The latest Keith Kohl ad caught my eye, since I’ve been interested in cobalt for a while now and figured that “blue gold” probably means he’s teasing that metal … so what’s the story, is it cobalt he’s talking about, and what’s the cobalt-related investment that he thinks will make us 1,000%-type gains?
Well, he wants some money for those answers, of course… and this is, yet again, one of those “no refunds” deals for a high-priced letter, they’re selling Pure Energy Trader for $1,499 a year and there is no trial period or refund allowed (and you’d have to cancel to make sure you’re not on the hook for another $1,499 on your credit card next year). Lots of folks are moving to a “no refunds” policy for their higher-end letters, which puts even more pressure on that sales pitch.
This is the part that has gotten our readers a bit revved up:
“This rare metal is critical to Apple and Tesla’s Future…
“It’s even more scarce than lithium…
“Experts are predicting a 503% supply shortfall in the coming months…
“One that could turn every $1 into $10 or more…”
And we get a tantalizing story that will sound familiar for anyone who has speculated on natural resources stocks… more from Kohl:
“We’ve all seen this before: commodities that are in high demand and have little supply always see massive spikes in price…
“We saw it with:
- Zinc in 2005 (up 403%),
- Uranium in 2006 (up 778%)
- Molybdenum in 2007 (up 809%)
- Silver in 2010 (up 443%)
“And now the current ‘blue gold’ shortage trumps anything the world has ever seen.
“‘Blue gold’ prices have jumped a whopping 150% in just the past year.
“And as a result, panic is starting to break out…
“JB Straubel, the Chief Technology Officer for Tesla, recently admitted he is more concerned about the supply of ‘blue gold’ than he is about lithium.”
So yes, this is all about cobalt, which is the rarer element that is in used in most lithium ion battery designs (including Tesla’s) … and yes, it is much more scarce than lithium, but that’s not saying that much — lithium isn’t really particularly scarce, though there are a limited number of places where it’s very profitable to produce it at current prices.
Here’s more about cobalt from the ad:
“With lithium, there is no shortage of development projects. Tesla has already signed deals with several lithium startups.
“But with ‘blue gold,’ there is a dire shortage of development projects, especially in safe mining jurisdictions.
“Over 60% of the world’s ‘blue gold’ comes from the Democratic Republic of Congo, in Central Africa.
“Congo is an extremely politically unstable country with deeply-rooted corruption.
“Child labor has become a major concern, with many children working in deadly mining conditions.
“Human rights organizations are pressuring companies like Apple and Tesla to completely ban ‘blue gold’ imports from the Congo.
“They’re demanding that these companies secure all their supplies from ethical mining sources.
“Which is why Tesla Motors has repeatedly said it will source all of its ‘blue gold’ from North America.”
And some more on the supply-demand imbalance that’s been driving cobalt prices higher:
“With a target of 500,000 lithium batteries for 500,000 electric cars annually, the Gigafactory will need 78,000 tons of ‘blue gold’ per year.
“And at last count, the U.S. only has 21,000 metric tons in proved reserves.
“The 500,000 lithium car batteries that Musk wants the Gigafactory to produce per year will swallow that up in a hurry.
“And that’s just Tesla Motors we’re talking about.”
There’s also a fun exchange related between Elon Musk and Robert Friedland, which will delight those who follow Clean Teq or participate in the discussions that Irregular hendrixnuzzles started here…
“Billionaire Mining Mogul To Elon Musk: ‘You’re Totally Screwed!’
“So recently, Musk visited Robert Friedland, a multibillionaire mine developer.
“Friedland made billions from his massive mineral discoveries in Northern Canada and Mongolia.
“And now he owns the largest ‘blue gold’ mining operation in Australia, which is free of the child labor concerns currently plaguing the Congo.
“Elon Musk said to him, ‘I’ve got the world’s biggest battery factory, so I want to buy your [‘blue gold’] at the current metal price for the next 10 years, because I’m the biggest buyer.’
“Robert Friedland replied, ‘Elon, you’re totally screwed. The Germans are building a gigafactory twice as big as yours, the Chinese are building four of them bigger than yours, the Japanese are building two and the Koreans are building one. So unless you’re willing to pay to buy our [‘blue gold’] at whatever the price may be in the future, you’re not going to be able to build any batteries in your own gigafactory and your whole company is going out of business.'”
