The genesis of this raise had to do with their cobalt price...

The genesis of this raise had to do with their cobalt price bullishness. Management clearly expected the cobalt price to recover during this quarter - prolly off the back of Chinese industrial activity. Instead, it fell further. And because they had riskily tied the Mercuria facility to the cobalt price - once the latter dropped, the value of their inventory declined further and didn’t fully cover this debt instrument. It appears that they have now been forced to pay down this debt facility.

Credit where it is due. @miningnut has been calling this raise for some time now. Even though their timing was out by several months, they called this raise correctly. And other posters such as @mondyinvest have questioned Jervois’ ability to service their debt commitments and had also smelt a raise on the horizon. Macquarie’s Adam Baker put out a note saying that Jervois would be raising A$100m at 4c (from memory) and then changed that to A$50m at 7c in late April. Saying this, his assumption was based on these funds being necessary to fund the SMP restart capex. This imminent raise doesn't have anything to do with the SMP, so Adam was only partially correct re: an equity raise.

And just like I thought the USG would intervene with some sorta deal around the ICO and prevent it from going on C&M, I had also backed & trusted management to close some deals in this quarter and prevent a raise. As I wrote on these boards on the 18th April:

The question marks since the 29th March have been around how they intend to fund all their plans moving forward with dwindling cash (now that they have used it for purposes not originally intended). What Jervois are basically saying in today's announcement is that they are negotiating with both industry and governments to fund their plans. Most likely, OEMs to fund the Kokkola expansion & SMP restart capex and the USG to fund a BFS on a domestic refinery (and if proven commercially viable - potentially funding a domestic cobalt refinery). I have run the numbers and understand the position they are in. They need deals - otherwise an equity raise is almost certain. But - unlike others out there - I think it is wrong to make statements that a raise is 100% on the cards. I've had my issues with management, however, I still strongly believe in their deal-making abilities. Let's revisit this post before the end of 2023 and see what they have achieved on this front.

As the weeks have passed sans deals, I confided in a few privately that I had changed my view on a raise putting it at 50/50. It wasn’t well received, but my numbers weren’t matching management’s narrative. The final tell was when I endeavoured to contact Jimmy May last week. We were slated to have a telephone chat on Wednesday. He didn’t answer my calls or reply to my texts. Poor form by Jimmy, but understandable given the announcement. NB: I think Jimmy is way over his head as the Jervois CFO. I hope you read this, Jimmy. You misled a mate of mine recently. I trust Jervois will bolster this part of their business with additional appointments. Jimmy clearly can’t manage multiple moving parts on his own.

Anyway, others were right and I was wrong re: raise. I have lost both trust and confidence in management as a result. And I have let them know this in no uncertain terms. No matter how they try and spin things (yes - I understand that business conditions change and necessitate appropriate responses/decisions), but they have clearly and on multiple occasions assured the market that they didn’t need any more capital (7 months ago) and wouldn’t be raising (2 months ago) - albeit they kept their focus on not raising for the SMP. Again - kudos to @mondyinvest for picking up this subtle language change at the time.

Taking the emotion out of the equation, sans deals - they had little choice but to raise. The outcome of this raise will see the Mercuria facility reduced. This strengthens their balance sheet. Am I happy with dilution? Of course not. With 2 billion plus in equity out there, adding hundreds of millions of shares down here isn’t ideal. Bryce & Jimmy have shown that they have scant regard for the capital structure of the business. But, the fact remains that they will have reduced the Mercuria facility from US$115m (31 Dec 22) to circa US$50m in 6 months. In A$, a reduction in debt of A$97-98m. The remaining US$50m falls due at the end of 2024 from memory. Importantly, once they reduce this debt facility, existing physical cobalt inventories should be valued slightly higher than the facility at today’s Co prices (according to my cals). Manageable. Yes, yes - they still have the interest payments on the ICO bond and bond itself (US$100m) due in mid-2026. That is for another discussion.  

I’d hoped they would renegotiate the Mercuria facility (improved terms, deferred payment), but that doesn’t look like the case. Not saying that won’t happen at some future point, though. Mercuria’s strategy is intriguing here. I hold the view that they are playing a “wait and see” strategy. It makes little sense for them to take over a business that is saddled with debt, one out of three assets up and running, having not proven they can generate decent free cash flow and in a niche and emerging market like battery metals. At the same time, they have consistently stepped up in some capacity re: equity raisings, so they are incentivised to keep Jervois alive. I’d like to see Jervois deepen their relationship with Mercuria, but that may be hard with someone as gruff, arrogant and intransigent as Bryce Crocker at the helm. He really needs to be more honest, show greater humility, deconstruct the massive house his ego has built and lose the pure arrogance he carries around with him. I’ve grown tired of his BS.

