Have been in meetings all day here in Tokyo, so am only now sitting down & digesting today’s announcement.
Today’s acquisition of Freeport Cobalt isn’t only value accretive - it is transformational.
Shareholders always prefer that companies sell less equity at higher prices to reduce dilution, however, that may not have been possible here, given the sheer size of the amount being raised. As mentioned earlier, it is better to see the forest for the trees.
It is more difficult to position once the market goes over the cobalt cliff. Better to position now when the supply & demand dynamics are still in the balance. In the ensuing years, a gap will open up between supply & demand & JRV will be perfectly positioned to exploit that. A reminder that Benchmark Mineral Intelligence have forecasted a 202k tonnes Co deficit by 2030.
For US$160m, they are securing 40% of Kokkola’s refining capacity (= 6,250 mtpa). This has expedited everything & instantly transformed them into the world’s second largest producer of refined cobalt outside of China. Adding in the SMP, they have 8,500 mtpa refined Co production. They are bigger than Glencore now in terms of refined Co production (7,500 mtpa). Potential to refine 20% of global cobalt supply outside China = real weight in the market.
In terms of paying US$160m, this amount is basically 2x 2018 EBITDA of US$83m when Co was US$36/lb (or 7.6x 2020 EBITDA of US$21m at Co price US$15/lb). Either way you look at it, it is cheap.
Fast-tracking cash flow will now put JRV on the radar of a different breed of investors - those who focus on quality earnings & who may not have joined the register until late 2022/early 2023. From a risk perspective, they have derisked with multiple cash-generating assets.
They have a multi-market presence in North & Latin America & Europe.
They have access to Freeport’s trading book.
They have a world class management team who have successfully raised US$335m in financing over the past month (100m debt + 235m equity). That is 100% of their current MC in USD (AUD$457m = US$336m) in a month.
The reason refineries are valued so highly isn’t simply a question of their replacement cost (into the hundreds of millions). A refinery’s true value lies in both the earnings upside from rising commodities prices & the degree of protection afforded to earnings from the vagaries of commodity prices. To wit, JRV will buy feed at approximately 70% of the LME Co price & sell end products at 110-120% of the LME price (so at a premium).
In 2018, Freeport generated EBITDA of US$83m (at US$36/lb). At US$40/lb, EBITDA would have been US$91m.
At US$40/lb, the EBITDA forecast for the ICO is US$150m.
Add in potentially $50-$100m EBITDA from the SMP.
At US$40/lb Co, they could be looking at annual EBITDA of US$291m - $341m (AUD$395m - $463m).
At a 10x earnings multiple, we are looking at a MC of $4 billion. At 20x, MC = $8 billion. On the latter, a SP of $5.07. On the former, a SP of $2.53.
No wonder there has been strong institutional support for this deal. They can see the upside.
* Rough back of the envelope calcs here.
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