EDITOR: | April 12th, 2016 | 11 Comments

Ecclestone on the “very big” cobalt niche

| April 12, 2016 | 11 Comments
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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.

Overall, cobalt demand is projected to grow from 87,383 tonnes to 113,725 tonnes between 2014 and 2018. Cobalt supply is projected to grow from 91,577 tonnes to 100,778 tonnes over this same time frame. Rechargeable batteries and superalloys comprise 46% and 18% respectively of the total refined cobalt demand. It’s important to note that most rechargeable battery users require cobalt in chemical form (sulfate and oxide), while superalloy manufacturers require metal.

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).

Primary cobalt mines are interesting because they are not dependent upon the pricing of another base metal to dictate their viability. However primary cobalt mines have become a rare commodity. One of the most advanced of the handful of primary plays out there is Formation Metals’ project in Idaho which I shall take a closer look at here.

Most Advanced to Production

Formation Metals Inc. (TSXV: FCO) 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 100%-owned deposit is one of that rare breed, the primary cobalt deposit. Its project, the 100% owned Idaho Cobalt Project (ICP) is comprised of the mine and mill site located in Lemhi County, near the town of Salmon, Idaho. The company has also mused upon establishing a refining facility, the Cobalt Production Facility (CPF), to be a stand-alone hydrometallurgical facility that would process the ICP Mine concentrates. The company owns a 16 acre industrial zoned package of land near Kellogg, Idaho which it deems suitable for the future placement of the CPF. At times it has also investigated other locations for the refining facility preferably located closer to the mine site and a railhead to reduce the operating expenditures of the ICP.

The Resource

The Salmon project is endowed with Cobalt, Copper and Gold. While the most recent PEA does not have a Mineral Reserve shown, a previous PEA showed diluted, Proven and Probable Reserves of the project 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 represented 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 19,000 ounces of gold.

The latest PEA has a Resource for the Ram portion of the deposit which showed:

Salmon_resource

The Mining Plan

A Feasibility Study on the ICP was completed in 2008 which kickstarted the initial construction of the project. Formation has already spent US$65.3 million (of which $15mn was towards the CFP) and completed two phases of the ICP construction program that commenced in June 2011 and completed in December 2012. This work was comprised of extensive earthworks including access and haul road, portal bench, mill and concentrator pads and tailing waste storage facility construction. In addition, pre-purchased mining and milling equipment, including the ball mill, flotation circuits, grizzlies, hoppers, conveyors, etc., totaling approximately US$16 million has been delivered to a staging area outside the town of Salmon, Idaho, proximal to the mine and mill. The fall in cobalt prices, and moreover, the dire financing environment put the project into abeyance at that point.

ICPAerialView2013

The final Phase III of construction will involve underground development and the construction of the mill and concentrator and other ancillary facilities at the ICP Mine Site and at the CPF.

Back in April 2015 the company published a new PEA on the ICP. That PEA was based on an underground mine with a target production rate of 800 tpd with a weighted average annual production of:

  • 2,771,000 lbs of cobalt
  • 4,533,000 lbs of copper
  • 3,600 oz of gold

The output is over a 12.5 year mine life with an estimated pre-production period of 21 months utilizing a 0.20% cobalt cut-off is estimated at:

  • Cobalt Production: 35,356,415 pounds
  • Copper Production: 57,384,700 pounds
  • Gold Production: 46,858 ounces

The economic model used a 35% corporate tax rate and an 8.5% discount rate, resulting in an after tax NPV of $113.45mn and an IRR of 24.07%.

The key difference is that whereas the original feasibility design, centered on the Cobalt Production Facility, produced high purity cobalt metal, the revised ICP is focused on producing battery grade cobalt cathode chemicals (cobalt sulphate heptahydrate). The CPF will also produce copper sulphate, magnesium sulphate, a clean copper concentrate and gold as saleable by-products.

Current plans call for the production of a bulk sulphide concentrate that contains cobalt, copper, and gold. Further processing for recovery of the individual metals is via a hydrometallurgical treatment plant (i.e. the CPF). The hydrometallurgical process includes a copper scalping flotation to produce a copper concentrate to be shipped directly to a copper smelter, and pressure leaching of the remaining concentrate. The CPF consists of an autoclave, copper solvent extraction and cobalt solvent extraction followed by crystallizers to produce cobalt sulfate heptahydrate, copper sulfate pentahydrate, and magnesium sulfate crystals. A gold leach circuit is also included in the process to extract gold onto carbon which will be sold as a product prior to leach residue disposal. The PEA contains a $55mn capex item for the CPF.

Approvals

The ICP has received a final Environmental Impact Statement and positive Records of Decision from both the U.S. Department of Agriculture National Forest Service and the U.S. Environmental Protection Agency.

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.

