U.S. alternative asset manager Anson Funds, a shareholder of Cobalt 27 Capital Corp (TSX-V: KBLT), said it will vote against the proposed acquisition of Cobalt by Pala Investments.
Pala, a Swiss mining private equity firm, agreed in June to acquire the issued and outstanding common shares it does not already own of Cobalt, a Toronto-based battery metals streaming business, for $501 million.
Anson said the deal undervalues Cobalt, primarily because it effectively results in the sale of the company’s Voisey’s Bay cobalt stream at a discount to the price paid for the asset last year.
Anson added that the transaction is unlikely to receive the required majority approval of minority shareholders.
Anson Funds Comments on Cobalt 27 – Pala Transaction
Anson Funds Believes Pala Transaction Undervalues Cobalt 27
Believes Current Proposal Highly Unlikely to Receive the Necessary “Majority of Minority” Shareholder Approval
TORONTO, July 08, 2019 (GLOBE NEWSWIRE) — Anson Funds (“Anson”), a significant shareholder of Cobalt 27 Capital Corp. (“Cobalt 27” or the “Company”), believes that the recently announced transaction between the Company and Pala Investments Limited (“Pala”), a related party of the Company and its largest shareholder, pursuant to which Pala will acquire 100% of the Company’s issued and outstanding shares for C$3.57 in cash plus shares of a newly listed company to be named Nickel 28 Capital Corp. (“Nickel 28”) (the “Transaction”), significantly undervalues the Company. Anson intends to vote against Transaction and believes that the Company is highly unlikely to receive the required “Majority of the Minority” shareholder approval.
Crown Jewel Asset Being Sold at Fire Sale Prices
Anson believes that the Transaction effectively results in the sale of the Company’s crown jewel asset, the Voisey’s Bay Cobalt Stream (“VB Stream”), to a related party at fire sale prices (and without paying a control premium). According to Anson’s calculations, under the Transaction, the sale price of the VB Stream is approximately $180 million, which represents a 40% discount to the price that the Company’s board of directors and management paid for the stream one year ago. In addition, the Transaction effectively crystallizes losses in excess of $225 million on the sale of physical Cobalt and the VB Stream, representing a loss of almost 50% of cost.
Despite management’s poor track record of capital allocation and the current cyclical low in Cobalt prices, Cobalt 27 is in sound financial condition with positive working capital in excess of $50 million (inclusive of the value of their physical Cobalt inventory). As such, Anson is perplexed as to why the Company has entered into an agreement with a related party to liquidate both its physical inventory and its crown jewel royalty stream at a time when Cobalt prices are near five-year lows. This is in stark contrast to the Company’s stated strategy of being a pure-play investment vehicle with a long-term secular focus on Cobalt and battery metal demand.
Majority Shareholder Attempting to Take Over Company with No Control Premium; Unlikely to Receive “Majority of Minority” shareholder approval
Anson believes that the only beneficiaries of the Transaction are: (i) Pala, who is acquiring a high-quality royalty stream with significant upside for a distressed price, (ii) management, who benefit from change of control payments and who will continue to manage Nickel 28, and (iii) the financial advisors who continue to earn unnecessary transaction fees in respect of the Transaction. As a result, and for reasons set out below, Anson believes that minority shareholders will see this Transaction for what it is – a fire sale of the Company without the payment of control premium – and vote against the Transaction and the Company will fail to obtain the “Majority of Minority” shareholder approval required under the Transaction. Pala and management are simply seeking to accrue benefits to themselves at the expense of the Company’s minority shareholders.
Anson’s View of the Transaction
In Cobalt 27’s press release announcing the Transaction, the Company provided their view of certain benefits that the Transaction would afford shareholders, including: a premium valuation, improved exposure to high quality assets, and the potential to unlock significant value through a well-funded Nickel 28. Anson disputes this view and instead views the Transaction as an unnecessary value transfer from minority shareholders to Pala and management.
Anson’s view of the Transaction is as follows:
Anson estimates that the VB stream has a net asset value (“NAV”) of $250 mm at the five year average of Cobalt prices of approximately $20/lb. In addition, as Cobalt 27 highlights in their marketing materials, royalty peers trade at a mean valuation of 1.4x NAV, implying significant valuation upside to the C$250 mm NAV today and over the course of a cycle.
The volume weighted average price (“VWAP”) since the Transaction announcement has averaged C$4.13 per share, less than the VWAP over the 45 days preceding the announcement. Anson believes that Pala is acquiring the Company without paying a control premium.
The Company states that the value of the consideration to be received as part of the transaction is C$5.75 per share, comprised of C$3.57 per share in cash and C$2.18 in Nickel 28. This compares to the WVAP since announcement of C$4.13 per share, with the market valuing Nickel 28 at a nearly 75% discount to the stated consideration. Anson does not understand how the Company can value Nickel 28’s assets at a premium to cost and justify selling the VB Stream at nearly 50% below cost.
The Transaction strips the Company (and indirectly, its shareholders) of its highest quality asset and sells it at cyclical lows:
Management believes that the Transaction results in shareholders having increased exposure to high quality-assets. Anson believes that the Transaction strips shareholders of exposure to one of the world’s premier Nickel sulphide projects that is low cost, long-lived, and in a low-risk political risk jurisdiction.
The long-term Cobalt price that the Company underwrote for the VB stream when management purchased it for $300 million a year ago was approximately $28/lb. While spot Cobalt prices have declined since then, the value of the VB stream has not moved down in lock step. The VB stream does not come online until 2021, is long-lived, and has significant exploration upside. As such, the value of the VB Stream should be derived by using long-term Cobalt pricing assumptions, not spot pricing. Anson does not see any rationale for selling the VB Stream at an implied price Cobalt price of $10-14/lb, which are well below long-term averages.
Nickel 28 is undercapitalized and will likely suffer dilution to realize positive cash flow:
Nickel 28 is being spun off with only $5 mm in working capital and will have negative cash flow after corporate expenses. Its primary asset, the recently purchased Ramu joint-venture interest requires in excess of $110 million of financing in order to be a meaningful contributor to cash flow. Reducing asset diversity by selling the VB Stream and stripping the Company of working capital by selling its physical Cobalt, increases its cost of capital and limits the go-forward financing options for Nickel 28.
Management’s track record of unlocking value or being able to determine the path of metal prices has been extremely poor. Management has a history of buying at the top of the market and selling at the bottom. There is no reason to believe that Nickel 28 will be any different. Anson Funds believes that management will destroy value at Nickel 28, just as they have at Cobalt 27.
Anson Funds has been a long-standing shareholder of Cobalt 27 and has expressed various value enhancing views to management over the past few quarters, including: monetizing physical inventory when Cobalt were near its peak, freezing capital deployment, and using excess capital to repurchase shares. Instead of embarking upon any of these paths, management chose to hold their physical inventory bullish on prices and unwilling to accept a discount, double down on the battery metals market by purchasing the Ramu joint-venture interest and paying a significant control premium to do so, and are now liquidating assets at the trough. Anson believes this is another step in the value destruction chain, but this time minority shareholders can voice their discontent with votes.
Anson has engaged Norton Rose Fulbright Canada LLP as its legal counsel in respect of this matter.
Anson Funds: Anson Funds is a privately held alternative asset management company, founded in 2007 with offices in Dallas and Toronto.
For further information: Jay Lubinsky, Tel: (416) 447-8874