Purecore Metals Inc. press release

First Cobalt Notes Former eCobalt Executives' Opposition to Value-Destroying Jervois Transaction

2019-07-15

CSE - Canadian National Stock Exchange · Canada

Canada NewsWire

TORONTO, July 15, 2019

TORONTO, July 15, 2019/CNW/ - First Cobalt Corp. (TSX-V: FCC, OTCQX: FTSSF) ("First Cobalt") notes that former key executive and directors of eCobalt Solutions Inc. (TSX:ECS) ("eCobalt") have disseminated the following press release opposing the proposed merger with Jervois Mining Limited (ASX:JRV) ("Jervois").

The Company did not participate in the preparation of the letter but believes it to be of interest to all eCobalt shareholders and we have therefore reproduced it in its entirety:

"Letter From Concerned Former Executives of eCobalt Solutions Inc.

Dear Shareholders,

We have profound concerns regarding the proposed nearly "at-market" merger between eCobalt and Jervois and the disclosure found in eCobalt's Management Information Circular dated June 19, 2019(the "Circular"). As shareholders who are the former President & CEO and a former Vice President of eCobalt, we are writing this open letter to communicate how we intend to vote in regard to the Arrangement resolution at eCobalt's upcoming shareholders meeting on July 19, 2019and the reasons for this decision. In a nutshell, we believe the proposed "merger" is highly beneficial for certain key officers and directors of both companies; however, we are not convinced that it is in the best interest of current eCobalt shareholders for the reasons to be addressed below.

It appears to us that the Jervois team has demonstrated they are shrewd negotiators as they have secured the 'YES' votes from all of eCobalt's Directors and Officers, as well as from one of eCobalt's largest shareholders, Dundee Corporation. This was accomplished while simultaneously ensuring that the current CEO of eCobalt (who was apparently eCobalt's principal negotiator of the deal) is expected to be further enriched as a Director of the "New Jervois" merged entity with a position on the resulting issuer's Board of Directors. eCobalt's CEO also received a timely gratuitous change to his employment contract with eCobalt (addressed in detail below) making it more advantageous for him to endorse the merger transaction. The result of these shrewd negotiating accomplishments was the achievement of a very insulated merger deal where: Jervois did not have to face alternate bidders in an auction process in regard to eCobalt; only a symbolic nominal premium is theoretically to be paid to eCobalt's shareholders utilizing recently depreciating shares of Jervois in order to acquire control of eCobalt and its prized Idaho Cobalt Project; no specific significant alternative transactions were disclosed as being considered and developed by eCobalt; disclosure available to eCobalt's shareholders in the Circular is brief and opaque (while paradoxically being encased in a 382-page document); and the definitive deal terms found in the Arrangement Agreement provide for only a theoretical (rather than practical) potential that a "superior proposal" could arise due to the existence of major cash penalties - basically a hefty "break fee" in the millions of dollars, to be effectively borne by the shareholders of eCobalt in terms of the valuation any alternate bidder or investor would attribute to eCobalt under such circumstances. Good for Jervois, bad for eCobalt.

During the weeks after eCobalt announced the proposed Arrangement (April 1, 2019), we were contacted by Robert Quinn(another eCobalt alumnus, who was a member of eCobalt's board for approximately 18 years and is its former Chairman) and Jim Engdahl(another eCobalt alumnus, who was a member of eCobalt's board for approximately 24 years). We together raised questions amongst ourselves and tried to decipher the merits of eCobalt's proposed merger with Jervois. We are confident that Mr. Quinn and Mr. Engdahl share our current concerns.

Some details about some of our concerns include:

1. Not the Prettiest Dance Partner: Jervois is an Australian company with a history of little cash and three early-stage mineral property assets. Two of these properties are in separate countries in Africa, both of which are rife with corruption problems (according to Transparency International's Corruption Perceptions Index), and the other is in Australia. Jervois' Australian mineral property is not yet advanced to the Pre-Feasibility Study (PFS) stage as Jervois only has a Preliminary Economic Analysis (PEA) for its leading property (as filed on SEDAR on April 5, 2019). A PEA is preliminary in nature, it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that a PEA will be realized. In regards to Jervois' Australian property, we are concerned that potential, large, low grade, open pit projects such as that can require unexpected additional years of development and may take multi billions of dollars in research, development and capital expenditures to reach their full potential production.

