Note: This article was first published on Trend Investing on August 3, 2017, therefore all data is as of that date.
Cobalt has been the boom metal in 2017, and my view is it will continue to boom for the next several years, as the cobalt market remains in deficit, with demand from electric vehicles (EVs) accelerating.
As my early followers will know I was one of the first analysts globally to pick the cobalt boom back in May 2016, long before most people had even heard of cobalt. For a background on my previous cobalt articles you can read:
- May 2016 - "Cobalt Miners Set To Boom."
- December 2016 - "A Look At The Junior Cobalt Miners."
- December 2016 -"Top 5 Cobalt Miners To Consider."
- March 2017 - "Top 3 Cobalt Miners To Accumulate."
Cobalt spot price - 12 year history
The graph below shows cobalt prices have surged since late 2016 from around US$10/lb to US$26.08/lb now. Market participants anticipate prices to increase by 20-24% by the end of the year.
Cobalt LME Inventory 6 years
Whilst the graph below shows London Metal Exchange (LME) inventory has increased by about 400 tonnes since 2011, it is important to understand that 400 tonnes of cobalt is under 0.5% of yearly cobalt demand, or less than 1 week's demand, so insignificant really. Actually it does beg to ask the question why it is not at zero given all market reports of cobalt being hard to get. Maybe this will be the case soon.
Cobalt deficit to continue and may worsen
- CRU - Forecasts 900 tonnes cobalt deficit in 2017. CRU Group analysts predict that in 2017 the deficit in the market could triple compared to last year.
- Macquarie Bank - Forecasts 885 tonnes cobalt deficit in 2018, 3,205 tonnes deficit in 2019, and 5,340 tonnes in 2020.
Cobalt deficit forecast graph - 2016 onwards
Cobalt deficit forecast to 2020 - CRU
Source: eCobalt Solutions presentation (and CRU analysis)
Three junior cobalt miners to consider
Previously I have discussed my top 3 cobalt miners to accumulate, which still are Glencore (OTCPK:GLCNF)(LSX:GLEN)(HK:805), China Molybdenum Luoyang Co. Ltd (OTC:CMCLF) (HK:3993), and Katanga Mining (TSXV:KAT) (OTCPK:KATFF). Whilst these names will still be the main cobalt players going forward, and good long term investment plays, adding a few juniors can hopefully spice up short term returns, and add diversification whilst reducing DRC exposure.
Cobalt projects by grade and size (excludes Glencore, Katanga Mining, and China Molybdenum DRC mines)
Note: The KNP zone has now been upgraded to 85,410 tonnes of contained cobalt.
1) Ardea Resources [ASX:ARL] [GR:A91] (OTC:ARRRF) - Price = AUD 0.91, USD 0.80
Ardea Resources 100% own the Kalgoorlie Nickel Project (KNP) in Western Australia. Ardea state they have "Australia’s and the developed world’s largest cobalt resource". Their higher grade KNP cobalt zone (see chart above) has 65.7Mt of ore at 0.13% cobalt and 0.79% nickel. That works out to be a very healthy 85,410 tonnes of contained cobalt, and 5.6 million tonnes of contained nickel. Ardea's total cobalt resource measures a massive 386,000 tonnes of contained cobalt at a lower average grade of 0.05%. Added to this is their recent scandium discovery, which will help reduce production costs as a valuable by-product credit.
Post publication update (in italics):
On Aug. 7, Ardea announced -The upgraded resource (previously 386,000 tonnes contained cobalt) updated as "405,000 tonnes contained cobalt (grade 0.05%), 5.46 million tonnes contained nickel (grade 0.7%)." The KNP (high grade) Cobalt Zone now has 83,000 tonnes contained cobalt @ 0.13% grade. Ardea state they have "the developed world's largest cobalt resource."
The company also has the Lewis Ponds gold-zinc project and the Mt Zephyr gold-nickel sulphide project.
