Anson Funds Provides Further Comment on Cobalt 27 – Pala Transaction

- Anson Funds believes the Cobalt 27-Pala transaction undervalues Cobalt 27

- Anson believes the transaction terms, including the $15,500,000 termination fee, are structured to ensure a value transfer from minority shareholders to insiders and related parties. Anson has shared its concerns with the Ontario Securities Commission, and urges other shareholders to do the same.

- Anson believes that the $21,500,000 in fees relating to the transaction payable to management and advisors is excessive.

- Anson believes the strategic review process was inadequate and was undertaken at an inopportune time in the cobalt market. 

- Anson believes the management information circular requires additional disclosure and contains misleading information.

- Anson believes the current proposal is highly unlikely to receive the necessary “majority of the minority” shareholder approval.

- Anson has lost confidence in Cobalt 27’s board of directors and management and intends to withhold its votes at the annual and special meeting.

TORONTO, Aug. 20, 2019 (GLOBE NEWSWIRE) -- Anson Funds (“Anson”), a significant shareholder of Cobalt 27 Capital Corp. (“Cobalt 27,” or the “Company”), is providing additional comment on the announced transaction between the Company and Pala Investments Limited (“Pala”), a related party of the Company and its largest shareholder, pursuant to which Pala will acquire 100% of the Company’s issued and outstanding shares for C$3.57 in cash plus shares of a newly listed company to be named Nickel 28 Capital Corp. (“Nickel 28”) (the “Transaction”). Anson’s initial press release outlining its initial views on the Transaction can be found here (the “Initial Release”).

After reviewing the recently filed management information circular (the “Circular”), Anson is highlighting additional concerns with the Transaction, and is reiterating its intention to vote against the Transaction and withhold its votes for all the directors standing for election. Since issuing its Initial Release, Anson has been contacted by a significant number of shareholders who share the same concerns as Anson pertaining to the Transaction. As such, Anson has additional confidence that the Transaction is unlikely to receive the necessary “majority of the minority” shareholder approval.

Transaction Undervalues Cobalt 27, Crown Jewel Asset Being Sold at Fire Sale Prices

As discussed in the Initial Release, Anson believes that the Transaction effectively results in the sale of the Company’s crown jewel asset, the Voisey’s Bay Cobalt Stream (“VB Stream”), to a related party at fire sale prices (and without paying a control premium). According to Anson’s calculations, under the Transaction, the net effective sale price of the VB Stream is approximately $180 million, which represents a 40% discount to the price that the Company’s board of directors (“Board”) and management paid for the stream one year ago. In addition, the Transaction effectively crystallizes losses in excess of $225 million on the sale of physical Cobalt and the VB Stream, representing a loss of almost 50% of cost. 

Egregious Transaction Terms, including $15,500,000 Termination Fee to a Related Party

The Transaction Terms, including the $15,500,000 Termination Fee payable to Pala and $1,500,000 expense reimbursement, are significantly off-market and serve to act as a significant deterrent to a third-party Superior Proposal. Anson believes that the Termination Fee and related provisions results in an 8.6% hurdle rate on the implied sale price of the VB Stream, which is excessive considering the Related Party nature of the transaction. In addition, Anson is concerned with Pala being provided with Confidential Information in the absence of a standstill provision customary for a Transaction of this nature. Anson has shared its concerns with the Ontario Securities Commission and urges other shareholders to do the same.

The Transaction is yet another example of Pala seeking to benefit itself through opportunistic related party transactions to the detriment of minority shareholders. These transactions includes Pala's failed partial insider bid for Neo Material Technologies Inc., where the Ontario Securities Commission declined to cease trade Neo's shareholder rights plan to allow Pala's bid to proceed, and Pala's failed insider bid for Melior Resources Inc., where the special committee of Melior's board rejected a Pala price that was significantly below the valuation range determined by an independent valuator.

Transaction Results in Unnecessary Fees Payable to Management and Insiders

After reviewing the fees payable on the Transaction, Anson is concerned at the quantum of value Management and Advisors are stripping from the company for what is as simple as selling to two assets: (i) its physical Cobalt and (ii) the VB Stream one year after purchasing it, both for significant losses. Anson does not comprehend how the Board could endorse a transaction whereby the Company incurs expenses of this magnitude.

In addition to the fees payable above, since mid-2017, the Company will have effectively paid out nearly $37 million to management, directors and advisors. This amount excludes over $1 million in cash per annum and the long-term incentive plan that will be paid annually by Nickel 28 going forward. This is in stark contrast to the nearly $385 million of shareholder capital destroyed to-date.

Cobalt Prices Rising, Despite Management and the Board’s Prediction Otherwise

It appears that one of the primary reasons that management and the Board have used to justify selling the Company’s recently purchased long-term focused Cobalt assets, is that they are predicting that a rebound of Cobalt prices in the future is unlikely. The following excepts are from the Circular:

“The Board and Special Committee’s knowledge of cobalt supply-demand dynamics informed their view that a sustained rebound in cobalt prices in the short to medium term is unlikely”.

“We are facing a challenging global cobalt price environment that may continue to exhibit significant downward pressure over the short to medium term.”

