Metals developer Highlands Pacific (ASX: HIG) has received a significant overnight boost with news coming out of Canada that battery metals company Cobalt 27 will be spending US$113 million to capture its cobalt and nickel production from the Ramu Nickel project in Papua New Guinea.
The US$2.1 billion Ramu cobalt nickel project near Madang, on the north coast of PNG, is one of the largest and most ambitious mining and processing projects to have been successfully brought into production in PNG during the past decade. Construction was largely completed by 2012 and the plant has since been progressively brought into production.
In a joint announcement, Highlands Pacific and Cobalt 27 announced they had entered into binding agreements relating to a streaming arrangement, private placement and strategic relationship.
Cobalt 27 currently owns 2,980 million tonnes of physical cobalt and manages a portfolio of ten royalties in addition to acquiring a significant chunk of production from the Ramu mine.
Under the terms of the streaming agreement, Cobalt 27 has agreed to pay Highlands an upfront deposit of US$113 million (A$149.5 million) via its subsidiary Electric Metals Streaming, to secure an entitlement to 55% of Highlands’ share of cobalt production and 27.5% of Highlands’ share of nickel production from the Ramu Nickel Cobalt mine for the life of the project.
Electric Metals will also make ongoing volume-based payments to Highlands of US$1.00/lb of nickel and US$4.00/lb of cobalt for the product it is entitled to under the streaming agreement.
Highlands currently holds a relatively small 8.56% interest in the Ramu project, which is operated under a joint venture with Metallurgical Corporation of China (MCC) which holds an 85% interest alongside several entities managed by the PNG Mineral Resources Development Company (MRDC), which currently hold a combined interest of 6.44%.
From debt to higher ownership
The deal with Cobalt 27 marks significant progress for Highlands as it allows the company to alleviate its debt burden with MCC and simultaneously increase its current stake in the Ramu mine.
Highlands will use the upfront deposit to fully repay loans outstanding to MCC that relate to the construction and operation of the Ramu mine. The repayment of the loans will immediately increase Highlands’ interest in the Ramu project 8.56% to 11.30% and allow Highlands to “access an immediate material uplift in Ramu project cash flows.”
Highlands also has a further option to increase its stake up to 13.27% if it decides to spend $15 million, although this option remains open for only 90 days and is not binding.
In another interesting caveat of the deal, Cobalt 27 said it is currently engaged in discussions with MRDC regarding an equivalent streaming arrangement in respect of MRDC’s interests in the Ramu project.
If agreed (and on similar terms), the deal is anticipated to involve Cobalt 27 paying an upfront deposit of around US$87 million to MRDC to facilitate repayment of its outstanding loans to MCC.
Upon repayment of these loans, the participating interests of MRDC in the Ramu Nickel Cobalt Mine would increase from 6.44% to 8.70%, much like Highlands’ own increase from 8.56% to 11.30%.
The commercially-important knock-on effect for Highlands is that in the event that MRDC enters into an equivalent streaming arrangement with Cobalt 27, Highlands will have a right to purchase up to an 11.5% interest in the cobalt and nickel stream from Cobalt 27 for up to US$10 million.
Closer ties with Cobalt 27
As part of the financing and streaming agreement, Highlands has agreed to issue 142.5 million shares to Cobalt 27 through a private placement at a price of 10.5 cents per share, to raise approximately A$15 million.
The issue price represents a 15% premium to the 5-day volume-weighted average price of Highlands shares at the previous close on the ASX.
Following the placement, Cobalt 27 will have a 13% shareholding in Highlands and has agreed to hold its shares in escrow for 12 months from their date of issue.
The multifaceted deal between Cobalt 27 and Highlands will also see Cobalt 27 executive chairman Anthony Milewski appointed to the Highlands board. Cobalt 27 will be granted customary anti-dilution rights to maintain its shareholding in Highlands although this step remains subject to regulatory approval from both the ASX and the Port Moresby stock exchange.
“This meets our strategic needs by enhancing our cobalt and nickel exposures, and it enables Highlands to draw on our financial resources to increase its ownership of Ramu and access to project cash flows,” said Mr Milewski.
Mr Milewski added: “We are delighted to be a partner and significant shareholder in Highlands and we look forward to working collaboratively with them to take full advantage of the unfolding battery metals revolution.”
Going in the other direction, Highlands managing director Mr Craig Lennon has been invited to join Cobalt 27’s advisory board, reflecting the long-term strategic partnership between the companies. The companies have also vowed to “identify mutually beneficial investment opportunities in the Asia Pacific Region in relation to cobalt, nickel and other strategic metals.”
“Highlands will emerge from this deal in a much stronger financial position, debt free with enhanced access to cash flows from the Ramu mine,” said Mr Lennon.
Mr Lennon added that “the repayment of Ramu project loans allows Highlands to increase its ownership interest in the Ramu Nickel Cobalt mine over five years earlier than expected and will result in an immediate substantial increase in the project cashflows released to Highlands,” as part of a strategic partnership that would create “exciting, value creating transactions in the future.”
Today’s deal helped Highlands shares to rise by around 40% to $0.037 per share, thereby valuing the company at A$123.5 million by market capitalisation. Highlands said it is “targeting financial close” of the streaming agreement by 30 June 2018.