Top Cobalt Producers And Some Cobalt Juniors To Consider

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

An update on cobalt demand and supply.

Top five cobalt producers and other smaller producers - a brief review and update.

Cobalt juniors with a reasonable chance to be producers by 2023.

This article first appeared on Trend Investing on Dec. 18, 2018; therefore all data is as of that date.

Cobalt miners have had a rough 2018 due to trade wars and a rush of new DRC cobalt supply. The DRC also has dealt DRC cobalt miners a heavy blow with their new onerous royalties (10%) and super profit taxes (50%), reminding investors about sovereign risk. Namibia looks likely to follow.

Cobalt price history

By May 2018 we saw a strong cobalt supply response from the DRC which caused cobalt prices to fall rapidly from above US$40/lb (year highs), after prices had quadrupled the past two years. Then just last month due to the Katanga cobalt output ban the cobalt price started to recover.

Five-year cobalt price graph

5 Year Cobalt Prices - Cobalt Price Chart

Source

Cobalt demand and supply update

I am expecting cobalt demand to continue to surprise on the upside, rising 2.7 fold from end 2017 to end 2025. This should mean all producers can do well, despite a possible H2 2018 to 2020 lull in cobalt pricing if DRC cobalt supply continues to surge. You can view my demand vs. supply model linked below.

The charts below show the strong supply response which has come from the DRC notably from Katanga Mining, ERG, Chemaf, Jinchuan Group, Metal Mines, and Somika.

DRC projects boosting supply notably from 2018 to 2020

Source

Analysts expect some mild surpluses in 2019 and 2020 and then increasingly larger deficits after 2022 unless new supply arrives.

Note: The Ruashi DRC mining project was operated by Ruashi Mining (75% owned by Metorex, 25% by the DRC state-owned Gécamines). Metorex was taken over by Jinchuan Group International Resources Co. Ltd in 2012.

Top 5 cobalt producers by volume - A brief review and update

1) Glencore [HK:805] [LSE:GLEN] (OTCPK:GLCNF) - Price = GBp 293

Glencore is the global No 1 cobalt producer having produced 27,400 tonnes of cobalt in 2017 from their Mutanda, Minara, and Mopani mines in the DRC. The restart of the Kamoto mine by Katanga Mining in 2018 has led to a big increase in Glencore's attributable production (Glencore owns 86.33% Katanga Mining) as explained below.

On October 26, Glencore announced: "Third quarter 2018 production report. Own sourced copper production of 1,063,100 tonnes was 116,600 tonnes (12%) higher than the comparable 2017 period and own sourced cobalt production of 28,500 tonnes was 8,700 tonnes (44%) higher, mainly reflecting the restart of Katanga’s processing operations."

Unfortunately Glencore is nowhere near a cobalt pure play despite being the largest global producer. To invest in Glencore you need to also be positive on their trading business, coal, copper, PGMs, zinc and nickel.

Glencore divisional revenue split in 2017

Glencore usually doesn't show their cobalt revenue as it's seen as a by-product credit for their copper segment. As a rough guide of cobalt US$55,000/tonne times 27,400 tonnes we get ~US$1.5b of revenues from cobalt (not including the Katanga contribution). Of course the recent DRC charges of a 10% cobalt royalty and 50% profits tax means a lot of the profit will potentially go to the DRC and not to Glencore.

Current market cap is GBP 40.6b (~US$51b), with an end 2018 debt estimate of US$25b. 2019 PE is 7.9 and 2020 PE is 8.0, with a 2019 estimated 5.91% dividend yield. 2019 net profit margin is forecast at 2.77%.

Current consensus analyst price target is USD 5.14, representing 41% upside.

Glencore looks quite cheap right now but there are plenty of issues surrounding them (new DRC royalty and taxes, government investigations into money laundering, contract disputes, mounting debt, weakening commodity prices).

Currently I view Glencore as a hold, or accumulate on any further weakness.

Glencore's financials

Source: 4-traders

2) China Molybdenum [HKSE:3993] [SHE:603993] (OTC:CMCLF) - Price = HKD 3.13, CNY 4.15

China Molybdenum is the global No. 2 cobalt producer having produced ~16,000 tonnes of cobalt from their Tenke mine in the Democratic republic of Congo (DRC) in 2017. 2018 is on track to reach ~18,000 tonnes of cobalt having produced 9,029 tonnes in H1, 2018.

