Back in August 2019, I created a thread titled ‘Mid-Tier Mining House’ where I outlined the future catalysts for JRV. From memory, the SP was around 20c at the time and the company was capped around A$120m. This thread garnered 500+ replies and was full of quality content by HC members. Much has transpired since then, thus warranting a new thread. I will endeavour to be as balanced as possible. And I welcome both positive and negativefeedback - as long as it is constructive (please refrain from ad hominem attacks).
I have been a loyal Jervois Global shareholder for almost 3.5 years now - ever since they closed the merger with eCobalt and secured the ICO in July 2019. I met with Bryce Crocker in Tokyo back in September 2019 and gave him a commitment that I would hold for 3-5 years and reassess my investment after this period of time. I fully intend to keep that commitment, however, I have been finding it increasingly difficult to justify my position of late (for reasons I will now discuss).
And honestly speaking, I came very close to reducing my position after the recent equity raise was announced. I have spent several days reflecting on my investment and have come to the conclusion that I do not want to sell a half-built mining house. 2022 & 2023 are transitional years for JRV, as they bring the ICO online (end of 2022) and SMP online (end of 2023). Earnings are typically subdued in the ramp up stages of bringing capital intensive assets online (especially in mining). I am also bullish on battery metals long term and want exposure to the increasing adoption of EVs and forecasted future demand for BMs.
Let me preface this by saying:
I understand that mining is capital intensive.
I appreciate that Jervois is experiencing teething problems, as it seeks to bring multiple cash-generating assets online.
I am well aware that fortunes ebb & flow based on cobalt prices.
Nevertheless, the pertinent question I have as a shareholder is whether or not Jervois can successfully generate the necessary cash flow to sustain the business. And at this point in time, I am starting to question that.
I’ll start with Kokkola.
To date, Jervois’ performance at Kokkola has been underwhelming at best. When cobalt prices were soaring, investors were informed that hydroxide prices were also elevated, so profits were subdued. When recent earnings guidance was missed, it was blamed on China and falling cobalt prices. The real culprit was undisciplined inventory management. I texted Bryce at the time the quarterly results were announced to express my displeasure. I am still baffled as to why the company decided to build up inventories so rapidly when cobalt prices were so high.
Hindsight is a wonderful thing, however, it surely would have been far more prudent to gradually replenish inventories across multiple quarters to reduce price risk fluctuations. Instead, they purchased too much higher priced feed and were then caught out when demand fell due to China, etc. End result? Jervois declared a net loss in Q3 of US$25.5m. Part of this could have been mitigated had they not built up inventories so heavily in a single quarter. At the end of Q3, they are holding 163 days of inventory - when target levels are typically 90-110 days. Working cap at Kokkola has been funded by the Mercuria facility - which they have drawn down (US$100m). So, they will unwind inventories to pay back the Mercuria facility. Adjusted EBITDA guidance for the FY is $US27.5m - but the bulk of that (US$26.8m) was made in Q1 & Q2.
Regardless of their revenue numbers, they simply aren’t generating positive earnings at Kokkola at present borne out by the following: US$-0.6m in Q3 2022 - which implies Q4 2022 EBITDA of US$1.3m (26.8m - 0.6m + 1.3m = 27.5m). As such, my confidence in Kokkola as a cash-generating business is low, unless they seriously improve their inventory management. And it is evident to me now the need for them to expand their refining capacity at Kokkola to improve the performance of this asset in terms of generating cash. I look forward to hearing more about their expansion plans (6,250mt to 12,250mt of refined cobalt) hopefully in the near future.
Historically, Freeport generated EBITDA of A$108m (2018), A$11m (2019), A$31m (2020), ? (2021) and at this stage are looking at approx. A$40m (US$27.5m) (2022). The volatility in operating performance across the past 5 years makes forecasting future earnings difficult. And of course, it mainly comes down to the cobalt price. At US$31/lb average Co price across 2022, they are looking at adjusted EBITDA of A$40m. We can probably assume similar numbers across 2023 (but only at a Co price circa US$30/lb). Grim at lower numbers & OK at higher numbers. Assuming they can expand refining capacity by 2024, they may be able to double these numbers. At best, I can see Kokkola EBITDA numbers around US$50-60m (A$74m-89m) by the end of 2024.
