Top 10 cobalt stocks to watch
Cobalt has become a popular metal among investors and its price buoyed by new demand from the rise of electric vehicles. But what do the long-term fundamentals look like and what cobalt stocks are worth your attention?
The price and popularity of cobalt – a rare, hard, metallic element – has soared over recent years. The metal has become a key material in an extensive range of applications, everything from magnets to paints to chemical catalysts, but the spike in demand over more recent years has been down to its crucial role in batteries used in electrical devices and electric cars. In fact, over half of all cobalt produced is used to make battery chemicals with nearly a fifth being used to produce superalloys used in high-end products like aircraft engines.
We have a look at the global cobalt market and outline the top 10 cobalt stocks investors should consider adding to their portfolio.
Cobalt: dominated by the DRC and China
Cobalt is extremely rare, and most all-known reserves lie in the unstable jurisdiction in the heart of Africa, the Democratic Republic of Congo (DRC). Over half of the seven million tonnes of cobalt in situ reserves around the world lie in the DRC, and almost two thirds of global production currently comes out of the country. No other country comes close to rivalling this unique concentration of cobalt in the DRC: Cuba, Russia, Australia and the Philippines are other major cobalt producers but none of them account for more than 5% of worldwide output.
The DRC – a historically unstable country fraught with corruption and war – and its outsized role in the global cobalt market is far from ideal for those wishing to mine or source the metal. The political environment can be volatile, supplies easily threatened, and operators can suffer from problems with security.
While DRC is the home to raw cobalt another country has dominated the other end of the market with China estimated to refine over half of the world’s cobalt. Cobalt 27 Capital, which invests in metals needed to build electric vehicles, warned earlier this year that the ‘two key issues facing cobalt supply are concentrated production and reserves in the DRC and Chinese control over the majority of refined cobalt output’.
Cobalt: a rare but vital metal for the modern world
While cobalt’s unique properties have made it a vital component for so many industries the instability, volatility and uncertainty over supplies means many companies are having to take drastic steps to secure the cobalt they need or try to move away from using the metal altogether. Tesla and other carmakers have said they are trying to minimise the amount of cobalt they need in their batteries while Apple is reportedly looking to take the unusual step of signing cobalt supply agreements directly with miners to wield more power over its supply chain. An electric vehicle can need anywhere between 4 to 14 kilogrammes of cobalt (a plug-in hybrid needs between 1kg-4kg) while the average smartphone needs 5 to 20 grams (tablets and laptops need much more, between 20g-50g).
SK Innovation and LG Chem have recently said they intend to produce new batteries later this year that comprise more nickel (which is much more abundant) and less cobalt. While current batteries contain closer to 20% cobalt, the South Korean firm’s new batteries will contain just 10%. The efforts to cut the amount of cobalt is aimed at reducing costs, but also to improve energy density which has gradually become a major barrier for the electric car industry striving to shorten charge times and lengthen range – all while bringing down the cost.
However, doubts about whether or not the need for cobalt can be completely eradicated are rising. Umicore, the Belgian materials technology and recycling group, has said while it may be possible to reduce the amount of cobalt needed in batteries it won’t be possible to remove it completely anytime soon.
‘Cobalt is the element that makes up for the lack of stability of nickel. There isn’t a better element than nickel to increase energy density, and there isn’t a better element than cobalt to make the stuff stable. So [while] you hear about designing out cobalt, this is not going to happen in the next three decades. It simply doesn’t work,’ said Umicore chief executive Marc Grynberg earlier this year.
That view has also been echoed by nickel powerhouse Sherritt International, which has said ‘removing cobalt from electric vehicle battery production in the near term is relatively low’.
Where next for cobalt prices?
Cobalt prices rallied throughout the first half of 2018 to hit a peak of over $44 per pound in June, before slumping in the second half of the year to enter 2019 closer to $25. As Glencore described it, it was a ‘tale of two halves’ as the US-China trade war and the sustainability of Chinese growth weighed on prices. However, while the price of cobalt had fallen dramatically from its peak it still ended the year over 30% higher than it was at the end of 2017.
