Q2 2022 Results/FY22 Guidance Lowered
Jervois (ASX: JRV) announced via its Q2 2022 results that it will be lowering its FY22 guidance due to lower cobalt prices and volumes. Given lower FY22 guidance, the JRV share price was down about 15%. However, cobalt prices are volatile, and it wasn’t long ago when cobalt prices were significantly lower than where they current sit (i.e., <USD20/lb).
While there is still risk for bondholders until construction is complete, this news is more concerning for equity holders who are valuing this company based on long-run through-the-cycle cobalt prices (remember: equity has no security as opposed to bondholders).
Australian Super continues to hold almost 20% of the public stock and is a long-term, stable equity holder in Jervois. Given Australian Super’s overall ethical stance on renewable energy, this gives us comfort they may also want to further support this investment vehicle going forward.
Despite the lower cobalt prices and volumes, bondholders have protection with a senior guarantee over the ICO mine as well as the nickel cobalt refinery in Brazil (SMP) respectively – thus recovery would be relatively good given the hard asset backing. Commissioned in Q3 2022, ICO will be the USA’s only domestic mine supply of cobalt, a critical mineral used in applications across industry, defence, energy, and electric vehicles. On this front, the ICO project is progressing well and everything continues to run on schedule
For those investors with large risk-budgets, the JERMNG 12.5 07/20/26 senior secured bonds still offer very good value. In our view, we’d be using any sell-off in the bonds as an opportunity to add – noting that we are nearing commissioning in Q3 2022 for the ICO mine. While expected cashflows may ultimately be slightly lower (due to lower cobalt prices), the total C1 cash cost at the ICO mine is only roughly USD4.70/lb (life of mine).
Thus, Jervois will still be throwing off a healthy amount of cash even with cobalt prices of <USD20/lb. We do expect pressure for a call will build for the company as it de-risks and starts to produce (meaning a 12.5% interest rate will not be feasible for the company’s WACC). Hence, investors should be comfortable with the yield to call (YTC) under the following dates:
- July 2024: 107.810
- January 2025: 104.69
- July 2025: 101.56
- January 2026: 100
Chart 1. Jervois Callable Dates
Table 1. Updated FY22 Guidance
|Updated FY22 Guidance||FY2022||Previous|
|Forecast Cobalt Price (USD/lb)||27.50||39.75|
|2022 Sales Volume Guidance (Tonnes)||5,500-5,750||5,750-6,000|
|2022 EBITDA Guidance (USDm)||35-40||50-55|
Source: IAM Capital Markets
Jervois Finland (the key income/earnings generator for the group) was impacted by volatility in both end-user demand and cobalt feed supply. Cobalt prices (MB SG Low) trended down from nearly USD40/lb at the end of Q1 2022 to USD26.95/lb as of 20 July 2022.
Table 2. Jervois Finland Financials
|Jervois Finland||Q2 2022||H1 2022|
|Sales Volume (Tonnes)||1,139||2,585|
|Average Cobalt Price (MB SG Low) (USD/lb)||37.8||36.5|
|Adjusted EBITDA (USDm)||11.9||26.8|
|Adjusted EBITDA Margin (%)||13.0||13.7|
Source: IAM Capital Markets
Chart 2. Jervois Finland Proforma Revenue
As of 30 June 2022, the group has cash (unrestricted) of USD57.6m (this excludes escrowed ICO bond accounts classified as restricted cash) or USD114.9m including the remaining ICO senior bond escrow and debt service accounts (remaining proceeds released from escrow on 20 July 2022).
The Mercuria standby working capital facility limit has been increased from USD75m to USD150m in June, providing additional financial flexibility. Debt drawn down totals USD150m (this represents an aggregate of amounts drawn down under the USD150m working capital facility and amounts drawn down from the escrow account under the terms of USD100m senior secured bonds).
The Idaho Cobalt Operations (ICO) remains on track for commissioning in late Q3 2022, with sustainable production at nameplate capacity expected in February 2023. An additional USD3.6m was committed (total USD4.8m in 2022) to infill and expansion drilling, with a total of 46,000ft to be drilled in 2022.
With detailed engineering, procurement, and commitments all more than 90% complete, Jervois revised the final forecast capex to bring ICO into production to USD107.5m (from USD99.1m), an increase of approximately 7.5%. In July, ICO completed the second and final drawdown of the USD100m senior secured bonds. The second drawdown of USD51m follows the July 2022 visit to the site by RPM Global, who is engaged in its capacity as an independent engineer on behalf of the bondholders. RPM Global submitted an affirmed Cost to Complete test to the bonds trustee, confirming ICO is fully funded to completion.
An official opening ceremony is schedule on site for 7 October 2022, with the expected participation of US political leadership and Australian government delegates. At the end of June, Jervois had spent USD66.9m of the total capex budget. Capex in Q2 2022 was USD25.6m.
The Sao Miguel Paulista (SMP) Nickel and Cobalt Refinery (Brazil) closed on 15 July with a cash payment of R$47.5m (remaining R$62.5m is to be paid on the earlier to occur of commencement of commercial production at SMP and June 2023, per the purchase agreement (which Jervois expects to be June 2023 based on SMP’s current restart schedule)).
Detailed execution planning for expected restart is underway. SMP is Latin America’s only electrolytic class 1 nickel and cobalt refinery, operating successfully for over 30 years prior to being placed on care and maintenance by CBA when its vertically integrated mine was closed due to low metal prices.