EDITOR: | November 21st, 2016 | 20 Comments

Tesla Loses When China has Control of Congo’s Cobalt

| November 21, 2016 | 20 Comments
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On Sept 22 this year we wrote about the impact of the Congo’s war on the price of cobalt. The devastating conflict has been responsible for 6 million deaths, with the expected negative impact on the Congo’s economy. Political corruption and instability tied to the November, 2016 presidential elections have added to the suffering. Copper production is at risk, taking with it the cobalt by-product, impacting global cobalt consumers including Tesla Motors.

The Tenke Fungurume Mine in the Congo produced 157,671 metric tons of refined copper and 11,669 t of contained cobalt in hydroxide in 2012 (from the US Geologic Service). Tenke is owned as to 56% by global powerhouse Freeport-McMoran Inc., 20% by the Congo’s state mining company Gecamines, and 24% by Lundin Mining Corp.

In May, 2016 Freeport announced it was selling its Tenke share to China Molybdenum for USD$2.65 billion, which gave Lundin three options: exercise a right of first refusal to buy Freeport’s share on the same terms, sell its own stake to China Moly or a third party, or simply allow the China Moly sale to proceed.

After receiving several extensions, Lundin last week announced it was selling its 24% stake to Chinese private equity firm BHR Partners. The sale price was roughly USD$1.14 billion in cash, with additional cash possibly payable to Lundin dependent upon copper and cobalt prices over the next 24 months. The sale price has the same implicit value as the Freeport sale to China Moly.

Lundin also waived its right of first refusal to buy Freeport’s share of Tenke, and also received a commitment for a $100M break fee secured by a letter of credit, in the event the BHR sale does not proceed.

Freeport anticipates its sale to China Moly will be completed before the end of 2016. Lundin will close its sale in early 2017.

This means that two Chinese owners will control one of the world’s largest copper mines and a source of much of the world’s cobalt. The world is already experiencing a global cobalt shortage as production falls and consumption skyrockets due to its use in the battery market. (Roughly 60% of the weight of your cell phone battery is cobalt. Depending on the energy density needs, somewhere between 6 and 12% of the weight of an electric car’s battery is cobalt.)

Congo Dongfang Mining, a wholly owned subsidiary of the Chinese mineral company Huayou Cobalt, is one of the largest mineral processors in the Congo. Other Chinese processors in the Congo include Zhejiang Huayou Cobalt Ltd and Huayou Cobalt. They sell the processed cobalt to end users like battery manufacturers in other parts of China, South Korea and Japan. Not much of that trade is directly with North American companies.

What does this mean for us? North America is import dependent for cobalt and cobalt-derived products like paints, pigments, magnets and oxides. If China controls the production and processing of cobalt, the western world becomes highly dependent upon China’s whims. It also means that China will have some ability to influence cobalt pricing – imagine the leverage through the London Metals Exchange if China simply backlogs cobalt sales for several months.

What is also means, closer to home, is that Tesla Motors needs to visit RealityLand. Dating back to 2014, Tesla has repeatedly said that it would not look overseas for the graphite, cobalt and other materials needed for its Gigafactory. The math tells us that this is impossible.

We’ve opined on this topic before. Here are the facts. Tesla has pre-sold roughly half a million units of its Model 3. Each of those cars will have an array of batteries which will require roughly 15 kg of cobalt per car. That totals 7.5 million kilograms (8400 tonnes) of new cobalt demand, or roughly 8% of the world’s annual production. In the aggregate, Canada and the USA together produce roughly 3% of the world’s supply, nowhere near Tesla’s needs for just one of its models.

Christopher Ecclestone earlier in the year wrote about Tesla’s wistful supply chain, and described “a frighteningly long table with the names of Cobalt projects that had been stopped in their tracks, mothballed or permanently decommissioned”.

The only advanced stage, near-term, environmentally permitted, primary cobalt deposit in the United States is the much-anticipated Idaho Cobalt Project, owned by eCobalt Solutions Inc. (TSX: ECS | OTCQB: ECSIF) (formerly called Formation Metals). eCobalt is roughly 12 months from initial production, and it will take a couple of years past that to hit full production. Even running at full efficiency, eCobalt will supply roughly 1,000 tonnes of cobalt per year or about 1% of the global market, for a 12 year life of mine. That’s not enough for Tesla.

From a compliance point of view, Tesla needs to make better disclosure of its supply chain issues. Functionally, it needs the Chinese-processed cobalt, whether directly or through an intermediary like Panasonic, or the Gigafactory will end up being the world’s most sophisticated dusty warehouse.

Expect cobalt prices to continue their march upwards, with the higher costs being ultimately passed along to the end consumer.


Peter Clausi

Editor:

Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>


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Comments

  • Tracy Weslosky

    The 1st 10 people that figure out what CEO is sitting in front of me in this TESLA win a complimentary Investor Intelligence Report. We sell these for $300USD annually…..