Moving on to the ICO and SMP.
I was annoyed by the abrupt (and significant) capital raising last week. They certainly aren’t afraid to simultaneously load up on high interest rate debt (which I hope they will sub out with cheaper debt) and blow the capital structure apart with circa 2 billion shares on issue. While I appreciate that assets need to be paid for, I had wrongly assumed that Jervois would find other non-debt or equity options to fund the SMP restart. To wit, an off-take agreement for nickel, etc. I understand and agree that the equity raising was the better funding pathway than loading up on even more debt and helps them maintain a more balanced capital structure. I still believe an off-take would have been a better option for shareholders - minimising even more dilution. US$200m in debt and circa $2 billion shares on issue at this point indicates a lack of capital discipline. And as far as I can interpret, this has mainly to do with their reticence to be encumbered with commitments to others (will touch more on this later). Jervois’ strategy is to hold all the cards if/when battery metal prices launch into the stratosphere. It is highly aggressive and risky. Trading off some of that risk would have been my preferred option, however, I am not managing the business.
Re: equity raise. I have worked through the numbers at the ICO and can now see why they needed to raise these funds. US$87m has been allocated to the SMP acquisition & restart capex, with US$66m for the ICO. Quite crafty of the company to raise the additional equity off the back of the SMP acquisition + restart. More palatable to shareholders this way than a separate equity raise at some point for the ICO. This was a preemptive move IMO. Necessary, of course, especially at the current cobalt price.
Using Mining Nut’s numbers:
FY23 ICO mine at US$22.15/lb Co price, Cu $3.85/lb, Au US$1,770/oz.
Revenue (US$m)
78.3 (3.9m lb Co @ 90.7% recovery)
34 (9.17m lb Cu @ 96.2% recovery)
14.3
If we break this down further, though (excluding sustaining capital costs which have been capitalised).
-12.5m financing costs (US$100m bond at 12.5%)
-5.4m license, fed & state taxes
7.1 Net operating cashflow.
And if we really wanted to be picky…
-37 (depreciation & amortisation of US$222m over 6 year mine life)
- 1 capitalised bond costs written off
- 30m Net loss from ICO ops at today’s Co price.
As I wrote the other day, it is best to add context and nuance to reduce claims of being disingenuous.
Jervois will be able to reduce smelter payabilities by sending cobalt concentrate to the SMP, but obviously this won't be for 12+ months. And it will also require a capital investment to add a POX to the SMP.
Depreciation & amortisation are balance sheet intangibles and probably shouldn’t be added to the above. Jervois has indicated the desire to expand - so once this occurs - these can be spread out over a longer life anyway. And the financing costs can be similarly spread out across the entire group (not just the ICO). Even if you spread these out, the ICO is marginal at best at a cobalt price of $22.15 l/b. And this mainly has to do with a 22.8% increase in annual operating costs (from US$57m in the BFS to the 2023 update of US$70m). Accordingly, Jervois will now need a +22.8% rise in the cobalt price used in the original BFS just to make the same margins. This calculates as US$30.7/lb. At this Co price, they will be looking at US$55.2m EBITDA.
I know the above is based on today's commodity prices and that nothing exists in perpetuity. LT forecasts for the cobalt price aren't sub-20c or even low 20s. China's recent lockdowns have clearly impacted price and need to be factored in. Now that China is in the process of reopening, normal trading patterns will follow and we should see a price more reflective of demand & supply fundamentals. If forecasted EV adoption rates are realised, the cobalt price will be much higher than low 20s. I think all shareholders understand that mining companies are at the mercy of commodity prices.