Location is good, only 150km from the city of Kalgoorlie, and all required infrastructure and mining leases are already in place. Additionally the laterite resource is quite near surface and amenable to a simple open pit mine with a low strip ratio and easy digging.
The current market cap of Ardea Resources is just AUD 61m, which is incredibly cheap when looking at their total resources, not to mention the AU$50m previously spent on the project (drilling etc). The reason the company is so cheap is the company is still in the early stages, laterite ore projects have higher CapEx and production costs (than sulphide ore), and perhaps because nickel prices are currently depressed making many nickel mines uneconomic at current prices (US$4.65/lb). Off course those mines don't have as much cobalt as Ardea has. A comparable cobalt laterite company is Clean Teq [ASX:CLQ] which has about 114,000 tonnes of cobalt, nickel and scandium at their Syerston project in Australia, and is about 16 months further advanced (a DFS due Q4, 2017) with a market cap of AUD 452m - 7.4 times higher than Ardea Resources. I have done some very basic and rough modeling on Ardea not yet to be relied upon. Purely as a cobalt mine with nickel and scandium as by-products, if we assume 5,000 tonnes pa cobalt production, at US$10/lb cost of production, US$25/lb sale price, 5% royalties, Capex at AUD 300m ($200m equity, $100m debt) then I get a valuation of A$4.07, or 4.47x upside. I plan to model properly once more accurate information comes to hand. Obviously Ardea's economics are sensitive to nickel and cobalt prices.
The company plans to release a PFS in January 2018, so we will know a lot more accurately then. Following that I would expect if they can raise CapEX funding that they could be in production by 2020/21 if all progresses well.
Investors can view their April 2017 company presentation here.
Ardea has by far Australia's largest cobalt resource
Note: Metals X owned Wingellina is not included in the table above and it has around 140,000 tonnes of contained cobalt.
Australian cobalt miners resource size comparison
2) First Cobalt [TSXV:FCC] (OTCQB:FTSSF) - Price = CAD 0.76, USD 0.58 (currently in a short term trading halt until ~mid August)
First Cobalt is a new comer to the cobalt scene; however they have been moving very fast under CEO Tent Mell. They have cobalt projects in Canada and the Democratic Republic of Congo (DRC).
In Canada, First Cobalt are optioned to own the historical Canadian silver-cobalt Keeley-Frontier mine. The company is in the process of friendly mergers with Cobalt Tech [TSXV:CSK] and Cobalt One [ASX:CO1]. This has significantly increased their cobalt projects in the historic Cobalt camp region of Canada. They will also now 100% own the nearby Yukon small size refinery in Canada.
In the DRC, First Cobalt have options over seven prospective copper-cobalt properties covering 190 square kilometers, all with known surface mineralization, in a region known for huge copper-cobalt-zinc discoveries. This gives them exceptional exploration upside, and a large discovery such as what Ivanhoe Mines [TSX:IVN] (OTCQX:IVPAF) achieved would be a game changer for the company.
The combined merged new company will be still known as First Cobalt, and is expected to have a market cap of around CAD 120m.
Given the early stage and large number of projects in key cobalt locations valuation is probably about right for now. I have included them in my top 3 due to their excellent fast moving track record, large acquisitions and number of promising projects, but most of all for their huge potential exploration upside. You can read more in my article "First Cobalt has huge exploration upside."
3) Fortune Minerals [TSX:FT] (OTCQX:FTMDF) - Price = CAD 0.22, USD 0.18
Fortune Minerals 100% own the NICO gold-cobalt-bismuth-copper project in the Northwest Territories of North America. The NICO sulphide deposit contains containing 1.1 Moz of gold, 82 Mlbs of cobalt (~37,300 tonnes), 102 Mlbs of bismuth, and 27 Mlbs of copper, as stated in their mineral reserve statement. Fortune also owns the Sue-Dianne copper-silver-gold deposit and other exploration projects in the Northwest Territories.
