Canaccord Genuity explained in a report its reasons for severely reducing its target price on this cobalt company post offer.
In a June 18 research note, analyst Eric Zaunscherb reported that Canaccord Genuity reduced its target price on Cobalt 27 Capital Corp (TSXV:KBLT), (NLB:KBLT) by about 68% to CA$5 per share from CA$15.50 due to the proposed acquisition of the company's main assets by Pala Investments and due to the related switch in the basis for valuing the company.
Zaunscherb commented that the deal is a good one for Pala and it is unlikely another entity will make a better offer. Pala agreed to buy 100% of Cobalt 27's issued and outstanding common shares for about CA$501 million. In return, it will gain Cobalt 27's 2,900 tons of refined cobalt metal in bonded warehouses, its cobalt stream on Vale's Voisey's Bay nickel-cobalt mine as of 2021 and its debt.
As part of the arrangement, a newly listed entity called Nickel 28 Capital Corp. will be formed to hold an 8.56% direct participating interest in the operating Ramu nickel-cobalt mine, along with an array of exploration and development project royalties, several minor equity interests and $5 million in cash, noted Zaunscherb.
The current spot price for cobalt is around $15 per pound. In comparison, the cobalt price in Canaccord Genuity's deck is at least $33 per pound, Zaunscherb pointed out, reflecting an expected pricing rebound as artisanal miners in the Democratic Republic of the Congo back off producing at the low prices and as electric vehicle and energy storage system sales increase demand.
With the Cobalt 27 acquisition, Zaunscherb highlighted, "Pala's offer crystalizes this upside at these low levels, and therefore, the financial services firm switched to using the cobalt spot price in its valuation, thus lowering its target price on Cobalt 27 significantly.
"In other words," the analyst explained, "our previous target captured the impact of a rebound in cobalt prices over the next 12 months while the revised target reflects cash in hand plus the stub shareholding in a nickel vehicle."
Despite the reduced target price, Canaccord Genuity maintains its Speculative Buy rating on Cobalt 27, which "reflects a 15% projected return and the slim outside chance of an alternative bid surfacing," Zaunscherb noted.