LiCo Energy’s Deal with Glencore, More Than Meets the Eye?

LiCo Energy Metals (TSX-V: LIC) / (OTCQB: WCTXF) announced important news on September 5th that I believe might be under-appreciated by the market.  But there’s a possible explanation for this lack of enthusiasm …. investors simply don’t know the best part of the story, until now.  Perhaps I should back up a bit.  

LiCo’s acquisition of Glencore’s Bucke Property has Back-in-Option

A month ago, LiCo Energy announced that they had entered into a property purchase agreement with Glencore Canada Corp. (a subsidiary of global miner and leading cobalt (“Co“) player, Glencore plc).  The deal is for a 100% Interest in the Bucke Property near Cobalt, Ontario that includes a “back-in provision, 3.5% production royalty and off-take agreement, in favor of Glencore.”

Glencore is one of the world’s largest producers of Co as a result of by-products created from its copper assets in the DRC and nickel assets in Australia, Canada & Norway.  LiCo’s President & CEO Tim Fernback commented, 

“We are very excited to acquire this strategic Canadian property from Glencore.  The property is conveniently located adjacent to our current Teledyne Cobalt property, and this purchase agreement allows LiCo to expand upon one of Glencore’s longstanding Canadian cobalt assets.  If all goes as planned, we could be selling all our cobalt produced back to Glencore in the future.”

Dwayne Melrose, Director & Head of the Technical Advisory Board of LiCo added,

“We are delighted to add this Glencore property to our land position in Canada.  By adding drill indicated cobalt mineralization from the Glencore property with similar mineralization as that found at our nearby Teledyne property, we have greatly enhanced LiCo’s potential for finding an economic cobalt deposit.” 

Before I reiterate the benefits of the transaction to LiCo, especially how well it fits in with the Company’s Teledyne project, please note the following terms of the Back-in-Option, 

“….pay to the Purchaser an amount equal to 3 times the amount of Expenditures incurred by the Purchaser from the date of execution and delivery of this Agreement through (and including) the date of the Back-In Notice;…”

The Back-In Option is subject to Glencore determining that a discovery of one or more ore bodies has a minimum aggregate in-situ value of C$100 M. 

As a reminder, the Glencore property consists of 16.2 hectares and sits along the west boundary of Teledyne, covering the southern extension of the former producing 15 vein on the past-producing Agaunico Mine Property.  Agaunico produced 4,350,000 pounds Co and 980,000 oz. silver (“Ag“) during the mining boom of the early 1900’s (Cunningham-Dunlop, 1979).

In the early 80’s, the Glencore property was explored by 36 surface diamond drill holes totaling 3,323 m.  The drilling program outlined two vein systems hosting significant Co & Ag values.  Notice on the map above the close proximity of the Bucke property to infrastructure, most notably Teledyne’s development ramp and adit that extend 500 feet down, parallel to the vein.

Why is Glencore’s Back-in-Option so potentially important? 

As far as I know, Glencore does not have Back-in-Options with any other junior Co companies in Canada. This transaction took over six months to negotiate, it was a notable vote of confidence that a small player like LiCo Energy earned Glencore’s trust.  It was another vote of confidence when Greg Reimer the former Executive Vice-President of BC Hydro’s Transmission & Distribution network signed on as a Director at LiCo.  

More than just the intent on Glencore’s part to play close attention to the progress of Teledyne and Bucke, there’s the stipulated financial formula [3x LiCo’s eligible expenditures].  This could play out quite nicely for the Company.  If drill results are encouraging, investors could begin to think about what a 51% back-in by Glencore might look like.  

51% Back-in rights on Bucke Co Project for 3x LiCo’s expenditures 

I am not able to venture a guess as to how much capital might be spent before Glencore is required to make a Back-in decision, or when that event might happen, or if it will ever happen.  However, one thing is certain….. Glencore has the financial wherewithal to carry 51% of the project!  And, to execute an off-take agreement on one or both properties.  If it comes to that, Glencore wanting to Back-in on the Bucke project, a nice chunk of non-dilutive cash would flow into the Company and LiCo’s carrying costs would fall from 100% to 49%.

Another important factor for investors to remember is that if exploration goes well, the Bucke property has never been mined, it’s virgin territory, ripe for the taking if there’s economic ore to be had.  Several Co juniors talk about past-producing mines, which is good, but it also means some, or a lot, of the ore has already been exploited.  

Of course, a lot needs to go right between now and the time that Glencore might make a Back-in declaration, not least of which, positive drill results!  It could be a year or more before the LiCo is able to demonstrate C$100 M of in-situ value from either or both properties.  Importantly though– “in-situ value” is a much lower bar to clear than indicative economic value.

Conclusion 

LiCo’s arrangement with Glencore is an attractive one because of the Back-in provision and prospective off-take, but especially because Glencore is on board to pay 3x what LiCo puts up front to claw-back a 51% Interest.  Compare that to peers, who, if they have success through the drill bit, still have to fund 100% of exploration & development.  Or, find a strategic partner– which is never easy, cheap or done as quickly as hoped for.    

Disclosures:  The content of this article is for illustrative and information purposes only.  Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research[ER] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered implicit or explicit, investment advice or a recommendation or solicitation to buy or sell any security. Mr. Epstein and [ER] are not responsible for investment actions taken by the reader. Mr. Epstein and [ER] have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and do not perform market making activities. Mr. Epstein and [ER] are not directly employed by any company, group, organization, party or person. Readers understand and agree that investments in small cap stocks such as LiCo Energy Metals can result in a 100% loss of invested funds. It is assumed and agreed by readers that they consult with their own licensed and registered financial advisors before making investment decisions.

At the time this article was posted, Peter Epstein owned shares in LiCo Energy Metals and the Company was an advertiser on [ER].  By virtue of ownership of the Company’s shares and it being an advertiser on [ER], Peter Epstein should be viewed as biased in his views on the Company.  Readers understand and agree that they should conduct their own research, above and beyond reading this article. While the author believes he’s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein & [ER] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article. Mr. Epstein & [ER] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Epstein and [ER] are not experts in any company, industry sector or investment topic.