The Cobalt Credibility Contest

Andrew Deaville - 5th September 2018


Rising demand has brought scores of cobalt exploration projects to the fore, but some of the most heavily-promoted deposits lack quantities of real economic significance. To many investors, the credibility of such projects is fading fast; Fortune Minerals (TSE:FT), eCobalt Solutions (TSE:ECS) and Global Energy Metals (TSXV:GEMC) (GEM) all failed to hold the attention of global capital this year, losing out to deposits with real merit such as the Opuwo project owned by Australian explorer Celsius Resources (ASX:CLA).

Why the Change of Heart?

While the cobalt price has settled to a more reasonable level, and the rush to substitute has lost its urgency, future demand can only support a small number of new mines. What’s more, only the largest resources with simple enough processing are likely to make it. However, innumerable small and complicated projects received substantial investment over the last year, and the recent price correction has put them firmly back in their place.

By the final week of August, the value of Celsius Resources shares had settled 120% up over twelve months, while Fortune, eCobalt and GEM had dropped between 30-50%. Investors were forced to question if these projects were actually of value: Is it competitive on cost? How much arsenic will it produce? Are the energy requirements reasonable? Is child labour or state corruption involved? In short, does the world really need it and everything that comes with it?

At the most basic level, the three companies that lost out this year simply don’t have enough cobalt. eCobalt’s Idaho Cobalt Project states life-of-mine production at only 14,409 tonnes, Fortune’s NICO site fares a little better with 37,195 tonnes proven and probable reserves, but GEM’s Werner Lake project features a measly 328 tonnes of indicated and inferred cobalt. Considering the 126,100 tonnes indicated and inferred at the Opuwo Project, the shift in focus was inevitable.

A Deeper Look

In addition to small tonnages, a multitude of other factors can drive up the cost of mining cobalt. Ores that contain arsenic must be roasted prior to floatation, increasing capex via the expense of the roaster, opex through daily energy costs, and environmental impact thanks to higher emissions and arsenic-rich waste. Like many North American deposits, The Idaho Cobalt Project features dangerous levels of arsenic, requiring temperatures of up to 850 degrees Celsius to remove.

Fortune’s NICO deposit, while marketed as cobalt-led, is actually an iron-oxide/copper/gold type resource. The company hopes to produce bismuth, copper, cobalt and gold from the project, but polymetallic mines are renowned for low yields since no single process will produce good concentrations of all contained metals. This approach simultaneously increases reagent costs as well as waste, making safe disposal a much greater issue.

Conversely, the Opuwo Project in Namibia is hosted in a sulphide ore that does not require roasting and is amenable to conventional and simple processing techniques. In addition, the project is genuinely cobalt-led, but still comes with a strong copper credit. This is highly unusual since cobalt is almost always extracted as a byproduct of nickel or copper, and since cobalt is coming into its own, pure-play mines have never been more necessary.

A Word on the DRC

It’s a well-known fact in cobalt circles that the DRC can’t be beaten on production cost. Glencore is firmly entrenched in cobalt extraction there with its Katanga mine, and while output is growing, none of the material is refined in-country and the overwhelming majority is shipped to China. As well, these deposits are almost always fronted by copper or nickel, meaning cobalt production is frequently disrupted by downturns in the price of either Cu or Ni.

More importantly, the cost advantage of operating in the DRC has become considerably less attractive since Amnesty International highlighted the prevalence of child labour specifically in Congolese cobalt mines. As if that weren’t enough, state royalties on cobalt mining increased from 2% to 3.5% in 2018, with a likely further rise to 10% since the DRC now considers cobalt a strategic mineral.

With both legal and armed conflict rife in the DRC, the door is open for other African nations to provide low-cost cobalt production. It seems highly unlikely that North America could compete with Sub-Saharan Africa on cost; even the more developed nations such as Namibia, where a ten-year tax holiday awaits miners who construct a refinery in-country rather than shipping ore overseas.

Celsius Resources (CLA:ASX) Boasts the  Largest Cobalt Sulphide Deposit Outside of the DRC

The scale of Opuwo is perhaps its best feature, but its location close to the port of Walvis Bay means no intra-Africa logistical issues to fear. Moving goods across African borders is known to be expensive, time-consuming and often disruptive, but in this case, cargo may depart directly from its origin country; an attractive proposition for manufacturers and investors alike.

Another confidence marker is Celsius’ reluctance to source premature offtake agreements. Achieving production with volumes intact is a long-term strategy and the preserve of a good project. Juniors most often try to impress investors with supply agreements signed early in the game, but only end up diluting shareholder value by giving material away too cheaply. If people want your material now, they are likely to want it later, too.

Moving into 2019, we are likely to see yet more marginal cobalt projects fall by the wayside. Large deposits with simple processes led by competent management such as Opuwo will almost always win out over lesser resources simply because they can market themselves with integrity; there’s no need to lie if you’ve actually got the goods.

 

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More Information on Companies Mentioned:
Fortune Minerals and the Nico Project
Celsius Resources and the Opuwo Project
Global Energy Metals and Werner Lake
eCobalt Solutions and the Idaho Cobalt Project

Glencore and the Katanga Project

Disclaimer: One or more of the companies mentioned above are public relations clients of Core Consultants. As such, Core Consultants holds options and/or equity in one or more of these companies. Nothing in this article is to be construed as investment advice.

Copyright © 2018 Core Consultants Pty Ltd.

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