Riding a strong, long-term trend is the key to success for many leading business entities, and junior exploration companyGlobal Cobalt (TSXV:GCO) is one group that embraces this tenet wholeheartedly.
Global Cobalt’s focus is exploration for metals used in the batteries that have become central to our modern way of life – the ones found in our mobile phones, running our tablet computers, and for owners of Nissan Leafs and Tesla S’s, the batteries that power our cars.
The company is positioned as a consolidator in what it calls the "battery metals" space, with a focus on cobalt, an important mineral in the manufacture of lithium ion batteries. Essentially, its team looks for projects that have proven themselves at anywhere from an early to advanced stage but are held back by a lack of requisite expertise. That’s where Global Cobalt comes in, and very soon a company it is spinning out to pursue the same strategy but with a new jurisdictional focus.
Global Cobalt initiated the process of bringing multiple primary cobalt projects under its umbrella in 2009 with the acquisition of its first project, the 1,700 hectare Werner Lake property and its associated cobalt deposit, in northwestern Ontario. A year later it signed an option agreement on the Karakul project, marketed as having the potential to become the world’s largest non-African primary cobalt deposit.
Werner Lake turned out to be a good project and still occupies an important place in the company’s asset portfolio, but Karakul was the one that kept management awake at night dreaming of the possibilities. There was only one thing about the project that would turn out to be problematic, which was that it was located in Russia.
The team had no problem working in Russia and found many of the regulatory and business organizations in the country to be excellent partners and colleagues. Drilling work completed in 2013 did what it was designed to – it confirmed the historic resource calculated according to the rigorous Russian system, and went beyond to indicate a resource significantly larger than anyone had anticipated. The resource at Karakul is now compliant under Canada’s NI 43-101 standard.
Chinese battery material suppliers and other Asian commodities groups soon showed interest, and Global Cobalt found itself with the quality of suitors that most junior exploration companies can only dream of. Then the world reaction to Russia’s alleged involvement in Ukraine brought the music to a stop. The problem was not so much relationships within Russia or the team’s ability to continue work in a technical sense. At issue was funding, and the financial community’s sudden distaste for all things Russian.
Chutter and her team braved some bad times because of the ensuing geopolitical circus, but managers oftentimes need to find ways to turn problems into opportunities. It was imperative to isolate the risk the investment community perceived in Russian projects, and it was decided that the best way to do this was to spin non-Russian assets out of Global Cobalt and into a brand new company.
The plan should prove popular among Global Cobalt shareholders, as they both retain their full position in Global Cobalt and receive one common share in the new company for each Global Cobalt share they own. Completion of the transaction is expected in mid-summer following a meeting of shareholders to vote on the proposal
Karakul is a strong project and being just over 100 kilometers from the Chinese border, the potential for it to go into production one day is undeniable. Perhaps of more immediate benefit, however, are the industry connections Global Cobalt management built during the years it worked on Karakul. These now look set to come into play with projects in jurisdictions with more acceptable risk profiles.
"We know the material procurement managers for both large and small battery manufacturers, plus we understand how the trading works and where the constraints are in the market. Essentially, we have built relationships throughout the whole supply chain," says Chutter, pointing to the offtake agreement for the Karakul project with Chinese battery component supplier Beijing Easpring Material Technology Co. as one example. "It is an area where our team has been able to develop niche expertise and with this transaction we take these relationships and the projects we have identified and bring it all together into a new company."
That new company will start with two main assets, one of which is the Werner Lake Cobalt Project, a past-producing cobalt mine in Ontario. Global Cobalt conducted a drill program to confirm the historic resource and the next step, under the new company’s banner, will be to upgrade the metallurgical work. "Really, the key determinant for the project to go back into production is the cobalt price, and we peg the price we need at around 18 dollars per pound," says Chutter. Cobalt currently trades around 15 dollars per pound.
The other project the new company will have is the Iron Creek Cobalt Project. Iron Creek is located within the Idaho Cobalt Belt, "one of the most prolific cobalt belts in the United States," Chutter beams. The Iron Creek project has a resource estimate which, while modest in size, features promising grades. In addition, the management team has been clear that they are looking at other projects to expand the holdings of the new company, both in North America and elsewhere.
"The split really brings us the best of both worlds," says Chutter. "It allows for ongoing investment at Karakul and exposure to the project for our shareholders, with the new company enabling management to make accretive acquisitions and do exciting things in the battery metals space."
Global Cobalt’s board would approve the transaction once shareholder approval is obtained. A shareholder meeting is set for June 11, with the record date at May 7. The latter is the date on which an investor would need to hold Global Cobalt shares in order to vote on the transaction.
If shareholder feedback and market reaction are any indication, the vote should garner widespread support. Chutter characterizes feedback since announcement of the proposed transaction as "overwhelmingly positive" and confirming this has been an increase of over 100% in the share price from its lows earlier in the month.
Investors in other projects in the segment seem happy at the news, too. "We have talked to various investors in the battery metals space, both in China and North America, and they are very enthusiastic about having a consolidator in the segment," says Chutter. "Many are involved in projects that for whatever reason are stalled and they see how we can provide a solution to some of those hung projects and really drive value into them."