Conclusion

The supply outlook for cobalt is muted to say the least, while there are potential bottlenecks on the usage side (e.g. Tesla). As we have noted before 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.

A key takeaway from last year’s PEA is that LOM Average Net Cash Cobalt Production Cost is projected at US$4.94 per lb (net of gold, copper and magnesium credits), while current Cobalt prices are around $10 per lb on the LME, giving a very healthy margin indeed.

Formation’s project is the most advanced Cobalt project held by any junior we know of. Reactivating the works is a relatively simple task that just requires the conjunction of financing and the cobalt price coming to the party. From capex financing Formation would then have 13 months of construction and eight months of ramp up for production. Therefore from start to finish for full production would be 21 months. Ergo, 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.


Christopher Ecclestone

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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Comments

  • jeff stufsky

    Given projected demand for cobalt (assuming BEV cars do explode and there is no change in battery technology) coupled with a permitted US story, this is an interesting and potentially lucrative higher-risk bet.

    But, it is not easy by math, mining or market. Despite the advertised low net cash cost per lb. of Co – and assuming a “perfect ride” for construction, start-up and operation – the all-in (roughly break-even) cost looks like ~$12-13 lb. Co. This includes all capex and other costs in the bottom line equation for per lb. of produced Co. The cost would go higher with Corp. G&A, any construction through start-up and operating hiccups, bonding/reclamation obligations, and (debt) financing costs.

    Mining involves a relatively low grade and a combination of not inconsequential dilution with chemistry-test-related met /processing risk (including for by-products). The project seems to be quite reliant on its higher grade first few years before the grade steadily drops through the remainder of the mine life, with production and costs adjusting higher. A great start (somewhat uncommon in mining, especially for processing-heavy projects) becomes even more important in order to take advantage of its “sweet spot” operating economics.

    There is also a bit of a “chicken-and-egg” problem associated with what is probably a nearly three -year time line from now to production (including completion of a new FS, financing, and 21 months of construction/start-up). Cobalt (and by-product copper) prices need to be sustainably higher compared to recent levels, for financing-purposes and otherwise, with serious and hard-to-get off-take agreements not only addressing volumes but price (and premiums) given cobalt’s historical volatility.

    It would be nice to see one of these succeed.

    April 13, 2016 - 2:47 PM

  • Christopher Ecclestone

    Thanks, Jeff.. some good observations… the real indictment of Elon Musk is that he isn’t putting his money where his mouth is and doing some sort of funding offtake to ensure that he has this type of project as a captive satellite (while the going is good – and cheap). It’s the difference between being the smartest guy in the room and a mere promoter… I have yet to be persuaded that he is not just the latter..

    April 13, 2016 - 3:18 PM

  • K Van den Cruyce

    Dear Christopher and Jeff. You both answered more or less my question in the previous article on Cobalt.

    You both deserve a beer when being in Brussels.
    So we will soon see who may do the DFS and its results. But maybe 3 years from now to full production is too long. On the other hand, if Cobalt remains strategically important for Musk he might just buy it or take a strategic position. This might shorten the ‘3 years’ considerably.
    From a long term perspective (even with lower Cobalt usage) it would a smart move.
    Exiting times.

    April 13, 2016 - 3:52 PM

  • Anthony Wallance

    An interesting read, however I have to say that the assumption for Formation Metals Inc. is not really correct. Out of the current trending cobalt developers FCO.TO only has a preliminary economic assessment (PEA) which is a 40%-50% hit or miss, preliminary feasibility and definitive feasibility are still pending.

    Formation Metals (FCO.TO) – (PEA) – Idaho Cobalt Project, hyped due to Tesla Gigafactory vicinity (Nevada), promotes itself with ethical mining, safety and responsibility, however other than economic studies they offer not much information about their deposit, other than estimated reported resources which are not particulary impressive in comparison with the resources elsewhere.

    Equitas Resources (EQT.V) – (N/A) – Garland-Nickel-Cobalt-PGM Project, other than forward looking statements there is no information regarding the surveys, resource deposit, orebody etc. available on their page that I could find. Must be in very early exploratory stages.

    Broken Hill Prospecting (BPL.AX) – (PEA* non JORC) – still lacks a JORC compliant study to further provide economic viability, the scoping studies for cobalt are years out of date, it will need current information for further assessment. The scoping study shows the deposit being fairly vertical with mineralisation occuring to 300m of depth, thus drilling and maintenance being a production cost factor.

    Conico (CNJ.AX) – (PFS) – Mt. Thirsty, potentially 4th largest cobalt producer, is owned, operated and managed by Conico. The orebody is relatively flat lying with an average thickness of 12m and an average depth below surface to the top of the orebody of 14m, deeming the production costs lower due to lack of necessity for extensive drilling.