As of 4 April 2019, cobalt is trading closer to $14.50, having spiralled further downward since the start of 2019. The trend has been in line with guidance from the market. China Molybdenum warned in its annual report that it expected cobalt prices to decline in the first half of 2019 as supplies of metal and upstream cobalt products continue to outweigh demand. Plus, metals analyst firm CRU has forecast there will be a small surplus in supply over the next few years before moving into under supply over the mid-term as demand from electric vehicles starts to really take off. China Molybdenum has said ‘consensus price forecasts suggest cobalt prices should range between $20-$30’ per pound going forward, suggesting there is room for the price to improve from its current low level.
Top 10 cobalt stocks to watch
It is important to note that 99% of all cobalt is mined as a by-product of other metals. About two-thirds of cobalt comes from mining copper with the rest from nickel. This is significant because, if demand for cobalt suddenly waned for whatever reason, then it would be highly unlikely that producers would have to shut down their operations so long as demand for the primary product holds up. Rather, it would mean their copper or nickel operations become less profitable. However, the demand for cobalt can make a significant difference when considering the up-or-downside of a copper or nickel mine.
For investors, this means gaining exposure to cobalt requires investment in companies that ultimately make the majority of their money from selling other metals. Cobalt is a relatively minor driver of earnings for the largest producers, and most ‘pure-plays’ are early-stage exploration and development companies that are yet to prove their commercial worth. However, investors can get pure exposure by investing in firms that provide investment or financing to cobalt producers and developers in return for royalties or a slice of the pie.
Here are ten cobalt stocks for investors to consider:
Glencore: the world’s largest cobalt producer
Glencore is the largest single producer of cobalt in the world, primarily as a by-product from its Katanga and Mutanda copper mines in the DRC but also from nickel operations in Australia (Murrin Murrin), Canada (Raglan and Sudbury), and Norway (Nikkelverk).
Glencore’s cobalt production jumped 54% in 2018 to 42,200 tonnes. The increase was predominantly down to Katanga, but sales did not fare as well because much of this output had to be stockpiled as it contained excessive uranium content which must be removed before being sold.
Glencore is the big foreign operator in the DRC and has demonstrated the difficulties of operating in the country over recent years. It has had to navigate a new mining code being introduced last year as well as legal battles with Congo’s state-owned miner Gecamines over the ownership of Katanga. It also had to pay off Dan Gertler to avoid losing control of its assets, but that was made more difficult by the fact the US had imposed sanctions on the Israeli businessman.
In February, a statement made by the chairman of Gecamines Albery Yuma in South Africa demonstrated the friction between government and industry. ‘I find it scandalous that when cobalt is discussed, and the explosion of electric vehicles, only the traders and consumers are referenced and Congo and Gecamines are not cited,’ he said.
Still, Glencore remains bullish on the metal and intends to raise output of cobalt between 2018 and 2021 by more than double the rate of any other metal in its portfolio. Output last year had steadily increased from just 19,000 tonnes in 2013 and is forecast to rise to 52,000-62,000 tonnes in 2019, 56,000-70,000 tonnes in 2020 and 61,000-75,000 tonnes in 2021. At the midpoint of those ranges, Glencore is aiming to raise output by 74% over the next three years.
Although cobalt is a very minor part of Glencore’s overall business a good or bad year for the metal can make all the difference. For every $1 change in the price per pound of cobalt in 2019, Glencore’s earnings before interest, tax, depreciation and amortisation (EBITDA) will be impacted by $100 million.
China Molybdenum: dual access to DRC cobalt and Chinese smelters
China Molybdenum is the second largest producer of cobalt which it mines from the Tenke Fungurume project (it owns 56%) in the same region as Glencore’s Katanga mine in the DRC. Niobium is the other major commodity within its wider portfolio, as well as molybdenum, tungsten, copper and phosphorous minerals.
The miner’s cobalt production from the DRC hit an all-time high in 2018 after rising 14% to 18,747 tonnes. Notably, cobalt sales grew at a faster pace of 27% as it sold down some of its inventory. That lower stockpile of cobalt comes at a time when the company has said guidance for output in 2019 is geared to the downside, setting a range of 16,500 to 19,000 tonnes.
