Highlands Pacific (HIG) and Cobalt 27 (TSXV: KBLT) have structured a streaming deal with HIG moving from an 8.56% interest in the Ramu nickel-cobalt project to 11.3% (a 32% increase in HIG's equity in Ramu) for US$113m.
Cobalt 27 and "the deal"
Cobalt 27 is listed on the Toronto Ventures Exchange. It owns over 2,980Mt of physical cobalt and manages a portfolio of ten royalties. Its focus is cobalt. It will pay HIG US$113m to acquire the right to an estimated LOM average 204tpy of cobalt (55% of HIG's attributable production) and 1,020tpy of nickel (27.5%) from the +20-year Ramu nickel cobalt mine PNG.
Cobalt 27 will also acquire a 13% equity interest in HIG and seek anti-dilution clauses.
Are battery makers watching?
HIG can take its interest in Ramu to 20.55% by paying market value, and have access to this attributable production, which is a mixed nickel-cobalt hydroxide product in a form and Ni-Co ratio that is very attractive to battery makers. Major resource operations in PNG operate to high standards of environmental and social governance, with billions of dollars invested in the PNG LNG operations, and the world-class Lihir and Wafi-Golpu operations, amongst others.
Ramu is a long life, low cost source of nickel and cobalt.
Through 2017, Ramu operated above nameplate capacity. We have modelled a return to LOM averages for future production. Allowing for the offtake to the streaming deal, and using a long term cobalt price of US$60,000/t (currently above US$90,000/t), and a long term nickel price of US$17,632/t (currently US$14,665/t), we generate a value of A$0.221/HIG share on the expanded issue capital after the issue to Cobalt 27.
At current spot prices the Ramu valuation is A$0.26 per share.
The deal should focus market interest on the inherent value of Ramu, and HIG's exposure to nickel and cobalt. With the move to eliminate the debt repayments and move to 11.3% of Ramu, the cashflow becomes available to HIG, placing it in a stronger position to negotiate its dispute with GRAM over Frieda River, and to advance its other PNG projects.
We increase our share price target and retain our Add recommendation.
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