There’s Buzz Around Cobalt But Don’t Buy Yet

January 30, 2017

There’s Buzz Around Cobalt But Don’t Buy Yet

  • The cobalt hype reminds me of the 2008 uranium and 2011 rare earth element spikes. Both ended badly for investors.
  • The bull case is tempting, but you should always investigate mining costs of junior miners because the cheapest way to get to cobalt is as a by-product, and there are big copper mines that can supply it.
  • Be careful of dilutive capital raises, liquidity issues, and stock liquidity and all other issues that penny stocks have, no matter how attractive the cobalt pitch might seem.

Introduction

Many of you might be wondering what’s going on with cobalt as its price has gone up lately which has created an interesting buzz in the financial world.

On top of it, many mention cobalt alongside sexy names like Tesla (NASDAQ: TSLA) which further increases the buzz.

Today I’ll shed some light on cobalt in order to see if there is a long term profitable trend forming in its supply and demand, or if it’s just a fad like rare earths, graphite, or uranium were back in their days.

Cobalt

Cobalt has been used since ancient times to produce blue glass and ceramics. Today, it’s mostly used in alloys for aircraft engine parts, in alloys with corrosion/wear resistant uses, and in the cathodes of high-performance lithium-ion rechargeable batteries.

TSLA’s lithium-ion batteries use a combination of 80% nickel, 15% cobalt, and 5% aluminum for their cathodes. Given the expectations surrounding electric vehicles, excitement around cobalt shouldn’t be a surprise.


Figure 1: Cobalt production and consumption. Source: London Metal Exchange.

Bull Case For Cobalt

Cobalt is one, if not the only metal that has seen its price recently jump to 5-year highs. It’s up 68% from its January 2016 lows.


Figure 2: Cobalt price in the last 5 years. Source: London Metal Exchange.

Before investing, it’s important to understand whether this surge is coming from speculation or if it’s due to a real structural shift in demand.

The bull case is pretty strong and is based on precarious supply given that cobalt is usually mined as a by-product of copper and nickel, and a surge in demand is expected given the increased supply of and demand for electric vehicles.

It’s expected that demand from battery producers will be 17% of global demand for cobalt in 2020, up from the current 6%.


Figure 3: Expected demand for cobalt. Source: Mining.

As a supply gap in copper will probably arise due to mine closures, it could also affect cobalt supply. Additionally, the majority of the world’s cobalt lies in risky regions.


Figure 4: Cobalt’s geographical distribution. Source: Mining.

According to the bulls, all of the above should lead to a significant supply gap in cobalt.


Figure 5: Supply gap forming. Source: Mining.

A supply gap as large as 10% of demand would send cobalt prices to the sky.

The Not So Bull Case For Cobalt

The bull case reminds me very much of two other recent commodities booms. Uranium prices spiked back in 2007 when the Cigar Lake project was flooded, while rare earth elements (REEs) prices spiked when it was expected that smartphones wouldn’t be able to do without such elements and, due to supply constrains, prices would surge.

You can read more about the current situation with uranium here, while the Rare Earth Elements Resources (REEMF) chart below will show you how dangerous investing in miners based on buzz can be.


Figure 6: REE’s stock price in 2010 – 2013. Source: Mercenary Trader.

Later, the stock got delisted and is now trading OTC for pennies. However, it’s a great example of how the price of a miner can get pumped up quickly while the real supply gap never arises.

Something similar could happen with cobalt because the quantity that you have to put into cathodes isn’t fixed. If cobalt prices surge, producers will make cathodes with something else and they are already beginning to prefer nickel, manganese, and aluminum.

Further, beware of the mushrooming junior cobalt miners because China Molybdenum has agreed to invest $9 billion in the Democratic Republic of Congo (DRC) in order to settle its needs for cobalt. Therefore, with global grades and reserves being much smaller outside the DRC, all other producers might find it extremely difficult to be profitable at any price.

Thirdly, the price of cobalt has been falling in the last 5 years due to oversupply. We can’t know how much of it is stockpiled around the world, but it could be a significant amount given the five years of oversupply.

Conclusion

There is a high chance that the price of cobalt will rise in the future, but the question is whether junior miners will ever make money. Major copper miners have an advantage because the best way to mine cobalt is as a by-product of copper.

Be aware of investment pitches and initial public offerings of junior cobalt miners that try to seize the moment and sell you an extremely risky equity.

If you still want to invest in cobalt, below is a list of producers to dig into.


Figure 7: Cobalt producers. Source: London Metal Exchange.

Apart from the above, there are many junior miners that hope to get on the list. Such miners have questionable mining projects, continuous dilutive capital raises, and are often penny stocks. The current buzz could increase their equity raises, but be very careful not to get stuck in such an investment. However, if the story is true then the rewards would largely outweigh the risks.

An example of a junior cobalt miner is Fortune Minerals Limited (FT.TO). Its stock price jumped recently thanks to the buzz for cobalt, but it’s still far from historical levels.


Figure 8: FT.TO’s stock price. Source: Yahoo Finance.