Highlands Pacific – (ASX: HIG, Share Price: $0.145, Market Cap: $138m, coverage initiated @ $0.085 in Oct 2015 – current gain of 71%)
Key Catalyst
Highlands Pacific agrees to a A$15 million share placement and US$113 million nickel and cobalt streaming agreement with Canadian battery metals company Cobalt 27.
HIG has definitely been a story for the patient investor, but when a company maintains stakes in world-class projects, there’s always the potential for big things to happen. We started following HIG back in late 2015 because of this corporate appeal, especially as major companies are finding it increasingly difficult to firstly find, then appraise and commercialise, world-class projects.
HIG has always been a small company with large project ambitions, something that hasn’t always endeared it to the investing public. Its major project interests comprise stakes in the producing Ramu nickel-cobalt mine and the Frieda River copper gold project, whilst from an exploration perspective it has work underway at Star Mountains. What’s encouraging is the value within the company has been recognised by a company-transforming deal with TSX-V-listed Canadian company Cobalt 27, which has repositioned HIG financially and strategically.
Latest Activity
Agreement with Cobalt 27
HIG has announced a A$15 million share placement and US$113 million nickel and cobalt streaming agreement with battery metals company Cobalt 27 Capital Corp.
i. The placement involves the issue of 142.5 million shares to Cobalt 27 at a price of $0.105 per share – a 13% premium to the pre-announcement closing price of $0.093.
ii. The streaming agreement will see Cobalt 27 pay HIG an upfront deposit of US$113 million for 55% of HIG’s share of future cobalt production and 27.5% of HIG’s share of future nickel production from the Ramu nickel-cobalt mine for the life of the project. HIG is targeting financial close of the streaming agreement by 30 June 2018.
Cobalt 27 will also make ongoing payments to Highlands of US$1.00/lb of nickel and US$4.00/lb of cobalt for product it becomes entitled to under the streaming agreement, which allows for cash settlement.
HIG will use the deposit to fully repay loans outstanding to the Metallurgical Corporation of China (MCC), the major shareholder and manager of the Ramu project. The loans repayment will immediately increase HIG’s interest in the Ramu project from 8.56% to 11.3%.
HIG has retained the right to up to a 13.27% interest in the cobalt nickel stream from Cobalt 27 for up to US$15 million, enabling it to gain increased exposure to potential upside in metal prices fuelled by changes in battery technology.
Technical Significance
The transactions represent a fundamental transformation for HIG – which will emerge in a much stronger financial position, debt-free with enhanced access to cashflows from its Ramu mine. Furthermore, the repayment of Ramu project loans will allow HIG to increase its ownership interest in the Ramu mine more than five years earlier than expected, resulting in an immediate and substantial increase in project cashflows to HIG.
The deal also creates a valuable strategic partnership with Cobalt 27, an innovative and entrepreneurial company that has the potential to offer HIG an opportunity to be its partner in future deals. The companies have agreed to work collaboratively to identify mutually beneficial investment opportunities in the Asia-Pacific Region in relation to cobalt, nickel and other metals.
Cobalt 27 will emerge as the largest shareholder in HIG with a holding of approximately 13% and the company’s executive chairman, Anthony Milewski, will join the HIG board. HIG’s managing director, Craig Lennon, has been invited to join Cobalt 27’s Advisory Board, reflecting the long-term strategic partnership between the companies.
Ramu Project Overview
Ramu is one of the largest producers of cobalt outside of the Democratic Republic of the Congo and a real success story of the PNG mining industry.
HIG currently holds an 8.56% interest in the Ramu project, which is operated under a joint venture with a subsidiary of Metallurgical Corporation of China Limited (MCC) (85% interest) and entities managed by the PNG Mineral Resources Development Company (MRDC) (combined 6.44% interest).
The Ramu nickel-cobalt mine is located 75km west of the provincial capital of Madang, on the north coast of PNG. The project consists of a nickel laterite mine at Kurumbukari, which hosts a JORC-compliant resource comprising 124 million tonnes of ore at 1% nickel and 0.1% cobalt.
The mine is linked by a 135km slurry pipeline to a process plant and deep water port at Basamuk, east of Madang, where a concentrate (mixed hydroxide product or MHP) is produced for shipment to offshore markets. The MHP is particularly sought after for use in battery manufacturing.
The Ramu project cost a total of US$2.1 billion to develop and commenced commissioning during 2012. During 2017 the project exceeded nameplate rates of production achieving output of 34,666 tonnes of nickel and 3,308 tonnes of cobalt in concentrate. Ramu realised a net cash inflow (unaudited) of US$170 million for the year to December 2017 after capital expenditure of US$17 million, and cashflows have increased during the current year as metal prices have risen.
Summary
The Cobalt 27 transactions are a credit to the company’s board and their overall persistence. It reinforces the value in looking at company fundamentals, not just chasing speculative situations. HIG has always been a story for the patient investor, but there were indications back in late 2015 that the stars were aligning for the company. This is exactly how things have panned out. Ramu, which is the specific focus of the Cobalt 27 transactions, offers exposure to strongly-performing cobalt and nickel.
Cobalt 27 is an interesting company – it owns more than 2,980 tonnes of physical cobalt and manages a portfolio of ten royalties – and is acquiring the world’s first producing cobalt nickel stream on the Ramu mine. Cobalt 27 intends to continue investing in a cobalt-focused portfolio of streams, royalties and direct interests in mineral properties containing cobalt.
