Katanga Mining Stock is Riding High on the Cobalt Price, More Upside Seen
JULY 12, 2017 Small Cap Power
Katanga Mining Limited (TSX: KAT) shares should continue to climb on a robust cobalt price, a stronger copper price, and a possible early start of production
Holding the world’s largest cobalt reserves of 1.3 billion pounds (lbs), Katanga Mining Limited (TSX: KAT) continues to ride the strong upsurge in cobalt prices over the past one-and-half years. While the cobalt price has zoomed nearly three times over the mentioned period reaching almost US$30/lb, the share price of Katanga Mining has skyrocketed five to six times to reach $0.70 a share from about $0.14 on January 4, 2017.
We believe there is more upside potential in Katanga Mining stock as the outlook for the cobalt price is robust on increasing usage in batteries, positive momentum in copper prices, and the possible early start of cobalt production in 4Q17.
Investment Thesis
Operates one of world’s largest copper and cobalt projects
Katanga Mining Limited, through its 75%-owned subsidiary Kamoto Copper Company SA (“KCC”), operates a large-scale copper-cobalt project at the Kamoto/Mashamba East mining complex in the Democratic Republic of Congo. The Company suspended processing of copper and cobalt at the mine on September 11, 2015, and continued through 1Q17. Production at the mine is not expected to resume until the WOL Project is commissioned, expected in Q4 2017. As of December 31, 2016, the project holds the world’s largest reserves of cobalt at 1.3 billion lbs (124.7 MT @0.52 % Co) and high-grade copper reserves of 8.7 million lbs (124.7 @ 3.51% Cu).
Recently, Katanga Mining announced the ramping up of saleable production of cobalt to 30 ktpa (earlier 22 ktpa) by upgrading infrastructure.
KAT’s reserves of 1.3 billion lbs are almost twice that of the second largest cobalt miner Lundin Mining, which has 670 million lbs. Market cap to total resources lbs of Katanga Mining stock is at 0.35X, lower than the producers Lundin Mining and First Quantum. We believe once Katanga Mining starts production in 4Q17 or early 2018, there is a potential for the multiple to go up to 1.0x, translating into significant potential upside in the share price of KAT from the current price of $0.70.
Strong demand for electric vehicles will continue to drive cobalt prices
As discussed above, Katanga Mining shares rallied strongly on rising cobalt prices and looks fairly valued at current levels. However as cobalt prices continue their upward momentum, the share price of Katanga Mining should also continue its upward momentum, as a small change in cobalt price will result in significant revenues and cash flows and the resulting valuation for KAT.
Global cobalt and lithium prices are being driven primarily by strong demand for electric vehicles. Cobalt is a key component of lithium-ion batteries used in electric cars, smart devices and other consumer electronics. According to the business intelligence company, CRU Group, global consumption for refined cobalt is estimated to reach 100kt in 2017 and is forecast to grow at an average rate of ~5% percent for the next 10 years. According to CRU, electric cars and plug-in hybrid vehicle sales could reach 4.4 million in 2021 and ~6 million by 2025.
Outlook
Although Katanga Mining’s share price has risen sharply over the past six months, we believe there is further upside left as cobalt and copper prices are expected to continue their upward momentum. The commencement of production in 4Q17 will be the key short-term trigger for the stock.
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