“Cobalt Is Keeping Battery Makers Awake At Night” has been published by Seeking Alpha on Nov. 18, 2016. 

http://seekingalpha.com/article/4024628-cobalt-keeping-battery-makers-awake-night

Beagle_Cobalt_EV

A new era. The next decade is poised to see a major revolution in energy storage and transportation. As often the case with major technological disruptions, a new supply chain is emerging and the development of reliable sources of raw material becomes critical.

Electric Vehicles (EVs) in particular need batteries to maintain power and downstream players are just starting to fully appreciate the supply chain for critical rare minerals. Lithium received much of the media attention in recent years, but Cobalt a.k.a. the goblin is the one keeping battery makers awake at night.

There is not much cobalt about, most of the supply comes from the DRC & very few companies are able to meet demand, particularly in the form required by lithium ion battery manufacturers.

We are witnessing yet another revolution with the advent of Electric Vehicles (EVs) in Europe, North America and Asia. And it is here to stay. The World Energy Council study published in June argues that 1 in 6 cars to be sold in 2020 will be electric to meet carbon dioxide emissions standards. Volkswagen believes that as much as 25% of its sales will be EVs by 2025 & plans to launch over 30 new EVs. And economically it will soon make sense. A report by Bloomberg New Energy Finance states that by 2022 an electric car will be cheaper than a petrol or diesel model.

The promotion of a broader use of EVs by governments/states is also being felt more keenly. California has already a zero emission vehicle mandate. China (which by the way became in 2015 the largest market for EVs before the US) this summer proposed a policy for carmakers to produce more EVs, in proportion to the number of fuel-burning cars sold. Failure to achieve emission reduction targets would require them to buy credits or pay heavy fines.

Tesla Gigafactory, Nevada, USA
Tesla Gigafactory, Nevada, USA

In Europe, carbon dioxide emissions rules are even stricter than in the US. EVs may account for less than 2 percent of car sales in Europe today, but that number is meant to substantially grow. Norway, a leading actor in the clean space, announced the ban of sale of fossil fuel-based cars by 2025.

Tesla has been leading the way, followed by large carmakers BYD, Volkswagen, Renault-Nissan, General Motors, BMW, Ford… Tesla Model 3 orders alone account for c.a. 400,000, a massive number.

1 in 6 cars to be sold in 2020 will be electric

The World Energy Council, June 2016

EVs need batteries to maintain power and downstream players are just starting to fully appreciate the rare minerals’ supply chain. Until today lithium-ion batteries (LIBs) have been the main energy efficient choice, and it is likely that they will remain prevalent for the next decade.

Dominant battery chemistry by market share (source: Avicenne Energy Analysis 2014)

LCO (Lithium Cobalt Oxyde)

NCM (Nickel Cobalt Manganese)

NCA (Nickel Cobalt Aluminium)

LMO (Lithium Manganese Oxyde)

LFP (Lithium Iron Phosphate)

But if Nickel-Cobalt-Manganese & Nickel-Cobalt-Aluminium chemistries are set to dominate for EVs, then cobalt is critical & this is my point. According to Benchmark Mineral Intelligence, 75% of LIBs cathode capacities are expected to contain some volume of cobalt by 2020.

Cobalt is not particularly a rare metal as such however whilst demand is soaring we are witnessing an increased scarcity of cobalt supply and we will outline the reasons below. Batteries are the primary drivers of cobalt market and we could well be in shortage as soon as at the end of the year. John Petersen at InvestorIntel calls it a “cobalt cliff”.

A bit of history…

The Yellow House, Van Gogh
The Yellow House, Van Gogh

An interesting footnote: “Cobalt” stems from the German mythology and is a derivative of Kobold (or goblin, these spirits haunting mines). Miners have long used that name for the metal as it was causing some intense grave respiratory problems upon melting (cobalt is arsenical) and many died from it.

It has had many applications since Antiquity, such as Egyptian sculptures, Persian jewellery, Chinese porcelain

etc. Silver on its own, when combined with other elements can turn deep blue and some will refer to it as “Blue Metal”. In 1802 the French chemist Thénard discovered a stable version of the so called blue cobalt. Impressionists Renoir and Monet were very fond of it as pigments because of its superior chromatic stability. Post-impressionist Van Gogh declared that Cobalt was “a divine colour which couldn’t be compared to any other blue”.

Until the 20th century cobalt was mostly a colouring agent. But cobalt is much more than just blue. With modern technology it has extended its applications and nowadays cobalt plays a variety of roles from aircraft engines to smartphones, cancer treatment, orthopedics or renewable energy.

It is even classified in many countries as a highly strategic material. “Strategic” meaning that a lack of availability during a national emergency would seriously affect the economic, industrial, and defensive capability of one country.

Supply risk 1: Cobalt, a by product

Approximately 97% of the world’s supply of cobalt comes as a by-product of nickel or copper. But the price of these two other base metals have been plunging to say the least and this year even reached six-year lows, making many deposits uneconomic.

The majors have been over the past couple of years significantly reducing output when more cobalt as a by-product is needed. Mines have become a casualty of the low prices and many are being taken offline or ‘placed on maintenance’ for an extended period of time until market prices would justify further investments. Glencore’s Katanga large copper mine in the Democratic Republic of the Congo (c.a. 15% of the DRC’s copper production in 2014) announced in 2015 an 18-months suspension. On August 24th 2016 Glencore’s Chief Executive announced that operations will actually not resume before early 2018 due to chronic low copper prices.

What about primary cobalt deposit then? That would obviously be interesting as not depending upon pricing and factors affecting other base metals. But it is a rare commodity so to speak. Just 6% of cobalt comes from primary mines as per the Cobalt Development Institute. The reason is simple; despite being widespread on Earth, its low concentration usually makes it unjustified to produce cobalt on its own   and to a large scale. Thus very little has been done to bring primary cobalt mines to production.

