Investing in Cobalt NEW

By pjain      Published June 29, 2020, 1:45 a.m. in blog Invest   

Investment Strategies

Investing in Cobalt has been a loser

Glencore and Wheaton Precious Metals have delivered a five-year total return (share performance plus dividends) of negative 17% and negative 3%, respectively. By comparison, parking your money in the S&P 500 for the last five years would have earned you a total return of 56%. In other words, these may be two of the best cobalt stocks for 2019, but individual investors should put their hard-earned money elsewhere.

Stoploss under Cobalt producers - post-Covid

  • GLCNF 42.2 kt'18
  • WPM
  • VALE
  • FCX
  • Umicore UMICY

Invest in Ni/Copper producers - ignore Cobalt

Invest in Lithhium producers

Trends in Cobalt

Commodity Prices fluctuate a lot, plunge in 2020 Covid-19

Analysts forecast a 6,300-tonne surplus this year and global consumption around 131,800 tonnes.

The average spot price of cobalt in the U.S. stood at $15.13, down about 15% since January, hitting lows not seen in ten months. Below are global cobalt prices, prices slumped 4-5 months before the pandemic.

Spike in EV sales led to Cobalt demand

  • EVs production especially in China was spiking very rapidly, and in USA eg under Tesla and its Gigapower factories. But there is evidence to suggest that a huge boom in the battery metals may still be just around the corner.

  • 70 lithium ion battery mega factories under construction across four continents… in October 2017, the global total was at 17.

global cobalt demand rising fourfold by 2023 and higher still by 2028, inspite of companies like Tesla seeking to reduce reliance on cobalt in their batteries in order to reduce supply-side risks. -- Analyst at Benchmark Mineral Intelligence

Past Price Levels Gone

  • Jan 2019> After soaring past $83,500 per metric ton (MT) in March 2018, cobalt prices began this year at $55,000 per MT. That's a big drop, but it still leaves cobalt as one of the most expensive metals on the market
Year Price/lb Notes
2017H2 $18 '17 Price spike led to euphoria, then sharp correction
2018H1 $44
2018H2 $25
2019Q2 $15
2019end $25 est

Economics of Cobalt Production and Monopolies of Refining

Cobalt is the element that makes up for the lack of stability of nickel. There isn’t a better element than nickel to increase energy density, and there isn’t a better element than cobalt to make the stuff stable. So it has become a critical element of the non-Lithium usually Nickel batteries.

  1. Very little primary Cobalt mines. Most ‘pure-plays’ are early-stage exploration and development companies (Microcaps on OTC) that are yet to prove their commercial worth.

  2. You really HAVE to invest in strong copper or nickel producers as 85% of all cobalt production is either copper or nickel related. Regardless of the price or demand for cobalt it would be highly unlikely that producers would have to shut down their operations so long as demand for the primary Copper on Nickel holds up.

  3. The actual price of cobalt is not a determining factor in the viability of most of the production sources or potential new sources.

  4. Since Copper is consumed heavily by China in construction, and Nickel also China heavily in steel and metal goods. So as goes China so go Copper and Nickel. Thereby available Cobalt also depends heavily on Chinese economy

  5. However, lower prices for cobalt means their copper or nickel operations become less profitable. Cobalt is a relatively minor driver of earnings for the largest producers

Any company looking to establish a cobalt operation needs to have strong economics and a strategic advantage to be able to withstand the ability of large producers of copper and nickel (with cobalt as a by-product) to increase its production.

Strategic nature and Geo-Politics

Cobalt is so integral to the defense, aerospace, and energy industries that the U.S., Japan, China, and EU have designated cobalt as a strategic metal.

But they all have negligible cobalt production.

Ethical and Sustainable Sourcing

Some companies like Umicore are marketing its status as ‘the first and only cathode material producer to be able to offer certified materials from a clean and ethical origin to customers in the rechargeable battery value chain. It does this by sourcing cobalt through OECD program audited by PriceWaterhouseCoopers.

‘The growing scarcity of metals and increasing societal pressures to source raw materials in an ethical and environmentally sustainable manner has resulted in a growing need for increased traceability in supply chains.

