Will Thomson | Battery Metals Fund Manager Discusses Cobalt, Nickel and Lithium Markets
Will Thomson is the Founder and Managing Partner of Massif Capital, LLC. He has experience in private equity and credit/political risk insurance, in addition to having served as a strategic and economic adviser to NATO/ISAF in Afghanistan. Will is a Graduate of Trinity College and holds a Masters in Government from Harvard University.
Massif Capital is a long/short equity fund focused on global opportunities in liquid real assets and industrials. The team’s work experience with governments in frontier markets, operational experience with growing energy companies, and time spent managing downside risk for project finance lenders gives them a unique edge.
0:05 Introduction
1:50 Will Thomson’s background and Massif Capital’s investment focus
4:03 Why Massif Capital opposes Pala Investment’s proposed takeover of Cobalt 27
14:17 Short-term trading possibilities with the proposed takeover of Cobalt 27?
16:25 Outlook for cobalt
20:21 Premium for non-DRC cobalt?
22:12 Outlook for nickel
25:50 Outlook for lithium
REPORTS BY MASSIF CAPITAL:
Intiating Report – KBLT- August 2019 – Massif Capital
TRANSCRIPT:
Bill: Well let’s start with you offering a little background on yourself, your investment experience, and your fund and the investment focus of your fund.
Will: So Massif Capital is a three years old as of last month, I believe it was. We’re a long short equity fund based out of Charlotte, North Carolina. We focus, as you , suggested, on basic materials, energy and industrial companies. We’re fundamental, bottom up stock pickers in difficult industries to do that in, At any given time. I’d say about a third of our portfolio is in mining companies of different kinds. Right now that’s principally battery related miners, golds and uranium.
Couple other things here and there. We run a fairly concentrated portfolio. I would say that at the moment our top five positions are about 50% of the fund. That’s who we are. It’s myself and a partner. Our backgrounds are all in energy, in mining, in different aspects of it. My partner has worked for battery startups and is quite knowledgeable on electricity markets. Myself, I worked in finance, in investment banking to start and then worked for Lloyd’s of London insurance syndicate writing political and credit risk insurance policies for project finance for mining companies mostly and commodity traders. That’s who we are and what we’re about.
Bill: For listeners, I’m going to put a link in the show notes below and post it on our … It’ll take you to MiningStockEducation.com in the post for this interview. There I’m also going to put a few reports that Massif Capital has written up. One of those reports is about the proposed takeover by Pala Investments of Cobalt 27. I’d like to kick off the discussion, Will, with you offering up for those that aren’t aware, if you could just an introductory overview of what the proposed transaction would look like. And then what is your funds assessment of this?
Will: Right, so Cobalt 27 for, those who don’t know, call it a bit of a mishmash of mining opportunities. The company was originally started to house a stockpile of cobalt, physical cobalt that they have in a warehouse in Rotterdam somewhere. I think it’s a thousand tons. I’d have to go back and double check. IPO’d in 2017. since then it has acquired a number of royalties and streams in pre-production, mostly nickel mines, but also a mix of nickel and cobalt mines. And they have acquired a JV interest in a nickel cobalt mine in Papua, New Guinea called Ramu. The crown jewel of the company, besides the physical cobalt and the interest in Ramu, is a cobalt stream from Vales Voisey Bay mine up in Canada.
The company has gone through some volatility as one would expect with cobalt prices and the excitement about EVs in 2017, 2018. traded up to as high as I believe $12 Canadian. Is now down to I think $3.85 or something as of today, a couple hours ago maybe.
So the Pala transaction, Pala is a private equity firm based out of Switzerland that has been invested in the company since the start, they own bout 18% of the company at the moment. They have a very close relationship with the management team. The CEO used to work at Pala and there were a couple of other people who used to work at Pala in the management team. They came in in June and proposed to buy the stock that they don’t own for a total consideration of $500 million Canadian, bout a 40% premium or so to the 20 day average of the stock at the time.
Now the transaction from our opinion is a bit of a disaster for shareholders, mostly because management they acquired this stockpile of cobalt in 2017 at about $60,000 a ton. It’s now trading at about $30,000 a ton on the London metals exchange. They acquired the Voisey Bay stream for $300 million last year. This transaction values that stream at about $180 million. And as part of the transaction, shareholders will get a about, we’ll say $3.86 or so in cash. Then they’ll get the remainder of the a about $5.75 in a share that’s being offered in stock in a new company called Nickel 28, which will hold the royalties and streams in the pre-production assets as well as the 8.6% interest that Cobalt 27 has in the Ramu nickel mine.
