Time To Buy Some Cobalt Miners

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Includes: AMSLF, ARRRF, BKTPF, BRCSF, CBBHF, CMCLF, CTEQF, CUZ, ECSIF, FTMDF, FTSSF, GLCNF, KATFF, NDENF, NILSY, NZRIF, RNKLF, SHERF, SMMYY, UMICY, VALE, WCTXF
by: Matt Bohlsen
Summary

The cobalt miners strangely fell in January following the lithium miners despite very strong cobalt price gains.

The cobalt miner fundamentals are still very solid with a restricted supply and surging demand.

Electric vehicle sales accelerated in 2017 finishing with a 58% increase.

New punitive DRC taxes threaten to reduce profits on the DRC cobalt players.

A summary of the cobalt miners to consider buying now and my top picks with price targets.

Note: This article was first published on Trend Investing on Feb. 11, 2018; therefore, all data is as of that date.

The cobalt miners have had a great run since mid 2016; strongly supported by fundamentals such as the cobalt price more than tripling from about USD 10/lb to USD 37/lb. Then in January 2018 the lithium miners rout caused by lithium oversupply fears infected the cobalt miners. I find this particularly strange given cobalt is currently in deficit, and the cobalt price rise accelerated the past 3 months rising ~32%.

In February the global stock market correction of around 10% dragged down the cobalt miners further. The sector has not fallen as badly as lithium, yet bargains have started to appear in a sector that should not be cheap.

Cobalt 1 year spot price chart - Current price = USD 36.97/lb

5 Year Cobalt Prices - Cobalt Price Chart

Source: InfoMine

Cobalt miner fundamentals have been improving

Some recent news includes:

  • Cobalt prices are up ~32% in the past 3 months, due to a cobalt deficit.
  • In November 2017 Mike Beck stated he sees cobalt prices going much, much higher "in excess of USD 100/lb." (video 15.20 mark)
  • In December Morningstar reported: "BMO Capital Markets expects current cobalt prices to double in the next two years as demand for electric-vehicle batteries continues to outstrip existing supply of the metal."
  • Bloomberg - "There just isn't enough cobalt to go around - says CRU."
  • Global electric cars sales grew 58% in 2017, and H2 was very strong.
  • BYD and other Chinese car makers switch from LiFePO4 to NMC batteries as China allows Nickel-Manganese-Cobalt [NMC] to qualify for subsidies.
  • Updated January 2018 - PushEVs - "China starts replacing LiFePO4 with NMC for EVs. The Chinese Government has passed legislation that requires EV cells to soon achieve an energy density of 200 Wh/kg. This is simply impossible with the LiFePO4 chemistry, but possible with improved NMC cells. This means that Chinese cell makers will now focus in improving this chemistry to reach the 200 Wh/kg goal."

Note: Katanga Mining did re-commence production late 2017, which is forecast to add 11,000tpa of cobalt in 2018 and bring the market back into balance. Additionally in January the Democratic Republic of Congo [DRC] announced their new punitive taxes (10% royalties for strategic metals (cobalt), 50% super profits tax) on miners which will potentially have a huge dent on DRC cobalt miner's profits. This can explain the DRC cobalt miners falling, but not the others.

Note: NMC chemistry is moving from NMC (1:1:1) towards NMC (6:2:2) and perhaps even NMC (8:1:1), meaning more nickel and less manganese and less cobalt. Despite this the cobalt market is forecast to go into deficit again beyond 2020 (see chart below).

Cobalt supplies are projected to fall short of demand

Source

Global electric car market share in 2017 - averaged ~1.4% and peaked at 2% in December

Source: EV-Volumes

Annual global electric vehicle sales forecast to hit 24.4 million by 2030

Source

Time to buy some cobalt miners

The price falls of the past month in the cobalt miners, combined with strong fundamentals has opened up some good buying opportunities, especially for those that did not buy in earlier. Below I take a look at the main cobalt miners, and their recent price action, in particular their percentage falls from their 52 week high and analysts' consensus target upsides.

