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How to invest in cobalt

The Oregon Group sits down with Nick French, a consultant with over forty years experience as a consultant in the cobalt market, to discuss the best approach to investing in cobalt.

“I think it’s one of these things that watch what people do, not what people say, because within months of Mister Musk making a high profile strategy on alternative non-cobalt batteries, it came out that they Tesla had bought a long term contract from Glencore for large amounts of cobalt per year.

It was a pretty telling indicator of probably what the inside thinking was at Tesla, and it wasn’t cobalt is no longer going to be required”

— Nick French, consultant, cobalt

In the wide-ranging discussion, Nick discusses the supply and demand drivers behind cobalt mining and investment, old and new jurisdictions — including the Congo and Indonesia — as well as the impact of new electric battery chemistries on the cobalt market.

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Full transcript:

My name’s Nick French. I’ve long been retired from the front end of cobalt, the cobalt industry, but I have kept a finger in the pie in form of being an advisor and a consultant to a couple of groups since I stepped back. So, if it’s a fascination for lifetime, it remains a fascination now, even though I got directly involved. And, if you were a new investor, looking to get involved in the cobalt market. What, just tell us a little bit about cobalt itself.

And just a general kind of, you know, a general knowledge question about what actually cobalt is and the market. Okay. cobalt the first thing to say is important about it. Cobalt is almost without exception, not mine for its own right.

It is a byproduct. That is produced when you’re digging up nickel or when you’re digging up copper. And so one of its key characteristics over the thirty, forty years I’ve been involved has been price volatility because the supply of cobalt is not able to be adjusted to the demand. It happens to be what comes out as a small percentage of the nickel and the copper that’s dug up.

And so the combination of that being a byproduct and the fact that a very large part of it is produced in an exotic part of the world, ie Central Africa, and a large part of its refining is produced in a slightly opaque territory of China, where pretty much eighty, eighty five percent now of certainly the battery making capacity is located, means that for the both for investors and analysts, it’s a very difficult, item to have clear sight on and has a rather exotic if you want, daring do element about it. And the kind of the demand factors for this market It’s growing immensely, and one of the features that makes it more difficult to predict price for the future is that both demand and supply are growing almost geometrically.

So again, if we go back to those forty years when I first got in the business, the vast part of, was in the form of metal. There are very few chemical compounds produced with cobalt, and the total life was about twenty thousand tons a year. Currently, it’s round figure either side of two hundred thousand a year, of that two hundred thousand, only about thirty odd thousand is in the form of metal, pure metal. The balance is in chemicals that comes out essentially, produced as hydroxide and goes for the most part into the battery field and is, anticipated will continue to grow both in demand and supply in the years to come.

So when we get round to talking about price, the issue is going to be not which is going up and which is going down, but which is going up faster. And that tension that you talked about between the metal and now kind of the EVs, tell us about that because that’s kind of all over the place at the minute. As I said, just about thirty thousand tons a year of metal it’s produced, and getting on for a balance called one hundred and sixty, one hundred and seventy thousand tons that starts its life as hydroxide. So if we look at the metal side, the industries that require metal specific can’t use hydroxide are essentially what we classify as the superalloy uses.

They are making jet engine blades for commercial airliners, for military airliners, for military planes, I should say, for, surgical implants, new hips, new knees, etc, for land based gas turbines for producing power from wind rather than fossil fuels. All of those for various reasons are extremely healthy. Commercial airlines obviously stop dead during COVID, they’re now playing catch up, military planes, obviously, for all the wrong reasons are being, you know, focused on again now. We’ve got problems in Ukraine.

We’ve got problems in the Middle East. We should come on to China and you know, the potential for ugly moments concerning Taiwan. So that’s all booming. Again, surgical implants stop dead during COVID for obvious reasons.

Now, everybody who is in my generation is thinking about their aching hips and their aching knees and again, playing catch up. And again, with the understandable concern one has for climate change and the damage done by fossil fuels, turbine blades are becoming a priority in many areas. Again, cobalt is included in that. So there is a booming demand, as any trader in the street will tell you, I’ve just come back from what they call the mating season conferences of long term contracts.