The Circular only presented Cobalt pricing through July 31, 2019. However, since the end of July, Cobalt pricing has rallied significantly from its lows as a result of a material change to the forecast future of supply of Cobalt due to curtailments. In fact, since the beginning of August, Anthony Milewski Chairman of the Board, has tweeted articles with the following headlines:

• August 8, 2019: “…shutting down Mutanda will balance cobalt market or bring “slight deficit” as EV demand rises.”
• August 13, 2019: “UBS forecasts continued Cobalt price strength over next 18 months…Cobalt Price to jump 60% in next 18 months.”

Cobalt prices have risen to $16/lb, as of Friday August 16, 2019, which is nearly 30% above their July 31^st, 2019 low and above the price at the time when the Company entered into the Pala transaction. It would appear that the Board and management are poor predictors of forward Cobalt prices.

Nickel 28 Undercapitalized; Inconsistent Valuation Methodologies

Anson is perplexed as to how the Company can state that shareholders will receive C$2.18 per share in Nickel 28 consideration when there is no reasonable valuation back-up in the Circular to support this. Anson has noticed inconsistencies in methodologies in Company’s pubic disclosure pertaining to valuing certain assets. Specifically, in the carve-out financial statements for Nickel 28, the Dumont royalty is valued at cost ($15.3 million). However, in their presentations, the Company values such royalty at over 2x that amount. Regardless of the correct methodology, Anson does not understand how the Board can value Nickel 28’s assets (including Cobalt-linked assets) at a premium to cost and justify selling the VB Stream at nearly 50% below cost. 

Nickel 28 is being spun off with only $5 million in working capital and will have negative cash flow after corporate expenses. Its primary asset, the recently purchased Ramu joint-venture interest, requires in excess of $110 million of financing in order to be a meaningful contributor to cash flow. Reducing asset diversity by selling the VB Stream and stripping the Company of working capital by selling its physical Cobalt, increases its cost of capital and limits the go-forward financing options for Nickel 28.

In addition, management, who will have just profited handsomely if the Transaction closes, have entered into new employment agreements with Nickel 28 with high cash compensation, participation rights in a new long-term incentive plan, and new change of control benefits (effectively allowing them to double dip if Nickel 28 is subsequently sold).

With such high management compensation, and assuming historical levels of professional, general and administrative expenses, Anson estimates that Nickel 28 will require external and potentially dilutive financing very soon after being spun-off. It is apparent to Anson why Pala is reducing their ownership at an inflated valuation as part of the Transaction. Anson believes that most shareholders would like the right to sell their Nickel 28 shares at C$2.18 per share as well.

Strategic Review Process was Inadequate

Very limited disclosure was provided in the Circular surrounding process that the Company's financial advisor undertook to find competing third party offers. However, Anson finds the timeline quite concerning as the Company's financial advisor only spent approximately one month on initial outreach to third party proposals, and one roadshow to attempt to find interest from parties other than Pala. This is in contrast to nearly three months of negotiation with Pala and the offer fluctuating by over $1.30 per Cobalt 27 share. Had a proper process been undertaken, rather than an accelerated process in reaction to a low-ball bid, Anson is confident that better offers could have been received. In addition, Pala may have been advantaged by virtue of their absence of a customary standstill provision.

Anson also believes that the strategic process was run at an inopportune time in the cobalt market. This view was also shared by the Board and special committee, as they admit in the Circular that monetizing Cobalt in a declining market was unlikely to yield positive results.

“…effort to monetize Cobalt 27’s physical cobalt position during a period of downward price pressure would be met with extreme difficulty and would be unlikely to yield positive results”

By the Company’s own admission, a market environment where Cobalt was in the process of declining from $44/lb to $12/lb, which coincided with when the Company's financial advisor was running their process, was not the best time to run a process to sell physical Cobalt and a Cobalt stream.

Fairness Opinion Detail Lacking

Anson derives very little comfort from the Fairness Opinion received by the Special Committee for the Transaction. Specifically, there is no back-up and supporting detail in the Circular outlining valuation methodology for the Transaction or Nickel 28. Anson is concerned not only that the $2.18 per share Nickel 28 value is inflated, but that a significant part of the consideration that Pala is paying for the assets is a reduction in its Nickel 28 ownership interest. As such, an inflated valuation of Nickel 28 is essentially a value transfer from minority shareholders to Pala, a related party. TD Securities, the investment bank who provided the fairness opinion, also published a research report on the Transaction details on June 20, 2019 and their valuation varied substantially. Below are some relevant excepts:

“At current spot prices, we estimate Nickel 28’s corporate NAVPS at C$0.42. We do not expect Nickel 28 to generate any positive distributions at current prices.”

“we believe that [the Transaction] does not fully capture the long-term upside for the company's high-quality cobalt assets.”

Given that Nickel 28 is such a large portion of the consideration that shareholders receive, and that Pala uses it to derive their purchase price, more disclosure should be provided on the methodology used to value various parts of the transaction and that back-up the stated $5.75 in per share consideration. 

Transaction is Highly Unlikely to Receive the Necessary “Majority of Minority” Shareholder Approval

We have heard from many shareholders who share our views and see this Transaction for what-it-is, an unnecessary value transfer from minority shareholders to Pala and management, and a squandering of corporate resources. We are confident Shareholders will vote against the Transaction and that it will fail to receive the necessary “majority of the minority” Shareholder Approval.

Anson intends to vote against the Transaction and withhold its votes for directors standing for election, as they have proven themselves unable to govern this Company effectively.

Anson Funds:

Anson Funds is a privately held alternative asset management company, founded in 2007 with offices in Dallas and Toronto.

For further information: Jay Lubinsky, Tel: (416) 447-8874