The Ubika Battery Metals Index, composed of 10 lithium and 10 cobalt companies, has rallied 56% over the past year, with some company valuations surging more than 100%. With an implied shortage of lithium and cobalt in the market, we examine which producing companies are best positioned to rise from this battery frenzy.
The comments above & below are edited ([ ]) and abridged (…) excerpts from an article written by Alex Cutulenco and Jassie Bhathal (Gravitas Financial Inc.)
While automakers worldwide are racing to produce electric vehicles (EVs), battery metals continue to climb as both lithium and cobalt see ever-increasing demand. The forecasted under-supply of battery metals is further complicated by conflict-ridden Congo, which supplies nearly half of the world’s cobalt, as it has recently been under scrutiny for inhumane working conditions and employing child labour.
…Spot prices for Cobalt have been on an upward trajectory since the start of 2017, surging 66% from US$15.50/lb to over US$25/lb today. Demand for the metal is expected to proliferate with the acceleration of Tesla’s Model 3 production and other EVs, as well as demand for energy storage solutions. The rally behind Cobalt has been further supported by increasing investor excitement and a fragile supply chain; nearly half of global cobalt supply is produced in the unstable Democratic Republic of Congo (DRC). High-profile funds in Switzerland and China have also been buying physical stocks of cobalt to lure investors, which has triggered panic buying by cobalt users along the manufacturing chain. The near-term shortage of cobalt has created bubble-like conditions, which are likely to dissipate once more supply comes online…
1. eCobalt Solutions Inc. (TSX:ECS)
eCobalt Solutions Inc. (“eCobalt”) is a mineral exploration and development company with properties in Canada, the United States, and Mexico. eCobalt’s stock price has more than doubled year to date, as it received financing to develop its primary asset, the Idaho Cobalt Project (ICP), which is the only near-term and fully-permitted primary cobalt deposit in the United States.
With the fragile state of the global cobalt supply chain, eCobalt is leveraging its ICP asset as original equipment manufacturers (OEM) shift away from conflict-ridden cobalt supplies from the Democratic Republic of Congo (DRC)…
Recently, Apple Inc. (NASDAQ:AAPL) announced that it had temporarily stopped buying cobalt mined by hand in Congo, while continuing to deal with problems concerning child labour and unsafe working conditions. Under securities law, companies are required to certify their materials do not come from militia-controlled mines. Apple publishes a publicly-available list of cobalt smelters just as it does for its conflict mineral smelters to ensure its supply chain is ethical and humane. As more and more companies adhere to their corporate responsibility, companies such as eCobalt, which operates outside of the DRC, will benefit from operating in a safe, conflict-free jurisdiction.
Earlier in Q1/2017, eCobalt released a third-party market study that established ICP’s cobalt sulfate samples had met nickel-manganese-cobalt (NMC) and nickel-cobalt-aluminum (NCA) battery technologies. With near-term production expected to commence in 2018, it would not be surprising for eCobalt to secure an off-take agreement with an OEM by the end of the year.
Currently trading at a price-to-book multiple of 2.1x, eCobalt Solutions Inc. is trading at a premium to its Cobalt Index 10 peers as well as the mining industry average of 0.7x. Although the updated feasibility study will likely increase the net asset value of the IPC project, it will not be enough to justify eCobalt’s astronomical valuation.
2. Katanga Mining Ltd. (TSX:KAT)
Katanga Mining Ltd. (“Katanga”) is a mining company focused on the exploration, development, and production of its large-scale copper-cobalt property, the Kamoto/Dima mining complex, in the Democratic Republic of Congo. Katanga has been punished in the markets due to underperformance and missed production guidance for its two main mines in the complex: Kamoto (underground) and KOV (open-pit).
In September 2015, Katanga announced an 18-month suspension of operations as the low-price environment for copper no longer made mining feasible. The shutdown reduced Congo’s copper production by 15% overnight. As a result, sales levels dropped significantly in Q4/2016 to $4.0mm from $10.8mm in Q4/2015, representing a decreased of over 60%.
However, on February 13th, Glencore PLC (LON:GLEN) acquired an 86.33% stake in Katanga Mining, as it plans to turn things around and restart the mining operations in 2018 now that both copper and cobalt are trading at more attractive forward strips. Katanga fits like a glove in Glencore’s portfolio, as Glencore had also recently acquired Mutanda Mining SARL, a high-grade copper and cobalt producer also located in the Lualaba province in the DRC. Mutanda has been consistently processing over 200 ktpa of copper cathodes and 24 ktpa of cobalt in hydroxide, and Katanga will definitely benefit from Mutanda’s operational expertise.