An increasing number of [car and part makers] are therefore looking for a closed loop approach as offered by Umicore,’ the company said in its latest annual report. Building on that, it has signed technology and research alliances with BMW and Audi.

Supply of Cobalt

Cobalt is rare - byproduct of nickel and copper mining

Cobalt is a hard, shiny, and grayish metal. It’s not found as a native metal due to its low concentration (0.002%) within the earth’s crust. This means that cobalt is usually produced as a by-product of nickel- and copper-mining activities. So, if mining for nickel and copper drops, cobalt production falls, too.

Cobalt is a metal that has the ability to focus energy in a very small footprint. Batteries without the substance do not perform well as well as those with cobalt.

The thing about cobalt is that you can’t easily find it in nature – it has an extremely low concentration. Instead, the substance is more commonly a by-product from mining other metals.

Pct Co Source
50% nickel mining
35% copper Mining
15% primary cobalt mines

West has very few Cobalt production resources

58% | Democratic Republic of Congo 17% | North America

Production Mines Congo export tax, instability, Child labor

Democratic Republic of Congo, which has 65% of world's reserves in the area known as the DRC copper belt.

The Congo upped its tax on the export by 50% and the figure could go higher.

The DRC government has tried to achieve vertical integration - getting more of the end price of Cobalt instead of the low price from ore.

So it has put restrictions on the export of ores and concentrates in order to encourage greater development of downstream processing in the country. It’s also been reviewing and renegotiating mining contracts.

But ability to mine or refine are limited by power and water shortages.

The Congo has talked about labeling cobalt as a strategic resource which would raise the royalty owed the DRC on the metal to 10% by 2%.

The DRC is a warlord and corruption zone after Western colonialism and interferece, so it does not have stability nor a robust regulatory environment.

There are also child labor concerns around the mining of cobalt. The metal has been called the “blood diamond of batteries.” If the miners cannot protect their supply chains, conscientious consumers may push for more humane conditions and with that comes increased costs.

Attempts to Expand Production outside the Congo

The rest comes from Australia, Brazil, Canada, Cuba, New Caledonia, Russia, and Zambia.

Much of the cobalt from the DRC ends up exported to China, which suggests lower spot prices are the result of declining electric vehicle sales.

China has 41% of refining and owns stakes in others

China is also the largest consumer of cobalt.

Over 40% of all the refining that results in cobalt comes from China.

Other refinery locations

Other major supply sources of refined cobalt are - Freeport Cobalt’s refinery in Finland, - Eurasian Natural Resources Corporation's (ENRC) - Chambishi refinery located in northern Zambia, - Sherritt’s refinery in Canada, - Umicore’s refining operations in Belgium.

Lockdown in South Africa amid Covid-19 hurts western supply

"The pandemic has affected demand and supply. Cobalt mined from (the Democratic Republic of) Congo is typically exported for refining through Durban in South Africa, where there was lockdown (to halt the spread of the new coronavirus), which created logistical disruptions," - Roskill analyst Ying Lu.

Demand, Growth and Uses of Cobalt

Computers, smartphones, electric cars, and an array of other modern industries need batteries. As a result, there’s been a huge surge in demand for key battery elements, such as nickel, lithium, and yes, cobalt.

Consumption Trends

For the past five years since 2015, consumption of the substance has been growing at a rate of 7.6% per annum

42% to Lithium EV batteries - mainly China as EV multi-millions produced

42% of the world's cobalt production goes toward the creation of lithium-ion cell batteries which have higher energy density than other battery types and are used in laptops, smartphones, medical devices and electric vehicles, in addition to having a number of other industrial applications.

Cobalt is the key component in 42% of the batteries used in the world today. Electric cars can require around 8 kg or more depending on their range.

Electric vehicle (EV) manufacturers like Tesla are a driving force for the growth in cobalt demand.

Cobalt is an important component of lithium-ion battery chemistries for EVs.

Tesla’s Gigafactory 1 battery plant is already sucking the metal up by the ton. And LG Chem and Foxconn Technology are building battery mega-factories of their own.

