Investors bought Cobalt 27 for its massive stockpile — but are now being asked to cash out just as cobalt prices are poised to surge
Cobalt 27 Capital Corp., which raised hundreds of millions of dollars promoting cobalt — an obscure metal that’s increasingly in demand because of its use in electric vehicle batteries — announced a new proposal this week to ditch cobalt just as its price rises.
On Tuesday, the company said its largest shareholder Pala Investments Ltd. would offer $4 per share for the company’s cobalt assets up from its earlier $3.57 offer, and also give them equity in a new company, Nickel 28.
“We have responded to the concerns expressed by shareholders and believe we have delivered a significantly improved transaction,” Philip Williams, chairman of Cobalt 27’s special committee said in a press release.
Anthony Milewski, chief executive of the company, was not available for comment.
The latest offer comes after Cobalt 27 twice postponed a meeting to tabulate the votes on Pala’s first offer, announced in mid-June, and then spent weeks meeting with shareholders, many of whom had said they would not support the deal. Even though some analysts believe the market outlook for cobalt is picking up, there remains some uncertainty about supply and demand for the scantily traded metal, and some shareholders now say they will support the buyout.
“It’s not the deal of the year,” said Etienne Guicherd, a portfolio manager in Paris at the multibillion dollar fund, Amiral Gestion. “I’m still a bit disappointed.”
But Guicherd, who said his fund controls around three per cent of Cobalt 27’s shares, said he would drop his opposition to the deal because of the increased cash component, and other factors including a reduction in the exit payout for management.
Although Guicherd said he wanted more cash, the investment represented a tiny fraction of his overall portfolio.
“It’s not meaningful,” he said. “We don’t have to hire a bunch of consultants.”
Anson Funds, another investor that had initially opposed the buyout, also announced it would support the deal, calling it a “fair price.”
But several retail investors who spoke to the Financial Post expressed anger at management for seeking to sell its assets at all. The stock had traded as high as $12 in mid-2018, and above $6 within the last 12 months, but then crashed as cobalt prices declined, which recently started to rise again.
“I looked at it as a long-term call,” said one retail investor. “It doesn’t have an expiry option, why does Cobalt 27 have to do anything?”
I looked at it as a long-term call
He said he had objected to the pay outs, including an estimated $7-million package for the company’s chief executive Anthony Milewski — who previously worked at Pala. In its latest announcement, the company said it cut the cash portion of the change of control payments by 46 per cent, but did not provide many other details.
Cobalt 27 Capital Corp. formed in 2017 and amassed the largest stockpile of physical cobalt in the world, and then bought up streams and royalties on mines such as the Voisey’s Bay Expansion in Labrador, from which it would receive 32.6 per cent of all cobalt produced.
The company also purchased several nickel assets, in various stages of development, including a stake in the Ramu mine in Papua New Guinea and in nickel development projects in Canada.
Pala is proposing to purchase the physical cobalt and the Voisey’s Bay cobalt royalty; and it would take a 9.9 per cent stake in the company’s nickel assets, which would be placed in a new entity, to be called Nickel 28.
Analysts appeared split on the deal.
David Talbot, of Eight Capital, kept a price target of $7.50 on the stock in a note published on Tuesday, and said the $4 per share offer means Pala is paying $341.5 million in cash for assets that the company valued at $465.9 million as of the company’s June 30 financial statements, which he pegged at $418 million. Plus, he noted the price of cobalt has risen 22 per cent since June.
One question relates to the value of the nickel assets.
“If those assets were in a well-capitalized company … they might be worth as much as $4.10 per share,” Talbot wrote. “However, we cannot ignore that the market hasn’t given the stock much more than a 30 cent valuation.”
However, Andrew Wong, of RBC Dominion Securities, wrote that Pala was paying a slight premium, pegging the value of the cobalt assets plus debt at $3.25 per share compared to the $4 per share being offered. He put a $5 price target on the stock.
Meanwhile, there remain differing views on the outlook for cobalt.
In early September, analysts at Citi Research wrote that the demand for electric vehicle-related metals isn’t going away, and called cobalt “one of the best long term buys … over the next 12 months.”
Around the same time, analysts at BMO Capital Markets wrote in a research note that they believed cobalt was oversupplied until 2023.
“There’s a chance in this market,” said the retail investor who opposed a sale and wanted to keep Cobalt 27 shares long term, “that people say, ‘you know what forget it, this is a disaster, I’ll take the cash.’”