A summary of the cobalt miners to consider buying now

Price

52 week

high

Fall from

52 week high

Producer

or likely

year to

start production

Analysts target price

(Upside %)

Glencore [HK:805] (OTCPK:GLCNF) 361 416 32%

Yes

[DRC]

429

(19%)

Katanga Mining [TSX:KAT] (OTCPK:KATFF) 1.65 2.83 42%

Yes

[DRC]

China Molybdenum [HKSE:3993] [SHE:603993] (OTC:CMCLF)

4.89 6.30 22%

Yes

[DRC]

7.15

(15%)

Umicore SA [Brussels:UMI] (OTCPK:UMICY) 44.08 45.28 3% Yes

37.7

(-14%)

Vale (NYSE:VALE) 12.91 13.57 5% Yes

13.50

(4.6%)

MMC Norilsk Nickel [LSX:MNOD] [GR:NNIC] (OTCPK:NILSY) 18.97 20.82 9%

Yes

[Russia]

21.50

(13%)

Sherritt International [TSX:S] (OTCPK:SHERF) 1.15 1.87 39% Yes

2.15

(95%)

Sumitomo Metal Mining Co. (TYO:5713) (OTCPK:SMMYY)

4,688 5,562 19% Yes

5,093

(8.6%)

eCobalt Solutions [TSX:ECS] (OTCQX:OTCQX:ECSIF) 1.37 2.10 35% ~2020

1.90

(35%)

Fortune Minerals [TSX:FT] (OTCQX:FTMDF)

0.25 0.38 34% ~2021

0.40

(74%)

RNC Minerals [TSX:RNX] (OTCQX:RNKLF)(formerly Royal Nickel Corporation) 0.25 0.39 36% ~2020

0.55

(116%)

Clean TeQ [ASX:CLQ] [TSX:CLQ] (OTCQX:CTEQF) 1.23 1.78 31% ~2020

2.09

(70%)

Australian Mines [ASX:AUZ] (OTCPK:AMSLF) 0.09 0.16 44% ~2020
Nzuri Copper [ASX:NZC] (OTCPK:NZRIF) 0.30 0.48 38%

~2020

[DRC]

Ardea Resources [ASX:ARL] (OTC:ARRRF) 1.26 2.20 43% ~2021
Cobalt Blue Holdings [ASX:COB] (OTCPK:CBBHF) 0.61 0.89 31% ~2021
Aeon Metals [ASX:AML] 0.25 0.35 29%

0.48

(92%)

First Cobalt [TSXV:FCC] (OTCQB:FTSSF) 1.02 1.65 38%
Bankers Cobalt [TSXV:BANC] [GR:BC2] (NDENF) 0.44 0.85 48%
Cruz Cobalt Corp. (NYSE:CUZ) (OTCPK:BKTPF) 0.33 0.41 20%
LiCo Energy Metals [TSXV:LIC] (OTCQB:WCTXF) 0.13 0.23 43%
Celsius Resources [ASX:CLA] 0.10 0.17 41%
Barra Resources Ltd. (OTC:BRCSF) [ASX:BAR] 0.04 0.14 71%
GME Resources Limited [ASX:GME] 0.14 0.19 26%
Havillah Resources [ASX:HAV] [GR:FWL] 0.27 0.63 63%
Cudeco Ltd [ASX:CDU] [GR:AMR] 0.20 0.48 58%

Note: I have left of the Chinese Cobalt miners (Jinchuan, Huayou Cobalt, Jiangsu Cobalt) as most investors cannot access them. Also ERG as they are not listed.

Note: All prices are on local exchanges in local currency.

Note: Analyst consensus price targets were sourced from 4-traders.com. Note in some cases 4-traders had no analysts targets.

Comments from the table above

The producers

The cobalt producers are all down from their 52 week highs with the DRC miners most affected (except China Molybdenum - down 22%).

The worst effected were Katanga Mining (down 42%), Sherritt International (down 39%), and Glencore (down 32%). The standout with the most upside to analyst's target is Sherritt International (95% upside).

