Cobalt Deals Snatched Up as Price Pushes Higher

By Eric Fry
Contributor

Commodities

The “cobalt rush” is gaining momentum. A big-ticket transaction earlier this week underscores the growing global appetite for the metal.

This formerly obscure element, No. 27 on the Periodic Table, has attained celebrity status thanks to its new identity as a critical battery metal.

Cobalt is one of the metals that comprises lithium-ion batteries, like the ones that enable your iPhone to send text messages, upload photos to Facebook, swipe right on Tinder and ask Siri what the capital of North Dakota is.

Batteries for smartphones, tablets and laptops consume nearly half the world’s annual supply of cobalt. But that’s just the beginning.

According to Glencore, a typical electric vehicle requires about 24 pounds of cobalt – or about 1,000 times more than an iPhone needs. But this source of demand is growing rapidly.

Glencore predicts annual EV sales will total about 30 million per year by 2030 – or roughly 30% of all autos sold. At that level of sales, Glencore estimates EVs will require more than four times the world’s current annual production of cobalt.

Day after day, EV industry experts are boosting the growth projections for global EV sales. Accordingly, research firms like Macquarie Research are predicting looming cobalt deficits.

Perhaps some new and better battery technology will arise that will dampen the demand for cobalt. (Efforts like these are already underway.) But for now, cobalt remains one very hot commodity, which is why forward-looking auto manufacturers are jockeying to secure long-term supplies today.

In March, for example, China’s GEM Co., a leading manufacturer of raw materials for batteries, struck a deal with Glencore PLC (OTC: GLCNF) to purchase one-third of Glencore’s planned cobalt production for the next three years.

Deals like this show how tenuous cobalt supplies have become.

Forward-looking investors are also taking note. Earlier this week, two metal-streaming companies struck a deal with Vale (NYSE: VALE), Brazil’s largest mining company, to purchase the company’s future cobalt production from its Voisey’s Bay nickel-cobalt mine in Labrador, Canada.

A metal streamer, as some readers may know, is a company that provides an upfront payment to a mining company (like Vale) in exchange for future production from a specific mining operation.

Typically, the streaming arrangement obligates the mining company to sell future production of a particular metal at a price that is well below the current market price. And this sort of streaming deal is exactly like the one that Vale just inked this week.

Under the terms of the deal, Wheaton Precious Metals (NYSE: WPM) and Cobalt27 (OTC: CBLLF) will pay Vale a combined total of $690 million to purchase finished cobalt equal to 75% of Voisey’s Bay cobalt production commencing January 1, 2021.

Cobalt27 is an upstart streamer that focuses exclusively on cobalt. Wheaton, however, is an established streamer that focuses on silver and gold. In fact, it is the world’s largest pure silver and gold streaming company.

So it’s noteworthy that this “pure” precious metals streaming company has decided to diversify into cobalt. Clearly, the company detects an opportunity too attractive to pass up.

Both Wheaton and Cobalt27 are delighted with their purchases and are looking forward to big boosts in cash flow when the cobalt begins arriving in 2021.

“We’re pretty excited about the deal,” Wheaton CEO Randy Smallwood beamed. “While our focus has been, and always will be, on precious metal streaming, we welcomed the opportunity to invest in another low-cost, long-life asset with a partner of Vale’s caliber. Wheaton has built a portfolio of streams on high-quality mines, and Voisey’s Bay has both the quality and the scale to make it an accretive addition to this portfolio.

“We see numerous similarities between cobalt and silver,” Smallwood continued, “as both are primarily produced as byproducts and both are integral to sustainable clean energy and electronics. In addition, given cobalt supply is concentrated in high political risk jurisdictions, Voisey’s Bay is particularly attractive for cobalt production as it is located in Canada.”

Cobalt27 CEO Anthony Milewski is equally pleased. “Cobalt 27 is very excited to partner with Vale to advance future development of Voisey’s Bay,” he said. “[T]his transaction builds on our commitment to add high-quality streams and royalties and represents a strong step forward in diversifying our portfolio with the Voisey’s Bay mine… We believe the enhanced exposure to cobalt will yield significant returns to our investors as electric vehicles begin to change our society in the coming years.”

EV manufacturers may be somewhat less delighted by this large-scale cobalt streaming deal.

For starters, it places a large chunk of future cobalt in the hands of investors, rather than in their hands. And importantly, this cobalt will not be coming from the Democratic Republic of Congo – where child labor is rampant in the mining industry.

Second, this deal sets a fairly lofty benchmark for long-term cobalt supply deals. It implies a long-term cobalt that is at least as high as the current price. By my calculations, this streaming deal produces roughly a 10% internal rate of return over 15 years, if cobalt prices average today’s prices.

That’s a decent return… but not mind-blowing. So presumably, Wheaton and Cobalt27 would not have inked this deal unless they expected the cobalt price to trend higher over the next few years.

They are not alone in expecting the cobalt price to rise. Sanford C. Bernstein & Co. has said that cobalt could climb to $60 per pound.

To be sure, these folks could be overly optimistic about the future price of cobalt. But one thing is certain: The cobalt rush is on.

Good investing,

Eric