What’s happened?
Jervois has suspended final construction at its 100%-owned Idaho Cobalt Operations (ICO) due to the continuing low cobalt price and US inflationary dynamics on construction costs. The ICO mineral asset is the largest and highest-grade cobalt orebody in the US and cobalt remains a critical mineral.
The decision not to mine ICO cobalt at cyclically low coal prices and preserve asset optionality, will preserve value in the medium to long term. The medium to long term fundamentals for cobalt are positive and will be influenced by impacts such as rising demand from the energy transition including Electric Vehicles, and the preference for cobalt from sources with Western ESG credentials. The US Department of Defence (DOD) will award Jervois with US$15m of funding through a Not to Exceed Technology Investment Agreement.
What are the implications for senior secured bondholders?
In our view, project economics are just as important as project execution, and on that basis, halting a project until the economics make sense is a prudent business decision, and preserves cashflow for bondholders in the near term. Note – this is a suspension, not a complete exit of the project. A complete exit of the project would be more negative for bondholders given the inherent sunk costs associated with this decision. In essence, this story is more negative for equity holders who are more price sensitive to the forward-looking earning profile – so I would not be surprised to see the stock come under pressure. The US government has recently shown their cards by stating that “developing a viable domestic cobalt supply chain is high on the agenda”, even to the extent of providing additional funding, if necessary.
Jervois will immediately commence and orderly and rapid demobilisation of construction contractors from ICO’s site over the next few weeks. Where practical, Jervois will reassign local ICO employees to the activities to be funded by the DOD award. The mine component of ICO’s construction has been completed, however the US inflationary dynamics and cost environment, is not conducive for project economics. Jervois has spent ~US$130m on construction at ICO, has a cash balance of ~US$52m, and since the December 2022 year end, has paid down US$45m of its US$150m Mercuria loan facility resulting in a decrease from the end December 2022 drawn balance of US$115m down to US$70m.
Should bondholders be worried?
On the contrary, Jervois’ US$100m senior secured bonds remain due for payment in July 2026, the company remains in compliance with its bond covenants and there is no expected adverse impact on the bonds to Jervois from ICO’s construction suspension. In our view, the likelihood of early call may have diminished given the project completion is now, however, holding the bonds until 2026 still offers a healthy 13% yield to maturity. The company can call the bonds according to the following schedule below.
Source: IAM Bloomberg