Smartphones use some Co

Smartphones use around 8 grams of cobalt per battery,

Turbine Blades

Superalloys are used in high-growth markets that include the production of jet engines and wind turbines.

Airlines are slashing orders for Airbus and Boeing passenger planes as the travel and tourism industry has collapsed. In response, carriers have had to quickly reduce operating capacity by ground fleets of planes until passenger volumes recover. Boeing CEO Dave Calhoun recently warned it could take 2-3 years for air travel growth to return to pre-corona levels, adding that long term growth trends could take much longer. With reduced flights and declining orders for new planes, demand for cobalt used in jet turbine blades is expected to slump in the back half of the year.

Cobalt demand for the aerospace parts industry will be around 4,442 tonnes this year, a drop of 18% from 2019 and the lowest since 2011.

Ultracapacitors in future

Other Uses - mainly technology and Cleantech

Demand also comes from many diverse industrial and military applications, ranging from computers and communications satellites to geothermal power plants.

EV Battery Recycling could reduce demand in future

The lithium-ion battery recycling market is boosting

  1. Rapidly increasing demand for electric vehicles
  2. EVs are supposed to be green, so increasing concerns about battery waste disposal,
  3. New stringent government norms about battery waste.
  4. Factors such as increasing demand for recycled products and reduction of earth metals are encouraging the global lithium-ion battery recycling market.

The chemistry of EV Li batteries varies Lithium-Nickel Manganese Cobalt (Li-NMC) Lithium-Iron Phosphate (LFP) Lithium-Manganese Oxide (LMO) Lithium-Titanate Oxide (LTO) Lithium-Nickel Cobalt Aluminum Oxide (NCA)

The major players in the lithium-Ion battery recycling market include 1. Umicore 2. Glencore International AG 3. Retriev Technologies 4. Raw Materials Company Inc. (RMC) 5. International Metals Reclamation Company, LLC (INMETCO) 6. American Manganese Inc., 7. Sitrasa 8. Li-Cycle 9. Neometals 10. Recupyl Sas 11. Metal Conversion Technologies (MCT) 12. Tes-Amm Singapore 13. Fortum OYJ 14. GEM Co. 15. Contemporary Amperex Technology Co. Ltd (CATL). T

EVs seeking reduction or alternatives to expensive cobalt

The supply insecurity and very high prices has forced some lithium-ion battery manufacturers to search for alternative materials and chemistries. However in next 5-10 years cobalt is likely to remain an important material even through end of 2050s or longer in niche applications regardless.

  • SK Innovation and LG Chem have recently said they intend to produce new batteries later this year that comprise more nickel (which is much more abundant) and less cobalt. While current batteries contain closer to 20% cobalt, the South Korean firm’s new batteries will contain just 10%. The efforts to cut the amount of cobalt is aimed at reducing costs, but also to improve energy density which has gradually become a major barrier for the electric car industry striving to shorten charge times and lengthen range – all while bringing down the cost.

  • Tesla is working to phase out its use due to high cost and control by China, etc.. Elon Musk to say, “We use less than 3% cobalt in our batteries & will use none in next gen.”

Companies in Cobalt

1. GLNCY y4% Diversified and Hedged

  • OTC:GLCN.F

Glencore used to have a 6%+ dividend, but seems to have cut it as current one is 4%.

While the company is one of the largest cobalt miners in the world, it does a lot more than that. Glencore is a natural resources firm that is based in Switzerland. It owns 150 different operations, including mining, oil production, and agriculture. With such a diverse portfolio, the company is very well-hedged which may make it less volatile than other, more polarized companies.

Although cobalt is a very minor part of Glencore’s overall business a good or bad year for the metal can make all the difference. For every $1 change in the price per pound of cobalt in 2019, Glencore’s earnings before interest, tax, depreciation and amortisation (EBITDA) will be impacted by $100 million.

Glencore provides the largest amount of recycled cobalt. Coming from cobalt bearing materials, such as batteries. This gives them multiple ways to stabilize their supply.

