Investor awareness of a possible cobalt boom has been growing, with the Australian Financial Review recently covering several supply constraints as well as a likely cause of booming demand – electric vehicles.
Due to the way cobalt is mined – predominantly as a by-product of nickel and copper – supply is sensitive to nickel and copper prices. With the price of these minerals very low compared to earlier in the decade, according to data from NASDAQ and Metal Bulletin, the supply of cobalt has come under pressure.
On the demand side of the equation, cobalt demand is expected to rise sharply due to strong forecast growth in the number of electric vehicles (colloquially referred to as 'EVs') and household energy storage. Cobalt prices have risen sharply in recent months and there's growing worldwide interest in cobalt miners. Here are two ASX-listed companies that could benefit from a cobalt boom:
Equator Resources Ltd (ASX: EQU)
This $50 million company made the news recently when it appointed Mr Paul Matysek as Chairman and raised $3 million in funding. Mr Matysek has a track record of growing small mineral companies into billion-dollar businesses, and investors like him a lot.
Equator Resources owns a number of cobalt tenements in Canada, which have predominantly silver-cobalt and nickel-cobalt mineralisation. After the latest acquisition this morning, Equator will be looking to use modern technology to re-evaluate these historic fields and firm up an estimate on the amount of cobalt available and the estimated cost of extraction.
With a $50 million market capitalisation, Equator is small enough to have decent upside as a speculative stock – just establishing a resource could be enough to cause the company to be revalued. However, this tiny explorer will likely require significantly more capital in the future. In my opinion it is a high risk venture and not suitable for every investor.
Tiger Resources Limited (ASX: TGS)
This copper miner recently completed a viability study investigating the cost of adding a cobalt recovery circuit to its Kipoi mine in the Democractic Republic of Congo (DRC). Further details are expected in the near future, but Tiger is sitting on an estimated 40,000 tonnes of cobalt, while a recovery facility has an estimated cost of around $22 million. This is significantly cheaper than the options available to several other would-be cobalt producers.
If it makes economic sense, adding cobalt capability would be relatively simple for Tiger, which already has an established mine in the region. The downside is that Tiger would have to raise capital or take on more debt in order to fund the facility, and the company already has a hefty debt balance; interest payments alone are crushing the company's profitability. Tiger is a very high risk venture in my opinion, but more attractive than some other cobalt companies which are either years away from production, or have only a minority interest in their cobalt tenements.
Foolish Takeaway
The cobalt industry in Australia is very early in its life. My opinion is that companies were caught off-guard by the growing potential for cobalt, and very few are in a position to benefit. Perhaps the most immediate benefactor could be BHP Billiton Limited (ASX: BHP), with its multiple nickel and copper mines and easy access to the capital required for cobalt recovery processes. As with all commodities, long-term success will go to the best managed and those with the lowest costs of production.
