Jervois is a leading independent cobalt and nickel company linked to the EV demand growth. Post-Covid restart in China and pent-up demand is expected to be a key near term demand driver. Jervois’ assets are strategically important as EV batteries require nickel and cobalt as critical minerals. Assets are relatively thin and recovery for investors would be low in an event of default.
We see the US$150mn equity raise by Jervois as credit positive because it shows that the company can source capital while also de-risking the credit. As a credit with construction risks, this is helpful to manage any unforeseen capital shortfalls which inevitably arise with these types of projects. Entities controlled by AustralianSuper, the company’s largest shareholder, invested A$56mn (US$36m) which shows considerable backing. In our view, investors are being compensated for the risks around ICO completion and SMP restart through a higher bond yield vs other opportunities. For now, the company has been meeting key milestones (where within its control) which lead us to believe that cashflow will eventually be generated from the two remaining producing assets.
Recent Performance
Jervois has now established a path to move from one to three producing assets by early 2024 (Jervois Finland – currently producing, Jervois USA (ICO), and Jervois Brazil (SMP)) which will help organic cash generation and deleveraging capability. The company raised US$150mn of equity in November 2022 to help fund its near-term growth pipeline. Q4 2022 sales at its ‘’producing’’ Jervois Finland operation were solid in challenging market conditions.
For FY22, group revenue was US$354mn translating into NPAT of US$55mn. This was off the back of cobalt sales volumes for the year of 5,347mt. The company has also strengthened its balance sheet with cash on hand of US$153mn. The strong demand outlook is expected to drive price recovery in Cobalt markets. Analysts forecast a range for 2023 of between US$22.5-30/lb for the standard grade cobalt price.
Source: JRV Q4 2022 Presentation
Jervois’ balance sheet was enhanced by the US$150mn of equity in November 2022. The equity raise underpins the SMP refinery restart in Brazil and ramp-up of ICO in 2023. Net working capital has improved supported by a 2023 business plan to deliver a reduction to ~110 days by December 2023. The cash released from lowering working capital is expected to be used for partial repayment of the Mercuria working capital facility.
Source: JRV Q4 2022 Presentation
On delivery of the two key milestones: (1) ICO commissioning phase continues to align to revised schedule; and (2) SMP refinery restart project has commenced.
In relation to the ICO, commercial concentrate production is now expected end of Q1 2023 after some unprecedented labour shortages and severe winter weather conditions. The initial mine development is complete and surface construction is in final stages. Positively, promising results from recent resource expansion drilling have confirmed potential for mine life extension.
The SMP refinery restart is underway with operational readiness taking place. There has been significant engagement with downstream users which should support the sales strategy development. First production is expected end Q1 2024.
Relative Value
US High Yield – Metals and Mining
Source: Bloomberg US Corporate High Yield (LF98TRUU Index)
AU High Yield – Metals and Mining
Source: Bloomberg SRCH – Australian High Yield Bond Issuers
Forward-Looking Financials (include market estimates for FY23-FY25)
Source: Bloomberg