At the current time, again the market is valuing or trading the stock at about $3.86 despite the fact that there’s an offer out for $5.75. The market doesn’t like the transaction. A lot of that has to do, in our opinion, with the fact that you’re significantly undervaluing the Voisey Bay stream. You’re significantly undervaluing the long-term value of the physical cobalt and then you’re significantly overvaluing the streams and royalties that are definitely worth something.
But again these are all pre-production minds. And as all your listeners know, there’s a lot of risk involved there. Then you have the Ramu asset, which is being thrown in there into Nickel 28 and is definitely worth a something. We think it could be worth as much as $3.86 Canadian and so worth more than the proposed Nickel 28 implied value. But there’s a lot of uncertainty as to how that value would be realized by shareholders. The nickel 28 that shareholders will end up with will be undersized. It will have very limited working capital. I think it’ll have about $5 million or so.
The only path towards value creation for that company will be the acquisition of further streams and royalties, which will require them to go out to the market and issue shares or raise a lot of debt. Either way, the shareholders who remain are going get the short end of the stick on that one. So overall, the Cobalt 27 transaction is, in our mind, an example of a private equity firm coming into make an underbid, if you will, for a company that is facing a tough market and stealing some assets from minority shareholders.
Bill: Yeah. And it’s not wrong of you to voice your opinion as a shareholder saying you feel like this is stealing. Because when this has been dissected by a number of people on the internet, there’s a lot of people that aren’t happy. One of the things that’s often pointed out is the termination and change of control benefits. Apparently from my understanding, the CEO gets about US$7.7 million for change of control and then other employees get $5.3 million, $2 million. So there’s an incentive for them to change control, even though on a share price basis, the shareholders have lost value over the last year. The management actually can get kind of a windfall here.
Will: Yeah, no, absolutely. So the termination fee is $15.5 million on a market cap. $15.5 million US on a $250 million market cap US company, that for all intensive purposes, has no assets generating any cash flow at the moment. So it’s quite a steep termination fee. And then all in the fees, and I’m including the advisory fees here, which we looked at recently, we’re about 6 million. But all, in you’re looking at transaction fees of about 21, $22 million. So the CEO who used to work for Pala is going to exit this transaction as the CEO of Nickel 28. so he’s not going to lose this job. And he’s going to pocket about $7.7 million in a combination of just straight cash, payments for shares he had accumulated in Cobalt 27 and then I believe on top of that 7.7 million, he’s going to get some shares in Nickel 28 as well.
So the incentives for this management team to act on the behalf of minority shareholders, or frankly just to act as a proper fiduciary in general, is just non-existent. It’s a prime example of corporate governance gone wrong. We think we’re seeing more of this with private equity firms these days, but this is a particularly nasty example in our opinion.
Bill: You’ll be voting against the transaction. And then you also wrote that you don’t believe the acquisition will be successful. Why is that?
Will: Yes, we will be voting against the transaction. Everyone we’ve spoken with who is a shareholder has also voiced that same opinion. And I know that there have been a couple of funds who have voiced that opinion publicly as well. In regards to not thinking it’s going to go through, in order for the transaction to go through, there is a vote on September 12th and they need a majority of the shareholders besides Pala to vote yes. We just don’t think it’s going to go through, which is a speculation based solely on the way it has traded.
Since the transaction, I think it traded as high as maybe let’s say, I’m going to get my numbers wrong, but let’s say it’s traded as high as $4.25. Yet there’s a $5.75 offer. The market doesn’t seem to buy that this is a good transaction. That spread has not closed at all. So we just suspect, based on the way it’s traded and based on our conversation with a fairly wide group of shareholders, that many are going to vote no. [crosstalk 00:13:02] That is the speculation though.
Bill: Right. So there’s an arbitrage there right now obviously. If it does go through, there’s a potential arbitrage. But what are some, other than that obvious arbitrage, are there any other short term trading possibilities around this proposed transaction?
Will: Besides the arbitrage I don’t think so. I think that if you’re really long-term focused, it’s not a terrible price to buy in it, at least to start a position with the idea being that if you get bought out, you know you haven’t lost anything. You’ve presumably made some money in a pretty short order. And if it doesn’t go through, we still have to deal with figuring out what to do with this current management team, which we personally would like to see go.
But that’s still something that’s got to be worked on. These assets are definitely investible assets for the long term. I view a purchase here frankly of the stock outright as a potentially interesting opportunity from a risk reward perspective. The downside risks seems fairly limited. And the upside risk is both, there’s a short term potential and then there’s the long-term potential. Which comes to pass will depend on the catalyst, if you will, how the vote goes.
Bill: So that leads us into your outlook for cobalt. Share with listeners, what’s your perspective on the future demand and supply around cobalt?