2. Ethically Sourced and US-Based Idaho Cobalt Project: eCobalt's US-based, advanced, near-term, permitted, Idaho Cobalt Project is considered an ethical source of this critical metal. It is also classified as a potential domestic source of this critical material, which is important in this era of trade wars, protectionism and security-of-supply concerns. Ethical and domestic sourcing by potential customers is a value-added, crucially important consideration in developing a cobalt mine and providing supply to North American customers. It is also a consideration of many financiers. However, if the resulting New Jervois owns a portfolio of mineral properties, including two that are not considered by many as being capable of supplying ethically sourced minerals, then this may create potential future liabilities or financing challenges for New Jervois and its shareholders.

3. Destination = a Junior Stock Exchange: Jervois is utilizing the proposed transaction with eCobalt to gain direct entry to the North American capital markets through its listing on the TSX Venture Exchange ("TSXV"). eCobalt is currently listed on the more senior Toronto Stock Exchange ("TSX"). We are concerned that an effective migration from the TSX to the TSXV is a big step in the wrong direction for eCobalt shareholders. We are concerned that a TSXV listing will reduce analyst coverage and financing opportunities involving investors who either require or prefer securities and companies that are listed on the senior exchanges. We are also concerned about the minority shareholder protections that will be lost by eCobalt's shareholders in a transition from the TSX to the TSXV. For example, issuer's listed on the TSXV are not required to adopt a "majority voting policy". This policy provides that, in a non-contested election of directors, voting will be by ballot and, if the number of shares "withheld" for any nominee exceeds the number of shares voted "for" the nominee, then, notwithstanding that such director is duly elected as a matter of corporate law, he or she shall tender his or her resignation. eCobalt adopted a majority voting policy at its shareholders meeting held on June 21, 2013. This is an important protection and empowerment for eCobalt shareholders who are now being asked to agree to a nearly "at-market" merger with Jervois where collectively control of the corporation will be lost and eCobalt shareholders will become minority shareholders of New Jervois and will collectively hold less than 50% of the outstanding shares. The loss of a majority voting policy is a win for any directors who seek entrenchment and the avoidance of shareholder democracy and activism. Other protections such as enhanced disclosure requirements and lower triggers for shareholder approvals for share issuances and dilutive transactions will also be lost in a transition from the TSX to the TSXV. All else being equal, a company with less minority shareholder protections and less minority shareholder empowerments will face a greater minority interest discount in its day-to-day trading price as compared to its peer with enhanced minority shareholder protections and empowerments. More on the topic of a comparison between the TSX and the TSXV will be addressed below.

4. Wow - How Many Shares?: Should this proposed merger and Jervois' recently announced conditional private placement financing be completed (see #5 below), then we estimate that New Jervois will have approximately 640,000,000 shares outstanding. While this share count may be considered culturally acceptable and the norm in Australian capital markets, by the TSX-community's standards that many hundreds of millions of shares will be considered by many participants to be a massive number of shares. Those circumstances may result in it becoming prohibitive for New Jervois to obtain additional equity financing. In addition, the potential for and expectation of a pending share consolidation or "reverse split" may overhang the stock with a negative sentiment and thereby suppress its value. While we believe eCobalt would also be expected to issue more shares and raise more equity financing if it does not merge with Jervois, at least all of the funds raised by eCobalt would be utilized for the Idaho Cobalt Project; whereas, far less than a third of Jervois' current conditional equity financing may be used for advancement of the Idaho Cobalt Project. This is an example of suffering direct dilution while the Idaho Cobalt Project only receives a minority of the proceeds.

5. Even More Shares: Since the date of the announcement of the proposed transaction by eCobalt and Jervois (April 1, 2019), and since the date of eCobalt's Circular (June 19, 2019), Jervois has undertaken a private placement whereby Jervois has accepted irrevocable subscriptions for the conditional issuance of 82,500,000 ordinary shares at a price of A$0.20per share. The closing of this financing is conditional upon the completion of the eCobalt merger. Therefore, if the eCobalt merger is approved and is completed, then these 82,500,000 additional shares of Jervois are expected to be issued. We estimate that will result in eCobalt's shareholders owning only approximately 41% of New Jervois as opposed to the pro forma 47% that is described in eCobalt's Circular.

