Cobalt: Recovery out of the Blue?
Cobalt is one of the biggest of the specialty metals. Its global volumes are sizeable at over 100,000 tpa BUT it is almost exclusively a by-product of some other mining activity with very few primary mines of consequence. Cobalt is almost always a by-product of nickel or copper mining. As a result those metals have to be viable to mine before the cobalt can be justified. In periods of bad prices for those metals (with mine closures) production of cobalt drops in tandem (as can be seen in the 1990s in the production chart below).
In 2013 the government of the DRC signaled new rules that indicated that it wanted to see the value added from mining of copper and cobalt stay in the country rather than go off to third-party or end-user smelters. Our suspicion is that this measure was really just code-language for a shakedown of Chinese interests. The Chinese have been notorious across Africa for ripping minerals out of the ground and then sending them back to the mother-ship in an unelaborated form so the value-added drops off in the domestic Chinese economy.
The South Africans have also slammed the door shut on this practice in the Chromite industry (where PGMs can also be spirited out of the country in the DSO), the DRC has joined the club as have the Indonesians with their ban of unelaborated tin and nickel exports. To some extent it’s the lobster-trap scenario where you get the Chinese just enough into the economy and then slam shut the door and they have to play ball. In the case of the DRC we would note that the country instituted restrictions back in 2006-2008 on unelaborated cobalt exports and that these went by the wayside somehow. We suspect the Chinese are currently scrambling to find the Swiss bank account numbers they “contributed to” last time to make this issue go away for the second time.
The Price Action
As the chart below from the LME shows, cobalt is not marching to the funeral dirge of other metals but rather surging, with the DRC’s change of policy on value-added processing of copper and cobalt having a dramatic uplifting effect.
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Cobalt has been a relatively healthy market over the last year with a move from around $23,000 per tonne to slightly over $30,000 in the first half of the year. It pulled back from these levels but then got a second wind when the DRC blocked exports of unprocessed metals from mine in that country. This is seen by us as a stick to beat the Chinese with as the DRC has taken exception to the Chinese essentially exporting the value-added part of the mining process to the mother-country. We would note that, unlike nickel, cobalt is not a metal with prolific supply. Its $45 per lb period was a genuine response to real demand (and supply shortages). Speculators were not in the metal (though it eventually became LME traded in 2010). Thus in a sustained economic recovery we would expect cobalt to be back above $30 per lb pretty smartly. Nickel might take decades to see its 2007 highs again.
Going Vertical in Cobalt
The tale of OM Group (NYSE: OMG) gives no better example of why the US is so woefully out of the metals game. The company has its origins as a spinout from Outukumpu, the major Finnish Metals group and the core of this spinout was the cobalt refining interests of the founder group. OMG resolved in early 2013 to ditch its interests in cobalt refining. It is this type of thinking that has created the pathetic dependency of US industry upon foreign (read mainly Chinese) suppliers, which creates much hand-wringing and zero action. With impeccable timing OMG exited cobalt just as the metal went for another of its runs.
It was back in late January of 2013 that OM Group announced the transaction which at that time was referred to a “strategic evolution” with the signing of definitive agreements to exit its Advanced Materials business. The transactions included the sale of the downstream portion of the business, including its cobalt refinery assets in Kokkola, Finland, to a joint venture to be held by Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), Lundin Mining Corporation (TSX: LUN) and La Generale des Carrieres et des Mines (Gecamines), for total potential consideration of up to $435 million, comprised of initial cash consideration of $325 million and potential future payments of up to an additional $110 million based on the business achieving certain revenue targets over a period of three years.
It makes sense that the two largest foreign-owned producers of cobalt in the DRC should band together with Gecamines, (which is State-owned) to buy up this key chess-piece. Lundin and Freeport own the massive Tenke Fungurume mine. More intriguing though is the thought that in participating in the purchase of this value-added facility, Gecamines is taking an action which, theoretically, flies in the face of the new DRC diktat that the country wants to see the value added from mining of copper and cobalt stay in the country rather than go off to third-party or end-user smelters. We do not think that any exports of concentrate to the Finnish smelter will encounter any problems whatsoever. That is the real test of who the DRC’s tightening is directed against.
