A Rare Opportunity in a Rare Metal
By:
Michael Molman
Investors
constantly search for the “next big thing”, the next innovation that will
disrupt entire industries and make early investors a lot of money. Now that
“next big thing” is electric cars and alternative energy. The question is what
is the best way to take advantage of the coming boom in these fields. The
answer is rare metals like lithium and cobalt.
These rare metals
are essential in the development of lithium ion batteries that power electric
cars like Tesla. With the launch of the Model 3, potentially the world’s first
popular mass market electric car, demand for these batteries is set to go
through the roof. Tesla is not the only player in the electric car field
either. All the major auto companies have electric cars in the works, and other
companies like Foxconn and Panasonic are busy building enormous battery
factories to satisfy the worlds ever increasing demand for battery products.
With increased demand for lithium and cobalt comes incredible opportunity.
Lithium was one of 2016’s best performing assets and 2017 is shaping up to be
cobalt’s year which is why I want to focus on the latter in this post.
Few people have
heard of Cobalt but it is one of the world’s most important metals. It is
primarily used in super alloys which are crucial to make gas turbines, jet
engines, permanent magnets, and turbine blades. Cobalt’s necessity to produce
these things have led governments to declare it a “strategic” metals. However,
the primary driver of the increased demand for cobalt comes from its use in
batteries. Cobalt’s unique chemical structure makes it possible for batteries
to hold their charge longer, which is why it is such a critical component. For example,
the lithium ion battery that powers a Tesla Model S, uses 22.5 kg of cobalt,
and just think, Tesla alone is about to start producing hundreds of thousands
of cars all using similar batteries. Meaning Tesla and other companies are
about to start soaking up cobalt by the ton (demand is set to triple by 2025), and
this can cause a problem, or an even greater opportunity.
Cobalt
Prices over the last year in USD per ton
As demand
increases there has been worries that a supply crunch in cobalt is inevitable,
this has led to surging prices (as shown in the chart above). Prices have
surged from $10 a pound to over $25 in a little over a year, including a 14%
increase in August alone. Unfortunately, taking advantage of these surging
prices and investing in cobalt is tricky. For starters, almost 98% of cobalt is
mined a byproduct of other industrial metals like copper and nickel, this means
there are very few pure cobalt deposits out there. Another problem is that 65%
of this “strategic” metal is mined in the Democratic Republic of Congo (DRC). You
might know the DRC as one of the world’s poorest and unstable countries, or you
might know it as one of the most corrupt but either way the fact that most the
world’s cobalt comes from the country poses obvious supply chain problems. Even
so there are a few options for those who want to get in on the cobalt boom.
Cobalt Futures
Cobalt
futures are traded on the London Metals Exchange under the symbol CO. The futures are quoted in U.S dollars per ton
and contracts range over a span of 15 months. These futures are up over 130%
over the last year. Unfortunately, there is very little liquidity in this
investment option, almost 40% of all contracts are owned by one buyer. These
futures provide the most direct way to invest in cobalt, but for investors
worried about the low volatility, another investment option could be cobalt
miners.
Katanga Mining (TSE: KAT):
Katanga Mining is
a Switzerland based holding company that trades on the Toronto stock exchange. It
has a market cap of about $1.45 billion (Canadian), and the stock is up over
250% year to date. The company produces copper and cobalt at its mines in the
Katanga province of the Democratic Republic of Congo, and is set to produce as
much as 30,000 tons of cobalt and 300,000 tons of copper a year. This makes
Katanga Mining one of the largest cobalt producers in the world with about 25%
of the current market. The company also has the benefit of being owned by
Glencore, which owns 86.33% of Katanga Mining. Glencore is one of the world’s
biggest commodities players with a market cap of almost $65 billion. It likes
to advertise itself as the largest producer of cobalt, but in fact most of
Glencore’s exposure to cobalt comes from its stake in Katanga Mining.