Their project is comparatively well advanced being fully permitted with a completed Feasibility Study (FS). Fortune will need to build an all weather access road and the government will need to build the all weather Ticho road. The federal government has agreed to provide up to 25 per cent of eligible project (Ticho road) costs through the P3 Canada Fund. Fortune are at the off-take and funding stage now, with an updated FS due out Q3, 2017. CapEx of the project is estimated at CAD 589 million, which includes the mine access road. Life of mine is forecast at 21 years, with a negative forecast production cost of $5.19 per lb cobalt due to the by-product credits from gold and bismuth. Production would be possible by 2020, if all went well.
Valuation is attractive with a market cap of just CAD 67m. The key with Fortune Minerals is their North American location, lower valuation (than eCobalt Solutions [TSX:ECS] (OTCQB:ECSIF) - market cap CAD160m), and superb by-products creating an amazing negative cost of cobalt production. Their negatives are the higher start up CapEx to build a fully integrated mine, the lack of all weather road access issue, and their cobalt resource is smaller than some of their Australian peers. Finally they may be able to do a gold streaming deal to help raise the CapEx funds, and the roads can be built in just 2 years once fully funded.
- The usual mining risks including permitting, financing, construction, and production. Fortune are the most advanced in this regard, so arguably the lowest risk.
- All three juniors will need to raise funds to build their mines and make it to production, so expect some dilution. The current higher cobalt prices, supply deficit, and surging demand should help with off-take agreements and funding.
- The cobalt price falls back sharply due to oversupply. Unlikely due to very strong demand and limited supply. Even as Katanga phases back online in 2018/19 that should only provide enough cobalt to meet growing demand.
- Nickel or copper prices may fall - A nickel fall can hurt Ardea, and a copper fall may hurt First Cobalt, but all 3 juniors are mostly tied to cobalt prices (Ardea being the most affected with a massive nickel resource).
- Sovereign risk - The DRC has widespread corruption. Mining contracts can be changed or revoked, same with royalties, taxes etc. This can affect First Cobalt with their DRC exposure. Fortune and Ardea benefit from being in much safer jurisdictions, as does First Cobalt's Canadian projects.
- Liquidity risk for those investors buying on the US exchange. Better to buy on the local exchanges (ASX, TSXV, TSX), as there's higher liquidity.
Investors would be wise to hold a basket of cobalt stocks - ideally a mixture of producers (Glencore, China Molybdenum, Katanga Mining - producer soon), and some juniors. The producers have already rallied strongly (especially China Moly and Katanga), so investors should accumulate those on market dips.
The three juniors I mentioned are all still quite cheap due to being at earlier stages, and hence are higher risk/higher return propositions and investors should invest accordingly. All three are focused primarily on cobalt and are not so much affected by copper and nickel production decisions when compared to the major producers I mentioned above. This is a very important point to remember, and a reason why some purer play cobalt juniors are necessary to include in a cobalt portfolio.
I like Ardea Resources for their huge cobalt and nickel resource, low market cap, and great location (near Kalgoorlie Australia). I like First Cobalt for their active CEO, their large number of promising projects, low market cap, and huge DRC exploration upside. I like Fortune Minerals due to their excellent resource and by-products (gold, bismuth), their North American location, and their relatively advanced stage (FS done and fully permitted).
The cobalt boom is not going away any time soon, so investing in some juniors with some patience required (a minimum 3-5 year time frame) should prove to be a profitable strategy.
As usual all comments are welcome.
Disclosure: I am/we are long GLENCORE (LSX:GLEN), KATANGA MINING (TSX:KAT), FORTUNE MINERALS (TSX:FT), CRUZ COBALT CORP (TSXV:CUZ), ARDEA RESOURCES (ASX:ARL), FIRST COBALT (TSXV:FCC). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice. This article is not a recommendation to buy or sell any stock mentioned, and investors should do their own due diligence.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.