Sure, you’ve probably heard of Lithium. It’s an energy metal used in batteries for electric vehicles. And there are other energy metals important to our #4IR energy future as well, such as Copper and Uranium. But none of those metals are as interesting an investment as Cobalt… Cobalt is an energy metal vital for our global shift to electric EVERYTHING.
What is Cobalt?
Cobalt is used in rechargeable lithium-ion (Li) batteries to improve their energy density and to act as a stabilizer.
Cobalt is a key component of three of the five principal lithium battery types; LCO, NMC and NCA. Electric vehicles (EVs) generally have between 4-14kg of cobalt with plug-ins using between 1-4kg. Laptops use between 30-50g of cobalt, tablets 20-50g and smartphones, 5-20g. NMC batteries are the predominant battery type used in electric vehicles and plug-ins although Tesla uses the NCA batteries in its new Model S. “Across the major automakers, all aside from Mercedes use cobalt-based battery technology in their electric and plug-in vehicles, which suggests that cobalt demand should remain robust…” – Cobalt 27
Where does Cobalt come from?
The principal source of mined cobalt supply is the Democratic Republic of the Congo (DRC), which accounted for 65% of global mined supply of 93.5kt in 2016. Total global Reserves of cobalt are estimated by the USGS to be 7Mt, of which 50% is located within the DRC.
The two most significant cobalt producers are Glencore’s Mutanda operation and China Moly’s Tenke mine. Other significant sources of mined production include Cuba, Russia, the Philippines and Australia, where cobalt is principally mined as a by-product of nickel mining. Globally, only 1% of cobalt is produced at mines where it is the primary product with 67% produced at copper mines and 32% produced at nickel mines. “Cobalt production has been tied to two metals (copper & nickel) that have been in oversupply for the past few years and, as a result, have seen increases in capacity and exploration reduced.” – Cobalt 27
Commodities are a story of supply and demand… For cobalt, the story is small supply and big demand:
In the last seven years, cobalt has seen an ongoing lift in demand and has effectively erased its production surplus – which was measured at approximately 10,000 mt in 2010. According to Darton Commodities, demand for refined cobalt grew by about 5% per year between 2007 and 2016, expanding from approximately 60,000 mt to 94,000 mt. With supply and demand balanced in 2016, cobalt’s story has now transformed in anticipation of a potentially massive increase in demand from a cobalt-hungry electric revolution in the transportation and power generation industries.
Supply Factors and Notes:
- Analysts expect a 5,500 mt deficit by 2020.
- Inelastic supply due to the by-product nature of almost all production.
- Cobalt is relatively geologically scarce and there are few deposits that could be brought into production quickly even at higher prices.
- The largest risk to Cobalt supply is production concentration in the DRC, a high-conflict jurisdiction that could materially influence pricing to the upside.
- There are relatively few major new cobalt projects that could come on stream over the medium term.
- Mines that are economic and whose primary output is cobalt are rare and will likely require long lead times to permit and begin producing.
- According to Bloomberg, several hedge funds, including Pala Investments and Shanghai Chaos, have stockpiled the equivalent of approximately 17% of 2016 global cobalt production.
- A return to production at Glencore’s Katanga (20,000 mt of cobalt production capacity) may temporarily reduce the Cobalt supply deficit in 2018.
Demand Factors and Notes:
- Over the medium term cobalt demand should increase by a CAGR of 7.9%, more than twice the rate of increases in supply.
- China’s State Reserves Bureau purchased 2,200 mt of cobalt in late 2015 and followed up with another purchase of 2,800 mt in late 2016.
- The U.S. Defense Logistics Agency has started stockpiling cobalt compounds as it sees cobalt as a “strategic and critical” material.
- Cobalt’s physical properties are not easily substituted.
- Cobalt market characteristics make consumption relatively price-inelastic.
- Volkswagen estimates that EVs will account for 20% to 25% of sales by 2025.
- Honda is aiming for two-thirds of its sales to be at least part-electric by 2030.
- Volvo recently announced that it plans to phase out the conventional internal combustion engine (ICE) in all of its vehicles by 2019.
- Beyond the automotive sector lies the potentially equally significant static power storage device sector, which remains at an earlier stage but could ultimately match or eclipse EV demand. This size of the market was 1,500MWh/year in 2015 and should almost double in size by 2020 with a CAGR of 13.8%.
- In 2016, about 3,100 mt of cobalt was used in the production of Li batteries in EVs and approximately 750,000 EVs and PHEVs were sold worldwide, representing less than 1% of new car sales.
- The proliferation of EVs and PHEVs will drive the second “battery boom”:
- IHS estimates that by 2025, EVs and PHEVs will make up approximately 16% of new car sales (3% to 6% for EVs; 10% to 12% for PHEVs).
- The IEA estimates that there will be between 9 million and 20 million electric cars by 2020.
- The IEA estimates that there will be between 40 million and 70 million electric cars by 2025.
COBALT 27 Capital Corp enters the “Perfect Storm”
The supply versus demand backdrop for Cobalt has been referred to as a “perfect storm.” Cobalt prices are skyrocketing and look to strengthen further as the supply deficit widens. But how can we invest in Cobalt? Beyond companies such as Glencore, which have exposure to, but not correlation with Cobalt, what are my options? Unfortunately, they are few and mostly sketchy. That’s why I was excited to learn about the recent Cobalt 27 IPO…
The company’s NAV consists primarily of its physical holdings in Cobalt (91%), which alone makes it a unique investment in the world of commodities.
As at July 7, 2017, Cobalt 27 held 2,158.6 mt of refined cobalt, which represents approximately 2% of global consumption. Amazingly, this is the second largest stockpile of cobalt in the world… second only to the holdings of the Chinese military. In addition, 1,486.5 mt of the Cobalt held by Cobalt 27 is of premium grade cobalt, with the rest of standard grade. The Cobalt is stored and insured in bonded London Metal Exchange (LME) warehouses. The company’s mandate is to focus on the long-term appreciation of Cobalt and for that reason it does not intend to actively trade inventory to take advantage of short-term fluctuations in the spot markets.
The company plans to increase its exposure to Cobalt through value-enhancing streams and royalties:
Cobalt’s by-product status makes the energy metal an ideal candidate for streaming and royalty agreements. Cobalt 27 currently holds six early-stage royalties in early stage exploration projects that each also contain ROFR rights over a future stream. These have all been vended in for a total of C$1.15 million that is payable in shares. Management is well positioned to negotiate other similar royalty agreements with a COO that was previously Head of Development at streaming and royalty at Sandstorm Gold. Moving forward, Cobalt 27 will target agreements with existing producers of both copper and nickel that produce cobalt as a by-product.
For the Bulls, the securing of additional agreements could be a catalyst for Cobalt 27, driving a re-rating of shares to a NAV premium at which royalty companies more typically trade.
Do I like what I see, or What’s not to like?
Trading under the ticker KBLT on the TSX, Cobalt 27 Capital Corp is uniquely positioned to benefit from the multi-year Cobalt supply deficit and can offer investors pure-play Cobalt exposure in the form of massive physical commodity holdings and potential streaming / royalty deals (without the risks associated with exploration, development, and geopolitics). As a play on secular EV growth, I believe Cobalt 27 represents a VERY interesting investment opportunity and I plan to investigate further!
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