6. Process, Process, Process (Part 1): It is concerning to us that no alternative transactions or deliberate process to both foster and optimize an outcome are specifically described in the "Background to the eCobalt Arrangement" section of eCobalt's Circular. While we expect that the names of any specific parties would remain undisclosed due to confidentiality agreements, we would have expected eCobalt to have fostered and procured at least one or more feasible alternative transactions or alternative parties to negotiate with when considering the sale or merger of the entire company. However, there is no mention of any structured approach that occurred in regard to creating alternatives to choose from and/or involving other parties in the process so as to foster an auction environment or otherwise require counter parties to make their best offers and optimize the outcome for eCobalt. There is no convincing information in this section of the Circular that allows us to conclude that: (i) the exchange ratio of 1.65 shares of Jervois for every share of eCobalt is the best and highest price that Jervois would pay for eCobalt; (ii) that another potential acquirer or merger partner would not have been expected to pay more (or would have been able to pay with superior consideration – being cash or non-speculative shares); or (iii) that an alternative transaction (or even sticking with the status quo) would not have been a superior decision in terms of maximizing shareholder value and minimizing risk. We are troubled that the Circular does not convincingly make these three specific points.

7. Process, Process, Process (Part 2): Our concerns regarding #6 above are heightened because the "Background to the eCobalt Arrangement" section of eCobalt's Circular leads us to believe that eCobalt's CEO, Michael Callahan, principally negotiated the deal with Jervois on behalf of eCobalt. We are concerned about how the CEO's conflicting interests were managed in that: (a) Mr. Callahan's personal financial interests are not well aligned with eCobalt's shareholders' interests (Mr. Callahan only owns 100,000 common shares of eCobalt); (b) he was negotiating with Jervois regarding a change of control share exchange arrangement effectively on behalf of eCobalt's shareholders; while (c) at the same time expecting he would soon be terminated from eCobalt and would become a director of Jervois. In addition, we are concerned that his financial interests were satiated and his conflicts of interests were exacerbated when, according to page 51 of the Circular "on March 13, 2019 Jervois submitted a revised non-binding LOI which … contemplated … severance or change control payments for those eCobalt parties terminated as a result of the transaction." These terminations included the termination of eCobalt's CEO. According to page 86 of the Circular: "Based on Mr. Callahan's October 1, 2018 employment agreement, Mr. Callahan would be paid the sum of 1.5 years of base salary ($777,594 or US$570,000) in the event of change of control. The change of control obligation was subsequently amended to 2 years of base salary ($1,036,792 or US$760,000) on March 14, 2019 and was retroactively effective on October 1, 2018." It appears the revised LOI included a gratuitous increase in the CEO's "golden parachute" severance package. This is surprising since page 51 of the Circular states that on February 20, 2019, eCobalt announced it had implemented cost control measures to preserve cash and reduced or eliminated non-essential corporate and site activities and costs.

On March 14, 2019, eCobalt and Jervois executed and formally entered into the revised LOI. It is not comforting to us that page 51 of the Circular indicates that on March 14, 2019"The eCobalt Board of Directors also established a special committee to provide oversight to the CEO and report to the Board of eCobalt." A mandate "to provide oversight" and to "report to the Board" is quite far from best practices. We believe the Special Committee should have been engaged in the process much earlier and should have had a more robust mandate so as to ensure that the interests of the corporation and its shareholders were properly taken into account. In this case, eCobalt's Special Committee was created after the proposed transaction had been substantially negotiated and it appears the Special Committee was mostly passive since its role was limited to "oversight" and providing a "report". The Circular certainly does not state that the Special Committee: (i) took any active role in the substantive negotiations (as would be evidenced by any substantive changes to the proposed deal after the Special Committee was created): or (ii) conducted a robust review of the circumstances leading to the transaction, the alternatives to the transaction that were available in the circumstances (including the status quo), and the transaction itself. In fact, we are concerned the Special Committee may have taken almost no active role. According to pages 51-52 the Circular, it appears that after the Special Committee was created on March 14, 2019, it only met on March 29, 2019before meeting again on March 31, 2019to receive the financial advisor's fairness opinion and finalize the terms of the definitive Arrangement Agreement, which was then approved eCobalt's Board of Directors the next day. The Circular states that eCobalt's Special Committee consisted of three independent directors, being Scott Hean(Chair), Gregory Hahnand Monique Rabideau, with Michael Callahan(CEO) also participating as a non-voting member. We believe that Mr. Callahan should not have been a member of the Special Committee. Our confidence in a special committee and its process is undermined unless it is permitted to carry out its responsibilities clearly free from any undue influence, whether express or even implied.