Supply risk 2: Democratic Republic of Congo

Source Cobalt Investing News, April 2016
Source Cobalt Investing News, April 2016

Most of the cobalt’s supply is mined out of Africa. In the 50s, the metal was already strategic for the US industry (applications for jet engines / electronic devices etc) whilst the country was heavily dependent on the then Belgian Congo (later Zaire, now DRC). Later on the US government looked into alternatives and sponsored loans to Northern Rhodesia (now Zambia) to be repaid in cobalt.

Looking at the global picture today, the world’s cobalt supply chain still derives from the politically and socio-economically unstable West African countries. The DRC accounts for almost 60% of the world’s output of cobalt.

Restrictions on exports and conflicts are almost a rite in the country. On the political front the current President Joseph Kabila, in power since 2001, has reached his two terms limit and has been delaying national presidential elections this year, thus leading to mass protests in the country. This surely casts more doubt over the future of cobalt supplies. Experts are anticipating a 15% decrease in cobalt supply in 2016 as a consequence of mines being shut in and more ethical controls put in place. This leads us to the next identified risk i.e. the battle for the control of cobalt supply.

Supply risk 3: China

The US has started this year to stockpile cobalt in the form of chemical compounds used in lithium-ion batteries. But the most significant strategic moves have been made by the Chinese. The People’s Republic of China (PRC) has set clear objectives to tackle pollution issues via the 13th Five Year Plan. And it is being very serious about it, “guidelines” in the environmental space pave the way to “targets”, a massive amount of capital is being injected in the economy. China consumes already today c.a. 75% of the batteries packs produced worldwide, and the demand is expected to soar in the next decade.

Problem: the DRC accounts for more than 90% of China’s imports, explains KPMG. There is no other material where China is so reliant on a single country according to analysts at Macquarie. China indeed has very little cobalt of its own and most of it is low grade (0.02% compared to 0.1% to 0.5% for the DRC’s reserves as stated in a report from Week in China).

China as a consequence has aggressively moved to secure a dominant position in the control of cobalt supply for its own consumption. “A la Chinoise” if you allow me the expression and following the playbook.

China Molybdenum acquired in 2016 a 56% controlling interest in the Tenke Fungurume cobalt mine in the DRC, the largest investment ever in the country. The mine accounts for c.a. 13% of the world’s mined cobalt supply. China Molybdenum also bought a 100% interest in the Kisanfu project (also located in the DRC) as well as a 56% controlling interest in the Kokkola Refinery in Finland (c.a. 10% of the world’s refined cobalt last year). When this is all effective China will then control 62% of refined cobalt production worldwide; according to CRU estimates.

Supply risk 4: cobalt applications

Cobalt is a critical metal used in many diverse industrial and military applications. Roughly half of the global cobalt supply is used in industries that have no other alternative and rely exclusively on the material. Think GE and its jet engines where cobalt is used as a super alloy, wind turbines, smartphones etc.

Perhaps this is not such an issue for GE as cobalt represents a tiny part of the costs and thus they can afford to pay regardless of the price. But this is bad news for battery producers and EVs. Material costs account for about 60% of LIB total cost.

With a tightening supply and soaring demand especially from the lithium ion battery sector, cobalt prices will most likely escalate from current levels. Cobalt is not the main material to impact the batteries’ pricing, but it remains critical and a cobalt shortage will give players who have secured cobalt supply chains a key comparative advantage.

As a battery producer (and indirectly downstream player), I would surely be concerned about securing off-takes with cobalt miners. Preferably without the political risk. And looking at the recent steady stream of acquisitions, the race is already on and the Chinese jockeys are leading the way.

For investors seeking to get exposure to cobalt, options on U.S.-based exchanges are hard to come by. Major producers are not pure plays in cobalt as illustrated by Freeport-McMoRan (NYSE:FCX), the U.S. company headquartered in Phoenix which also notably produces copper, gold and silver. Freeport-McMoRan incidentally sold this year its controlling stake in the Tenke Fungurume copper cobalt mine to the Chinese CMOC. Glencore (OTCPK:GLCNF) and the Brazilian iron ore miner Vale (NYSE:VALE) also provide an exposure to cobalt mostly through their nickel operations.

Some of the best known companies can be found in Canada whilst Australia also presents some interesting plays. Lunding Mining Corp (TSX:LUN) holds an indirect 24% equity stake in the Tenke Fungurume mine and in the cobalt refinery Kokkola located in Finland (through a joint venture with Freeport-McMoRan and La Générale des Carrières et des Mines).

For a more direct play on cobalt, one needs to take a look at smaller companies. Most are not yet cobalt producers, hence are potentially very rewarding but also riskier investments. eCobalt Solutions Inc (formerly Formation Metals) (TSX:ECS) is a Canadian mineral exploration and mine development company primarily owning the Idaho cobalt project, a high grade and primary cobalt deposit in the USA. In Australia Broken Hill Prospecting (ASX:BPL) is attractive as the deposits in the Broken Hill area unusually do not occur as a bi-product of copper or nickel deposits. Thus cobalt is the main focus of the mine development. Clean TeQ (ASX:CLQ) is also tapping into cobalt through its Syerston deposit and the billionaire mining investor Robert Friedland cemented this year his hold on 20% of the company. Corazon Mining Ltd (ASX:CZN) secured the rights to earn up to 80% of the promising Mount Gilmore cobalt-copper-gold project in New South Wales. Get it while you can…

DISCLAIMER

I am not a mining analyst. Information presented is believed to be factual and up-to-date, but should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect my judgment as of the date of publication and are subject to change. Readers are advised that this article is provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities mentioned herein. This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.