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Highlands Pacific shares up 39% in US$70 million takeover deal by Cobalt 27

Highlands Pacific Ltd. CEO Craig Lennon still believes in streaming despite his deal falling through with Cobalt 27 Capital Corp., which is now taking over his company, whose shares soared just over 39% on Jan. 2 after the news.

On Jan. 1, Cobalt 27 announced a friendly acquisition of the ASX-listed junior to boost its exposure to Papua New Guinea's Ramu nickel-cobalt mine, compared to the exposure it was looking at under the deal it signed in May 2018 to buy a US$113 million nickel-cobalt stream from Highlands.

Cobalt 27 will acquire all of Highlands' issued ordinary shares it does not already own for an all-cash offer price of 10.5 Australian cents per share, in a deal valued at around US$70 million.

Highlands has an 8.56% interest in Ramu which would have increased to 11.3% once it paid off a US$115 million loan to operator Metallurgical Corp. of China Ltd., or MCC.

Cobalt 27 CEO Anthony Milewski said the Highlands acquisition would boost his company's attributable exposure to Ramu's nickel production from 27.5% to 100% and cobalt production from 55% to 100%, at nearly half the cost of the Ramu nickel-cobalt stream.

Under the stream, Cobalt 27's implied production exposure would have amounted to about 450,000 pounds of cobalt and roughly 1,000 tonnes of nickel, based on 2018 Ramu production guidance for Highlands' pro forma 11.3% interest.

Taking over Highlands would boost Cobalt 27's attributable production to over 600,000 pounds of cobalt and over 2,900 tonnes of nickel based on 2018 Ramu production guidance for Highlands' 8.56% interest.

Once Highlands' partner loans are paid off and its Ramu interest rose to 11.3%, that would imply 2018 attributable production of over 800,000 pounds of cobalt and over 3,800 tonnes of nickel.

Thus, Cobalt 27 deduced, taking over Highlands would give it "significantly more attributable cobalt and nickel production at a lower transaction cost compared to the stream transaction."

There is also considerable upside as MCC is evaluating a potential US$1.5 billion expansion of Ramu.

"In light of the current commodity price environment for cobalt and nickel, Cobalt 27 declined to extend the stream transaction, which has been mutually terminated," Cobalt 27 said in the Jan. 1 statement.

Streaming issues

Highlands told the ASX on Jan. 2 that it had been seeking MCC's formal approval of the streaming agreement since May, and had negotiated a 'project way forward agreement', or PWFA, to facilitate the loans repayments, along with a sales agency agreement, with the Chinese group.

However, Highlands said the PWFA is yet to be executed by the other joint venture partners Mineral Resources Ramu Ltd. and Mineral Resources Madang Ltd., collectively known as MRDC, which needed to repay its project loans at the same time as Highlands, before June 30, 2019.

Thus the Cobalt 27 streaming agreement could not close before the long stop date of Dec. 31, 2018, due to "the late receipt of such approval from MCC and requirement for MRDC participation." Though Highlands was willing to amend the streaming arrangement to extend the long stop date, Cobalt 27 declined.

Lennon told S&P Global Market Intelligence that while his company considered a revised stream agreement, the lack of streaming players in nickel and cobalt and the changed market conditions meant a takeover was a "good outcome."

"Right from the word go when we did the stream, there's no one who would sit here and argue with a straight face that streaming isn't expensive from a financing point of view … but, given the alternatives we had and the objectives we wanted to pay down that loan to get an increased interest in the project streaming was OK," he said.

"I don't think there's anything wrong with streaming as a financing technique in the right circumstances."

Frieda frustration

Highlands also has 20% of the Frieda River copper-gold project which will be sold back to operator PanAust Ltd. as part of a buy-back agreement.

Having been with Highlands Pacific for over 15 years including nine as CFO, Lennon said he had enjoyed seeing the projects develop, particularly Ramu, but was "frustrated" at how Frieda progressed.

Highlands lost the first stage of arbitration proceedings over the Frieda River joint venture with PanAust after it was determined that Highlands' free carried interest in the project ceased from the date the special mining lease application was submitted.

Highlands also has the Star Mountains copper-gold exploration project plus the Sewa Bay exploration tenements, both of which Cobalt 27 considers "non-core."