TD researchReport was out Feb 26. Rating buy. Target = $18CDN
Event
Yesterday before market open, Cobalt 27 announced that it had acquired a 1.75%
NSR royalty on the Dumont Ni-Co project in Quebec. We are assuming coverage
of Cobalt 27 Capital Corp.
Impact: POSITIVE
First royalty deal post-IPO - The Dumont royalty transaction marks the
company's first royalty acquisition post-IPO and is consistent with its strategy
to acquire royalties and streams on cobalt related assets in established, stable
mining districts.
Royalty terms - The purchase price of the royalty was not disclosed, but it
does contain a buyback provision whereby the Dumont joint venture, which is
50% owned by Royal Nickel and 50% by Waterton, can repurchase 0.375% of
the NSR for US$15mm. Under this scenario, the buyback provision implies an
undiscounted value of US$70mm for the 1.75% royalty.
Dumont overview - Dumont is among the largest undeveloped Ni-Co sulphide
projects in the world. The project received its federal permits in 2015, but has not
progressed to construction given depressed nickel prices, and in our view, the
large capex required to production (C$1.2bln). The project has a 33-year life-ofmine,
targeting average annual payable nickel and cobalt production of 84mmlb
and 1.79mmlb, respectively.
Valuation accretive - We assume the company paid ~$12.5mm for the royalty
resulting in a pro-forma working capital position of $12.7mm. We model production
start-up for Dumont in 2023, allowing time for nickel prices to recover towards our
long term price of US$7.50/lb. We also assume the Dumont JV repurchases the
0.375% royalty for US$15mm in 2020. We calculate a US$43.4mm NPV for the
Dumont royalty using a 12% discount rate, which is consistent with the discount
rate we apply for our base metal developers under coverage.
TD Investment Conclusion
We have increased our target price to $17.00 (from $16.00) to reflect the royalty
acquisition and we remain a BUY. Cobalt 27 remains, in our view, the best way in
the TD coverage universe for investors to get pure-play cobalt exposure as part of
the broader trend of increasing electric vehicle adoption without traditional mining or
development-related project risks.