Will: As everybody knows, cobalt is an important component to battery cathode architecture at the moment. With the emergence of EVs, there’s significant future demand for cobalt. We think that the move we saw a 2017, 2018. That was the speculative move on the short term expectations for what the long-term future demand might be. We’ve now settled down and the prices come back quite a bit. But that long-term demand story hasn’t changed. So now is an interesting time to be looking at people who are engaged in cobalt mining. Only about 2% of cobalt globally is mined on its own, meaning it’s always mind along with nickel or copper. The supply is a very difficult picture to paint because the supply of cobalt is in some regards tied to the supply and demand for nickel and copper.
But in the short to medium term, we expect to see a bump in the price of cobalt as a result of some mines coming offline and some mines producing below what they are expected to. In the long-term, we expect the demand to pick up quite significantly and for that to drive the price higher. The short to medium term picture for cobalt, which at the time of, just to bring it back to Cobalt 27. tying it back to cobalt 27 when the cobalt 27 transaction was proposed, it appeared like we were going to have to wait for cobalt price appreciation to some time when the actual EV demand would increase demand for cobalt. But what has happened since then is Glencore, who is the largest cobalt miner in the world, has come out and said that two of their minds in the DRC are underperforming. One of which is going to be put into care and maintenance, and the other is going to produce about half the cobalt that they thought it was going to produce this year.
The end result is that on the supply side, the one mine that’s being put into caring maintenance produces about 20% of global cobalt supply. And so all of a sudden, we’re looking like we may see a shortage of cobalt much sooner than we expected. So not only, frankly, is one of the arguments for the Cobalt 27 takeover, it doesn’t apply anymore. But we may be looking at a nearer term rally and the price of cobalt based on supply constraints. So we’re, I would say, fairly constructive on cobalt going forward.
Bill: I think that this proposed transaction, it took away from you and the other investors that invested in Cobalt 27. that upside that you guys originally saw, which brought you into that company. And then a lot of the pre-production royalties and so forth that you mentioned, you don’t necessarily get to get to experience that. As you say, the transaction just does not seem in the best interest of shareholders. Regarding cobalt production and where are these companies, the electrical vehicle or battery companies that will need future cobalt production, do you see almost a premium being put on cobalt not from the DRC? Because some companies don’t even really want to buy from the DRC from what I understand, just from a public relations standpoint.
Will: We haven’t talked with any automotive OEMs, but we’ve talked with battery manufacturers who supply people like Apple and Microsoft, so consumer products mostly. And they all say that DRC cobalt is largely untouchable. Now whether that concern continues in the presence of a tightening cobalt market, I don’t know. I’d be surprised if that that concern can hold for that long, just given where the supply of cobalt is, how much is needed and what can be accomplished from the potential cobalt producers, say out of North America where there are a couple of juniors who are exploring for cobalt or have cobalt assets that they’re trying to bring online. It’s just not going to be enough. I think for for the short to medium term, sure. They can say they don’t want cobalt from the DRC. But in the long term, I don’t really think a lot of us have much in the way of choice.
Bill: What’s your outlook for nickel?
Will: We really like nickel. We think nickel is actually the overlooked battery metal. This is coming despite the fact that battery chemistry and cathode architecture is increasingly moving towards nickel heavy construction. Nickel is a little more complex than cobalt. But a lot of the battery metals are a little more complex it turns out than some of the more base metals. So nickel can be mined in either a sulfide or a laterite form. Most of the deposits globally are a laterite, especially those deposits in some place like say Indonesia.
Laterite nickel, although it can be turned into what is called class one nickel, which is what you need for battery grade nickel. It’s a very complex, very capital intensive, very difficult process that a lot of nickel producers have struggled with. I think the prime example of that would be someone like Sherritt, which is a Canadian nickel miner that has a have nickel mine in Cuba and Madagascar. I’m not up to snuff on the company at the moment, but they went through significant growing pains trying to produce class one nickel from there, laterite deposits.
The other deposits are sulfide deposits, and they are a much fewer. You can turn the nickel sulfide into a class one nickel in a much more efficient, much more direct way. And there are several very interesting juniors in the nickel space that are focusing on sulfide deposits.
Bill: Are there any companies that you’d like to mention that your fund invest in?
Will: So we have looked at Talon Resources which is-
Bill: It’s Minnesota, is it?
Will: Minnesota. Yes, exactly. They have a resource in Minnesota called Tamarack. We think that that is a very interesting deposit. That’s a sulfide deposit, and that company is well worth keeping an eye on. It’s got strong backing and a very, very nickel knowledgeable management team. I think that as with all juniors, the team is a bit heavy on geologists and engineers.
