Stockhead Guide: Why cobalt is hot and how local stocks are faring
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Cobalt has grabbed the attention of investors over the past couple of years thanks in part to a rise in demand for lithium ion batteries in electric vehicles.
Have ASX-listed cobalt minnows benefited? Let’s take a look.
What is cobalt?
Cobalt, which goes by the periodic symbol Co, is a hard, lustrous, silver-grey metal found in the Earth’s crust.
The main source of the element is as a by-product of copper and nickel mining. The copper belt in the Democratic Republic of the Congo (DRC), Central African Republic and Zambia yields most of the cobalt mined worldwide.
Cobalt can be magnetised and alloyed with aluminium and nickel to make particularly powerful magnets.
Globally, 58 per cent of cobalt is used in diverse industrial and military applications while the remainder is used in the development of lithium-ion batteries used in electronic devices, electric vehicles, and energy storage, according to Cobalt Development Institute (CDI).
Over the past year, cobalt has witnessed a significant uptick in price based on booming demand for lithium-ion batteries.
On the London Metal Exchange, three-month cobalt price has jumped about 70 per cent from $US32,750 tonne at the start of January to around $US56,000t today.
The price is driven largely by concerns that not enough cobalt can be mined in time to meet future demand from battery manufacturers.
This is because 97 per cent the world’s supply of cobalt comes from nickel or copper mining — but demand for nickel and copper is subdued due to concerns of oversupply, according to research released by Canaccord Genuity in May.
Adding to the supply-side risk are on-going concerns of political instability in the DRC, which accounted for 53 per cent global production in 2016, and the shortage of quality project development opportunities in the medium-term.
How have ASX-listed cobalt stocks fared his year?
Despite the price surge and booming demand for cobalt to fuel EVs, the first six months of calendar 2017 have been mixed for Australian junior stocks with exposure to the metal.
This table, sourced from Bloomberg, shows the share price movements of ASX-listed stocks with cobalt exposure from the beginning of 2017 up to the end of July 2017.
* Listed on 9th February 2017 – closing share price from that date
**Listed on 2nd February 2017 – closing share price from that date
Half of those listed reported falls in share price over the period with Havilah Resources (ASX:HAV) Riva Resources (ASX:RIR) and Latin Resources (ASX:LRS) reporting price falls of 94 per cent, 72 per cent and 67 per cent respectively.
However, there have been some notable increases with Ardea Resources (ASX:ARL), GME Resources (ASX:GME) and Cobalt One Ltd (ASX:CO1) gaining 325 per cent, 150 per cent and 89 per cent respectively over the period.
Why has this occurred given the widespread expectation that ASX-listed cobalt stocks would have a bumper year on the back of surging cobalt demand and supply-side issues?
To answer this, we need to look at the Electric Vehicle (EV) market more closely and how a company called Tesla Motors has so far fared in 2017.
Batteries, EVs and a company called Tesla Motors
Since almost half of cobalt produced is used in lithium-ion batteries, cobalt miners and explorers follow the highs and lows of the lithium battery industry.
If the battery industry is doing well, the same usually goes for the miners and explorers. However, the same also applies if the industry hits a bump with stocks also suffering.
A Tesla Motors electric vehicle getting recharged.
Recently, Tesla Motors announced the roll-out of its much-hyped Model 3, its first mass-marketed sedan with a price tag of $US35,000.
So much hinges on the success of the Model 3. It is not only pivotal to Tesla but also to the broader cobalt and lithium market.
The Model 3 was launched in late July, with forecast production numbers of 5000 per week by the end of 2017, rising to 10,000 at some point in 2018.
However, the Model 3 was beset by production delays and overshot schedules which resulted in the likes of Morgan Stanley and Goldman Sachs downgrading the stock on concerns it would miss delivery dates.
The result of these downgrades was a 5 per cent and 6 per cent fall in Tesla stock in February and May this year, resulting in several ASX-listed cobalt plays also taking a hit.
What is the future for ASX cobalt stocks?
The answer hinges on availability as demand grows for cobalt in electric vehicle lithium batteries and consumer electronics.
EV sales are forecast to hit 41 million by 2040, which represents 35 per cent of new light duty vehicle sales, according to research by Bloomberg New Energy Finance. This compares to approximately 462,000 sales in 2015.
Traditional car makers are now joining Tesla in the EV market.
Volvo has announced it will build only electric and hybrid vehicles starting in 2019, marking “the historic end of cars that only have an internal combustion engine”.
Government measures will also increase demand.
France and Britain have announced they will ban all petrol and diesel vehicles by 2040.
The Electric Vehicle Initiative (EVI), a global, multi-government policy forum, may drive short-term demand with its call for an electric car fleet of 20 million by 2020.
On the supply side, an oversupply of copper and nickel will continue to put pressure on cobalt supply and is expected to result in further significant increases in the cobalt price.
Modelling by Canaccord suggests the cobalt market will remain in deficit over 2017-2025 resulting in a 41 per cent rise in price over the forecast period to US$34/lb.
All this bodes well for cobalt stocks on the ASX as the bulk of stocks listed have acreage in Australian projects, a country which doesn’t have the same sovereign risk and political risk as countries such as the DRC.
The key is for these stocks is to have their projects up and running in time to benefit from the demand-supply deficit and the high cobalt price that is expected.
If the sky-rocketing future demand for EVs over the next decades becomes a reality, it will indeed be very exciting times ahead for these ASX-listed cobalt stocks.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.