    November 21, 2016 - 5:01 PM

  • jeff levanger

    J. Paul Farquharson.

    November 21, 2016 - 6:10 PM

  • jeff levanger

    L. Paul Farquharson

    November 21, 2016 - 6:12 PM

  • Jack Lifton

    I don’t think that Tesla/Panasonic will have any problems buying American made engineered graphite anodes for its projected 2018 model year batteries. As of this writing however it would have a problem sourcing or producing American made lithium cobalt cathodes in the quantities required. American and European EV carmakers who choose to use non Chinese, or even non Asian, batteries will have two distinct problems:
    1. The global cobalt supply chain is inadequate on a volume basis alone for such a non Chinese ramp up anytime soon, and 2. Even if non Chinese EV carmakers choose not to use Chinese made batteries they may be unable to source them elsewhere due to factors such as the ones this article describes.
    China recently mandated that EVs built in China use only Chinese made batteries, period! Why would Daimler, Nissan, Toyota, BMW, VW and GM use Chinese batteries in their models for the red-hot Chinese domestic EV market and not use their purchasing power to buy such batteries also, if allowed, for their export models.
    Donald Trump may, however, throw a monkey wrench into everyone’s calculations and plans simply by mandating American content for vehicles sold in the USA just as the Chinese are mandating Chinese content for vehicles sold in their market. For several years China has put a 150% import tax on luxury vehicles sold in China but not made in China. .A Rolls Royce sells in China for 1,000,000 dollars because of this tax law. Such an import duty on Chinese made lithium ion batteries would surely kick start the American li-ion battery manufacturing industry. I note that Japanese and Korean companies have been coming to the US as domestic manufacturers for many years now. The de-gloabllization programs of the Trump administration will only accelerate this trend. Chinese companies already are major domestic American suppliers of auto glass and other components. Look for this trend to spill over into the EV components markets, soon.

    Jack Lifton

    November 21, 2016 - 8:46 PM

  • Jim Bond

    J. Paul Farquharson. Ecobalt

    November 22, 2016 - 7:30 AM

  • Tracy Weslosky

    Please note that the guesses are wrong right now…..this is the CEO for a graphite company….try again. Sharron, how about I get you to tweet out via @Investor_Intel some additional photos…..

    November 22, 2016 - 9:14 AM

  • Kris VD Cruyce

    Ian Flint, Elcora

    November 22, 2016 - 10:03 AM

  • Peter Clausi

    Pulling a few different memories together, I’m guessing it’s a company at the back end of the alphabet, with a high purity graphite deposit in northern Ontario … oh Aubrey?

    November 22, 2016 - 10:09 AM

  • Peter Clausi

    Jack, reality meets theory when there are actually large scale cobalt projects on the ground in North America. Until such deposits are found, then the talk is just that. Building a plant like the Gigafactory is a hollow gesture if it’s not economic, and without local raw materials it’s not economic. We will be dependent upon foreign sources and manufacturers.

    November 22, 2016 - 10:14 AM

  • Ron

    Aubrey Eveleigh of Zenyatta Ventures

    November 22, 2016 - 11:47 AM

  • Tracy Weslosky

    Congratulations Ron – you are correct! Please send an email to Tracy@InvestorIntel.com to collect your subscription. One other person has won a subscription to the Investor Intelligence Report — eight more to give away. PS. Send your address and we will send you a complimentary InvestorIntel mug!

    November 22, 2016 - 1:25 PM

  • Carlo

    I was fortunate enough to be able to attend a Robert Friedland presentation yesterday in Australia that focussed on the coming cobalt demand explosion. The presentation was part of a ASX listed company’s annual general meeting, Friedland is the co-chair of the company. To say his presentation was colourful was an understatement. If anyone is interested in viewing the presentation which has some excellent commentary on input demands for EV batteries (only PDF, not audio visual unfortunately), you can view it here: http://www.asx.com.au/asxpdf/20161122/pdf/43d2pb5fp58k92.pdf

    November 22, 2016 - 3:22 PM

  • Jimmy Bond

    Aubrey Eveleigh of Thunder Bay when I knew him Zenyatta.

    November 22, 2016 - 8:22 PM

  • David L Covell

    J. Paul Farquharson.

    November 23, 2016 - 6:50 AM

  • A. Paul Gill

    Aubrey Eveleigh of Zenyatta Ventures I would think in in the Tesla. Great article, insight and comments Tracey.

    November 23, 2016 - 11:58 AM

  • JJBeswick

    Aubrey Eveleigh of Zenyatta Ventures:
    but I feel a bit of a con as I got the answer from above….
    Nonetheless, I’m one of the first 10 I believe

    November 24, 2016 - 11:23 AM

  • JJBeswick

    Worth pointing out that there are several Australian cobalt opportunities, the most prominent being
    CLQ:ASX
    MLM:ASX
    PGM:ASX and (non-Aust company)
    SCY:TSX.
    They all appear to be genuine Co opportunities with significant co-products mostly scandium and nickel.

    November 24, 2016 - 12:06 PM

  • jeff levanger

    Aubrey Eveleigh. Email submitted also. Thanks Tracy and Jack for all you do for investors. Happy Holidays to all. Jeff

    November 24, 2016 - 3:37 PM

  • jeff levanger

    Of course the Thanks includes Peter and all the staff at Investorintel!!

    November 24, 2016 - 3:41 PM

  • Sharron Clayton

    Thank you Jeff, we all enjoy what we do here at InvestorIntel!

    November 25, 2016 - 9:19 AM

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