|Shares Out. (in M):||25||P/E||na||na|
|Market Cap (in $M):||233||P/FCF||na||na|
|Net Debt (in $M):||-16||EBIT||0||0|
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In our prior write up (UMI BB), we highlighted a way to take advantage of the accelerating worldwide move towards electric vehicles (EV) by investing along the EV battery value chain. As we wrote then it looks as follows: Basic materials (lithium, graphite, cobalt etc) are mined and sold to companies like UMI to be turned into active materials (cathode and anode), which are then combined by battery producers (e.g. Panasonic LG Chem, Samsung, etc) into cells and ultimately into battery packs for use by the OEMs.”
Thanks to the recent IPO of KBLT we now can invest into another link in this chain– a pure play cobalt business.
Cobalt supply/demand dynamics and expectations
Until recently 51% of cobalt demand came from non-battery industrial applications (mostly in metallurgy where it is used as a strengthener). Within the battery world, the non-EV electronics space (consumer/computer/communications) accounted for the 46% of the remaining 49%. Only 3% of the total ~100k metric tonnes of refined Cobalt went to the EV batteries last year.
Fast forward to 2025, and the demand breakdown will look drastically different. With total demand expected to reach anywhere between 165k and 205k tonnes (65k-105k tonnes increase or 6.5%-8.4% CAGR), the industrial applications and the non-EV electronics contributions to the demand growth will be 12k-18k Tonnes (~3% CAGR) and 10-28k tonnes (3-6% CAGR) respectively. The biggest driver of demand growth will be the EVs, which in 7 years are forecasted to account for 34k-80k Tonnes, or 21-38% of the total, translating into 30+ % CAGR.
These figures are based on 2025 EV sales projections which we’ve observed to be between 10m and 15m+ vehicles. In our UMI write-up we used the 13m figure. Since then the launch of TESLA’s Model S and increased EV production targets coming from almost every other car-maker prompted upward revisions for the 2025, making us more comfortable with the upper end of the range. Another source of variability for the demand figure is the cobalt content per vehicle. Depending on the type of vehicle (e.g. Plug-in Hybrid vs pure EV) and the choice of the cathode material (e.g. Chevy Volt’s NMC vs TESLA’s NCA. See our UMI write up for more details), Cobalt content per car can range anywhere from 3 to 12 kg. Using weighted average of about 4.6kg/vehicle (based on the OEMS projection targets) we arrive at the 70k tonnes 2025 figure.
(For now we will ignore the energy-storage technology as another potential source of demand for cobalt as the technology is still in early stages of development and adoption.)
In the past 7 years global cobalt supply grew by 6%/ann and continues to be constrained by almost nonexistent primary cobalt deposits, technically challenging extraction process, funding hurdles and multiyear development lead times.
Because Cobalt is recovered primarily (97%) as a byproduct of copper and nickel mining, it is the prices for those two metals that dictate cobalt production volumes. Thus price increases in cobalt cannot on their own induce supply increases.
61% of the supply comes from Democratic Republic of Congo (expected to reach 80% by 2025). Between several civil wars, coups, cancelled and postponed elections, poor infrastructure and electricity shortages, concentration of cobalt mining in DRC presents obvious serious supply risks. In addition, thanks to the dangerous mining conditions, human rights abuses, and routine, documented use of child labor in that country, the DRC’s mined minerals are dubbed “conflict minerals” or “blood metals.” Increased awareness of these human rights issues as well as DRC’s poor environmental record creates unfavorable public scrutiny motivating OEMs to avoid DRC as their supplier of record.
Finally, as we wrote in our UMI write up, China is aggressively extending its control over cobalt mines in Africa, steadily gaining near-monopolist control over the metal. Most recently FCX sold its copper/cobalt mines to a consortium led by China Moly. Over 85% of raw cobalt goes into China and over 85% processed cobalt leaves China, leading to the possibility that China will adopt monopoly pricing power in the future (Comparing to what happened in rare earths, we note that China is an importer, and since there is no primary supply, there is no incentive to flood the market to destroy competition. )
All of this translates into anticipated deficits in cobalt even in the most conservative demand scenarios. (Which is already driving OEMs to secure long-term supply of cobalt.) In particular by 2022 we can anticipate this deficit to reach the 2008 record of 12%. At the time cobalt prices reached $50/lb. By 2025 even the most conservative demand estimates translate into at least 17% deficit and could reach as high as a 33%. Thus $70/lb cobalt price assumption for 2022 (vs ~$28 today) does not seem unrealistically aggressive.
As this unfolding imbalance already translates into higher cobalt prices (cobalt prices doubled last year), the increases are likely to be easily passed through to the OEMS. Both consumer electronics and EV battery spaces are characterized by low price sensitivity and low substitution risk with respect to cobalt. The former results simply from cobalt being only a tiny fraction of the ultimate final product’s price tag (cobalt contributes about 50c=0.1% to iPhone cost, and about $600=0.7% to a Tesla car), and the latter is the consequence of the unique energy density and safety profile of Cobalt-based cathodes (again pls refer to our UMI write up for details), as well as its relative low cost for the overall product.
Cobalt 27 is a recently (june 2017) IPOd Canadian investment vehicle offering pure-play exposure to physical cobalt, while avoiding any exploration, development or operating risks associated with mining investments, as well as any DRC specific risks. At this time it is effectively the only way to practically play cobalt, as all other real mines have too small a cobalt component or are highly speculative.