China Molybdenum may hold a unique offer to investors because of its dual access to the raw material in the DRC as well as the refining capacity concentrated in China. However, this meant the price of its product was also adversely impacted by the big increase in smelting capacity in China last year, and the subsequent oversupply of cobalt concentrates and intermediate products.
Vale: using cobalt to bet big on nickel
Brazilian miner Vale generates less than 1% of its total revenue from cobalt ($313 million in 2018) but it has started to take more interest in the metal. It has recently finalised a deal to sell 75% of future cobalt production from its Voisey’s Bay mine in Canada to two companies: Cobalt 27 Capital and Wheaton Precious Metals.
The logic of the deal for Vale is to sell future production for immediate cash it can use to expand the underground mine. This means it can lower the cost of development now while retaining some of the benefits to the cobalt that is eventually produced – and all of the nickel. Wheaton has paid $390 million in cash while Cobalt 27 has paid $300 million. The combined $690 million will fund around 40% of the $1.7 billion needed for the entire mine expansion.
Vale is a clear believer that nickel is a safer bet when it comes to electric vehicles considering the issues with cobalt, with a strategy to ‘preserve optionality in nickel’. The expansion will mean the mine will see current production levels increase by 45,000 tonnes of nickel, 20,000 tonnes of copper and 2600 tonnes of cobalt each year. The deal is scheduled to take affect from the start of 2021.
Umicore: the large but ‘sustainable’ source of cobalt
Umicore is a materials giant that generates over €3.3 billion in annual revenue, predominantly from the likes of emission control catalysts, materials for rechargeable batteries, and recycling.
Its comments on attempts to remove cobalt from electric vehicle batteries looks justified, but it is also notable that it is stressing that whilst also marketing its status as ‘the first and only cathode material producer to be able to offer certified materials from a clean and ethical origin to customers in the rechargeable battery value chain.’ It does this by sourcing cobalt through the Organisation for Economic Co-operation and Development (OECD) programme which is audited by PriceWaterhouseCoopers.
‘The growing scarcity of metals and increasing societal pressures to source raw materials in an ethical and environmentally sustainable manner has resulted in a growing need for increased traceability in supply chains. An increasing number of [car and part makers] are therefore looking for a closed loop approach as offered by Umicore,’ the company said in its latest annual report. Building on that, it has signed technology and research alliances with BMW and Audi.
Sherritt International: Cobalt from Cuba and Madagascar
Sherritt International is a nickel producer with mines in Canada, Cuba and Madagascar with a relentless focus on costs. Cobalt makes up a larger proportion of Sherritt’s portfolio than other firms: revenue from the metal rose 24% last year to over $160 million, accounting for almost one third of its $498 million annual revenue last year.
The firm offers a unique proposition to investors. Its primary cobalt operation is a joint venture over the Moa mine in Cuba, which produces nickel and cobalt. Due to the tensions between Cuba and the US, Sherritt has to circumnavigate the inability for the two countries to do business. The firm mixes the nickel and cobalt into sulphides and sends them to its refining facilities in Fort Saskatchewan, Canada, where it can then be refined and freely sold onto to other markets. It primarily sells in Europe, Japan and China.
Moa delivered the very bottom of its guidance range last year by producing 3234 tonnes of cobalt (100% basis), and in 2019 it expects this to rise to 3300-3600 tonnes. The improvement will be down to investments made last year in new equipment and shortening the haulage route. Its Canadian refinery is also able to handle a step-up in cobalt production if needed with the capacity to process up to 3800 tonnes per year.
Its other cobalt producing operation is the Ambatovy joint venture in Madagascar, another nation which can be problematic. Output missed guidance last year by coming in at 2852 tonnes (100% basis) versus a 3100-3400 tonne target because of cyclones and hurricanes, but it has said it will deliver an improvement in 2019 versus last year – subject to no unforeseen weather conditions.
