November 24, 2016

Tesla Loses When China has Control of Congo's Cobalt

On Sept 22 this year Investor Intel wrote about the impact of the Congo’s war on the price of cobalt. The devastating conflict has been responsible for 6 million deaths, with the expected negative impact on the Congo’s economy. Political corruption and instability tied to the November, 2016 presidential elections have added to the suffering. Copper production is at risk, taking with it the cobalt by-product, impacting global cobalt consumers including Tesla Motors.

The Tenke Fungurume Mine in the Congo produced 157,671 metric tons of refined copper and 11,669 t of contained cobalt in hydroxide in 2012 (from the US Geologic Service). Tenke is owned as to 56% by global powerhouse Freeport-McMoran Inc., 20% by the Congo’s state mining company Gecamines, and 24% by Lundin Mining Corp.

In May, 2016 Freeport announced it was selling its Tenke share to China Molybdenum for USD$2.65 billion, which gave Lundin three options: exercise a right of first refusal to buy Freeport’s share on the same terms, sell its own stake to China Moly or a third party, or simply allow the China Moly sale to proceed.

After receiving several extensions, Lundin last week announced it was selling its 24% stake to Chinese private equity firm BHR Partners. The sale price was roughly USD$1.14 billion in cash, with additional cash possibly payable to Lundin dependent upon copper and cobalt prices over the next 24 months. The sale price has the same implicit value as the Freeport sale to China Moly.

Lundin also waived its right of first refusal to buy Freeport’s share of Tenke, and also received a commitment for a $100M break fee secured by a letter of credit, in the event the BHR sale does not proceed.

Freeport anticipates its sale to China Moly will be completed before the end of 2016. Lundin will close its sale in early 2017.

This means that two Chinese owners will control one of the world’s largest copper mines and a source of much of the world’s cobalt. The world is already experiencing a global cobalt shortage as production falls and consumption skyrockets due to its use in the battery market. (Roughly 60% of the weight of your cell phone battery is cobalt. Depending on the energy density needs, somewhere between 6 and 12% of the weight of an electric car’s battery is cobalt.)

Congo Dongfang Mining, a wholly owned subsidiary of the Chinese mineral company Huayou Cobalt, is one of the largest mineral processors in the Congo. Other Chinese processors in the Congo include Zhejiang Huayou Cobalt Ltd and Huayou Cobalt. They sell the processed cobalt to end users like battery manufacturers in other parts of China, South Korea and Japan. Not much of that trade is directly with North American companies.

What does this mean for us? North America is import dependent for cobalt and cobalt-derived products like paints, pigments, magnets and oxides. If China controls the production and processing of cobalt, the western world becomes highly dependent upon China’s whims. It also means that China will have some ability to influence cobalt pricing – imagine the leverage through the London Metals Exchange if China simply backlogs cobalt sales for several months.

What is also means, closer to home, is that Tesla Motors needs to visit RealityLand. Dating back to 2014, Tesla has repeatedly said that it would not look overseas for the graphite, cobalt and other materials needed for its Gigafactory. The math tells us that this is impossible.

We’ve opined on this topic before. Here are the facts. Tesla has pre-sold roughly half a million units of its Model 3. Each of those cars will have an array of batteries which will require roughly 15 kg of cobalt per car. That totals 7.5 million kilograms (8400 tonnes) of new cobalt demand, or roughly 8% of the world’s annual production. In the aggregate, Canada and the USA together produce roughly 3% of the world’s supply, nowhere near Tesla’s needs for just one of its models.

Christopher Ecclestone earlier in the year wrote about Tesla’s wistful supply chain, and described “a frighteningly long table with the names of Cobalt projects that had been stopped in their tracks, mothballed or permanently decommissioned”.

The only advanced stage, near-term, environmentally permitted, primary cobalt deposit in the United States is the much-anticipated Idaho Cobalt Project, owned by eCobalt Solutions Inc. (TSX: ECS | OTCQB: ECSIF) (formerly called Formation Metals). eCobalt is roughly 12 months from initial production, and it will take a couple of years past that to hit full production. Even running at full efficiency, eCobalt will supply roughly 1,000 tonnes of cobalt per year or about 1% of the global market, for a 12 year life of mine. That’s not enough for Tesla.

From a compliance point of view, Tesla needs to make better disclosure of its supply chain issues. Functionally, it needs the Chinese-processed cobalt, whether directly or through an intermediary like Panasonic, or the Gigafactory will end up being the world’s most sophisticated dusty warehouse.

Expect cobalt prices to continue their march upwards, with the higher costs being ultimately passed along to the end consumer.

Read the full article here.