Over the last two years global demand for lithium has surged on the back of hype over an anticipated shift towards electric-powered vehicles, and investors have been keen to snap up stock in any miners with a stake in lithium production.
Shares in Galaxy Resources Limited (ASX: GXY) have surged over 450% since the beginning of 2016. Orocobre Limited (ASX: ORE) shares have more than tripled in price over that same time period, and shares in Pilbara Minerals Ltd (ASX: PLS) are also up 180%.
At their highest points many of these stocks were trading at unrealistic multiples, and have recently seen pullbacks in their share prices.
But the underlying demand for lithium isn't going away. As recently as September 2017, Bloomberg reported that annual electric vehicle sales are forecast to exceed 24 million by 2030, with most of that demand coming from China and the US.
But what's also crucial to understand is that in order to cook up a lithium ion battery you need a few other key ingredients as well. And one of them is cobalt, which makes up 14% of your typical battery.
It too has seen its price surge higher recently – a pound of cobalt has tripled in price since June 2017 to be now valued at around US$36.
But cobalt is currently a little more controversial than lithium.
More than half the world's supply of cobalt comes from the Democratic Republic of Congo (DRC). But political instability and a lack of legal transparency in the country poses big risks to the global cobalt supply chain.
Plus there is evidence of a "grey market" of cobalt flowing out of the DRC from mines controlled by insurgent militia that may employ child labour.
This has caused the giant companies fuelling cobalt demand – like Tesla and Apple – to seek out alternative sources of cobalt from ethical miners in other parts of the world. This could offer unique opportunities for some ASX-listed junior cobalt miners.
Newly formed Canadian-based First Cobalt Corp. CDI (ASX: FCC) claims to be the largest cobalt exploration company in the world. It owns upwards of 10,000 hectares of land in Ontario's Cobalt Camp region – an area which includes more than 50 past producing mines. First Cobalt also owns C$100 million in existing infrastructure, including the only permitted cobalt refinery in North America capable of producing materials suitable for use in lithium ion batteries.
Its share price rose almost 9% in Friday trading to $1.16 on the back of positive drilling results from its 2017 drilling program.
European Cobalt Ltd (ASX: EUC) is exploring and developing cobalt mines in Slovakia and Finland. Its 100% owned flagship Dobsina project in Slovakia was historically mined for iron ore, but the company claims the region also has high grade cobalt deposits. It is close to power and rail infrastructure, and the company hopes it can be a key source of cobalt for European automotive companies like BMW.
Investors didn't react favourably to the subdued quarterly activity report the company released to the market on Tuesday. Its share price shed about 15% of its value across two days of trading before rebounding slightly to end the week at 10 cents.
Another small cap cobalt stock with potential is Aeon Metals Ltd (ASX: AML). In December, Aeon received an $185,000 grant from the Queensland Government which it said would cover 50% of the costs of seismic survey and drilling activities at its Walford Creek Project in the state's North West. In a June 2017 investor presentation, Aeon estimated the value of the cobalt deposit at Walford Creek to be $4.4 billion.
Aeon is also raising $30 million through an institutional placement which will fund additional drilling in 2018 and strengthen its balance sheet.
After more than doubling in price over the last quarter of 2017, shares in Aeon have shed some of those gains in January and now trade at about 25 cents.
Foolish takeaway
These small cap cobalt stocks –and dozens others like them – are very speculative investments right now and carry significant risk. But for those investors who think lithium stocks are overbought but are still looking for ways to profit from our electric car future, they could be investments worth considering.
