COB released its PFS today, whilst the company still has extensive potential exploration upside to add to its ore reserve thereby extending its mine life, the market wasn't satisfied and the share fell 23.5% to 73.5c. Despite the conservative estimates used by COB the PFS highlighted a 22% post tax IRR and an NPV(7.5%) of A$544m. Based on the current share price, on a fully diluted basis, COB's enterprise value is A$87.4m. Below I will highlight why COB will realistically achieve a A$1bn NPV(7.5%) and a post tax IRR of 27% when it releases its bankable feasibility study in June 2019. Further, there are additional refinements and corporate transactions that COB could execute that would improve the IRR to over 30%. It should be noted that LG Chem, through a binding agreement, have partnered with COB and will provide technical and financial assistance. LG, after a due diligence, recently subscribed for a placement of COB shares at A$1.10 / share.
COB enterprise value recap:
Shares in issue: 116.1m
Options outstanding: 24.4m (25c strike - premium A$6.1m)
Share price: 73.5c
Cash on hand: A$9.8m (+ option premium A$15.9m)
Enterprise value: Market cap ($103.3m) less cash (-A$15.9m) = A$87.4m
PFS Estimated Model:
Above is an estimated model based on the disclosed PFS inputs of COB. The company has highlighted 4 areas that could improve the economics of the project, namely:
1) Optimisation of process plant tailings handling and storage. This could potentially reduce both capex and opex.
2) Optimisation of metal recoveries. During the metallurgical test work COB achieved higher recoveries. The PFS has used 85.5% for cobalt, the company is targeting 90%. There is also potential to improve sulphur recoveries. Increased recoveries will boost production volumes and revenues without increasing opex.
3) Optimisation of average power pricing.
4) Opportunities to extend mine life. COB is targeting a 20-year + mine life. This is achievable by treating inferred inventories and other sources outside the project.
There are further drilling targets on COB's land that should increase its resources substantially.
BFS estimated model:
The above model highlights a
A$1bn NPV(7.5%) for COB in June 2019. The key changes and assumptions relative to the PFS model are as follows:
1)
Reduce the estimated long term cobalt price to US$32.80/lb from US$33.80/lb
2)
Life of mine extended to 20 years from 12.8. This equates to a total tonnage of 105.5Mt, up from the current 58.7Mt.
3)
Average grade increased to 825ppm from 809ppm. The current mineral resource is 72Mt at 852ppm cobalt. With an increased resource to around 120Mt my expectation is that COB will be able to optimize a life of mine grade higher than the PFS utilizing 105Mt.
4)
Metal recovery improvement from 85.5% to 88%. Whilst the company is targeting 90% for cobalt my assumption is that the results of the previous metallurgical test work (88%) will be successfully repeated.
5)
C1 cash cost to fall to US12.00/lb from US12.80/lb. This will be achieved through the improved sulphur recovery (higher credit value) and the optimisation of electricity and tailings costs.
6)
Capex estimate remains A$550m
In addition to the above improvements COB could potentially reach agreements with surrounding companies to source higher grade
cobalt pyrite ore. There are a number of juniors immediately surrounding COB that could potentially deliver similar style ore with better grades.
Conclusion:
Whilst the estimated capex (A$550m) for the project came in above my estimates (A$400-A450m) the remaining key variables were very much in line with my forecasts. By the time the BFS is released in June 2019 COB will have refined its process and is likely to show a A$1bn NPV(7.5%) / 25% + IRR.
COB remains my top junior cobalt company pick and whilst the capex estimate has lowered the economics slightly my share valuation remains A$1.50 - A$2.00 to June 2019. In the event that the cobalt price recovers to US$45/lb + (Citigroup Q4) there is further upside. As COB has sufficient cash to execute its BFS there is no risk of dilution through a cash raise. If investors want shares they will need to make on market purchases.
