Cobalt: The Bass Player in the Tesla Band
Numbers are numbers and facts are facts: we make serious money when we figure out how those statistics could affect the future.
For the past year, we’ve been haranguing about the global shortage of cobalt. We’re not alone in this. See John Petersen‘s series of beautifully analytical data-driven articles and Chris Ecclestone‘s thesis. The key facts you need to know:
- roughly 97% of the world’s supply of cobalt is produced as a by-product of nickel or copper production. Fact;
- the spot prices for copper and nickel have plummeted to and have stayed at levels that make many deposits uneconomic. Fact;
- as a result of these economics, the owners of some of those copper and nickel mines are closing the mines, putting those mines on care and maintenance in a Hail Mary that someday the commodity price will recover enough to someday make these mines economic. Fact;
- if those mines are shut in, the supply of cobalt will fall in tandem. Fact;
- geographically, roughly 53% of the world’s supply of cobalt comes from nickel and copper mining in Conflict Africa. This supply is at risk on the best of days. Even worse, there are ethical concerns involving child labour. Read this article from Wired magazine, and understand why there is a global movement to impose an ethical supply chain on cobalt out of that area. Fact;
- the experts who specialize in this area are anticipating a 10 – 15% decrease in cobalt supply in 2016, resulting from a combination of ethical controls on the supply chain and mines being shut in. Fact;
- every battery used in an electrically powered vehicle needs cobalt. Fact;
- Tesla says it will punch out 500,000 electrically powered vehicles by 2018, each one of which will need an electric battery. Actually, each car will use many small electric batteries, each one containing lithium, graphite and cobalt. John Petersen’s work, supported by others, indicates that roughly 7,000 tonnes of additional cobalt will be needed to create the batteries for these vehicles. That number could be as high as 12,000 tonnes. Fact.
Simple facts, easily verifiable by your own due diligence. Global demand is increasing while supply is decreasing.
So what do those numbers mean?
Econ101 tells us that if demand increases and supply decreases, the price for the item must increase.
Think of the last time you went to a bar and saw a live band. You’re having a great time and really appreciating the music. The crowd is moving and the band is smokin. The drummer makes your arms move. The guitar player makes your hips pivot and your hips swing. Then you look down and your foot is moving … you don’t even know it but your toes are tapping along with the groove. That’s not the sax solo, that’s not the singer … it’s the forgotten bass player who makes your toes tap.
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If lithium is the lead singer in Tesla’s band, cobalt is the bass player.
Lithium gets all the media attention. It seems that every day there is another mining company announcing a lithium project, and those forays always reference Tesla directly or indirectly. Some of them are idiotic. Recognize that some of those are merely marketing plays, trying to shore up a disastrous stock price with blumphus and hoopla. These are the same companies that marketed a run at rare earths in 2009, at gold during its bull run, then at marijuana, and today they speculate with your investment money with passing references to lithium.
But Tesla needs cobalt in the cells to be provided by Panasonic (page 25 on Tesla’s quarterly disclosure here). Volkswagen needs cobalt. Honda needs cobalt. BMW needs cobalt. Demand is increasing and global supply is falling.
You can probably name a dozen companies with a lithium asset. How many can you name whose primary asset is a cobalt deposit? Right. Think about all those facts above. Draw a conclusion as to what those facts mean. Then do one of two things.
If you think Tesla is wrong and it won’t build those cars, it is now an obvious short. All shorts are high-risk, and this would be no different. But if you don’t believe in the Cult of Musk, then Tesla’s marketing machine has set you up for the fortune of a lifetime.
If you think Tesla is even partially right, then the right answer is to leave the crowded lithium world to others and go find yourself a cobalt company. Take a large early position and wait for the rest of the investing world to join you.
That’s where serious money gets made.
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>