Palisade Research - Wed, Jun 14, 2017

Cobalt Set To Rise To By 130%: (V.KBLT) Cobalt 27

picture of blue colored batteries

Palisade Research was one of the first to begin coverage on cobalt.

On October 26, 2016, we released a primer outlining the fundamentals of cobalt, and concluded that due to insufficient supply and surging demand, there will be an inevitable increase in cobalt prices. We forecasted in the next five years, cobalt could more than double from its current price of ~$13.00/lb to over $30.00/lb.

Less than one year later, cobalt is now trading at $25.63/lb, and the fundamentals are even stronger. We re-examined our forecast, and feel comfortable expediting the time frame, and therefore increasing our forecast to $60.00/lb.

To reiterate our supply concerns, 60% of the world's cobalt reserves originate in the Democratic Republic of the Congo. Within the DRC, 20% of the cobalt exported comes from the hands of underage artisanal miners, something that has not escaped the public eye.

bar chart of raw cobalt production in thousands of tonnes and forecast by region from 2009 to 2020

Amnesty International has been able to trace cobalt mined by artisanal miners to some of the world's most well-known electronics companies and car manufacturers, including Apple, Microsoft, Samsung, and Volkswagen. This means end-users will either have to enforce higher standards, or look elsewhere for their supply.

Our concerns are also exaggerated by the fact that 98% of cobalt production is in the form of by-product from copper and nickel production (60% from copper, 38% from nickel). According to our analysis, the top 15 cobalt producing mines in the world account for 50% of the world's cobalt supply.

pie chart of 2015 cobalt production by source

We believe there is a supply crunch transpiring, and will emulate the events of 2007. This time around, it is not China's insatiable appetite, but the electronic vehicle revolution. Countries will begin to hoard supply to ensure cobalt strategic stocks are maintained at healthy levels. The United States has already deemed the metal a critical metal, which means it is essential to the country's economic health and national defense. In 2007, the supply squeeze peaked when the DRC placed a moratorium on all cobalt exports. The chain of events resulted in cobalt prices increasing from $15.00/lb to $50.00/lb.

While we cannot foresee a black swan event such as an export moratorium, we do believe the future demand is enough to propel it forward. The Paris Declaration on Electro-Mobility and Climate Change targets 100 million EVs by 2030, and this will require an increase in annual cobalt production by at least four times. This equates to a forecasted CAGR of 6.9% from 2016 to 2020.

line chart of projected cobalt supply and demand in thousands of tonnes from 2010 to 2025

The Newest Way To Participate In The Cobalt Revolution

Cobalt 27 made the news in a big way.

Headed by seasoned resource investor, Anthony Milewski, Cobalt 27 announced it will raise $200 million to acquire physical cobalt, streams and royalties, and other alternative investments. This mandate gives investors direct leverage to cobalt prices, blue-sky growth through streams and royalties, all while limiting exposure to operational and capital risks.

Cobalt 27 currently has the option to acquire up to 2,157.5 tonnes of cobalt, including 1,486.5 tonnes of premium grade and 671.0 tonnes of standard grade cobalt.

table of cobalt grades, sizes and values which Cobalt 27 has options on

The company has also entered into 6 agreements to acquire royalties on 8 exploration-stage cobalt properties.

table of royalties which Cobalt 27 has options on

Unlike exploration companies, Cobalt 27's burn will be low. The company projects expenses of only $2 million per year, which include storage costs of ~US$0.03/lb of cobalt and insurance costs of ~0.1% of the total cobalt value.

From what we hear, the current offering is fully subscribed by institutions. We see this as a great opportunity for retail investors to come in with the smart money. There are no other vehicles like this in the market; Cobalt 27 is a 'must own' if you want to invest in cobalt or the electric vehicle thematic more generally.

It is important to note that other vehicles and holding companies on the TSX have a history of trading at significant premiums to NAV, especially during periods of bullish sentiment. Take Uranium Participation Corp, the uranium holding company, during the last uranium bull:

line graph of T.U Uranium Participation stock price versus net asset value from June 2005 to May 2007

If you believe in the fundamentals of cobalt, reach out to a broker and indicate your interest. You may be able to get a piece of the offering before the premium really opens up. The deal prices tomorrow.

To read our full primer on cobalt, please click here. publishes interesting contributor articles in addition to its own content. We have not verified any of the above details.

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