Mines

Glencore is the world's largest miner of cobalt, responsible for some 25% of the planet's total output in 2017

This is primarily as a by-product from its Katanga and Mutanda copper mines in the DRC but also from nickel operations in Australia (Murrin Murrin), Canada (Raglan and Sudbury), and Norway (Nikkelverk).

Aggressive Expansion Plans

As a $53 billion company, it has the financial heft required to operate in the cobalt-rich, high-risk region of Katanga, Democratic Republic of Congo. That's come in handy recently.

Glencore’s cobalt production jumped 54% in 2018 to 42,200 tonnes. The increase was predominantly down to Katanga. The company's most recent guidance called for hitting the mark of 39,000 MT of cobalt output in 2018, but a revised estimate of just 57,000 MT in 2019. That included a sharp reduction of 8,000 MT due to delays ramping production at its expanded facility in Katanga that produces both copper and cobalt.

Sadly the DRC contract woes and sanctions happened was before it embarked on expansion plans that would triple production in the three-year period ending 2019.

Growing pains aside, Glencore thinks it can address the uranium impurity by adding an additional processing unit at Katanga and believes it can work out its contract issue. It expects to ramp cobalt production to 68,000 MT by 2021, representing 74% growth from 2018 levels. If it hits the mark, and selling prices average a conservative $40,000 MT in a few years, then cobalt production would generate $2.7 billion in annual revenue. That would cement its place as the undisputed leader of the global cobalt market.

DRC Contract issue, US Sanctions, Conflict with State-owned miner

Glencore is the big foreign operator in the DRC and has demonstrated the difficulties of operating in the country over recent years.

It has had to navigate a new mining code being introduced last year as well as legal battles with Congo’s state-owned miner Gecamines over the ownership of Katanga.

It also had to pay off Dan Gertler to avoid losing control of its assets, but that was made more difficult by the fact the US had imposed sanctions on the Israeli businessman.

Katanga Mine Problems - uranium impurities

More worrisome, Glencore had to halt cobalt exports after finding uranium in the finished cobalt hydroxide product produced from a part of the Katanga facility. That's not as unusual as it sounds, as many metals are found together (gold and silver, gold and lead, copper and cobalt, nickel and cobalt, and the like), but it's an unacceptable impurity for battery customers.

Much of this output had to be stockpiled as it contained excessive uranium content which must be removed before being sold.

Sales did not fare as well because much of this output had to be stockpiled as it contained excessive uranium content which must be removed before being sold. Also, a Chinese battery customer has stopped purchasing cobalt from the miner after market prices dropped below those outlined in the three-year supply agreement.

WPM

Precious metals streamer Wheaton Precious Metals

Wheaton currently has proven and probable cobalt reserves of 32.6 million pounds, but also offers over 11 million ounces of gold, 540 million ounces of silver and 660,000 ounces of palladium. For Wheaton and peers like Cobalt 27, the idea is that they buy the metal for today’s prices but take delivery in the future when they hope prices for these key metals will be higher.

  1. Wheaton is one of the world’s largest precious metals streaming companies

  2. STREAMING Agreements. WPM has 28 agreements to take off cobalt from primary eg Nickel producer Vale, gold stream for Salobo mine, silver stream on Glencore's Antamina, etc.

  3. It will be a participant in Vale’s deal to sell 42% of future cobalt from the Voisey’s Bay mine starting 2021.

FCX

Freeport-McMoRan the Copper powerhouse

One of the two biggest cobalt miners in the DRC. Problem is that it is highly sensitive to the price of copper and other metals, so cobalt represents only a fraction of their revenues as mega-billion dollar companies.

Umicore.com UMICY UMICF:OTCMKTS

Revenue: Euro 12b, 2017 Employees: 10,224 Headquartered in Brussels, Belgium

A materials giant focussed on sustainable sourcing and recycling for European customers.

It generates over €3.3 billion in annual revenue, predominantly from the likes of emission control catalysts, materials for rechargeable batteries, and recycling.

