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How would a cobalt shortage impact these three Aussie mining shares?

Lithium is the element most associated with electric cars. However, there are likely ample lithium reserves to meet projected demand. The big shortage seems to be cobalt. Where will this come from and at what price?

While Elon Musk is making headlines locking up future lithium production , the larger problem looming for electric cars appears to be cobalt.

According to Argonne National Laboratory, a typical electric car battery (NMC532) had 8kg lithium, 35kg nickel, 20kg manganese, and 14kg cobalt.

Even though manufacturers are minimising the amount of cobalt in batteries to reduce cost, the rapid expansion of the electric vehicle market is expanding the demand for cobalt. It’s been a choppy ride for cobalt prices.

Just in the past year, cobalt jumped from $50,000 a ton to $82,700 and back to $50,000 currently on the London Metal Exchange.

Could the world run out of cobalt?

  1. Cobalt is an essential part of EV batteries
  2. The number of electric cars is increasing exponentially
  3. Most reserves are in the Congo – a difficult place to do business
  4. Mining in Australia -- the main alternative to the Congo -- may not be enough to take sate the market

Cobalt is an essential part of many common EV batteries

Electric vehicles (EVs) generally run on lithium batteries. The advantage of lithium batteries is that they can be recharged thousands of times, recharge rapidly, and hold a high amount of electric charge relative to lead-acid or nickel-cadmium batteries. This last one is energy density.

This is particularly important for micro-electronics and transport. These batteries aren’t just lithium, however. Most lithium batteries also incorporate nickel, manganese and cobalt in the cathode. This combination maximises the energy density of lithium batteries. An alternative technology recently adopted by Tesla uses lower-cost iron phosphate aluminium in the cathode in its Chinese operations. This lowers the price, but also lowers the energy density, meaning these batteries require more lithium.

Excluding Tesla in China, other car manufacturers continue to use nickel cobalt manganese cathodes in their rapidly expanding product lines of electric cars.

Electric car sales are growing exponentially

According to the International Energy Agency, the number of vehicles requiring batteries (electric, plug-in hybrid, and hybrid) doubled in 2021 to 6.6 million units, and another 2 million were sold in the first quarter of 2022. Bloomberg NEF forecasts this to triple to 20.6 million units in 2025. This would represent a quarter of annual sales, up from just 2.5% in 2019.

Even if manufacturers reduced the average cobalt per car by 50%, this could still require 144,200 tons of cobalt per year by 2025. That exceeds 2020 mine production of 142,000 tons.

70% of cobalt is in the Congo

The Democratic People’s Republic of the Congo (DPRC) is one of the largest countries in Africa and ranked 169 out of 180 on Transparency International’s Corruption perceptions index.

This makes it a difficult country to do business in while maintaining expected ethical standards. For example, in 2019 Tesla was sued for alleged issues relating to the sourcing of cobalt produced through child labour.

Most of the ore mined in the DPRC is bought by China, which by 2019 already refined and supplied 65% of the world’s refined cobalt.

Over a million tons of reserves are in Australia

While the DPRC dominates production, the largest untapped reserves outside of the DPRC are in Australia – 1.4 million tons or approximately 18% of global reserves.

These reserves are attractive to western manufacturers because they are less likely to be controlled by China and won’t have issues with child labour.

Three companies could benefit from interest in Australian cobalt

Cobalt Blue Holdings Limited (ASX:COB) is a small resource company focused on developing its cobalt resource in Broken Hill, Australia. The current pullback in Cobalt prices hasn’t affected Cobalt Blue’s share price, which tripled in the past three months from 0.275 to 0.86. The current market capitalisation is $279 million.

Jervois Mining Limited (ASX:JRV) is an international resource company focused on developing its cobalt resources in Idaho, USA. Jervois Global’s share price fell in recent weeks along with cobalt prices. It’s now below where it was a year ago. The current market capitalisation is $684 million.

Australian Mines Ltd (ASX:AUZ) is focused on developing its nickel and cobalt mine at its Queensland-based Sconi project in Australia. Australian Mines shares fell steeply in May 2022 and are now down 70% on the year from 0.219 to 0.073. The current market capitalisation is $34 million.

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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