Electric vehicles will drive cobalt demand

Cobalt is not flashy. Nor is it going to skyrocket in six months. But the demand for cobalt in the automobile manufacturing industry is immense. Unlike the small amounts needed for smart phones, an electric car might need 10 to 20 kilograms. The MoneyLetter has scoured lists of analyst-favoured cobalt stocks. We note five of them below.

Electric_CarsIn The Graduate, the memorable 1967 film that launched Dustin Hoffman’s career, the young, just-graduated Ben Braddock (Hoffman) is seen being given career advice by one of his father’s good friends. “Ben,” the friend says, “Plastics. Just one word describes the future, Ben. Plastics.”

If that scene were re-written today, the word plastics might be replaced by another relatively unknown or under-appreciated material—cobalt. Yes, there is the town of Cobalt in northern Ontario. But the cobalt that is the focus of this article is the mineral that is a necessary component of the lithium batteries that power electric vehicles (EVs) and smart phones. And Elon Musk’s decision to build Tesla’s batteries without cobalt aside, the mineral is seen by established investment firms as one of the best performing over the next 5 years. The reason? Other electric cars don’t leave the assembly line without the lithium-powered batteries that contain cobalt. Nor do the millions of smart phones glued to people’s ears around the world power on without cobalt.

Says one observer: “In portable electronics, everything is about energy by volume—not weight or cost—and cobalt is the best option. Consumer electronics don’t care about the lithium ion battery in your phone. It is all about the real estate it takes up.”

Car companies cannot afford this attitude as an electric car might need 10-20 kilograms. And the car companies will continue to pay the prices that consumer electronics makers will pay. But while cobalt prices have recently spiked, many believe there is no ceiling for it. Think about that, car owners in England and India, which have banned combustion-engine-driven cars by 2040 and 2030, respectively. As well, the surge in demand for colossal batteries used in storage grids has tripled and will move considerably higher. Think too about the fact the price for cobalt has skyrocketed from $54,000 a ton to more than $90,000.

Five reasons to buy into the cobalt story

1. The demand surge: There may only be 2 million EVs on the road today but the global auto industry has already completed a dramatic shift to EVs, and that shift depends on cobalt, which makes up 35 per cent of the lithium-ion battery mix.

2. Tesla may be floundering, and so too is its goal of using a cobalt-less battery. The focus really should be not on a car but a country—China, which consumes almost 50 per cent of the world’s supply of cobalt. The country is expected to see a 14 per cent increase in consumption, mainly on the back of EV and battery growth.

3. Tight supply: The global cobalt market is already facing tight supply, and analysts see no relief through 2021, when the supply gap is expected to reach 12,000 tons. Future supply remains uncertain, since 60 per cent of the world’s cobalt is found in the Democratic Republic of the Congo, where children working under inhuman conditions mine it.

4. Uncertain demand: There is a dearth of demand now because the cobalt story is largely unknown. For example, there are only approximately 24 cobalt-related stocks on North American exchanges. However, skeptics should be forewarned: China and the US see cobalt as a metal of strategic importance. China’s latest 5-year plan calls for 15 per cent of power to come from non-fossil fuels. (The hoarding has begun).

5. Cobalt was instrumental in the Industrial Revolution, and one country that is certain that it will lead the next one is Canada. (See below for promising cobalt stocks.) And one reason why Canada is such a desirable location for cobalt miners is the Democratic Republic of the Congo—specifically its unrelenting instability and sub-standard working conditions.

EVs will become the world’s largest user of cobalt—surpassing portable electronics—by 2021. It is important to note that analysts remain bearish in the short term, a view born of the oversupply of the metal. But these same analysts, and mining behemoths such as Anglo-Swiss Glencore PLC, see a supply shortage and a price rise materializing in what the industry calls the “medium” term, about 3 years out. “The party’s over for now,” says one analyst, “but keep listening in for the festivities to resume. It will happen.”

Prices have risen threefold since 2015 and the current cobalt price is around $40 a pound, up from $30 in 2017. Possibly a double by 2019. In fact, long-term agreements between car makers and battery makers have capped prices at $40 per pound in 2019.

Cobalt is not flashy like a Facebook. Nor is it going to skyrocket in six months. And nor is it what every stock also is not—a sure thing. The MoneyLetter has scoured lists of analyst-favoured cobalt stocks and we note five of them below.

Five cobalt stocks favoured by analysts

■ Cobalt 27 Capital Corp (TSXV—KBLT) acquired a 32.6 per cent stream on Vale’s cobalt production from Voisey’s Bay Co-Ni mine in Newfoundland beginning January 1, 2021. The mine is estimated to have a reserve life of 14 years. Cobalt 27 is one of the only companies providing investors with pure-play access to cobalt. Analysts at BMO and TD are bullish on the metal, as are a number of observers of the global market.

■ The behemoth that is Glencore (LON—GLEN) is the world’s leading producer of cobalt. It produces cobalt mainly as a by-product of copper mining in the Democratic Republic of Congo, but also as a by-product of nickel mining in Australia and Canada. It is also one of the largest recyclers and processors of cobalt-bearing materials—such as used batteries—helping secure the supply of the metal at a time of increasing demand. The company says that cobalt looks to become one of the most important commodities in the EV revolution.

■ Cobalt Blockchain (TSXV—COBC) is a resource firm that is expanding its exploration and development business to include cobalt assets in the Democratic Republic of Congo. It has been authorized by its shareholders to acquire a 100-per-cent interest in an existing metals trading business specializing in sourcing conflict-free minerals from artisanal and small-scale mines in the DRC.

It’s been a busy time for Cobalt Blockchain. In January, the company announced and closed a private placement for C$750,000. That same month, Cobalt Blockchain acquired Belair African Metals.

In March, Cobalt Blockchain engaged Better Chain to provide a blockchain-based platform to demonstrate the compliance of cobalt and other minerals with international standards on responsible procurement. Shareholders also approved the company’s name change from Peat Resources to Cobalt Blockchain. On March 22, Cobalt Blockchain announced definitive joint venture agreements on cobalt projects in the DRC and filed a cobalt trading and export licence.

On April 3, Cobalt Blockchain, together with DLT Labs, signed a letter of intent to establish a joint venture to provide secure, traceable and transparent methods for tracking and certifying the provenance of metals and minerals.

■ Analysts following First Cobalt (TSXV—FCC; OTCMKTS—FTSSF), in eastern Quebec, say it is rock solid in terms of cash balance, vision, structure and projects. The Keely-Frontier Mine, controlled by First Cobalt, is the largest historic cobalt producer in the belt and the fourth-largest silver producer in the belt. According to Wealth Research Group, the mines have the highest cobalt-to-silver ratio in the entire district at 1 pound of cobalt to 6 ounces of silver. In contrast, peers in the district averaged a 1-to-30 average.

■ Canada Cobalt Works Inc. (TSXV—CCW) is a pure play cobalt company focused on its past producing Castle mine in the Northern Ontario Cobalt Camp, Canada’s most prolific cobalt district. The company has underground access at Castle.

This is an edited version of an article that was originally published for subscribers in the September 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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