There is no doubt in my mind, though, that the recent equity raise was not only for SMP purposes, but also because they had crunched the numbers at the ICO and realised they needed more funds. Again, I understand that mining is capital intensive, especially early doors when bringing a mine into operation. I also understand the inflationary factors that have led to an increase in opex.
If we assume a Co price of US$31/lb across 2023 (and also 2024), they are looking at approx US$55m EBITDA per year. If they can expand production & grow earnings +25%, potentially US$68-69m EBITDA (A$100-102m) by the end of 2024.
Re: SMP. While I am excited about this asset coming online in early 2024, I can’t help but think of all the problems associated with Kokkola and the entire margin business strategy. They will still need to source nickel feed & a significant capital investment is required for a POX. The SMP BFS has EBITDA at $US33m p.a. based on a Ni price of US$8/lb. Being able to pick up a primary nickel mine in Brazil to supply nickel feed would provide enormous upside along with a nickel refinery, but they are carrying too much debt and have blown the capital structure out too significantly to make this a near-term possibility IMO. I think the BFS Ni price is too conservative and have assumed a Ni price closer to US$12/lb. So, 2024 EBITDA of US$50m is a decent forecast. This is based on Phase 1 (10,000mtpa). The refinery can do 25,000mtpa, so there is upside growth here.
TOTAL FORECASTED EBITDA 2024 for all 3 assets US$168m-$179m (A$248m-$264m). Assuming 2 billion shares on issue, I have a SP of A$1.34 at a 10x EBITDA multiple. This represents a 235% increase from today’s SP of 40c.
A LOT has to go right for this to happen, but they probably have a few aces up their sleeves. I have been endlessly frustrated by the lack of strategic partnerships between Jervois and government agencies and private industry - despite this angle constantly being talked up & other mining companies receiving material support. If they can prove up greater resources at the ICO, perhaps the USG will fund a U.S. based refinery. That would be a game-changer, however, there must be a commercial/financial logic to such an investment (we understand the strategic necessity).
I’m also working from a position of imperfect information. They must surely know that a battery metal storm is on the horizon and they are privy to discussions with multiple suitors/players who might be expressing serious interest in their products. As shareholders, we work in the dark to a large extent. There are hints in the recent presentations re: speaking with companies in multiple countries. So, perhaps my assumption that they are being too risky by not entertaining partial off-takes isn’t quite accurate. It may look like that on the surface, however, we simply don’t know what they are cooking.
I’d like to see an OEM et al. make a strategic investment in Jervois. Ultimately, I would like to see them acquire a Brazilian nickel mine and really exploit the vertical integration advantages of having a primary nickel mine & nickel refinery. I think they would be wise to pivot more to nickel than cobalt in the coming years. And if they truly wanted to be a one-stop battery metals shop, they might look at lithium as well, even though most assets are fully priced for future growth in this space and won’t come cheaply.
Lastly, an important point that cannot be overlooked or underestimated is Jervois Global’s degree of institutional support. Let’s face it. This is an institutional stock now, so the instos will move the SP. They are well supported by Mercuria, one of the world’s largest commodity trading companies, along with AustralianSuper - Australia’s largest superannuation fund. Both have expressed continued and ongoing support of Jervois.
I’ve tried to be as balanced as possible in this post. I will issue an erratum for any mistakes above. While I have been frustrated at the capital destruction of late (I've ridden this all the way from the teens to A$1.02 and back again to 40c), I am planning to stick with my long-term investment strategy. It is possible to critique ST performance while remaining bullish on the LT prospects of a particular company. Saying that, the real value of a company is determined by its ability to generate free cash flow. I will allow them the requisite time to bring all 3 assets online, but once this happens, I will scrutinise their performance to a much finer degree based on actual numbers. I think the share price is capped for quite some time, but honestly who knows? All I know is that I want to see how the market will value Jervois once they have 3 cash-generating assets online and are hopefully moving into a period of strong growth in battery metal prices.
This is not financial advice. As always, please DYOR.
JRV Price at posting:
40.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
