Building North America's Next Primary Cobalt Mine

February 3, 2015

Sherritt International - Massive Upside As Cobalt Prices Revert


Just as the China demand story sent cobalt prices soaring 300-1000%, global adoption of electric vehicles should create a similar pricing environment.

Cobalt Has Already Experienced a Major Structural Upheaval

Today the main source of cobalt is as a by-product of copper and nickel mining. The copper belt in the Democratic Republic of the Congo and Zambia yields most of the cobalt mined worldwide. Although the majority of the worlds cobalt supply is originally sourced from the DRC, only a fraction of this is actually refined within the country itself. Primary export markets for DRC's production are China, Finland, Zambia and Belgium. Here, these materials are either refined into cobalt metal or into downstream chemical products or specialty materials.

Along with other major metals, China has become the single largest cobalt consumer in the world, sending cobalt production volumes skyrocketing. As can be expected, prices also dramatically readjusted with blossoming demand, with supply largely bottlenecked to high risk countries such as the DRC (source: U.S. Geological Survey).

Following a short but intense period of industry consolidation fewer than ten producers account for over 80% of China's total refined cobalt output. Having little cobalt resources of its own, China imports over 90% of its cobalt raw material requirements from the DRC.

While Lithium Gets Most of the Press, Cobalt Should be a Major Beneficiary of Electric Vehicle Adoption, Setting the Stage for Yet Another Structural Shift for the Metal

Current prices for cobalt are around $35,000/t. Prices have generally moved up with demand over the past 30 years but have shown volatility due to supply risks in major cobalt producing countries. Just as the China demand story sent cobalt prices soaring 300-1000%, global adoption of electric vehicles should create a similar pricing environment.

Cobalt cathode chemistry is the product of choice for applications requiring thin, flexible and high energy density batteries (e.g.. Li-ion batteries). According to data compiled by Navigant Research, electric vehicles have the potential to more than double cobalt demand over the next 20 years. Already, demand for rechargeable batteries in laptop computers, tablets, mobile phones and other portable electronics have been major drivers of global cobalt consumption over the past decade. Electric vehicles should provide the next leg of this long-term growth story.

Business intelligence firm CRU Group believes that the current global cobalt surplus will be quickly eaten up and the market will be in a deficit by 2017. The firm's senior consultant Panos Kotseras wrote in a report issued in December, "The cobalt market is expected to become tight due to a combination of robust demand and absence of a concrete project pipeline."

As One of the Major Global Producers of Cobalt, Sherritt International Has Significant Upside

Sherritt International (OTCPK:SHERF) has two major JV's that product cobalt: their Moa JV and their Ambatovy JV. Sherritt has a 50/50 partnership with General Nickel Company S.A. of Cuba (the Moa Joint Venture) and a 40% indirect interest in two companies (together the Ambatovy Joint Venture) that own a significant nickel operation in Madagascar. Both of these JV's produce Cobalt as a by-product of Nickel mining.

As mentioned, cobalt demand is expected to almost triple over the next 20 years, with electric vehicles supplying ~50% of demand by 2035 from a nearly 0% base. Should prices readjust to reflect this demand shift (as cobalt prices have historically done), the additional EBITDA generation would be exceptionally meaningful for Sherritt.

A reversion of cobalt prices back to their historical highs would add an additional ~$75m in EBITDA assuming flat production volumes. At it's current valuation (6.3x Adjusted EBITDA), this would imply roughly 74% upside from an increase in cobalt prices due to rapidly growing demand.This however may underestimate the true share price appreciation potential of another dramatic rise in cobalt prices. Over the last period of rapidly rising prices (2002-2007), Sherritt's share price rose ~400%. Given that the Electric Vehicle story should be less volatile than fluctuating Chinese demand, this impending growth driver for cobalt could provide a more stable demand floor with similar price action upside.

With the collapse in cobalt prices stemming from the financial crisis, now may be an extremely attractive time to enter an investment with long-term secular growth drivers at a depressed valuation.

To read the full article please click here to visit
View the main Cobalt News page.