Essential Power…Infinite Possibilities

March 27, 2015

Investing in Cobalt Stocks - Three Stocks for the Cobalt Bull Market

Investing in Cobalt Stocks - Three Stocks for the Cobalt Bull Market

(Panasonic, Freeport-McMoRan and Formation Metals Inc.)
Excerpt from Energy & Capital’s Editorial - March 27, 2015
Keith Kohl writes:
Regular readers of Energy and Capital know our editorial often focuses on two commodities: oil and natural gas.

And that’s for good reason…

As far as investment goes, oil and natural gas are two of the biggest moneymakers in the world.
But today I want to take a different approach.
Mind you, I’m not saying oil and gas are bad investments (they’re set up to see huge gains this year, actually), but I feel I wouldn’t be doing you justice if I didn’t mention the latest commodity I have my eye on.
The truth is, I might be the only one with eyes on it based on what I see in the financial press these days.
Anyway, if you’re reading this editorial on a laptop or tablet, you use this commodity…
If you watch television, it powers your remote, and if you have smoke detectors in your house (I hope you do), it keeps them ready to warn you if there’s a fire.
You probably already realize I’m talking about batteries. But there’s a crucial commodity that goes in each of these types of batteries that has dipped into very valuable territory on the open market.
And while many investors and analysts, including myself, are discussing lithium —- which is also used in batteries —- I’m talking about a commodity that is just as important but that hasn’t stuck in popular opinion, for whatever reason.
That commodity is none other than cobalt.
And if you haven’t been paying attention to the cobalt market, you’re sorely missing out on an incredible opportunity for growth and diversity in your portfolio.
Prices Look Bullish
Cobalt is predominately used in alloys because of its strength and ability to resist corrosion, so, naturally, most of the mined cobalt is used in metallurgy for things like gas turbines and jet engines.
However, cobalt has several other uses including chemical catalysts, gamma radiation, porcelain production, pigmentation for paint and glass, and, of course, batteries, which is why I like it as an investment.
Like I mentioned before, cobalt is an important component of both nickel-cadmium batteries —- which are commonly found in children’s toys and smoke detectors, among many other things —- and lithium-ion batteries.
Lithium-ion batteries give cobalt its most bullish upside because they’re the gold standard of rechargeable batteries throughout the world.
They’re used in your phone, laptop, tablet, and —- if you happen to have one —- Tesla Model S electric car.
Most of the world’s cobalt comes from the copper belt in the Democratic Republic of the Congo and Zambia, where mining is huge business.
Companies dig up cobalt all over the world, as you can see in the map above, but 55% of it comes out of the Democratic Republic of the Congo (DRC).
And political unrest in the African nation creates supply squeezes that affect cobalt prices greatly.
Since the late 1990s, various rebel groups fought civil wars against the government, and the price spike you see in the chart between 2005 and 2009 can be attributed to what’s known as the Kivu conflict.
I won’t bog you down with the complex geopolitical details, but it’s safe to say that strife throughout the nation caused serious damage to the mining industry. The resulting supply squeeze pushed prices above $50 per pound.
As the Kivu conflict ended in 2009, though, you’ll see the price begin to drop along with the global recession and stay relatively close to current levels around $12.50 per pound.
This price presents us with an opportunity to buy cobalt at what could be its lowest price for a long time.
You see, tensions are flaring once again in the DRC, as countrywide protests against president Joseph Kabila broke out earlier this year. There’s no telling if these protests could lead to more civil war and violence, but if they do, it could create another serious supply squeeze for cobalt.
Of course, a potential civil war is not a reason to invest in cobalt; rather, the metal is becoming so prevalent that it only makes sense to buy now.
Ways to Play Cobalt
I mentioned earlier that Tesla uses cobalt in its lithium-ion batteries for its Model S…
As far as cobalt is concerned, the construction and planned capacity of Tesla’s massive “Gigafactory” in Reno, Nevada shows a bullish future for the commodity.
Tesla uses cobalt in its batteries because it provides a much better driving range, while other companies like Nissan and Fisker use different, less effective metals.
Once the factory starts producing around 2017, it wouldn’t be a surprise to see other carmakers purchase their batteries from Tesla to get in on the electric car market, which is consistently growing.
However, I wouldn’t suggest an investment in Tesla at this point because the stock price is so high. Instead, I like Panasonic (OTC: PCRFY) because shares are just $13, and the company already partners with Tesla on its batteries.
Not only that, but Panasonic makes lithium-ion and nickel-cadmium batteries for other applications, too.
Of course, if you’re looking for a more direct play on cobalt, I would suggest Formation Metals (TSX: FCO). Although the company only trades for about $0.15, its mines aren’t in the DRC, which means it will garner a higher price for its cobalt if there is a supply squeeze due to political unrest.
But I understand if a penny stock makes you queasy, so I also suggest Freeport-McMoRan (NYSE: FCX).
The company’s shares trade under $20, it pays a 6.8% dividend, and it is diversified with other metals and projects besides cobalt.
I suggest you keep your eye on the cobalt market and these three companies in particular as lithium-ion batteries take over the rechargeable electronics market.
Until next time,
Keith Kohl
Follow Keith on Twitter: @KeithKohl1
To read the full editorial on the Energy and Capital website please click here
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