So, we have a smallish equity raise to reduce the Mercuria facility and a con note for some additional funds to help shore up their balance sheet. They have financial covenants that need to be satisfied, so this capital raising was necessary.

So, where are we now? This raise doesn’t explain/impact how they are going to fund all their activities moving forward and execute on their strategy of bringing three assets online. Let’s go through each asset in turn and analyse what they have achieved and what they need to do to develop these assets and maximise their value.

Kokkola:
1. Redo the near terminal legacy contracts which forced them to stockpile cobalt feedstock at peak Co prices and end the impact of this on the balance sheet (Q1 was the final quarter).
2. Turnaround Kokkola and return it to positive EBITDA. Reduce inventories & maximise cash generation. I actually think they may surprise us this quarter in terms of Kokkola’s performance (mainly due to the previously mentioned point re: finishing the adjustment of the higher priced feedstock).
3. Secured funds from the Finnish government (12 million euros) to fund an expansion BFS.
4. Management need to close a commercial deal here to fully fund Kokkola’s expansion. IMO, management are finally starting to understand how to effectively manage a margin business. They would have worked out that Kokkola is incapable of doing all the heavy lifting re: funding group activities, etc - on its own and in its current form. Expanding Kokkola is a reasonably high priority - to maximise its cash generating abilities. I fully expect them to close a deal in H2 2023. And part of this would entail a pivot away from predominantly industrial customers - with increased focus on OEMs. In other words, I think an OEM/s will pay for this expansion.

SMP:
1. Deferred the final acquisition tranche by a year.
2. Close a deal with an OEM/s to fund the US$65m restart capex. They no longer have the luxury of pretending they are unencumbered, blah, blah, blah. They do not have the money to fund the SMP restart capex on their own. And they have maintained that they wouldn’t be seeking to raise further equity funds to pay for this - after being forced to use the previously raised funds to pay down the Mercuria facility. There is a degree of urgency here. They need a second cash-generating asset up and running. They are too exposed to single commodity risk (with cobalt). Demand for refined battery-grade nickel for ternary batteries is growing.
While I appreciate that these asset-level deals take time and involve other parties with their own internal procedures to work through, I once again can’t help but question Bryce’s seeming intransigence. He banged on about shareholders not seeing the impact of these commercial off-take deals until they flow through to balance sheets. His implication was that they reduce the upside for the seller. And while shareholders hold management to their fiduciary duty to maximise value for shareholders, sometimes - a compromised deal that benefits both parties is preferable to no deal at all. Bryce comes across as not wanting to cap any upside whatsoever without comprehending that they are solely dependent on others to bring this asset online. Time to drop the unencumbered crap and close a decent deal for this asset. Again, I fully expect them to close a deal in H2 2023. I expect OEMs to fully fund the restart capex (I am not convinced on the US$65m. They have proven via the ICO that they are clueless when it comes to figuring out capex requirements and sticking to budgets. Jimmy May did a Stevie Wonder on the blown out ICO capex. Thanks, JT).

ICO:
1. Their flagship asset isn’t coming back online anytime soon with depressed cobalt prices.
2. Execute DOD funded drilling and complete the domestic refinery BFS.
3. The final piece of the puzzle is negotiating a deal with the USG to sub-out the Nordic bond with cheaper government financing, partner with the USG on a domestic cobalt refinery (funded by the USG) - and close off-take deals with the USG and commercial parties.
My view is that the USG will revert to its historical policy of stockpiling a certain quantity of critical minerals for security purposes. As such, I doubt any commercial ICO deals will be arranged until after they have closed a deal with the USG re: cobalt. Part of this needs to involve hedging. They have a floor ("cobalt price with a 2 in front of it") that can’t be breached to run this asset profitably. As I mentioned a while back, they probably need circa $30 l/b just to maintain their original BFS margins given their forecasted opex blowout. I think overall that increased government engagement is most positive and can only help in terms of negotiating commercial deals with OEMs and industry.
IF - and it is a big if - management can access USG government funding to sub out that Nordic bond and close an off-take deal with the DoD and/or DoE - this would transform Jervois. I am cognisant of the complexity of such deals and am not assuming that it is a fait accompli, but I am naturally optimistic that they can sort something out here.

Strategic partnerships are the way forward for Jervois Global. While my confidence in management is at an all-time low, I am prepared to give them another 6-12 months (taking my hold through to 5 years) to execute. If they are still floundering in 12 months from now, I will review my strategy and most likely look to exit. Even though a true recovery is linked to a rebound in cobalt prices, there are plenty of value-accretive activities for management to focus on. I have contacted Bryce and served him up a healthy dose of unsolicited advice. Told him to reduce the hubris and start executing and delivering for all shareholders.