Finished my more thorough analysis of COB. Good for new investors wanting some info on the company, but also gives a NPV target for both BHCP and Waste streams project.
Executive Summary
The report is constructed to develop an understanding of Cobalt Blue’s Broken Hill Cobalt project (BHCP) and the associated financial aspects of the opportunity. Cobalt is a critical mineral that is used in the development of Lithium-Ion batteries, allowing batteries to have greater density, smaller size, and greater stability. The move towards a greener future, accelerates the demand for LI-Ion batteries to power electric vehicles which accounts for 50% of the Cobalt market. The current economic factors surrounding Cobalt has seen the Cobalt price more than double, with analysts predicting todays Cobalt price $82,000 USD/T to triple by the end of the decade (VanityFair). 70% of today’s Cobalt is mined In the DRC with questionable ethics surrounding working conditions, child labour, corruption, and extortion. COB markets itself as producing ethical and sustainable Cobalt product, focusing on Environmental and social factors. Being a mining company in the developer stage, COB have negative cash flows and continue to operate supported by investors through capital raises, options, and partnerships. The company will make a final investment decision in Q1 of CY 2023. If the project is viable, $560M will need to be financed to bring the project into production in 2025 (company presentation). The main project in contention is the Broken Hill Cobalt Project, which is the current focus, providing an expected mine life of 20+ years. COB are additionally exploring a ‘Cobalt in waste streams’ opportunity that has the prospect of nearly tripling their current resource by separating tailings from mine waste. The analysis presented in this report concludes that the BHCP is a viable investment that can return annual growth of 16% in current market conditions. It is expected that the demand for Cobalt is expected to continue rising, further snowballing the profitability of COB’s project(s). Summarised, COB is an attractive company with knowledgeable management, and are given a recommended buy rating.
WACC
The WACC is 9.37%, synonymous with the cost of equity due to the company being primarily financed with equity over debt. For the project to be feasible, the Internal rate of return must be higher than 9.37%, to cover financing costs.
Valuation
Company valuationTwo Free Cash Flow forecasts were completed with one including the waste streams project if it were to go ahead. Regarding the Waste Streams opportunity, information is very limited an From director interviews, the estimates were that the project has 200MT+ of cobalt and AISC one third cheaper than the BHCP.
COB have used their own discount rate of 7.5% when calculating the project NPV, suggesting that the FCF in this report is conservative when using a WACC of 9.37%.
BHCP project
Using todays Cobalt sulphate spot rate, the NPV of the BHCP project is $699.6M.However, using a spot rate is not accurate as in the long-term, future contracts are used to hedge against price volatility risk and demand. Therefore, the NPV is only an estimation of the projects book-value today. Associated with this NPV is a share price of $2.11. This is a percentage gain of 111% on the closing price of $0.96 on the (1/4/22)
BHCP + Waste Streams
Including the waste streams project, the NPV using spot rate, over the same time-period is $2.375B. This indicates that if the waste streams is successful in Queensland alone, the company can triple their future cashflows. The NPV correlates with a share-price of $7.15, representing a 645% increase in the share-price as at (1/4/22). Sensitivity analysis of BHCP and waste streams projectThe large increase in demand for Cobalt and growing popularity of Electric vehicles could see Cobalt supply in a deficit by 2024 (S&Pglobal). This is supported by estimates of the Cobalt price tripling before the end of the decade (VanityFair). The sensitivity analysis hence focuses on 100% and 200% appreciation on today’s cobalt spot price of $82,000USD/T (Tradingeconomics). As per figures 4,5,6, the project has great financial fundamentals which is supported by even greater cobalt prices. A 10% increase in the Cobalt price sees a 30% increase in profitability.
Dividends
Graph below shows how dividends are affected by profits, with higher Cobalt prices resulting in greater dividends. At an absolute minimum, a 0.17c/share is forecast for 2030. At an 8% dividend yield, this gives a minimum share price of $2.12, consistent with the NPV forecastd is in an exploratory period. (Percentages at the bottom refer to the payout ratio).