China Molybdenum makes most of their revenue from copper and cobalt (also from molybdenum, tungsten, phosphorus, niobium, and gold), so again not a cobalt pure play, but along with Glencore they are the two dominant global cobalt producers.

China Molydenum 2017 revenue breakdown

Current market cap is CNY 84b (~US$12b), with an end 2018 debt estimate of zero. 2019 PE is 14.0 and 2020 PE is 13.0, with a 2019 estimated 4.22% dividend yield. 2019 net profit margin is forecast at 21.81%.

Current consensus analyst price target is CNY 5.41, representing 33% upside. I rate the stock an accumulate on any further weakness.

China Molybdenum's financials

Source: 4-traders

3) Katanga Mining [TSX:KAT] [GR:31Z] (OTCPK:KATFF)- (Glencore owns 86.33% of Katanga shares)

Katanga Mining has the world's largest cobalt reserves at good grades and hence has huge potential as a DRC copper-cobalt play. I love the resource but don't like the location (DRC) given the new onerous royalties and taxes.

Production guidance for cobalt production from Katanga was 11,000 tonnes in 2018 and 34,000 tonnes in 2019. Given the news below it will be tough to reach 2019 guidance, and I would expect a number closer to 15-20,000 tonnes in 2019, ramping up toward 30,000 tonnes by 2021.

Katanga Mining has several hurdles to overcome such as their recent cobalt output ban until about mid 2019 due to elevated uranium levels. This will impact cobalt revenues in the short term but not copper. Other hurdles include the huge debt to Glencore, government fines, and the DRC issues.

Current market cap is CAD 1.18b. I was not able to find any analyst estimates. I think there's a speculative buying opportunity there at some point, but given the cobalt output ban until ~mid 2019, near-term cobalt oversupply concerns, weak copper prices, trade war issues, government fines, DRC royalties/taxes, there may still be cheaper buying opportunities despite the current depressed stock price. Risk is very high, so the reward needs to be higher to compensate.

Katanga's high grade copper and cobalt Kamoto mine in the DRC

Image result for katanga mining kamoto mine dRC

Source

4) Umicore SA [Brussels:UMI] (OTCPK:UMICY) - Price = Euro 34.36

Umicore is a global materials technology and recycling group. Umicore is a processor of cobalt rather than a miner.

Cobalt production (refining) in 2018 is expected to reach between 6,000-8,000 tonnes of cobalt.

Umicore 2017 revenue breakdown

As shown in the chart above, recycling (mostly for cobalt) has become an important source of revenue for Umicore.

Current market cap is Euro 8.76b, with an end 2018 debt estimate of Euro 624m. 2019 PE is 21.3 and 2020 PE is 18.4, with a 2019 estimated 2.28% dividend yield. 2019 net profit margin is forecast at 10.52%.

Current consensus analyst price target is Euro 46.90, representing 35% upside.

Definitely one of the better quality and safer ways to more indirectly play cobalt with the recycling upside in future years. Somewhat less exposed to the DRC.

Umicore's financials

Source: 4-traders

5) Eurasian Resources Group [ERG] (owns ENRC) - Private

On Oct. 25, 2013, Eurasian Natural Resources Corporation Limited (ENRC) was acquired by Eurasian Resources Group. ERG’s Metalkol Roan Tailings Reclamation (RTR) copper and cobalt project in the DRC is almost completed and is set to produce ~7,000 tonnes of cobalt in 2019. This can be phased up by stage to reach 21-24,000 tonnes pa of cobalt (and 120,000 t copper) from old tailings. This will elevate ERG into fourth or fifth place for 2019.

Chinese and DRC cobalt miners

The main Chinese cobalt miners (Jinchuan Group International Resources Co. Ltd , Huayou Cobalt, and Jiangsu Cobalt) are worth considering as they are smaller size but growing producers. The main issue again is the DRC. Jinchuan and Huayou Cobalt would be my picks of the three due to their existing size and expansion potential. Chemaf and Somika have not been included but are growing DRC miners who sell to China.

Other smaller cobalt producers

Vale SA [BR:VALE3] (VALE)- Price = USD 13.03

Vale is the very large Brazilian iron ore miner, so any cobalt production is not really significant to their earnings. If you are positive on iron ore with a splash of cobalt then Vale is a good choice.