My top picks in the producers right now are none, as I see much more opportunity in the near term producers (juniors). Also I see the new DRC tax situation as a very big expense for those producers in the DRC. Norilsk Nickel would be my current preferred pick despite being more a nickel, copper and platinum group elements [PGEs] play with ~5.5ktpa cobalt production.

The non-producers

The non-producers with the largest falls from their 52 week highs were Barra Resources (down 71%), Havillah Resources (down 63%), and CuDeco (down 58%).

In term of upside to reach analyst price targets the standouts are RNC Minerals (116%), Aeon Metals (92%), Fortune Minerals (74%), and Clean TeQ (70%). Note many don't yet have analyst targets.

My top picks of the non-producers (based mostly on my model) are:

  • Cobalt Blue - My end 2021 updated target is AUD 2.78, or 4.6x upside. Assumes 4ktpa cobalt production selling at USD 30/lb. Note at USD 35/lb cobalt the target price rises to AUD 3.63 or 6.0x upside. At USD 50/lb it hits AUD 6.31 or 10.5x upside. Even at cobalt USD 20/lb the COB target price is 1.09 or 1.8x upside.
  • Ardea Resources - My preliminary end 2022 price target is AUD 5.31, or 4.2x upside. Assumes phasing up to 5ktpa cobalt production selling at USD 30/lb. At cobalt USD 50/lb my price target rises to AUD 10.21 or 8.2x upside. Note Ardea will have a higher CapEx being a laterite ore, and is ~50% dependent on nickel prices.
  • RNC Minerals - I am still building my model for RNC. I select them in my top 3 due to their massive resource, advanced stage, and analyst target price of CAD 0.55 or 116% upside. If they made it to production, and/or if the nickel price rises further they will do even better. Whilst their grade is low their scale and sulphide ore can make up for that. RNC's Dumont project in Canada has the world's 2nd largest nickel reserves, and the world's 8th largest cobalt reserves.

Others with potential that I like are Fortune Minerals, Clean TeQ, and Cruz Cobalt. Or for explorers I like Bankers Cobalt.

Conclusion

The cobalt miners have had a poor January and early February 2018 with falls ranging from 3% up to 71% in the group I have covered here. This group represents those that are either producers or near term potential producers and a few explorers towards the end.

During the past few months the fundamentals behind the cobalt sector have improved as evidenced by a surging cobalt price up 32% in the past 3 months. The only negative news has been the proposed new DRC taxes on minors. This has impacted the DRC miners, but should actually be a net positive for the non-DRC miners. Additionally Katanga Mining has re-commenced production which will help bring cobalt demand and supply back towards balance, and perhaps slow down the cobalt price rises depending on cobalt demand.

My top picks right now are in the non-producers Cobalt Blue, Ardea Resources and RNC Minerals. All are advanced juniors with Cobalt Blue being a pure play cobalt miner. Ardea is a 50/50 cobalt and nickel play, and RNC is a bit more dependent on nickel. All offer exceptional buying for a patient investor, albeit with the usual risks when buying miners in the development stage.

As usual, all comments are welcome.

Disclaimer: The information in this article is general in nature and should not be relied upon as personal financial advice.

Disclosure: I am/we are long GLENCORE (LSX:GLEN), KATANGA MINING [TSX:KAT], NORILSK NICKEL (LME:MNOD), HIGHLANDS PACIFIC [ASX:HIG], AUSTRALIA MINES [ASX:AUZ], FORTUNE MINERALS [TSX:FT], RNC MINERALS [TSX:RNX] , ARDEA RESOURCES [ASX:ARL], COBALT BLUE [ASX:COB], AEON METALS [ASX:AML], GME RESOURCES [ASX:GME], CASSINI RESOURCES (ASX:CZI) , HAVILLAH RESOURCES [ASX:HAV], CONICO LTD [ASX:CNJ], CRUZ COBALT CORP [TSXV:CUZ], BANKERS COBALT [TSXV:BANC], POSEIDON NICKEL [ASX:POS]. 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.

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