    I personally would pick to play the cobalt market with Conico (CNJ.AX), its companies tangible book value exceeds their SP (0,02 SP – 0,05 TBVPS), meaning that even if it gets de-listed and liquified the investment will not be lost.

    April 13, 2016 - 6:03 PM

  • jeff stufsky

    Chris, I would not argue with your sentiment about Musk being the consummate promoter, but at least he is producing a quality product. I believe his cleverness comes from turning hard-to-find funding for boring and unbranded battery research/production into a publicly-funded (plus considerable subsidies from the government) sensation by wrapping it inside a high-volume, sexy, big-ticket, mainstream, branded product. Making money….we’ll see.

    April 13, 2016 - 9:03 PM

  • Christopher Ecclestone

    Thank you Anthony for bringing some more names into the mix, but the fact of the matter is that Salmon is already 80% built and needs little extra expenditure to get across the finish line. Frankly I don’t even know why Formation is pandering to the cheap seats in Canada by talking of more feasibility studies. As far as I am concerned they are only useful as a fire-starter.

    Formation will be in production before any of these other names purely because they are so far ahead.

    April 14, 2016 - 3:37 AM

  • Anthony Wallance

    Thank you for the reply Christopher. I understand that the mine was in construction until 2013, some heavy machinery was purchased, all this gives the security to the investor, unfortunately I see a halt at the moment, and FCO.TO are even on inquiry not giving more information concerning the project. Nonetheless, eventhough the mine schedule certainly has a big impact on the shortage-market entry point, if it is not deemed more profitable than others due to vertical orebodies and/or other excavation peculiarities, they will be squeezed out by other producers with greater deposits and lesser production costs. I hope we will see some information regarding the construction progress of ICP coming soon.

    April 14, 2016 - 4:29 AM

  • jeff stufsky

    Formation needs the FS for itself as well as financiers/investors in order to determine the project’s current-market economic viability based on, among other things, a new (processing) flow sheet. Such upgraded technical report could restore the M+I resource to P+P reserves. While the modest grade and underground mining (dilution) pose one important set of risks, the bigger consideration may likely revolve around the fact that this is more of a story about downstream metallurgical/chemical processing performance and quality-of-product -for-sale metrics than upstream extraction. This ignores the risks associated with fairly common capital cost overruns, start-up delays and operational underperformance, all of which is endemic to mining and exacerbated by a junior company sponsor without organic development or mining experience, plus cobalt-specific price volatility and the unknown size of future quality premiums. Tight operating math in today’s cobalt price environment is another important factor, which both impacts and is impacted by the paucity of high-risk equity in today’s cynical investor market alongside the commensurately lower limits for debt-based leverage in an equally constrained financier market. Gold and silver (another by-product metal) are confronting the same issues despite a much simpler fact-set. Formation and similar companies are worth following based on the broader story about prospective battery-related increases in demand for cobalt vs. new supply limitations. But, it seems like the macro-story must truly lead the micro- in order to give ample economics-based head-room for financiers and investors to jump in. It’s not an easy sub-space.

    April 14, 2016 - 10:40 AM

  • JR

    Unfortunately, the manufactures do not fully appreciate or understand the supply chain for battery minerals. Cobalt could be the one element that could put the brakes on Tesla et al production. Like many “in-the-know” Chris is raising concerns about Cobalt supply and offering one solution for investors. The only real primary production of Cobalt in the world is in the DRC. But unfortunately they have a civil war every other year so it is neither secure or stable. Thank you Chris. Keep up the good research.

    April 23, 2016 - 3:04 PM

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  • Thomas T. Draper

    Never had anything to do with the stock market but I am a past professional engineer and manager with overseas experience. Weighing up all the reports and reviews by seemingly qualified commentators and considering the international situation re politics and inventions it seems logical to invest in the minerals that are in close proximity to Tesla. Their final product like most American products since way back, will be trusted more than anything out of Korea or China. Of course sub-assemblies could be, as is so often the case made entirely from raw materials sourced elsewhere and assembled elsewhere yet have to pass stringent US quality control. Little has been mentioned it seems about military uses of large lithium-ion storage facilities and nano. It is surely going to be significant, just how relevant however is beyond me. All considered, I think I may take a small punt on Formation Metals Inc. cobalt together with the others close to Tesla, knowing full well that the US wants to source everything locally to assure minimum hiccups in the supply chain. This so, even when the quality of some local minerals is not great or requires more processing than imported materials. Local stock piling may also be more practical from a cost stand-point. I think in terms of sitting on investments for the long term (dependent on ore quality and mine life). I don’t see why the 3 year tim-frame should matter a lot. Normal logistics apply provided the stuff is available to the end user. Maybe somebody else wants a reliable source of US cobalt. I hope my comments do not seem too simple or brief. It’s a long time since I studied metallurgy.

    April 16, 2017 - 8:28 AM

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