Vale 2017 revenue breakdown

The 2019 PE of 7.7 looks appealing provided iron ore prices hold at or above current levels.

Current consensus analyst price target is USD 17.55, representing 35% upside.

Sumitomo Metal Mining Co. (TYO:5713) (OTCPK:SMMYY)- Price = JPY 3,159

Sumitomo Metal Mining Co owns 47.7% of the Ambatovy nickel-cobalt mine in Madagascar). Sumitomo is mostly a Japanese processing/smelting company. You can read more here.

In 2017 they produced ~4,600 tonnes of cobalt from Ambatovy (noting capacity is 5,600 tpa). They also source some nickel and cobalt from The Philippines.

Current market cap is JPY 934b, with an end 2018 debt estimate of JPY ~256b. 2019 PE is 9.6 and 2020 PE is 10.2, with a 2019 estimated 3.03% dividend yield. 2019 net profit margin is forecast at 10.18%.

Current consensus analyst price target is JPY 4,139, representing 29% upside. Not the worst, but be aware Ambatovy is a laterite ore project and has had some problems.

Sumitomo Metal Mining's financials

Source: 4-traders

Sherritt International Corp. [TSX:S] (OTCPK:SHERF) - Price = CAD 0.41

Sherritt recently sold down their share in Ambatovy to reduce their debt. They now own 12% of the Ambatovy nickel-cobalt mine in Madagascar and 50% the MOA mine in Cuba.

In 2017 Sherritt's 50% of MOA produced only 1,801 tonnes of cobalt for Sherritt, and their 12% share from Madagascar only produced 1,173 tonnes of cobalt, making a total of 2,974 tonnes.

Sherritt's income is from nickel and cobalt.

Current market cap is CAD 168m, with an end 2018 debt estimate of CAD 617m. 2019 PE is 10.6 and 2020 PE is 3.9, with zero dividend yield. 2019 net profit margin is forecast at 1.01%.

Current consensus analyst price target is CAD 1.69, representing 298% upside.

The net profit margin being so low increases risk. However if the nickel price can improve Sherritt is well leveraged to succeed.

Sherritt's financials

Source: 4-traders

MMC Norilsk Nickel [LSX:MNOD] [GR:NNIC] (OTCPK:NILSY) - Price = GBP 19.76

Nornickel are the giant low cost base metals producer with mines in Russia and a refinery in Finland. The key drivers of Nornickel's revenue are palladium, copper, nickel (and cobalt). Platinum also is another metal produced by Nornickel, which for now is only a small contributor to revenue. Generally the company does not show cobalt revenues as they are included as by-product cost credits for copper. Nornickel has the largest global nickel reserves in the world.

Nornickel revenue breakdown - Palladium, nickel and copper the key three drivers

Current market cap is USD 31.5b, with a mid 2018 debt estimate of Russian rubles 574b (~USD 8.6b). 2019 PE is 8.5, with a 11.9% dividend yield. 2019 net profit margin is forecast at 1.01%.

Current consensus analyst price target is USD 20.68, representing 4% upside.

I rate Norilisk either a hold or an accumulate on dips. You can read more in my article "An Update On Norilsk Nickel."

Highlands Pacific [ASX:HIG] (OTC:HLPCF) - Price = AUD 0.07

Highlands Pacific is an Australian mining company with projects in Papua New Guinea. They own 11.3% (up from 8.56% previously) of the Ramu nickel/cobalt mine (in production) and 20% of the massive $3.6b Frieda River gold/copper resource.

Current market cap is AUD 82m, with an end 2018 debt estimate of AUD 101m. No available data for PE, although market watch shows the current PE as 0.78.

Current consensus analyst price target is AUD 0.33, representing 346% upside.

Despite being a laterite project and being in the PNG, I see good potential due to a low valuation and huge production expansion potential ahead.