They need a few more business people. But I think that every junior suffers from that issue at their early stages. The project is they haven’t produced a definitive feasibility study yet or a bankable feasibility study. But they’ve produced a preliminary feasibility study and the results are quite positive.
Bill: Yeah, there’s not a lot of primary nickel producers are there?
Will: No, no, definitely not. Their deposit, the land package that they’ve got is comparable in size to, and I’m not saying that the nickel deposits in that land package are comparable in size, but the land package is highly prospective and is similar in size to other primary historically significant nickel deposits say like Sudbury or Voisey Bay or Norilsk in Russia. So it’s quite an interesting potential opportunity.
Bill: What’s your take on lithium? Over the past six months or so, lithium and the lithium equities have not performed well. What do you see for this market and where are you finding the best opportunities here?
Will: I think lithium is another example of a complicated mineral in that mining lithium should really be understood. So first you have both hard rock lithium mining, which is mostly done in Australia at the moment for what’s called Spodumene. Then you have lithium brines, which everyone’s seen pictures of down in South America. You can produce lithium hydroxide or lithium carbonate. Different types of batteries with different types of architectures require one or the other. That gets quite complicated and picking your horse, if you will, you want to ride. Because most firms don’t produce both hydroxide and carbonate. Now what we see in the lithium space is that there’s more Spodumene being produced than is necessary at the moment.
What there is not enough of his processing capability for lithium of all kinds. So our general take is that within the lithium space, you have the three big guys, which are Livent, Albemarle and SQM. And because of the chemical complication associated with lithium and the value add from being vertically integrated and the resource endowment that those three guys have, there’s very little reason to look at any of the juniors. The refining is the missing link for lithium. And because the juniors just don’t have the capability and they don’t have the experience, we’re going to stick with the the majors. Now at the moment, we aren’t invested in many of them. We think there’s an opportunity to be patient here. But in the long-term, I would look to one of those three personally.
One of the other issues is that, the car producers, the battery manufacturers are intensely concerned about their supply chains. So for a car maker and a battery manufacturer to secure a stable supply, they’re not exactly going to be looking towards juniors first. They’re going to be looking first towards someone they know can produce the product that they need at the specifications that they need.
All of the battery metals require refining into not only say a concentrate if you will, but then into a technical qualification where there’s very few impurities in it. And then they require refining again into a battery quality. That supply chain with all those different production and refining steps has got to be nailed down in order for any of these metal is to be used. I think that’s overlooked. We actually see a pretty significant gap in the ability to process cobalt, process lithium, process nickel and get it to the state that the battery manufacturers need. A lot of that processing capability is in China at the moment. Outside of China, there’s very little of it. And quality control out of China is a mixed bag.
Bill: Would you invest in something having to do with processing then of these metals? Are there investments that your fund’s prospectus would allow you to invest in?
Will: We could invest in some opportunities. At the moment though ,there really aren’t any. That’s part of the issue. There are some lithium miners in Australia who are mining Spodumene who have decided that they are going to become processors, but they have no experience in processing. They’ve never built processing facilities. So this is a new line of business for all intensive purposes for them. In some regards, not only is it a new line of business, but it’s outside their sphere of competence. There’s all sorts of new knowledge that they need to get.
So the opportunities in the processing space are very limited and I would say that everyone needs to keep their eye out for them and create a long list of them and watch them for a while before they can really invest in one. Speculation is one thing, investment is another. There are definitely opportunities in China. We don’t invest in China, mostly because of the knowledge gap. We don’t speak the language. We can’t read Mandarin. We don’t have any contacts on the ground, but there are definitely some opportunities in China for those who who can venture forth to that jurisdiction.
Bill: Will, your fund, Massif Capital, what was the genesis of it? Was it your bullish view on the EV revolution? Was that kind of like the generative perspective that caused you to launch this fund?
Will: No. We consider ourselves a liquid real assets fund. The evolution of our fund is just looking out at the world and seeing that real assets have been trading at a discount, if you will, to other types of assets. And we view the real assets as a great long-term opportunity in a world where we may face significant inflation, where there are currency wars, or at the very least currency disputes. Wars may be a bit dramatic, and where interest rates are going to zero if not already negative. In whatever comes next, we view real assets as an important part of a complete portfolio.
Bill: Excellent. If listeners want to get in contact with you or learn more about your fund, how would they do that?
Will: Our website is just www.MassifCap.com Our contact information is up there. We are very responsive and always interested in talking with investors, whether they’re interested in investing in us or they’re just interested in talking about nickel and cobalt or whatever other basic material or energy they’re interested in.
Bill: Excellent. I appreciate your time today, Will. Thanks for coming on the show and sharing your insights.
Will: Absolutely. Thanks for having me. Bill.