That quote, from an interview James West of The Midas Letter apparently held with Friedland, has circulated widely… though the original interview seems no longer to be available online (it’s quoted here, among many places, I don’t know if it’s accurate, or what the context was of the original interview).
But it’s not Friedland’s cobalt operation that’s being teased here, it’s something in North America — here’s a bit more from the ad as we continue to harvest clues:
“I’ve found a tiny company that controls some of the best “blue gold” in the resource realm… over $1 billion worth of it at today’s prices.
“And it’s operating right here in the good ol’ U.S. of A!
“This tiny company’s property is sitting on the most prolific trend of ‘blue gold’ mineralization in the United States.
“That makes this tiny company a prime candidate for a major supply deal… or even a major buyout!
“And you can scoop up shares of this firm — right now — for less than $1 a share!”
He also refers to it as a “little 0.94 company” and says it’s sitting on “over $1 billion worth” of cobalt and “some of the purest reserves of ‘blue gold’ in the world” … and that it’s “America’s sole primary, near-term producer of this incredibly rare material.”
So that doesn’t leave much room for doubt… the Thinkolator sez that this must be eCobalt Solutions (ECS in Toronto, ECSIF OTC in the US), which owns the Idaho Cobalt Project (ICP). This is the one cobalt speculation that I continue to have in my portfolio as well, after having put on a small position in eCobalt last October.
Why is this our match today? Well, the feasibility studies did estimate that the total gross revenue for the life of the mine would be just about a billion dollars… and it was trading at 94 cents (US$) just a couple months ago (it’s back over a dollar now, but not much)… and, of course, the real selling proposition for eCobalt, even back when it was named Formation Metals before the opportunistic name change, is that it is the owner of the one primary cobalt mine that is permitted, partially built, and ready to go in the U.S., which gives them some strategic heft (and maybe some orders from the Defense Logistics Agency, which is responsible for stockpiling important materials like cobalt).
This is the standard language eCobalt uses in their promotional materials:
“[ICP] remains the only advanced stage, near term, environmentally permitted, primary cobalt deposit in the United States. The ICP will ethically produce environmentally sound battery grade cobalt salts, made safely, responsibly, and transparently in the United States.”
So what’s the situation with eCobalt today? They did the first phases of their mine construction five years ago, when they were planning to produce cobalt metal for aerospace, but then cobalt prices collapsed and they put their mill equipment, etc., on care and maintenance for a couple years… and then, with the push for electric vehicles, decided to revamp the production plan to produce cobalt sulfate for batteries instead. They decided that looked worthwhile, continued with testing and metallurgical work, and commissioned a feasibility study that they will use to get mine financing (they probably need between $150-200 million for construction).
And just a couple weeks ago, they announced a bit of a “green light” that cheered investors — they don’t yet have the feasibility study, which they now expect in September (prior expectation was Q2), but they did start “preconstruction” activities that will, they say, allow them to restart construction more efficiently in 2018. So that provides some encouragement that they expect the final feasibility study to make this look like an attractive and bankable project, at least.
The last numbers before the feasibility study were from the revised preliminary economic assessment (PEA) that they shared in January, which concluded that the construction capital required would be $147 million, which gives a post-tax internal rate of return of 24% and a post-tax net present value (NPV), at an 8.5% discount, of $113 million. And if you’re excited about catching this up-move in cobalt prices, the fact that they’ve got a fairly short construction timeline might be appealing — they indicate that they could be producing less than two years after the start of construction, so it’s theoretically possible that they could be selling cobalt by late 2019 (I assume their nearby refining facility will take less time to build, but that’s just a guess). If the feasibility study is compelling and bankable, they could even start pre-selling production through offtake agreements if they can get Tesla or other potential customers to pay a good price.
It’s that $113 million number that makes some folks wary, though, since the company already has a market cap of $140 million — but that PEA was also based on $22 cobalt, and cobalt is now at about $27 (with, according to eCobalt, a premium paid of a couple dollars over that level for cobalt sulfate, which is what is generally in demand for higher capacity batteries for electric vehicles). The biggest downside that I see for eCobalt, other than the typical issues like “building the mine might cost too much” or “cobalt might fall” is that it’s not a super-huge deposit, and it only has about a 12 year mine life, so there’s maybe not a lot of upside to the price unless cobalt prices rise substantially. I don’t know whether or not there’s potential to extend the reserves with additional drilling, but this is probably not a “mega upside” name unless cobalt prices climb or something else changes.