  • Umicore, the Belgian materials technology and recycling group, has said while it may be possible to reduce the amount of cobalt needed in batteries it won’t be possible to remove it completely anytime soon. ‘Cobalt is the element that makes up for the lack of stability of nickel. There isn’t a better element than nickel to increase energy density, and there isn’t a better element than cobalt to make the stuff stable. So [while] you hear about designing out cobalt, this is not going to happen in the next three decades. It simply doesn’t work,’ said Umicore chief executive Marc Grynberg earlier this year.

Umicore Group (OTCMKTS:UMICY) is a $14 billion Belgian company focuses on materials, technology and recycling. That may seem like an odd combination at first glance, but it’s actually fairly straightforward. UMICY takes metals, transforms them and then remarkets them. Cobalt is one of these metals.

This company is well positioned to be a major player in the cobalt and lithium business, and it already has strong ties to automotive manufacturers.

UMICY has been slowly trending higher over the years, but the rally slowed down in 2018 and the stock recently fell to its 200-day moving average (the blue line) for the first time since April 2017. That weakness looks like an attractive opportunity, as I expect the long-term uptrend to resume. These trends to reduce new cobalt via substitution or recycling may not happen immediately, and some firms will not eliminate the use of cobalt at all.

VALE, Brazil - Focussed on Nickel

Brazilian miner Vale generates less than 1% of its total revenue from cobalt ($313 million in 2018).

Vale is a clear believer that nickel is a safer bet when it comes to electric vehicles considering the issues with cobalt, with a strategy to ‘preserve optionality in nickel’.

It is increasing Cobalt production, and has finalised a deal to sell 75% of future cobalt production from its Voisey’s Bay mine in Canada to two companies: Cobalt 27 Capital and Wheaton Precious Metals. Vale will sell future production for immediate cash it can use to expand the underground mine. This means it can lower the cost of development now while retaining some of the benefits to the cobalt that is eventually produced – and all of the nickel. Wheaton has paid $390 million in cash while Cobalt 27 has paid $300 million. The combined $690 million will fund around 40% of the $1.7 billion needed. The expansion will mean the mine will see current production levels increase by 45,000 tonnes of nickel, 20,000 tonnes of copper and 2600 tonnes of cobalt each year. The deal is scheduled to take affect from the start of 2021.

LUNMF:OTC

Lundin Mining

One of the two biggest cobalt miners in the DRC. Problem is that it is highly sensitive to the price of copper and other metals, so cobalt represents only a fraction of their revenues as mega-billion dollar companies.

S.TO, SHERF:OTCMKTS c0.09 - Sherritt Intl - NI major

Employees: 7,670 HQ: Toronto

Nickel powerhouse Sherritt International, is a nickel producer with mines in Canada, Cuba and Madagascar

It is known for a relentless focus on costs.

Cobalt makes up a larger proportion of Sherritt’s portfolio than other firms: revenue from the metal rose 24% last year to over $160 million, accounting for almost one third of its $498 million annual revenue last year.

  1. CUBA mine. Its primary cobalt operation is a joint venture over the Moa mine in Cuba, which produces nickel and cobalt. Due to the tensions between Cuba and the US, Sherritt has to circumnavigate the inability for the two countries to do business. Moa delivered the very bottom of its guidance range last year by producing 3234 tonnes of cobalt (100% basis), and in 2019 it expects this to rise to 3300-3600 tonnes. The improvement will be down to investments made last year in new equipment and shortening the haulage route.

  2. Madagascar Mine. Its other cobalt producing operation is the Ambatovy joint venture - another nation which can be problematic. Output missed guidance last year by coming in at 2852 tonnes (100% basis) versus a 3100-3400 tonne target because of cyclones and hurricanes, but it has said it will deliver an improvement in 2019 versus last year – subject to no unforeseen weather conditions.

  3. Canada Refining. The firm mixes the nickel and cobalt into sulphides and sends them to its refining facilities in Fort Saskatchewan, Canada, where it can then be refined and freely sold onto to other markets. Its Canadian refinery is also able to handle a step-up in cobalt production if needed with the capacity to process up to 3800 tonnes per year.