And I’m told these have been hot in terms of long term contracts for that superalloys sector that I’ve just described. Same with metal on the other side, the producers of it, people like Vale, people like, Xstrata, or used to be called Falconbridge, and Sumitomo at the Japanese. For various reasons, they’re all down in production. Vale, for example, has just started underground mining, open pit mining for its source, and that slowed down the rate of production.

There have been technical problems at Sumitomo. So those productions are down. What was available and most of that industry, by the way, the consumption side of it, a large part of it, if not in Europe, is in the USA. The USA for the geopolitical reasons we ought to talk about geopolitics in a moment, have effectively banned Chinese cobalt metal coming into the States with a higher tariff.

So what was available to America is not, so therefore, there’s a suction down from the European market of the Vale that would have gone to Europe, the Falconbridge that would have gone to Europe. Sumitomo that would have gone to Europe. All being sucked back into the States. Russia produces or has the capacity to produce large amounts of alloy grade, super alloy grade cathodes, And again, because of the various restrictions and sanctions surrounding the war, that is not available in North America.

So all of that puts an upward pressure on the metal. That’s the metal side. On the hydroxide side, obviously, there’s a lead lag between production plans and demand. So the demand, as you remember, before we went into COVID, every business newspaper we picked up talked about EVs, new battery requirements, new giga plants being built, and the subsequent result of that was the commitment to CapEx, to opening up new mines, a lot of them financed and run by the Chinese, and a lot of them in, in Congo, in Africa.

But they take two or three years to come into production. Those are now coming into production. So, for example, one of the large producers is, Chinese. China Moly, it’s called.

Tenke Fungurume in Congo. They’ve all increased their capacity. They’ve, put it I can’t pronounce it correctly. Is it Kisanfu, I think in Congo, they’ve put on another twenty or thirty thousand tons, and that’s now coming up out of the ground, just at a time when, for economic reasons we can look back at why, sales of EVs in China have actually slowed down for the time being.

That will all catch up. It’s a bit if you imagine towing a car with a tow rope, and the towing car slows down a bit. The car that’s being towed suddenly catches up and the tow rope goes tight. It goes loose.

I beg your pardon. And that’s the state of hydroxide, that the tow rope’s gone loose. Now eventually, my belief is that electric vehicles still in healthy shape, still growing. Sales are still growing globally.

Will pull away again, and that tow rope will come tight, and hydroxide will tighten up, but there is a disconnect if you want to it, even a tension between the two going in different directions in the short term. We should mention, and that’s obviously been implicit in everything I’ve be discussing. The geopolitics of it all. You know, cobalt happens to be a pawn on the chessboard, but there are a lot of shifting sands going on, and one of the main themes that we’ll read about in our newspapers, is this whole US, I’m gonna call it USA rather than the West, but obviously the West in many cases falling behind the States and China.

To cut a long story short, China managed to get ahead of the rest of us, build up a, a battery production capacity, get into Africa, get its claws into the raw material flow. As we know, they promised many, not promise they’ve gone ahead and given many countries in Africa, financial aid, supposedly built roads and railways and hospitals and infrastructure in return for advantageous positions in raw material supply. With all that in hand, China got way ahead of the West in electric vehicle production, in battery production, and for the last couple of years, the West has seen its vulnerability in this quarter and has desperately been trying to play catch up.

So for, let me just take one example, there’s a mine and a production capacity in Congo called Chemaf. They, have been supported to a great degree over the last few years by Trafigura, who is, as you know, a large mining and finance company who, telling a long story very short, cited it isn’t for them. So the Chemaf production capacity in Congo is now effectively up the sale. The USA and the EU are desperate that this capacity should not fall into Chinese hands.

So there is, I’m not a party to the details of it, but I’m sure behind the scenes, there are a lot of Americans, whether they’d be industrious, bluntly whether they be CIA, in the Congo at the moment trying to figure out how they cannot lose this price asset, again, another price asset to China. And the Chinese, I’m sure, equally, helped by all those lack of handicaps that we in the West set ourselves to jump over in this area are working out how they can grab it all. So I think this, and this is just one small corner on the chessboard, there’s some tension going on there right now over that particular project.

And, for example, Chinese stock pile. It’s called the SRB, a Chinese government stock pile, has regular purchasing programs for cobalt metal. For the last few years they bought, and remember I mentioned metal is only thirty odd thousand tons, they bought five thousand tons of it no more the year ago. And I think a week or two ago, it’s just either they’ve announced or it’s leaked out.