Cobalt 27 Capital: cobalt streams, royalties and investments
Cobalt 27 Capital offers investors a different way to gain exposure to cobalt. As an investment vehicle focused on metals needed for electrical applications, the firm is building a portfolio containing investments in physical cobalt material, cobalt and nickel streams, royalties and interests in mines. In total, the company holds over 2900 tonnes of physical cobalt comprised of 2193 tonnes of ‘premium-grade’ material and 713 tonnes of ‘standard-grade’ cobalt.
Its major cobalt streaming deal (whereby it pays for future cobalt production upfront to act as an alternative finance provider for those developing cobalt mines) is the one announced with Vale and the Voisey’s Bay mine, which will start from the beginning of 2021. Its other major deal is the outright acquisition of Highlands Pacific, an Australian firm with over 11,000 tonnes of cobalt resources. Highlands Pacific has an 11.3% interest in the Ramu nickel mine in Papua New Guinea with an option to acquire another 9.25% at market value. It also owns 20% of the Frieda River mine which it says is the ‘largest undeveloped copper-gold project’ in the country and one of the top ten in the world.
In its latest results covering the nine months to the end of September 2018 showed the firm reported a $16.1 million loss on its investments compared to an $8.2 million gain the year before.
Wheaton Precious Metals: a larger and more diversified streaming firm
Wheaton is one of the world’s largest precious metals streaming companies and the other participant in Vale’s deal to sell future cobalt from the Voisey’s Bay mine. It will be entitled to over 42% of cobalt production from the project from the start of 2021.
But that is just one of 28 streaming agreements, 19 for mines already in operation and nine that are in development. It already had deals in place with Vale before the latest agreement, such as the gold stream for its Salobo mine. It also has a silver stream on Glencore’s Antamina mine and Goldcorp’s Peñasquito mine.
Wheaton currently has proven and probable cobalt reserves of 32.6 million pounds, but also offers over 11 million ounces of gold, 540 million ounces of silver and 660,000 ounces of palladium. For Wheaton and peers like Cobalt 27, the idea is that they buy the metal for today’s prices but take delivery in the future when they hope prices for these key metals will be higher.
African Battery Metals: early-stage play but with lower-risk jurisdictions
African Battery Metals is an AIM-listed stock that has turned its attention to nickel and cobalt projects it acquired last year in Cameroon and the Ivory Coast. Although these are at a very early stage there is reason to take note, with the firm stating four of its licenses in Cameroon are ‘close to one of the largest undeveloped cobalt reserves in the world’. In the Ivory Coast, it has bought the irrevocable right to earn-in to up to 70% of the Lizetta II cobalt, chrome and nickel project. If successful, the firm could yield new significant deposits of cobalt outside of the DRC and in more stable African jurisdictions. But it does have exposure to the DRC through interests in the Kisinka copper-cobalt project, where it has started exploration.
Red Rock Resources: all bets on cobalt
Red Rock Resources is another smaller, early-stage player but one that is betting big on cobalt. The firm currently has interests spanning gold, copper and other materials in addition to cobalt but has been channelling attention into developing one of its three copper-cobalt deposits in the DRC. It has just over a 50% share of the assets, giving it ultimate control over them.
The firm has said it hopes the Musonoi deposit will ‘prove up a signature asset’ – enough so that it hopes to ‘divest itself of what will become non-core activities and assets’. Simply, Red Rock is hoping to become solely focused on its DRC assets and sell-off its other interests down the line, but investors will take comfort that it has other options to fall back on should its efforts in the DRC fail.
Horizonte Minerals: diversifying from nickel to cobalt
Horizonte Minerals is predominantly a nickel producer focused on two Tier 1, scalable, high-grade nickel deposits in Brazil. These are split into two projects: the Vermelho nickel-cobalt project it acquired last year and the more-advanced Araguaia ferronickel project.
The Vermelho project was bought from Vale at the start of 2018 and was part of Horizonte’s strategy to not only acquire another large nickel resource to compliment its existing one but take advantage of the cobalt that can be processed alongside it. It is currently conducting a pre-feasibility study for the project which it hopes to release before the end of 2019. This outlines the parameters for the project (estimating capex, production capacity, etc) and possible economics (potential income and costs), which also sets the first serious valuation of the project. Although it is a very preliminary report, good personal financial specialists (PFS’s) can send share prices in smaller miners soaring.
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