(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, July 5 (Reuters) - Wanna buy into one of the hottest commodities in town?
No, it’s not lithium. That’s so much last year’s thing. We’re talking about cobalt. And this one’s really hot.
On the London Metal Exchange (LME) the price for three-month cobalt has leapt from $32,750 per tonne at the start of January to a current $58,500.
This stellar near 80-percent price surge mirrors what happened to lithium prices a year or so ago.
The linkage is both metals’ evolution from niche applications to mainstream usage in the batteries that are now powering the green technology revolution.
If a minimum $58,500 bet is a bit too much for you, some bright hedge fund guys have come up with a cheaper option.
For just nine Canadian dollars you can now buy a share in Cobalt 27 Capital Corp, which made its C$200 million ($150.7 million) debut on Canada’s Venture Exchange last month.
Cobalt 27 describes itself as a “pure-play cobalt investment vehicle”, an alternative to investing in producers such as Glencore, for whom cobalt is one small part of a much wider portfolio.
Just don’t tell the automotive guys. Because if Cobalt 27 is right in its assessment there is much more upside to the cobalt price, there’s going to be some sort of reaction to a bunch of investors holding physical stocks of a strategic metal in short supply.
Cobalt 27 has used a sizeable chunk of its IPO proceeds to exercise options to buy a total 2,157.50 tonnes of physical cobalt. To put that figure into perspective, the United States Geological Survey (USGS) estimates global production of refined cobalt was 97,400 tonnes in 2015.
The metal will be stored in LME warehouses operated by C. Steinweg (Baltimore, Rotterdam and Antwerp) and the Vollers Group (Rotterdam).
A smaller part of the proceeds will be used to purchase royalties and cobalt streaming agreements from eight exploration-stage properties.
Seven are prospects in Canada, three of them operated by Palisade Resources Corp, and one in Vietnam, operated by Asian Mineral Resources.
The company’s ambition is to add to this list.
In essence, Cobalt 27 will offer capital appreciation, assuming the price of cobalt does indeed rise, and cash flow from royalties.
The whole thing is the brain-child of Pala Investments, which describes itself as “a multi-strategy investment company focused on the mining and metals value chain”.
Cobalt 27 Chairman and Chief Executive Anthony Milewski is also a managing director of the Pala team.
Pala is the largest shareholder with 19.64 percent at the time of the IPO, although the stake may have fallen slightly as an over-allotment option has since been partially declared.
Part of Pala’s holding represents payment for the supply of 626 tonnes of cobalt under one of the physical supply options.
Pala was one of several funds to have scooped up physical cobalt last year, which was when the metal first emerged from the specialist shadows into the investment limelight.
Another was Green Energy Metals Fund, part of the Portal Capital investment group, which is the second-largest shareholder in the new public entity having also supplied physical metal.
Not all of the cobalt sellers chose to convert to Cobalt 27 shares. According to the company’s final prospectus, “a total of 961.9 metric tonnes of cobalt are being acquired for cash”.
But Pala and Portal evidently think there is more to come from the cobalt story.
Or to quote Cobalt 27’s prospectus, “the company believes strong cobalt demand, coupled with challenged supply due to a lack of primary cobalt mines and political instability in the Democratic Republic of Congo, which is the largest supplier of mined cobalt, creates an attractive proposition for cobalt price appreciation.”
This is a market that is widely viewed by analysts as being in transition from a state of supply surplus to one of shortfall.
And as Cobalt 27 is happy to remind us, “in 2008, during the last multi-year cobalt supply deficit, the price of cobalt exceeded US$50/lb”. That’s equivalent to just over $110,000 per tonne.
There are any number of uncertainties in trying to forecast the price in such a fast-evolving market as cobalt, or lithium for that matter.
Everyone agrees that the electric vehicle revolution has arrived but beyond that there is no consensus as to how fast it might evolve.
And what sort of batteries will those vehicles use?
Noting that cobalt is currently used in six main types of lithium-ion battery, analysts at RFC Ambrian write that “what the demand for cobalt as a constituent for future batteries will be is open to question.” (“The Alchemist, Issue 31: Cobalt”, July 2017).
If prices rise too fast, they argue, battery makes will try and reduce the amount of cobalt used, even if they can’t eliminate it altogether.
Ambrian’s conclusion is that cobalt demand in the year 2021 could be anything from marginally lower to 80 percent higher than today.
Pala and Portal evidently believe in the more bullish of those scenarios.
The irony is that if they’re right and the cobalt price does go stratospheric, it will be because there’s not enough of it around to meet burgeoning demand from the battery sector.
And that’s going to draw a lot of unwelcome attention from a physical supply chain desperately seeking spare units.
There’s a precedent for this sort of manufacturer-speculator showdown in the industrial metal space.
In 2010 JPMorgan and BlackRock near simultaneously filed prospectuses for copper funds backed by physical metal.
Copper processors were outraged.
They viewed the funds as competition for physical units in a market that was at that stage suffering chronic supply shortfall.
Although the regulatory and legal reactions were eventually cleared, such was the furore in the copper industry that neither fund was ever launched.
Those two funds envisaged combined holdings of around 180,000 tonnes of copper, equivalent to less than 1 percent of global refined metal production at the time
Cobalt 27’s holding is already more than double that level in terms of global output.
Might it too risk the wrath of a supply chain struggling to keep up with demand?
Only time will tell, but if that scenario does materialise, it will, of course, mean that Cobalt 27’s fund backers will have already been rewarded for their bullish views.
Editing by Susan Thomas