Geovic (TSX: GMC) – getting back on track?
We were once very fond of this stock back in 2010. The rationale was that we liked cobalt (of which it had a large deposit in Cameroon) and it had chromite (in the form of beach sands) in New Caledonia. It also had a market cap of around $50mn and something like $42mn in cash if memory serves us right.
We then revisited it sometime after and when the capex was showing no sign of moderating its expansion and management failed the give the right answer to our classic trick question. “is it scalable?”. The wrong answer being “yes, we can make it bigger!”. We had started to have a queasy feeling then that management was peddling an undoable project and was not prepared to scale it down to a size that would be more realistic.
Our enthusiasm for cobalt or Cameroon remains undulled (though we are somewhat cooler on chromite). However a glance at Geovic tells a tale not just of ambition unfulfilled but gives a glaring example of all that is wrong in the mining industry’s lower echelons. The company’s magnificent cashpile, which should have been enough to kickstart Cameroon had wilted over the intervening years.
The chart below shows its “progress”:
Meanwhile, exploration spending ($10.9mn in 2009, $16.3mn in 2010, $10.9mn in 2011 and $4.9mn in 2012) had plunged commensurately. The one item that had not declined in line was GS&A. It went from $8.4mn in 2009, to $7.7mn in 2010, $7.1mn in 2011 and $6.8mn in 2012. This is scarcely trimming of the coat to suit the cloth. Why was GS&A so high at what is basically a junior explorer? Essentially the problem was a very highly compensated executive suite with top players paid like they were in a producing major rather than a junior explorer.
Back in July of 2013 though it seemed that salvation was in sight as the company announced that it had agreed a Definitive Agreement with the Chinese company, Jiangxi Rare Metals Tungsten Holdings Group Company Ltd. JXTC is a large state-owned large scale enterprise with significant mining and industrial operations in cobalt, copper, tungsten, and other rare metals. The terms and conditions of the DA were agreed amongst JXTC, Societe National d’Investissement du Cameroun, and the National Investment Corporation of Cameroon that owns or represents 39.5% of Geovic Cameroon.
The transaction could very well end up with JXTC acquiring 60.5% of the existing shares of Geovic Cameroon. In addition to acquiring 60.5% interest in Geovic Cameroon, JXTC would also secure 100% of the mixed cobalt-nickel sulphides product to be produced by the project through a long-term arm’s length offtake agreement with Geovic Cameroon. By the sounds of it, Geovic has lost control of their asset.
Global Cobalt (TSXV: GCO) – a challenge worth facing
This company always strikes us as larger than it is because it is the most vociferous advocate of the attractions of cobalt as an investment. It’s hard to work out whether it is helped or hampered by the off-the-beaten track nature of its project. Its 100%-owned Karakul Cobalt Deposit is located in the southern Siberian region in the Republic of Altai, part of the Russian Federation. It is approximately five kilometres from the border with Mongolia, in an area that is considered to have strong mineral potential. The exploration project license covers an area of 4.62 square kilometres and grants rights to rock and mineralization within the designated area to an elevation of 2,100 metres above sea level.
The company claims that the Karakul deposit is potentially the world’s largest source of primary cobalt outside of Africa’s Copper Belt. The Altai Republic is regarded as pro-mining.
Global Cobalt is acting as the operator under an earn-in option agreement with Imperial Mining Holdings Limited. The option agreement positioned Global Cobalt as the first foreign invested mining company to explore and develop in the Altai Republic.
The Karakul deposit is a hydrothermal polymetallic sulphide deposit with potential for cobalt, copper, bismuth, silver and tungsten mineralization. At least five parallel north-south trending structurally controlled sulphide zones are delineated and open at depth. Historic (non NI 43-101) Russian estimates suggest 14.9 million tonnes of 0.26% cobalt equivalent in nine sulphide bodies with potential expansion on strike and at depth.
In Siberia the words “access” and easy” are all relative. Access by air is to Barnaul and then by regional paved highway through the towns via Byisk, Gorno-Ataisk and Koch Agach. A well-maintained dirt road connects the project site from the highway. There is a 110-kilovolt power line, with spare capacity, that terminate some 18kms from the project. The closest railway station is in Byisk, connected to the project via the regional highway, and is approximately 620 kilometres from the deposit.