I’m not sure if it’s official or not official, but it seems to be fact. That they are aiming to buy another three thousand plus tons over the next few months. Technology, technological changes, particularly in the battery metals. Now, I don’t kind of expect you to be like, I don’t think many people will be okay with all of the technological research going on.

But there are some major trends. And, also pulling on your experience on how long these things can take to come into the system. So I’m wondering, you know, what does technological …

I can’t say that now…. technological change mean for the cobalt market. I suspect we’re particularly talking about battery metals here. We we are talking about batteries, and obviously that’s been a pivotal point ever since the lithium cobalt manganese, battery was the and the technology was the main runner. Now you have, liquid iron phosphate, and you’ve got other alternatives as well.

And we’ve always got an eye on them. I think what’s telling, and this is now a year or so ago, is Tesla, by way of example, major user, of course, of these batteries and now have their own gigafactories in partnership with some of the Japanese partners, around the world in particular in the States. Were aware of the vulnerability at that time to cobalt and, of course, to nickel. I can’t speak for nickel.

I’m sure one of your previous correspondents Martin Vydra had something to say on that. He is an expert. But they Tesla, public knowledge, you know, talk to any metal trader, and they’ll know that Tesla were sniffing around looking for nickel, high grade first class nickel. And were sniffing around looking for cobalt.

And then decided that, since they couldn’t get the right answers on cobalt, they would go into an alternative strategy which is Mister Musk standing up saying, we’re not going to need cobalt anymore. We’ve got these secret projects going for alternative non cobalt containing battery raw materials and, technologies, and we won’t need cobalt. But I think it’s one of these things that watch what people do, not what people say, because within months of Musk making a high profile, strategy of making those announcements. It came out that they Tesla had bought a long term, I think it was a five year contract, from Glencore for large amounts of cobalt per year, which along the lines of see what people do, not what people say, was a pretty telling indicator of probably what the inside thinking was at Tesla, and it wasn’t cobalt is no longer going to be required.

One argument I’ve heard on this is, you know, yes, the technology is gonna come in, but it will take time and at the same time, you’ve got these projections for electric vehicles, you know, just to keep rising. So this sort of the balance of okay, so demand may be falling just for individual batteries, but for batteries as a whole, for the number of batteries, it’s gonna keep going up. Even if cobalt per battery is reduced. So that’s per battery, let’s say, in a standard car is reduced.

That doesn’t mean that we’re gonna need less cobalt, because of course, if cobalt per battery reduce by fifty percent, but you’re using, or you’re producing four times as many batteries, you still need overall net net two times as much cobalt, and that’s the general pattern. So unless the whole trend for electric vehicles reverses, which despite its challenges, its challenges on, you know, mileage you can get up a battery, where to recharge them, etc, which are still concrete limitations and the items that make individuals like you and I hesitate as to whether we go to electric vehicles or not.

The overall number of batteries, sorry, vehicles will increase. Remember that China is a very large part of the global sale of electric vehicles, and we all know what’s happening there. And so I think the amount of cobalt required for batteries will continue to increase. So, obviously, we’ve been talking about Congo.

And, you know, a huge amount of supply comes from that, but then we’ve got this stuff going on in Indonesia. Yes. You’re right. You put your finger on it.

Indonesia is the new frontier. And it’s really opened up since I stopped being involved directly in it. But, If you look at the stats and there was a conference last week in China, in Shanghai, the annual Antaike conference, which is the big nickel cobalt conference, and they forecast some figures going through over the next couple years, I’ve got them here somewhere. But, they talk about today China accounts for, I think, about seventy six percent of refined cobalt, but if you go back to cobalt, the raw cobalt coming out of Congo.

Congo is currently about seventy or eighty percent, and Indonesia about fifteen percent. But in two, three years’ time, Indonesia, they they think it’s going to be twenty five or thirty percent. So it’s a major area to watch. You know, Congo’s been the raw materials source.

China’s been the refining product, certainly on the battery side. And it’s that they hold all the cards. Having any other party, in this case Indonesia, that’s going to be a significant supplier raw material has to improve global supply stability and take away from the risks that come with one source dependence. If you’re interested in what you’ve just been talking about.

