Corcel – Go go for Wo Wo Nickel-Cobalt Project. Valuation disparity reaches extreme proportions. Buy with tweaked price target of 20.03p

August 12, 2021 | Posted by

By Dr. Michael Green

It all looks to becoming together very neatly at Corcel. This morning, investors learnt that the acquisition of the Wo Wo Gap Nickel-Cobalt Project in Papua New Guinea looks to be in the bag.

Wo Wo Gap is located 200km from PNG’s capital of Port Moresby and some 150km SE of Corcel’s existing Mambare asset. There is no doubt that the company sees significant synergies between these two projects and visualises this acquisition as a significant step in its evolution to become a leading PNG battery metal and nickel/cobalt exploration company with material scale in country and the region.

The latest news is that the company has signed a binding but conditional share purchase agreement with Australian-registered Resource Mining Corporation Limited (ASX: RMI) to acquire a 100% interest in Australian-registered Niugini Nickel Pty Ltd, which owns 100% of the Wo Wo Gap nickel-cobalt project. As far as the consideration goes, the company will gain the project by releasing all liabilities and obligations in connection with its A$4.76 million senior debt position in RMI. For this deal to happen, RMI needs to gain shareholder approval at a general meeting, which is expected to be convened shortly.

At the time Chairman James Parsons was able to point out that “We are delighted to have secured direct ownership of the Wo Wo Gap Nickel / Cobalt project subject to approval of RMI shareholders, which positions Corcel as a leading PNG Battery Metal exploration company with genuine scale in both the country and the wider region – this is the culmination of a key part of our long term strategy to build our presence and progress towards creating material value in Papua New Guinea.  Today’s news marks further progress as we continue to develop our portfolio of high upside battery metal exploration projects alongside our low risk energy generation and storage projects in the UK.  Our strategy remains to support the every-accelerating decarbonisation of the economy by operating at the intersection of battery metals and their end use in flexible energy.”

Apparently, exploration at Wow Wo Gap dates back to the 1950s. Over time, something like £8 million has been spent here which includes multiple drilling programmes, including diamond drilling, wacker holes and ground penetrating radar activities. Project activity of late has focused on maintaining commitments for the exploration licence, including site-based activities such as maintenance of the existing infrastructure and equipment, so as to facilitate a ready state for future exploration and development which is likely to be focused on a potential direct shipping ore (DSO) operation.

Wo Wo Gap is located at the south-eastern end of the Papuan Ultramafic Belt, a complex of peridotite, pyroxenite and gabbro that forms the prominent east-west trending Didana Range. The project hosts 125Mt @ 1.06% nickel and 0.07% cobalt Indicated Resource Estimate (JORC 2004) within the laterite profile based on drilling along the 12-kilometre strike length. Importantly, Wo Wo Gap lies 150km SE of Mambare and is a similar deposit with a higher grade and there are clear synergies. The acquisition of Wo Wo Gap sees the prospect of Corcel becoming a sizeable leading PNG exploration company.

The recent GPR work at Mambare was designed to determine the location for the DSO operation for the Mining Lease. This development is likely to require US$25 – 30 million of capex and at that stage, Corcel would either be looking to bring in larger players for a JV or consider a complete disposal. Currently, the company owns 41% of the project, but given a perceived inability of BMA to fund the asset through to production, it would seem logical that the entire asset is vended into Corcel to allow for meaningful development. Chinese investor Sinom has been happy to accept Corcel’s paper, as demonstrated by the 2020 debt deal, and has now emerged as a highly supportive 12% plus shareholder. Such backing speaks volumes for being a potential source of both offtake agreements and future funding.

There is an obvious plan in progress to explore synergies with Wo Wo Gap and Mambare. In fact controlling both now makes it materially more likely that they will be brought into production either jointly or sequentially. The financial and resource savings of having them run jointly in both manpower and admin is likely to be real, across collectively geology, admin & on the ground logistics.  Dealing with the PNG government as a larger player in the space, means Corcel are more likely to get the attention/access from the MRA and officials needed to take these projects forward in contrast to a smaller entity.

The degree to which Wo Wo Gap and Mambare are combined depends on a host of factors. However, putting them together as a combined PNG project would make Corcel a big player in PNG and likely ease relations with the government. There is no doubt that the synergies are pretty big here with the opportunity to cherry pick the best bits for DSO at each deposit, potentially exporting using the same logistical streams and applying revenues from one to further develop the other. In the end Corcel looks like it will acquire this quite second large nickel cobalt play for a song.

That is of course not to mention Corcel’s Flexible Grid Solutions project portfolio that is going from strength to strength. Recent months have brought news that the company has gained the exclusive rights to acquire a 100% interest in the shovel ready Avonmouth 50MW gas peaking project outside of Bristol from FPC Electric Land Limited (Electric Land) plus an additional 15MW of potential grid capacity. This takes Corcel’s pipeline of projects up to 185MW.

In our recently updated research report, we used an EV/tonne figure of £6.02 to value Mambare using peer comparisons. At the time we commented that Corcel didn’t own the project yet and that Wo Wo Gap was at a slightly earlier stage of development than Mambare. On that basis chose to use the EV/t figure ascertained for Mambare of £6.02/t then risk it to the tune of 70%. The latest news removes some of these uncertainties and so we have reduced the risk weighting to 20%, as a small discount is probably still in order considering the RMI shareholders do need to vote, but presumably administration isn’t a super attractive alternative. The result is that our SOTP valuation totals £111.03 million, where we have added in the funds resulting from the options being exercised. On this fully diluted basis (554,199,464 shares), the valuation works out at 20.03p per share which we have chosen to adopt as our new improved target price for the stock.   

Going forward, a good case could probably be made for Wo Wo Gap being worth roughly the same as Mambare – if not the full £40 million Mambare had in 2011-12, then at least some reasonable discount to that. With nickel prices strong and Chinese producers looking to have diverse sources of ore (outside the Philippines and Indonesia), Corcel looks mighty well-placed moving ahead. Plans at Wo Wo Gap are likely to involve updating the JORC to 2012 standard, then progressing towards a mining lease with all the hard lessons that the team has learnt from Mambare taken into account. It is now on the cards that the Mining Lease at Mambare could be awarded in the coming months allowing a DSO operation, funded by a JV partner. Together with Wo Wo Gap, this could nicely set the scene for valuation creation and M&A action.

As mentioned before, by any yardstick, we believe that Corcel is ridiculously undervalued. Ahead of any further updates, with the shares sitting at 1.75p, our stance on Corcel remains Conviction Buy with a new target price of 20.03p.


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