We’ve been telling you it would for four months now, but the price of Cobalt Power Group (CPO.V) ramped up 20% in early trading Monday after the company dropped news that Hochschild Mining (HOC:LON) has agreed to buy into the Canadian cobalt explorer for a minimum of US$500k.
The deal, which comes in no small part from the fact that CPO CEO Andreas Rompel worked for Hochschild for a lot of years, in Peru, Mexico and Chile, establishes Cobalt Power Group as a larger player than their (now) $8 million market cap would suggest.
Hochschild will buy in at $0.13 per share in an upcoming private placement, which already seems like a win as the stock hit $0.15 today.
In an interview with Equity.Guru Friday, CPO’s Corporate Development honcho, Daniel Caamano, said the deal has been simmering for some time.
“They first communicated with us back when we were in the early phase, and still finding our footing with where we wanted to be as a company, whether that was going to be copper or something else,” said Caamano. “We tested the waters, but it wasn’t an intense discussion. We just knew they were looking for silver assets in South America, while we were going into North America, and figured maybe there could be a synergy there. They liked our group and knew we were serious, but it wasn’t a defined deal until we went into the cobalt space and, more importantly, this asset.”
With the news going public today, energy metals investors have given CPO a fresh look and appear to like what they see. When Equity.Guru first started talking about the company, it was a $0.075 stock. With today’s news, it’s now hit a double from that date.
Caamano says the intent of the arrangement doesn’t just revolve around the silver that sits in the ground in their Cobalt, Ontario property, but in the cobalt potential as well.
“Their focus is silver and gold, we’re obviously silver/cobalt, so there’s lots of crossover. I imagine they like the value proposition, being as we’re the cheapest cobalt company in the region, but sitting on considerable land. For us, the investment is a significant injection that allows us to take a deep breath and proceed with our next phase of exploration with freedom.”
In addition, Hochschild now has an option to take their pick of CPO properties for a future joint venture.
The right granted to Hochschild to option and joint venture one of CPO’s properties provides that Hochschild may select in its sole discretion a project held and being explored and developed by CPO for joint participation. If a project is selected for participation over the next 24 month period, Hochschild will reimburse CPO for 20% of CPO’s cost of exploring and developing the selected project and credit CPO for the remaining 80% of expenditures towards a joint venture participating credit.
Thereafter, Hochschild will be entitled to earn a 60% interest in and to the selected project by making work expenditures of CDN$6,000,000 over a four year period. Once the 60% interest has been earned, Hochschild and CPO will jointly contribute to the joint venture work expenditures.
Full terms will be set out in a joint venture agreement that will be subsequently negotiated and that CPO and Hochschild have agreed will include these key terms.
If you were a cynic looking at CPO earlier this year, you may have worried about the little explorer running out of money before they’d been able to prove the property out – or that it might be tough to get a bigger player in to JV on the project. Those risks are now far lessened, and with the potential of an off-take agreement down the road, it lessens even more still.
“We wanted to be aggressive on exploration, not aggressive on promotion,” says Caamano. “There are others in the region and sector that really focused on acquiring any project they could at whatever cost, just building a portfolio and not putting anything into the ground. If that leads to a project generator scenario or just an asset base, fine, but that’s not us. We were one of the first in the space in the Cobalt Ontario region, we had an intimate connection with a guy who lives there, and has worked the area for years, who knows where to go, what to stake, so we feel we have the best land package, in geo terms, that’s available. We didn’t have to go acquire ten projects and figure out which one works, we focused on the one where we can really believe in what we have, we’re not spread thin, and focus on that deal because we have geological certainty that, in our opinion, this is the spot.”
While the company definitely isn’t promotional in nature, the story is starting to become clearer – and get out. That stock price jump has gone from a few cents here and there to a definite upward trajectory of late. Caamano says a number of factors play into that, but that fortune favours those who get in first.
“It’s certainly a combination of factors. The [cobalt] sector has been moving, the Cobalt Ontario campus is starting to be seen as a true mining region too. First Cobalt (FCC.V) and Cobaltech (CSK.V) and Cobalt One are coming together, forming a larger company in the area, which shows there’s interest not only from the investor side but the sector in general.”
As for next steps, CPO has a firmly laid out plan, that it will go at even harder now that six figures are coming into the kitty.
“A few weeks back, we found a new mineralized zone on our property, so we’re keen to get some holes into it and see how it plays out on the trend. This is basically what we’ll do once we hit phase II, following the trend where we began, and punch a few holes into the new mineralized zone, which is about 800m to the SE of the existing. That allows us to proceed with determining where we’ll develop our other properties, which are all contiguous to the Smith Cobalt, so we’ll be able to plan for those as well.”
The deal will see Hochschild, which can afford a half million investment even with some rough financials last quarter, take just under 10% of CPO, and continue its recent plan to explore more broadly.
Pre-tax profit in the six months to the end of June came to US$39.9 million, compared with US$60.3 million the same period a year ago, on the back of increased investment in brownfield exploration, the elimination of benefits from a Patagonian port last year, and higher costs at one of its mines in Peru.
Fine details of the CPO/HOC deal are not yet nailed down, but Caamano says the firm has pledged to stay at their current intended stake, which would mean they’d likely participate to a similar level in any future financing.
“It’ll be up to them to participate in financings going forward to maintain that, and they’ll help with their technical team going forward – they specialize in a very similar type of vein structure as the one we’re seeing in Cobalt, in deeply dipping narrow veins, so that tech expertise will be phenomenal for us. Whether they take the silver, that’s not something we’ve got to yet.”
“The area is pregnant with these veins, so it would be easy to go broad-based exploration, but it makes the most sense for several reasons for us to go hard at our immediate successes, continue with news flow from those, and keep investors in mind with important news that shows our progress. We are going to keep being actively engaged with the property and pushing it forward, which has been our goal since we started.
“The drive in this area way back was originally silver; that pushed the whole region, and that doesn’t just go away overnight. They didn’t stop finding it, they stopped mining it because the price dropped. Over the years, it went dormant in the the 30’s and 40’s, folks focused on other things and other areas, and it was only when the search for cobalt heated up that folks gave it another look. Essentially, this has always been a silver story and it may well be again.”
But the cobalt remains important to CPO if, for no other reason, than it’s staring them in the face.
“We see it on surface,” says Caamano. “It’s not like we’re just blindly going in. We have mine shafts and historic production data and an end product that is in dire global need and it’s literally right there on the ground.”
I’m always one for a risk assessment of any deal, even deals that, like this one, appear to have a good team, a good land package, a hot sector and an undervalued market cap – all good pieces on an investable puzzle.
But what if a new battery emerges that doesn’t require cobalt, and that shows data better than existing lithium ion offerings?
Caamano says that’s possible, but has one proviso; “Let’s say the planets align and that tech emerges. By the time that sort of thing is streamlined and tested and licensed and financed and finally brought into mass production, the infrastructure would frankly take years to get in place to push lithium ion products out of existing consumer and industrial goods. You’d have to redesign a lot of things, spend billions of dollars, and even then, it’s an outside chance that would take years to materialize. We’re moving forward in the belief we’ll be making money long before that day comes, if it ever does.”
— Chris Parry
FULL DISCLOSURE: Cobalt Power Group, First Cobalt, and Cobaltech are Equity.Guru marketing clients, and the author owns stock in Cobalt Power Group, purchased on the open market.