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Cobalt going from strength to strength on ASX

Cobalt has been the standout commodity over the past 12 months, and analysts at this week's mining explorers conference in Fremantle, Western Australia, believe it will continue to attract risk capital with more floats expected on the ASX in 2018.

Patersons Securities' senior resources analyst Simon Tonkin told attendees at the RIU Explorers Conference in Fremantle Feb. 21 that the Patersons Cobalt Index had shot up 145% over the past 12 months.

S&P Global Market Intelligence analysis shows the LME cobalt price has risen from US$47,750 per tonne on Feb. 20, 2017, to US$79,253/t on Feb. 20 this year.

Tonkin said cobalt, a critical metal in lithium-ion batteries, was "very difficult" to secure supply for, with 98% of it coming from byproduct credits from predominantly nickel and copper mines and 60% of global production sourced from the Democratic Republic of the Congo. Battery manufacturers have had difficulty trying to secure the valuable commodity.

Tonkin also noted that Volkswagen, which recently said it would need more than 150 gigawatt-hours of battery capacity annually by 2025 for its electric vehicles, reportedly tried to secure a lot of cobalt in late 2017, but failed to come to an agreement with producers.

Volkswagen put out a tender for a direct cobalt supplier for 10 years from 2019, in one of the largest procurement projects in the automotive industry, as part of a US$24 billion shift to electric vehicles.

Despite the major need for cobalt, Tonkin warned Australian investors at the Fremantle conference that while some of Australia's cobalt players have significant value in their share prices, "investors should be cautious because cobalt can sometimes be difficult to recover."

In January, the DRC's Senate approved a new mining code to raise copper and cobalt royalties from 2% to 3.5% which, along with raising gold royalties from 2.5% to 3.5%, would double the state's free share in mining projects to 10%.

With the world's second-highest reserves in terms of cobalt, Tonkin suggested that Australia was ideally placed to exploit its position — a view shared by cobalt-focused, Perth-based junior Barra Resources Ltd. CEO Sean Gregory.

Gregory told S&P Global Market Intelligence that the "exciting" cobalt market was more than a short-term phenomenon.

He said the nickel and copper operations which produce most of the world's cobalt need the price of those commodities to increase to justify new investment, and that an increase in the cobalt price is not going to entice new mines to come on.

This is where he believes Barra's Mount Thirsty project in Western Australia comes in as a point of difference, with roughly double the cobalt grade in a typical nickel project and makes up a far greater proportion of the company's revenue than a nickel or copper project with cobalt as a mere byproduct.

In this way, he said, Barra is more able to respond to increasing cobalt prices once in production.

Though cobalt prices had doubled over the past two to three years, Gregory noted that there were 34 uses for cobalt other than batteries that have maintained that pricing level over 100 years, so the price jump in recent years is "still in step" with the range that cobalt has traded in.

While the electric vehicles coming in are helping the demand side of the equation, Gregory noted that cobalt pricing was also "pretty inelastic".

"There's US$1 of cobalt in your mobile phone; about 2% of the cost of the electric vehicle is cobalt, so manufacturers and consumers will be pretty insensitive to changes in the price.

"However, with electric vehicles coming on the scene it's easy to see a step change in that price, but we've yet to see that step change."

BDO corporate finance partner Adam Myers, who also addressed the Fremantle conference on Feb. 21, told S&P Global Market Intelligence that there was a shortage of cobalt in regards to battery chemistry; and with copper production falling, more pure cobalt plays were emerging.

Tonkin said Patersons was seeing good demand for gold, cobalt and lithium floats as risk capital has "returned to the small-cap space."