Column: Electric dreams turn into a nightmare for battery metals
A sector that was once racing to build new supply has been closing mines and deferring projects as low prices bite into the cost curve.
Source: Photo from original article.
Numis Securities launched coverage on Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE) in June. Analyst Jonathan Guy noted that Cobalt 27 is a company that “provides direct exposure to the metal through a combination of physical cobalt holdings and a series of royalty agreements with companies that hold an interest in cobalt projects.”
The thesis on this minerals company includes the outlook for the current situation of “constrained supply in a high-demand growth environment,” wrote Guy.
Supply is “relatively inelastic” because cobalt is primarily produced as a byproduct of copper and nickel mining, the analyst explained. “While there are 6,500 tons of idled capacity that could be brought back into operation, there is a lack of major new greenfield projects that could be brought into production.”
At the same time, however, Numis expects “cobalt consumption to increase by an average compound annual growth rate (CAGR) of 7.9% over the next five years. . .more than twice the rate of increases in supply,” wrote Guy. “This should be accompanied by [an] 11.7% CAGR in demand for lithium-based batteries,” which are used in electric vehicles and static power storage systems, “and we expect this to be the principal driver of demand growth.”
Given this supply/demand backdrop, Guy added, “we expect the cobalt price to be sustained at current or higher prices.”
Consequently, Numis’ CA$11 per share target price on Cobalt 27 is “based on 1x net asset value based on a long-term cobalt price of $40 per pound for standard grade material,” reported the analyst. “We expect the shares to rerate in line with the expected increase in the cobalt price and as the company secures royalty agreements.”
“Co27 offers unique exposure and leverage,” Guy noted.
As for its direct physical exposure to the metal, Cobalt 27 used the funds of a CA$200 million raise “to invest in contracts for 2,157.5 tons of premium and standard grade physical cobalt,” indicated Guy. It utilized CA$1.15 million worth of issued shares “to acquire royalties on a series of early-stage exploration projects.” The plan now is to acquire “in-production royalties from nickel and copper mines where [cobalt] is a secondary product.”
Cobalt 27’s stock is currently trading at around CA$9.14 per share.
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1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She owns, or members of her immediate household or family own, securities of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
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Additional disclosures about the sources cited in this article
Numis Securities, Cobalt 27 Capital Corp., Initiating Coverage, June 27, 2017
The research analyst who prepared this research report was Jonathan Guy. The research analyst who prepared this investment recommendation receives compensation based upon various factors (such as the general perception of the analyst’s ability and commitment to their analytical work) and upon the overall revenues including the investment banking revenues and trading revenues of Numis and/or one or more of its affiliates.
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The research analyst who prepared this research report also certifies that no part of the analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in the research report.
Numis or one or more of its associates or a director or an employee of Numis or of an associate may from time to time have a position, or may have undertaken or may undertake an own-account transaction, in a security referred to in this document or in a related security. Such a position or such a transaction may relate to the market making activities of Numis or to other activities of Numis.
Numis or one or more of its associates may from time to time have a broking, advisory or other relationship with a company which is the subject of or referred to in this investment recommendation, including acting as that company’s official or sponsoring broker and providing corporate finance or other financial services.
It is the policy of Numis to seek to act as corporate adviser or broker to many of the companies which are covered by the Research Department. Accordingly companies covered in any investment recommendation may be the subject of marketing initiatives by the Corporate Finance Department.
Numis acts as a market maker (as defined in point (7) of Article 4(1) of Directive 2015/65/EU) in the subject company of this report. Additionally, at any time Numis may have a long or short position in the companies mentioned in this investment recommendation, and may have received customer orders to buy or sell instruments in the companies mentioned in this investment recommendation. If Numis holds a long position of >0.5% or a short position of <-0.5% in the subject company of an investment recommendation, this is separately disclosed.
A company covered in this investment recommendation may have paid for an analyst’s reasonable expenses to visit their premises or offered modest hospitality or entertainment; further details are available on request.
Unless otherwise clearly specified in this document, the author(s) of this document does not own a long or short position in the issuer, whether received or purchased before or subsequent to a public offering of such shares.
Source: Streetwise Reports (9/19/17)