Highlands Pacific's financials

Source: 4-traders

Other small cobalt producers

  • Korea Resources Corporation (40.3% share of Ambatovy meaning ~4,0000tpa of cobalt attributable to Kores).
  • Pengxin International Mining Co.’s Shituru Mining

Cobalt juniors with a reasonable chance to be producers by 2023

  • RNC Minerals [TSX:RNX] (OTCQX:RNKLF)
  • eCobalt Solutions [TSX:ECS] (OTCQX:ECSIF)
  • Fortune Minerals [TSX:FT] (OTCQX:FTMDF)
  • Clean TeQ [ASX:CLQ] [TSX:CLQ] (OTCQX:CTEQF)
  • Australian Mines [ASX:AUZ] (OTCQB:AMSLF)
  • Ardea Resources [ASX:ARL] (OTC:ARRRF)
  • Cobalt Blue Holdings [ASX:COB] (OTCPK:CBBHF)
  • Aeon Metals [ASX:AML](OTC:AEOMF)
  • GME Resources [ASX:GME][GR:GM9] (OTC:GMRSF)
  • Havilah Resources [ASX:HAV] [GR:FWL]
  • Castillo Copper [ASX:CCZ]
  • Cassini Resources [ASX:CZI] [GR:ICR] (OTC:CSSQF)
  • Nzuri Copper [ASX:NZC] (OTCPK:NZRIF)
  • Celsius Resources [ASX:CLA] [GR:FX8]
  • Barra Resources Ltd. (OTC:BRCSF) [ASX:BAR] / Conico Ltd [ASX:CNJ]
  • First Cobalt [TSXV:FCC] (OTCQB:FTSSF)
  • Cruz Cobalt [CUZ] (OTCPK:BKTPF)
  • Bankers Cobalt [TSXV:BANC] [GR:BC2] (NDENF)
  • Alloy Resources [ASX:AYR]

Note: Those higher on the list are closer to reaching production.

Risks

  • Cobalt prices falling.
  • Mining risks - Exploration risks, funding risks, permitting risks, production risks, project delays. Laterite miners have a high capex (and opex depending on by-products) so it can be harder to achieve funding, but generally have a larger resource and longer mine life. Sulphide miners resources are often smaller and can be further underground.
  • Management and currency risks.
  • Sovereign risk - The DRC is a very high risk country ranked one of the very worst on the global corruption index. Russia, PNG and Madagascar also would be medium to high risk. Australia and Canada are low risk. The new DRC 10% cobalt royalty and 50% super profits tax is expected to have a negative impact on DRC cobalt miners profits in 2019.
  • Stock market risks - Dilution, lack of liquidity (best to buy on local exchange), market sentiment (the trade war has negatively impacted most all metal markets in 2018).

Further reading

Conclusion

As 2018 progressed the cobalt sector has become increasingly more complex and harder to pick the best stocks. The DRC is where the production growth is, yet the DRC miners are getting a poor deal from the DRC government with onerous royalties on cobalt (10%) and the new super profits tax (50%). Essentially this means a DRC cobalt miner may have increased production in 2019 but may earn less net profit.

Meanwhile the increased DRC production threatens short-term oversupply at least in 2019 and 2020. Added to this the poor sentiment (trade war etc.) has meant the cobalt juniors are now out of favor. Cobalt thrifting is not a large concern nor is recycling as far as supply, as the EV demand surge will create much bigger demand by comparison.

Having been a very early cobalt bull in 2016 I'm now neutral on the sector at least for the next 2-3 years as it seems most of the profits will go to the DRC government. I do see any small cobalt surpluses in 2019-2021 being stored by companies in preparation for the quite likely cobalt shortages post 2021 as EV demand surges.

Given the above I am neutral on the current cobalt producers, although I do see some value across the names due to the trade war depressing prices. Where I see opportunity is for non-DRC miners that are currently reasonably priced (Umicore, Vale, Sumitomo Metal Mining Co, Sherritt International, Norilsk Nickel, Highlands Pacific) with low costs of production. There's also a good opportunity for patient investors with the top tier non-DRC cobalt juniors that are able to progress to production by 2022/2023. Those with large resources (Ardea Resources), good funding potential (Clean TeQ), strong off-take partners (Australian Mines), or large sulphide projects (RNC Minerals, Cobalt Blue, Aeon Metals) can do very well but will require higher risk tolerance and a good deal of patience.

As usual all comments are welcome.

Disclosure: I am/we are long GLENCORE (LSX:GLEN), KATANGA MINING [TSX:KAT], NORSILK 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], HAVILLAH RESOURCES [ASX:HAV], CONICO LTD [ASX:CNJ], CRUZ COBALT CORP [TSXV:CUZ], POSEIDON NICKEL [ASX:POS], CASTILLO COPPER (ASX:CCZ), COBALT27 [TSV:KBLT]. 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.