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The 'Minor Metal' with a major impact
Stockhouse Editorial
0 Comments| 20 hours ago
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Humans have been producing the major metals for thousands of years. Gold, copper, silver, iron ... the big hitters. The “minor metals” are those that have relatively small global production, and are primarily a by-product of a base metal.

No one would be surprised to hear that tellurim, for example, is a minor metal. A by-product of gold, lead or copper mining, global production of tellurim is a miniscule 220 tonnes a year.

The Minor Metals Trade Association lists 49 metals it currently considers “minor metals”, presenting them in a helpful version of the periodic table. One metal that we think should be removed from that list is #27, cobalt. It's about to have a major impact on your portfolio.

First, the conclusion: we are entering a prolonged global cobalt shortage. Consumption is skyrocketing, production is decreasing. Basic economics says this is low-hanging fruit for investors to pick.

Now, the facts supporting that conclusion, starting with decreased production. Cobalt is a by-product of nickel and copper mining. Roughly 97 – 99% of the world's supply comes through that route. That means if nickel and copper mines are shut in, whether for environmental reasons as is happening in the Philippines or due to depressed commodity pricing, then we lose the cobalt production as well. It's not possible to just mine the cobalt.

The Philippines produced about 4,600 tonnes of cobalt last year, or about 4% of the world's supply. That production is at risk.

Production out of the Congo is also at risk. That risk is key to our investment thesis because the DRC is the world's largest producer of cobalt, which as a by-product of its large-scale copper mining accounts for roughly 55% of global production. The copper is mined mainly out of the Katanga belt.

That region has been subject to a prolonged horrible conflict, leaving over 6 million people dead from violence, disease and starvation. There is no reason to believe this unnatural disaster will be resolved any time soon.

Comparing the first quarter of 2016 to Q1 2015, Congolese cobalt production fell 19% to 16,396 tonnes. This decrease tracks the fall in copper production, which fell about 22% over the same period. As goes the copper, so goes the cobalt.

The war will continue to grind down the Congo and will continue to negatively impact cobalt production. It also is attracting international attention from Amnesty International, the Enough Project and activist celebrities who are seeking to minimize the damage by imposing an ethical supply chain on cobalt production out of the area.

To understand the need for an ethical supply chain, “This Is What We Die For” is mandatory reading. It's a depressing read – even the title is numbing. It's Amnesty International's report on the hazardous conditions in which artisanal miners mine cobalt in the DRC. Using rudimentary hand tools and without basic protective equipment, child and adult miners dig out rocks from tunnels deep underground. We can likely count on the imposition of an ethical supply chain, which will take further cobalt out of the global supply.

Taking all of that into account, we can expect to lose roughly 15% of the global supply next year.

Falling supply of any commodity has a natural price increase response. Cobalt's response, though, will be dramatic because demand continues to surge.

Roughly half of the world's 100,000 tonne per year cobalt production is consumed in industrial applications:

When alloyed with aluminium and nickel, cobalt can make powerful magnets
Other alloys are used in turbines where high-temperature strength is important
Electroplating due to cobalt's attractive appearance, hardness and resistance to corrosion
Cobalt salts have been used across cultures and time to produce brilliant blue colours in paint, porcelain, glass, pottery and enamels. Such painted items were even found in King Tut's tomb. That colour is called “cobalt blue” for a reason
Radioactive cobalt-60 is used to treat cancer and to irradiate food
Medical devices contain cobalt. For example, roughly 70% of all hip replacement joints use cobalt

All of these uses total about 50,000 tonnes a year. That usage has been fairly stable year-over-year.

The part of the market that has seen dramatic increases is the electric battery and lithium battery markets. Good technical descriptions why cobalt is needed in the battery can be found here. In layman's terms, cobalt oxides are layered with other metals to form the cathode.

If it's rechargeable, it's almost certain to have some amount of cobalt in it. For example, the battery in your cell phone, by weight, is about 70% cobalt. Every cell phone, notepad, laptop, remote control, beard trimmer, GPS, scanner, drone, power tool, camera, handheld vacuum cleaner, battery pack...

But what is really driving this part of the market is the exploding growth in electric vehicles. There are close to 30 electric car manufacturers around the world (including hybrids), and all of them consume cobalt for their rechargeable batteries.

The Tesla story lately has revolved around the Model 3. Tesla pre-sold close to 500,000. Each car will consume roughly 15 kilograms of cobalt, or 7,500,000 kilograms in total. That's 8300 tonnes, or about 8 % of the global supply. And that's one model for just one manufacturer.

In the United States, Tesla holds the #1 and #3 sales spots. The Chevy Volt comes in at #2, having already sold over 16,000 cars through to the end of Sept, 2016. Every one of those cars consumes cobalt.

This is a global phenomenon. Germany has announced plans to ban all combustion engine cars by 2030, a mere 14 years away. Over one billion iPhones have been sold globally, each containing cobalt. In Q2 2016 alone, the world bought close to 350 million cell phones, each one using cobalt in its battery. There was a surge in Powerwalls two weeks ago after blackouts in South Australia, as people seek to “blackout proof” their homes, and every Powerwall needs cobalt.

Last year we called for cobalt to see large price increases in 2016 – that call is starting to play out. The cobalt quote on the London Metals Exchange is up over 25% since the end of February, 2016, with Benchmark Intelligence calling for a continued surge in the price.

The big question then is, how do we make money off this opportunity? Here are three suggestions:

Buy the metal through the well-respected LME.
The oxides tend to trade at a 15 – 25% premium over the metal itself. For the more adventurous and those having access to larger pots of capital, trade in the oxides. The risk here is that there is no assured counter party for these trades (unlike on the LME), and there are no assurances of finding a buyer for your special formulation when you decide to sell.
Find a cobalt producer in which to invest. The problem with this suggestion, is that the cobalt contributes only a tiny percentage of revenue for a large nickel or copper producer. It's hard to get much leverage on cobalt by buying Glencore.

So the way the average investor can win the cobalt game is to invest in a smaller company showing high cobalt values in addition to other metals, in a good mining jurisdiction, with minimal infrastructure issues, capable of proving an ethical supply chain, and with near-term production plans. Go do your homework and invest accordingly.

Tags: ETF JUNIOR MINING COBALT

Read more at http://www.stockhouse.com/news/newswire/2016/10/31/the-minor-metal-with-major-impact#UY0EHGWbTs8lywlt.99