Selective Investors Return to Cobalt Market
Andrew Deaville - 5th September 2018
Buyers returned to the cobalt market at $25-29/lb in August after a two-month slide from decade-highs. However, investors maintained support for only a limited number of cobalt mining stocks. At the end of August, Cobalt 27 (TSXV:KBLT) was down almost 30% over 12 months, both eCobalt Solutions (TSE:ECS) and First Cobalt (TSXV:FCC) plummeted more than 50%, yet Australian explorer Celsius Resources (ASX:CLA) emerged relatively unscathed and up 120%.
This year, Katanga exceeded its production targets, some hinted that cobalt would soon be ditched, and China continued to dominate the supply chain via its DRC sources and state-controlled domestic refineries. While these factors impacted the outlook for new mines, demand for cobalt is still set to increase, and investors have simply become more discerning of which projects remain feasible.
Many manufacturers have been clear that cobalt will remain an essential ingredient in modern batteries until at least 2025, but even then, commercialising a new product is a long and painful process. US and European automakers will not surrender their EV ambitions to China so easily, and major companies such as BMW have been openly shopping for decade-long cobalt supply deals directly from miners.
The need still exists, but more sensible metal prices mean that competition has grown fierce. Small projects, or those mining cobalt as a secondary metal, generally have higher production costs than large primary deposits. The risk of unsustainable costs is ultimately what has scared investors away from some of 2018’s most lauded stocks while Celsius and its massive Namibian Opuwo project maintained credibility.
Where Will the Cobalt Price Settle?
Looking at the cobalt price from 1930 onward, we remain far from the historic peak (plenty of room left for growth). Additionally, strong support can be seen at $25/lb both before and after the rally. With demand projected to increase until at least 2025, the price is likely to remain between $25-35/lb, and although the trend is projected to be positive overall, large fluctuations should be expected along the way.
Cobalt is a burgeoning commodity, and many people will attempt to capitalise on its upside. This rush should result in a short period of oversupply during the next five years, and while metal prices will suffer during this time, the devalued market will quickly self-correct by crippling the least economical producers, limiting output and increasing scarcity to drive prices back up.
In the long-run, the feasibility of cobalt mines rests on their scale and the ease with which the material can be refined. Investors will avoid mines with energy-intensive or overly-complicated processes because the cheapest mines are far more likely to survive hard times. Commodity prices do not stay high forever, and a truly successful mine remains open either way.
Celsius Resources is a Cobalt-Led Deposit
A significant contributor to the failure of the abovementioned cobalt stocks is the locations of their assets. Cobalt found in Canada and the United States is almost always contained in ores that necessitate roasting or the removal of harmful elements, whereas ore bodies in Africa are more likely to yield lower operational and capital expenditures thanks to the local geology.
Critical to the Celsius Resources’ Opuwo project success is the fact that the deposit is cobalt-led and amenable to simple and conventional processing techniques. Historically, cobalt production is a byproduct of nickel and copper mines, which predominantly obey the fundamentals of their primary metal, resulting in a sporadic output of the secondary. In the case of Opuwo, cobalt is the frontrunner with copper bringing up the rear; a far more stable investment if cobalt is the desired exposure.
While ramping up cobalt production on copper-led sites is possible, it requires process alterations that simultaneously decrease yield and drive up costs. During the price rally, some nickel laterite projects with a relatively insignificant cobalt credit were hastily rebranded as cobalt deposits. However, this was solely to attract investment and projects such as these are highly unlikely to produce meaningful quantities of cobalt in the future.
Is Opuwo the Cheapest?
A scoping study is expected during 4Q18 that will more accurately answer this question, but generally speaking, the largest mine with the smallest overheads will produce at the lowest cost-per-tonne. Judging from the information already available, Opuwo’s size and grade earn it a place alongside projects that are already in production, even though the majority of these still produce cobalt as a secondary metal. Moreover, the most recent drill results confirm that Opuwo should have a strong copper credit.
Celsius Resources’ mineral resource estimate shows that Opuwo has 126,100 tonnes of cobalt contained within 112.4 million tonnes of sulfide ore, making it the largest cobalt sulfide deposit outside of the DRC. The ore does not require roasting and has no issues with deleterious elements. The site has easy access to the port of Walvis Bay, and mining-friendly Namibia even offers a ten-year tax holiday should Celsius choose to build a refinery there.
Also on Celsius Resources (CLA: ASX)’s side is the presence of copper and zinc which would likely provide additional revenue streams and serve as a hedge against any potential decline in the cobalt price by offsetting production costs. Even after the recent correction, the cobalt price is sitting above $60,000/tonne, and with an inflation-adjusted historic mean of $55,197/tonne since 1938, future demand can still support new mines. However, only the largest and most economical deposits are worth the colossal effort and expenditure required to start a new mine.
Disclaimer: One or more of the companies mentioned above are public relations clients of Core Consultants. As such, Core Consultants holds options in one or more of these companies. Nothing in this article is to be construed as investment advice.
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