On March 31, Katanga Mining released an updated NI 43-101 technical report for its material assets in the DRC. The Kamoto and KOV mines have combined measured and indicated resources of 16.4 Mt of copper and 1.9 Mt of cobalt, enough to give Katanga the potential to be Africa’s largest copper producer and the world’s largest cobalt production company.
Glencore’s interest has brought significant traction to Katanga’s stock, as it has more than doubled since the announcement of Glencore’s investment. Having said that, Katanga is still trading much lower than its 2007 highs of over $20/share.
Looking forward, if Katanga can produce copper and cobalt with conflict-free operations—low cost and ethically humane—as well as synergistically benefit from Glencore’s Mutanda asset, Katanga Mining Ltd. is well positioned to become a mid-tier mining company. Currently trading at a P/B multiple of 0.5x, Katanga appears to be undervalued as it is trading well below its Cobalt Bubble Index peer average of 1.0x.
3. Lithium Americas Corp. (TSX:LAC)
Lithium Americas Corp. (“LA”) is a resource company focused on the development of two lithium projects: the Cauchari-Olaroz project in Argentina and the Lithium Nevada project in the U.S.
- The Cauchari-Olaroz project is a 50/50 joint venture with Sociedad Quimica y Minera de Chile (SQM) and is believed to be the world’s third-largest lithium brine resource.
- Located in the lithium-triangle of Argentina, it is a source of the cheapest and highest-quality lithium brine deposits in the world. Click here for our expert article, where we present the case for Lithium Americas’ potential to become the world’s lowest-cost lithium producer.
- The Cauchari-Olaroz project is fully-permitted with construction currently underway. The site benefits from excellent infrastructure, including access to power, water, paved highways, and a deep-sea port.
- A March 2017 feasibility study supports operating costs of US$2,495/t of battery grade lithium carbonate, generating average annual EBITDA of US$233mm and an pre-tax NPV of US$1,266mm. However, it is worth noting that these estimations utilize a very conservative lithium carbonate price of US$12,000/t and a discount rate of 10%, compared to forward projections of lithium reaching as high as $20,000/t by 2021 and the mining industry average discount rate of 8%.
- Additionally, an upcoming feasibility study for the Cauchari-Olaroz project is expected to double production capacity to 50,000 tpa over a two-stage mine plan, which is expected to drastically increase the NPV and reduce the payback period of the project.
- As for the Lithium Nevada project, an upcoming Pre-Feasibility Study (PFS) is expected to be released in 1H/2017, which is likely to boost the stock.
- The Company is advancing the Nevada project with a new highly-skilled technical team that is focused on producing lithium hydroxide from clay.
- A Subsidiary of LA is RheoMinerals Inc., which manufactures lubrication products from clay that is used in oil and gas exploration as well as animal feed and industrial coatings. RheoMinerals is another value that entails further upside into shares of Lithium Americas.
Looking ahead, Lithium Americas has secured US$286mm in debt and equity financing (at $0.85/share) and expects Stage 1 production of 25 ktpa by early 2019 at Cauchari-Olaroz.
Currently trading at a P/B multiple of 4.4x, Lithium Americas is trading at a premium to its Lithium 10 Index peer average of 3.7x. The valuation for the index and stock itself seems superfluous considering the mining industry P/B average of 0.7x.
Nonetheless, the future of Lithium Americas Corp. seems bright as lithium carbonate prices continue to rise and it employs operational learnings from its Cuachari-Olaroz JV partner SQM—the world’s largest lithium brine producer.
Industry Disruptor: Vanadium
Industry experts are touting Vanadium as the next big wave after lithium batteries to be used as grid, microgrid, and off-grid renewable electricity storage.
Although Li-ion batteries have taken the lion’s share of the energy storage market, technological advances in flow batteries have brought down costs and improved their safety and environmental profile for utility-scale installations.
Compared to lithium-ion batteries, vanadium redox flow batteries (VRB) are non-flammable, environmentally friendly, and have significantly longer lifespans (10,000 cycles) with less decay—maintaining up to 90% of their capacity over two decades.
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