The local terrain comprises rolling hills. The climatic conditions reflect the central continental location and high elevation of the steppe area. Precipitation is modest with snow depths seldom exceeding a few centimeters, and as such exploration and mining can be undertaken year round.
Global Cobalt still has its work cut out for it…the deposit needs its NI43-101 and that is on the way…
Sherritt International (TSX: S) – the best proxy
This company is the one the US government loves to hate despite its importance as a major source of cobalt on the US’s doorstep. However this metal makes up only a small proportion of Sherritt’s output but is by far the most interesting part of the company’s product mix.
Sherritt has long had cobalt production out of the Moa Bay mine in Cuba and has just added production
from Ambartovy in Madagsacar. The Moa Bay facility traditionally produces around one lb of cobalt for every pound of nickel. Sherritt’s 50% share of the sales of cobalt is running at around 4mn lbs per annum. Ambatovy, at full capacity, could be putting out 12mn lbs of cobalt per annum (of which 40% will pertain to Sherritt).
The US has its nose out of joint as the assets belonged many moons ago to Freeport and were nationalized by the Cuban government at the Revolution. This churlish attitude makes the US even more vulnerable to supply disruptions, some of which are the result of policies in countries the US regards as friendly (e.g. Indonesia).
Sherritt is in the throes of divesting its coal interests and once again narrowing down to a focus on nickel/cobalt and Cuban energy. Frankly the latter assets should be spun off onto the Madrid stock exchange to “ease tensions” and give the investors in Sherritt a stake in these promising businesses (which will come into their own as Cuban opens up). The nickel & cobalt assets though are the jewels within the Sherritt structure. This company stripped of the energy assets, represents probably the best leverage into cobalt in any of the global mining markets.
Formation Metals (TSX: FCO) – on the road to primary production
Formation is ahead of the pack amongst the juniors. This company has the advantage, strategically, that its project is located at Salmon in Idaho and thus could potentially provide the US with an onshore source of Cobalt. The deposit is a unique 100%- owned primary cobalt deposit.
Diluted, Proven and Probable Reserves of the project currently stand at 2.636 million tons @ 0.559% cobalt, 0.596% copper and 0.014 ounces per ton gold utilizing a 0.2% cobalt cut-off for a ten year mine life. This represents contained metals in a Proven and Probable Reserve category of 29.5 million pounds of cobalt, 31.4 million pounds of copper and 37 thousand ounces of gold. In addition, there are Inferred Resources of 1.122 million tons grading 0.585% cobalt, 0.794% copper and 0.017 ounces per ton gold representing contained metal of 13.1 million pounds of cobalt, 17.8 million pounds of copper and 19 thousand ounces of gold.
Expected production is estimated at 1,525 tons annually of super-alloy grade high-purity cobalt metal over a minimum ten year mine life. The project’s output will be equivalent to 3.3% of the entire global cobalt supply and it will be able to feed 14.9% of North American demand for cobalt.
This is the most advanced Cobalt project held by any junior we know of. Construction is under way and the underground mine is progressing. Formation appears to be one of the best exposures to new production. It will also be an interesting test case of the profitability of primary cobalt producing mines.
The “Blue Metal” is sometimes the term used to describe cobalt. While Cobalt has had the blues in the recent past its worst days seem behind it. Like many other specialty metals it has a poor supply prognosis as its tailwind at the current time and for the foreseeable future. Supply is linked to two base metals, one of which (nickel) has been underinvested for quite a while and still has a relatively depressed price (despite the bulls of that metal) while copper is satisfactorily priced at the moment but the bulk of the cobalt by-product rich mines are in Central Africa NOT in Latin America (Chilean mines have more Moly as the by-product).
So the supply outlook for cobalt is muted to say the least, while there are few clouds on the usage side. As we have noted above the number of players threatening to bring new production to the market is very few indeed. The prospect thus is for investors to wake up one day that cobalt is a specialty metal that at least due to the sheer size of its market — is niche but a very big niche.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>