Katanga Mining has
large proven copper and cobalt reserves at it mines in the DRC however there
are significant risks involved with doing business in the DRC and investing in
Katanga. For starters, the region is known to be incredibly unstable both
politically and economically. The country’s large debt load and constant
warfare has left the country’s infrastructure and power grids virtually
nonexistent. Also, it is known that many mines in the region employ child
labor, something that violates international labor laws and the moral standards
of most companies, including Katanga Mining. The company’s heavy exposure to a
few core industrial metals also poses long term issues, the company was forced
to shut down production at times because of low copper prices. That coupled
with several recent accounting problems could turn potential investors off to
Katanga Mining. There are other options for investors who do not feel
comfortable with investing in the DRC, due to the increased demand for cobalt,
prospectors have been looking for new deposits, some of which have been found
within existing copper and nickel mines in Canada, Australia, Russia and even
the United States.
Ecobalt Solutions Inc. (TSE: ECS):
Is
a Canadian mineral exploration and mine development company traded on the
Toronto stock exchange. The company has a market cap of about $175 million
(Canadian) and has seen its stock rally 125% over the last year. The company’s
primary investment is the Idaho Cobalt Project (ICP), which is located on 4,080
acres within the American mineral rich state of Idaho. The project is slated to
produce about 1,500 tons of cobalt a year over the lifespan of 12 years. The
primary advantage of Ecobalt Solutions and its Idaho mine is that it will avoid
the obvious supply chain risks associated with mining cobalt in the DRC. By
having its main mine in the United States Ecobalt Solutions has the advantage
of America’s modern infrastructure and political stability. Something larger
mining companies in the DRC do not have. Ecobalt is also a pure play cobalt
company. The company does not have exposure to other industrial metals like
copper meaning investors have a rare opportunity to bet on cobalt and only
cobalt.
Unfortunately,
junior mining companies like Ecobalt Solutions have their own unique set of
problems. For starters, they are extremely risky and their stocks are prone to
periods of large swings. The company also does not have any revenue now since
its Idaho mine is still not operational, even though the company is making
progress it could still take months if not years for the mine to start yielding
actual cobalt. The company has invested over $110 million in the project to
date, meaning any delay in the development of the mine could have severe
financial consequences. However, Ecobalt Solutions Idaho mine is currently the
only late stage environmentally friendly primary cobalt deposit in the United
States and with cobalt prices surging, the company does seem to be in good shape
for the future.
Umicore (BSE: UMI):
Umicore
is a Belgian based global materials and technology company, that trades on the
Belgian and London stock exchanges (in London under the ticker ONSI). The
company has a market cap of about 7.12 billion euro, and its stock has rallied
about 18.5% over the last year. Unlike the other companies I have mentioned
Umicore is not a cobalt miner at all, the company’s activities revolve around
automotive catalysis, energy and surface technologies and recycling. The
company is involved in the cobalt space in a different way, it deals with
cobalt recycling and refining. Umicore uses the cobalt it collects from
recycled products and uses it to make super alloys. As the amount of lithium
batteries increases so too will the demand for recycling of these same
batteries. The company also produces materials and technologies that are found
in 1 out of every 5 lithium batteries.
Umicore is
striving to become a world leader in clean mobility materials and recycling. As
the production of lithium ion batteries increases profits at companies like
Umicore that provide materials, technology and recycling solutions will also
increase. Already the boom in lithium batteries is having a positive effect on
this companies bottom line, revenues are up 13% year over year. This company
could be a good option for investors hoping to take advantage of a niche field
that will be created by a boom in electric cars and rare metals.
Regardless of
whether you invest in cobalt through futures, miners or refiners, the
opportunity is there. Right now, there are 2 million electric cars on the road
worldwide, estimates say this will increase to over 140 million by 2040.
Britain and France have already decided to ban petrol cars entirely by 2030,
demand is only going up and investors hoping to take advantage of the coming
boom should get on board.
Disclaimer: This material has been written for informational purposes only, it should not be considered as investment advice. Any investment decision should be made after consulting multiple sources and a financial advisor.