  4. ASIAN (not USA) Sales due to Cuba mine origins. It primarily sells in Europe, Japan and China.

x China Molybdenum CMCLF:OTC

The second largest producer of cobalt in the world, it is a $12.4 billion company that is partly owned by the Chinese government

It owns the majority (56%) of the Tenke Fungurume mine in the DRC, which has one of the largest deposits of cobalt in the world in the same region as Glencore’s Katanga mine in the DRC. The miner’s cobalt production from the DRC hit an all-time high in 2018 after rising 14% to 18,747 tonnes.

The stock has struggled in 2018 and recently hit a yearly low. However, the company’s financials are improving, and over time I expect to see higher prices. This could turn into a deep value play, so it’s definitely a stock worth keeping on your radar.

Niobium is the other major commodity within its wider portfolio, as well as molybdenum, tungsten, copper and phosphorous minerals.

Notably, cobalt sales grew at a faster pace of 27% as it sold down some of its inventory.

  1. Anticipated decline in 2019 prices. Its guidance for output in 2019 is geared to the downside, setting a range of 16,500 to 19,000 tonnes. It also warned in its annual report that it expected cobalt prices to decline in the first half of 2019 as supplies of metal and upstream cobalt products continue to outweigh demand.

  2. Unique dual access to the mines/raw material in the DRC as well as the refining capacity concentrated in China. However, this meant the price of its product was also adversely impacted by the big increase in smelting capacity in China last year, and the subsequent oversupply of cobalt concentrates and intermediate products.

x Cobalt 27 Capital - investment in future price rises

Not investible as a pure finance play, it seems to have invested just as Cobalt prices fell sharply.

Cobalt 27 Capital offers investors a different way to gain exposure to cobalt. As an investment vehicle focused on metals needed for electrical applications, the firm is building a portfolio containing investments in physical cobalt material, cobalt and nickel streams, royalties and interests in mines.

In its latest results covering the nine months to the end of September 2018 showed the firm reported a $16.1 million loss on its investments compared to an $8.2 million gain the year before.

In total, the company holds over 2900 tonnes of physical cobalt comprised of 2193 tonnes of ‘premium-grade’ material and 713 tonnes of ‘standard-grade’ cobalt.

  1. Its major cobalt streaming deal (whereby it pays for future cobalt production upfront to act as an alternative finance provider for those developing cobalt mines) is the one announced with Vale and the Voisey’s Bay mine, which will start from the beginning of 2021.

  2. Its other major deal is the outright acquisition of Highlands Pacific, an Australian firm with over 11,000 tonnes of cobalt resources. Highlands Pacific has an 11.3% interest in the Ramu nickel mine in Papua New Guinea with an option to acquire another 9.25% at market value.

  3. It also owns 20% of the Frieda River mine which it says is the ‘largest undeveloped copper-gold project’ in the country and one of the top ten in the world.

Smaller, Early stage E&P players

  • Horizonte Minerals owns two Tier 1, scalable, high-grade nickel deposits in Brazil: the Vermelho nickel-cobalt project it acquired last year and the more-advanced Araguaia ferronickel project.

  • Red Rock Resources has interests spanning gold, copper and other materials in addition to cobalt. It is developing one of its three copper-cobalt deposits in the DRC. It has just over a 50% share of the assets, giving it ultimate control over them. The firm has said it hopes the Musonoi deposit will ‘prove up a signature asset’ – enough so that it hopes to ‘divest itself of what will become non-core activities and assets’. Simply, Red Rock is hoping to become solely focused on its DRC assets and sell-off its other interests down the line, but investors will take comfort that it has other options to fall back on should its efforts in the DRC fail.

  • African Battery Metals is an AIM-listed stock that has turned its attention to nickel and cobalt projects it acquired last year in Cameroon and the Ivory Coast. Although these are at a very early stage there is reason to take note, with the firm stating four of its licenses in Cameroon are ‘close to one of the largest undeveloped cobalt reserves in the world’. In the Ivory Coast, it has bought the irrevocable right to earn-in to up to 70% of the Lizetta II cobalt, chrome and nickel project. If successful, the firm could yield new significant deposits of cobalt outside of the DRC and in more stable African jurisdictions. But it does have exposure to the DRC through interests in the Kisinka copper-cobalt project, where it has started exploration.

Resources


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