Yes. I mean, how do you get what are the what are the ways to get exposure to cobalt. Right. It is very opaque still.

Very difficult to get into. And does not give us the perfect, opportunity like buying BP shares if you’re interested in oil or, you know, Tesla shares if your interest in the automobile industry. There are a number of ways in, none of which are perfect. You can buy shares in a large mining company such as Glencore, who produce round figure, fifty thousand tons of the two hundred thousand tons of cobalt produced per annum.

But of course there you have the question of dilution because they have many other activities in coal, in iron ore, in oil, in other metals, And so, even if cobalt prices quadruple, it doesn’t mean Glencore share price do if the coal price goes down or the oil price goes down. You can invest in some new projects who haven’t yet put a spade in the ground, but are promising all sorts of things for the future. There are a number of those. I won’t go through them at the moment, but they they’re all online.

You can look them up. And they are really a double or quits option and it has to be said in the last couple of years, a couple of them, which, a number of our listeners maybe will know who I’m speaking about have been mostly quit rather than double. In 2013, I think it was 2010, 2013, the LME, the London Metals Exchange opened a contract on cobalt which tried to give investors exactly that. But, it has been, for a number of reasons we can go into, relatively illiquid and is now subject to your opinion on that, mostly redundant.

Most recently, one of the markets in the USA, the CME, it’s referred to, has become an active financial instrument on the cobalt price. It’s a financial settlement, so you don’t have to worry about things like warehouse insurance and drums and packing and certificates of analysis, it’s totally a price against another price and a financial settlement. But it’s priced out at the end of the day against what used to be the Metal Bulletin and now called the Fastmarket’s price. But again, it’s mostly for large corporations, some of the big end users, whether it be, BMW, Tesla themselves, Apple, do I believe hedge large numbers on it, as do some of the producers people like Glencore.

Again, not really suited to the smaller user because the small independent retail user, you and me in the street have to satisfy a number of financial credit points, which are probably beyond the value of your or my house, And secondly, you have to answer a number of KYC know your customer regulations because, of course, this market which it wasn’t twenty, thirty years ago, is now regulated, particularly when it’s a financial instrument, and any wrong doings or liabilities are carefully avoided. So that’s quite difficult for this small investor. There are a number of smaller traders in London, for example, but also New York who might consider you if you approach them, if you can meet KYC, if you can meet the financial clients who will sell you and hold for you small quantities of cobalt.

There will be margin requirements. There will be quite, I think, hefty buy sell, ranges between the buyer price and the seller price. So that may be quite useful if there is a major movement going on if the price is gonna go up to ten dollars to fifty dollars, and you don’t mind paying five of those to your broker in the middle. But if, again, we will talk about price outlook in the, in the immediate future.

If it’s going to be moving within a very narrow range, then those buy sell ranges on the trading in and out will nullify any benefits that you might have. So I think I’ve given you a lot of non answers, rather than the easy answer how to come into it. So I suppose, final thoughts is that basically, you know, cobalt’s been written off before, but don’t write it off again kind of thing. Is that where we’re at?

It will continue to be an important element. I’m afraid it’s not one as we said before earlier on. That makes itself immediately available to investors as an investment or a speculation or how you you want. But, as an industrial raw material, will continue to be significant.

And I think will more and more be considered if you look, again, we began this discussion by talking about where we were forty years ago and roughly where we are today. One of the ingredients within that, it’s become a lot more if you want a respectable metal for mining companies to consider as part of the, revenue flow you know, it’s now run by big companies, mining companies, whereas before it was a lot of individual opportunists. I think I remember, in the early days seeing to a company producing copper. Well, you know, what’s your total revenue, you know, what’s your profitability on your cobalt?

And they said, well, Cobalt, we don’t look at the profitability. We’re just whatever the revenue is from the Cobalt. We just reduce it from the cost of our copper production. But I think it’s notable now that in the accounting departments and the revenue departments, these large mining companies, they have a separate stream where they identify, of course, the copper or the nickel revenue and a separate stream for looking at the cobalt costs and the cobalt revenue.

So it’s it’s become a grown up member of the family rather than just one of the the little kids round the corner.

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