Cobalt pure play offers 'unique exposure and leverage'

September 20, 2017 02:03 PM

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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