So eCobalt is very clearly a bet on both the willingness to pay a premium price for US cobalt, and on cobalt prices rising in general… if cobalt is going to be in the low-$20s, eCobalt is probably already at a pretty high valuation given the uncertainties of actually building a mine and processing plant over the next couple years, it’s if cobalt goes to much higher prices or there’s a real “buy traceable cobalt” initiative that cuts out the DRC, that this stock will be a boomer (cobalt was over $50 the last time it really spiked, in late 2007… and yes, it was spiking for some of the same reasons back then, and the DRC was a mess back then, though the electric vehicle battery demand story was a bit ahead of itself a decade ago).
There are a couple unmentioned parts of the cobalt story, of course… one is that lots of people have been paying attention to cobalt, and the price has gone up sharply over the past year, and there are other projects with junior miners trying to move forward… though none nearly as advanced in the US, and few that are of any real size just yet. One that comes up pretty frequently is Fortune Minerals, which has the NICO cobalt/gold/copper project in the Northwest Territories and is currently planning to update its feasibility study. Their old feasibility study put the levered base case NPV at C$250 million, which sounds more attractive relative to the C$70 million market cap… though that project is nowhere near as advanced as eCobalt’s ICP in terms of permitting and construction. I bring that up not to recommend Fortune Minerals, but just to give one example of the variety of small(ish) cobalt stories out there. Including Robert Friedland’s Clean TeQ (CLQ in Australia, CTEQF OTC in the US), which could possibly be producing cobalt within three or four years.
And the other, perhaps more compelling story, is that the reason for the shock to the cobalt price is a combination of falling supply and rising demand — it’s not just that supply has been used up, or that demand has grown too fast, it’s that supply has been somewhat artificially halted by a lot of major producers even as demand has been rising.
That’s because almost all the world’s cobalt is produced as a byproduct of copper mining or, to a somewhat lesser extent, nickel mining, and a lot of large copper and nickel mines have been delayed or paused or shut down over the past couple years because of weak economics for their primary metals. If you’re a copper miner and copper prices get so low that you can’t make a profit, you’re not going to run your massive copper mine just because the cobalt that you also produce is getting more valuable. Cobalt’s not a meaningful enough part of the economics of most copper and nickel mines to drive their production decisions.
Copper is well below its highs of five and ten years ago, but it has been staging a decent recovery over the past year on hopes of more economic growth, and particularly on optimism that China’s infrastructure investing will pick back up (China is the marginal buyer for pretty much all base metals). Nickel has been less steady in its recent recovery, but has at least shown some signs of ending its five year downtrend recently with a summer pop in the price. So it might be that some optimism from big base metal producers like Norilsk Nickel or Glencore helps to boost cobalt output again over the next few years, though these things tend to move pretty slowly.
And, of course, the big elephant in the room is the Democratic Republic of Congo (DRC), source of about 2/3 of global cobalt and home to perennial (and violent) political crisis and human rights violations, particularly child labor. The big cobalt names in the DRC are also arguably inexpensive, including Katanga Mining (KAT.TO, KATFF, majority owned by Glencore) and China Molybdenum’s (CMCLF OTC in the US) Tenke Fungurume (they bought control of that from Freeport last year), but they’re inexpensive because people are scared of the many possible negative outcomes from the DRC. If people stop worrying about the DRC for whatever reason, then it might be awfully hard for the world’s small cobalt producers to compete with the likes of Katanga and Tenke Fungurume, which could increase production at probably substantially lower global cobalt prices.
So that’s what I see in eCobalt… I do own a small position, but have already enjoyed the pop from cobalt’s price move over the past year so I don’t know how long I’ll hold it — I will at least wait until the feasibility study comes out, which could be either positive or negative.
Any thoughts on cobalt yourself? It’s your money, after all — think there’s money to be made in cobalt? More excited about the larger producers, or in other juniors? (Or, like a lot of Gumshoe readers, in Clean TeQ, which I haven’t bought personally but admire?) Let us know with a comment below.
Disclosure: I own shares of eCobalt solutions. I am not invested in any of the other companies mentioned above. I will not trade in any stock mentioned above for at least three days, per Stock Gumshoe’s trading rules.