The company holds 1,486.5 Tonnes of premium cobalt and 671 tonnes of standard cobalt. At 2% of global annual consumption, it is one of the largest holdings of physical cobalt in the world. Costs associated with storage include insurance expenses at ~.084% of the cobalt’s value, and amount to about US$0.03/lb
In addition it holds 8 exploration-stage cobalt royalties and also intends to acquire cobalt streams from miners of cooper, nickel, etc. Increases in royalty and streaming assets should support multiple expansion, as discussed later in the write-up.
We can use Uranium Participation Corp (UPC) as a case study to appreciate KBLT’s business model. Similar to KBLT UPC holds physical uranium serving as a non-mining investment vehicle. In periods of high uranium demand UPC trades as high as 1.3-1.45x its NAV.
The second way KBLT can expand its cobalt exposure is through acquiring Streams and Royalties. These introduce longer-term optionality with respect to exploration potential and mine expansions, while avoiding operating and capital costs characteristic of mining investments. Generated cash-flows can be used to fund KBLT’s operation and can eventually translate into dividends for shareholders.
Being a byproduct of primary copper and nickel mines cobalt is particularly well suited or the streaming model. In a streaming agreement a producer of a commodity sells a part of its future [typically non-core] output to another party at a pre-specified, below-the-market price (as low as 20% of the prevailing price). The price can be fixed or could be expressed as a percentage of the prevailing metal price. The producer is incentivized to do so by getting paid (at least partially) upfront, giving it immediate access to capital it may need for construction, debt payments or acquisitions.
Part of their game plan has always been to acquire a stream, one that would provide actual cash flow, distinguishing them from Uranium Participation. Such an acquisition, which we would expect to be accretive to value, would entail raising a substantial amount of money in equity or debt or getting a partner. We believe it would be a mature asset (unlike the royalties of certain junior prospective miners described below) like the cobalt part of a diversified major miner. So it is not surprising KBLT has recently filed a shelf with the idea of doing a major stream. This is to be distinguished from the current royalties owned by KBLT (all of which are junior prospective miners), acquired at nominal cost, which we view more as lottery tickets and do not ascribe much value.
Justin Cochrane KBLT President and COO came from a gold streaming company, Sandstorm Gold, and has a wealth of expertise in this area.
KBLT has stated that it is in discussions with cobalt producers for such agreements, and in fact, there are many candidates for being the counterparties. Companies with stressed balance sheets (e.g. Sherritt Intl.) could immediately benefit from such agreements. Also, Glencore, Panoramic Resources, First Quantum and Nonferrous Metal Mining all have mines with temporarily suspended operations that possess sizable cobalt by-product credits. Finally, KBLT can approach companies like Norilsk Nickel where cobalt is a tertiary by-product.
Similarly royalties also provide exposure to the commodity without the operating or capital costs and are simply percentage of proceeds received by the miner from a smelter or refinery either before (gross royalties) or after (net) transportation, smelting and refining costs, depending on the agreement details.
KBLT has no debt and C$15.7mm in cash
There are 24.7mm basic shares, 107,407 warrants (exercisable at CAD 6.33) and 158,867 options (CAD 4.33) outstanding
Typically there is a spread between premium and standard grade cobalt prices, but recently it’s become very narrow (~$1) thanks to the run-up of standard grade prices. At current prices (~ $29/lb) and using FX of 1.26 CAD/USD, KBLT cobalt holdings are worth ~C$175m or C$7.05/ share. Adding the royalties at cost (C$1.2m = ~C$0.05/share) and cash ~C$ 0.75/sh we get C$7.85 NAV/share at the current cobalt spot prices.
$1 of cobalt price increase translates into ~C$.25 of NAV. So our projected 2022 cobalt price of C$70 gets us to ~C$17, which then translates into ~ C$13 today after discounting at 8%.
This of course does not price in any of the value coming from the streaming agreements which we anticipate to be announced in the near future.
KBLT should trade at an expanding premium to NAV as underlying projects for the royalty portfolio approach production stages, cobalt price outlook improves further and streaming contracts are signed.
Also, going back to the UPC example above, we note that in periods of supply concerns, reflected in the sharply rising uranium prices, the P/NAV multiples also expanded from the average of 1.1x to 1.45. KBLT multiples are likely to follow a similar path as cobalt supply worries begin to materialize. Further, unlike UPC which was not the only game in town for the investors seeking uranium exposure, KBLT is about the only direct investment vehicle for similar cobalt exposure. A 1.45x multiple gets us close to C$12/share at the current cobalt price
If they are unable to trade at a premium with liquidity, they can always sell out to a strategic, so there is little risk of it trading at a permanent sizable discount.
Pala Investments Ltd with 18.8% of total shares outstanding and Green Energy Metals Fund LP with 16.4% are subject to a lock up period that will expire in the end of December. KBLT’s CEO Anthony Milewski is part of the investment team of Pala, while the founder of Green Energy Robert Mitchell is on the KBLT’s advisory board
Slower than expected EV adoption
Substitution risk of future battery technology reducing or eliminating cobalt battery content
Inability to secure streaming contracts
Stream agreement announcements
Cobalt price appreciation
Royalty projects production starts
Accelerated EV adoption
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