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Cobalt 27 eyes cash flow with US$113M deal on cobalt-nickel stream

Cobalt 27 Capital Corp. signed a deal to buy a US$113 million nickel-cobalt stream from Highlands Pacific Ltd. while investing A$15 million in the junior base metals producer in what it calls a first in the mining industry.

"I don't think there's another cobalt stream out there," Cobalt 27 Chairman Anthony Milewski said in an interview.

The deal would make Cobalt 27 cash flow positive and show that the company can do what it set out to accomplish, Milewski said. Cobalt 27 launched in 2017, raising C$200 million with a cache of physical metal and royalties on early stage cobalt plays, mostly in Canada.

But the goal from the beginning was to buy a stream or royalty on a producing or advanced-stage cobalt asset to capitalize on the skyrocketing price of the metal and a market that has risen to the top with the increasing popularity of electric vehicles, which often contain lithium-ion batteries that are dependent on cobalt.

Projected needs for cobalt, which is largely produced in the Democratic Republic of the Congo, has enticed juniors such as Cobalt 27 to pursue business models centered around the metal, figuring its importance will grow in coming years barring any revolutionary changes in battery technology.

The price of cobalt tells a story of want as automakers try to secure supply and contend with a fraught supply chain that depends on production dominated by the Congo. The metal's price has nearly quadrupled in the past few years.

In the deal, Cobalt 27 will acquire cobalt and nickel from the Ramu mine in Papua New Guinea, with the streaming agreement anticipated to close by June 30.

Highlands Pacific owns an effective 8.56% stake in the mine, which is 56.97%-owned by Metallurgical Corp. of China Ltd., and agreed to sell 55% of its attributable cobalt production and 27.5% of its attributable nickel production to a Cobalt 27 subsidiary, which will pay US$1/lb of nickel and US$4/lb of cobalt.

The company will retain the right to purchase up to a 13.27% interest in the cobalt-nickel stream from Cobalt 27 for up to about US$15 million.

In addition, the two companies will undertake a private placement, with Cobalt 27 to acquire 142.5 million Highlands Pacific shares priced at 10.5 Australian cents apiece to raise A$15 million. As a result, Cobalt 27 will acquire about a 13.0% interest in the company and will be able to appoint a Highlands Pacific director, with Milewski named.

Highlands Pacific will repay debt with cash from the deal to increase its stake in the Ramu operation to 11.3%.

Cobalt 27 is also in discussions with local stakeholders with an aggregate 6.44% interest in the property regarding a US$87 million stream agreement on the same terms.

While the cobalt sector now gets more attention from the market, Milewski said competition for assets was not overly fierce.

"There are more transactions than we're able to transact on," he said. "There's plenty of opportunities to go around."