8. Process, Process, Process (Part 3): After recognizing our concerns as described in #6 and #7 above, we were hoping to be comforted by the Fairness Opinion that was provided to eCobalt by its financial advisor. According to page 53 of the Circular, the eCobalt Board requested its financial advisor to assess the fairness, from a financial point of view, of the consideration to be received by eCobalt Shareholders pursuant to the Arrangement. Page 53 of the Circular states that, pursuant to its engagement letter with financial advisor, eCobalt has agreed to pay a fee for the financial advisor's services (irrespective of the substance or conclusions of the Fairness Opinion). The body of the Circular did not state whether the financial advisor's fee was a flat fee or whether it was a success fee that is contingent on the outcome of the proposed transaction. However, upon reviewing the Fairness Opinion itself (found at Schedule "C" of the Circular) it states that a portion of the fees that the financial advisor will earn will be payable upon the delivery of the Fairness Opinion and a portion of the fees payable by eCobalt to the financial advisor are contingent on completion of the Arrangement or certain other events. Therefore, it appears that eCobalt choose to structure its contract with its fairness opinion provider such that the provider is positioned to earn, in part, a contingent success fee. While this is certainly legal, it is not considered to be a best practice on the part of eCobalt due to the theoretical conflict of interest that it creates for the financial advisor. Importantly, we believe these circumstances influence the weight, confidence and credence that should be placed in the opinion. It would have been preferred by us if eCobalt had of structured its engagements with its financial advisors such that it obtained a fairness opinion from a financial advisor that was only earning a flat fee and was therefore entirely disinterested in the outcome of the proposed transaction.

Also, there are a couple of other concerns related to the Fairness Opinion. Firstly, related to #6 above, the Fairness Opinion expressly states that the opinion does not address the relative merits of the Arrangement as compared to other transactions or business strategies that might be available to eCobalt. So, accordingly, we gain no comfort from the Fairness Opinion in regard to our concerns described in #6 above. Secondly, the Fairness Opinion states that its conclusion is conditional upon the completion of Jervois' royalty sale occurring prior to the closing of the Arrangement. This fact is also stated on page 79 of the Circular as part of the risk disclosures. This royalty sale transaction by Jervois is a non-dilutive fundraising transaction whereby Jervois plans to sell a portfolio of royalties to Franco-Nevada Corporation for $A3.6 millionin cash. Jervois' recent dilutive private placement is no substitute. This royalty sale has not yet occurred and therefore this fact influences a person's ability to rely upon the conclusion arrived at in the Fairness Opinion. If the conclusion in the Fairness Opinion is conditional upon the assumption that Jervois has completed its non-dilutive royalty sale (along with other assumptions) and that condition has not been met, then does the Fairness Opinion provide any value to anyone until that condition is met? If effectively there's no operative fairness opinion at this time in support of the proposed Arrangement (or even when the decision was made to enter into the Arrangement Agreement, along with its break-fee terms and significant transaction costs) then what were and are eCobalt's directors relying upon to comfort themselves that the proposed significant and transformative Arrangement transaction is in the best interests of eCobalt and that the consideration that has been offered is fair and reasonable in the circumstances? Are the Special Committee and eCobalt's Board of Directors' recommendations effectively hollow? Given the entirety of the concerns raised in #8, what is there that eCobalt's shareholders can rely upon in regard to conducting their own review when making a decision about approving the proposed Arrangement?