How investors can profit as Cobalt hits new highs
So it's time to revisit Geovic Mining (GMC-TSX)
As most base metal prices are treading water, cobalt is hitting new highs every week, and is in a true supply crunch. Read these headlines:
From www1.metalbulletin.com on January 11: "Cobalt buyers were left reeling this week after prices for the blue metal rose by almost $5 between Monday and Friday. Consumers have been left "shocked" by recent prices, one trader told MB as he reported prices for high-grade material as high as $47 per lb. "They are shocked by these prices."
From www.minormetals.com on January 10: "The relentless upward move in cobalt prices continued during late Thursday trading in Europe, with the market continuing to trade at its highest since 1978 and edging ever nearer to the $50 all-time high."
From www.theaustraliannews.com.au on January 8: "Cobalt prices got off to a good start with a sale at a post-1979 record of $US45 a pound, and everyone is confident the all-time figure of $US50 will soon be matched. Supplies from the main source, the Democratic Republic of Congo, have been disrupted and BHP Billiton and Norilsk Nickel are finding that each new sale is at a price higher than the preceding one. Think hybrid cars. The batteries in Toyota's Prius each contain 2.5kg of cobalt, and only 65,000 tonnes are produced each year worldwide. Keep an eye out for announcements that contain the word "cobalt".
From www.thetelegraph.co.uk on January 11: "The slew of gadgets and gizmos unveiled at this week's Consumer Electronics Show in Las Vegas could soon become much more expensive to run than anyone had previously imagined. Cobalt, the key mineral used to make electric batteries, has soars to a new record high. Strong demand and scarce supply pushed prices in Europe to $46 a pound."
And the list goes on. Cobalt is getting mainstream press. Cobalt is in a huge bull market. It is playing an increasing role in our everyday lives. And yet it's a small market, with most production coming from politically suspect areas - particularly the Congo. So nobody knows how secure the ongoing supply of cobalt will be in the future.
The other single most important thing to remember about cobalt supply is well summed up in the same Telegraph Newspaper article: "With stockpiles being run down, the price looks set to climb further. "There's no metal around, producers are sold out," said one European trader. The US Defense Logistics Agency has historically kept a large stockpile of the mineral to help secure the US military's needs. One London-based trader said the DLA held about 52m pounds of cobalt in 1993, but this has been whittled down to little more than 1.5m pounds. "The average rate of annual sales in those 14 years has been 1,650 tonnes per annum," the trader said. "At this rate of sales the DLA will have exhausted its cobalt stocks by June of this year."
In short, cobalt prices have gone much higher than anyone anticipated a year ago. These same pundits were talking about a spike to $40 and a long term cobalt price of $10 per pound after 2010. I don't believe it. I have no crystal ball, but with this kind of political instability in supply, the fact there is no inventory of metal anywhere in the world now, nor likely to be with growing demand in electronics, I see cobalt prices staying much higher much longer than most people think. If the US Defense Department had a stockpile of it, it is a strategic metal and they will need it again. One of the largest world inventories is gone.
I am an investor, so what does all this mean to me? It means I should revisit Geovic Mining (GMC-TSXV) which will be the largest primary cobalt producer in the world when their Nkamouna deposit goes into production in Q3 2010. The stock traded great volume exactly a year ago up to $4.50/share, and now trades for $1.70.
This deposit is a shallow blanket of coarse cobalt and nickel, lying only 17 m or 60 feet below surface. There is no blasting - it's in tough soils, and highly weathered rock. They scoop it out with backhoe and trucks. The company has their politics covered, as the government owns 20% of the deposit. Geovic owns 60% and four private investors each own 5%.
The major reason the stock is so much lower is because the feasibility study on their main asset, Nkamouna, showed the cost to build the mine grew to almost $400 million - more than double previous estimates. The internal rate of return, the most common measure of profitability, is now 39%, compared to 96% in the 2004 pre-feasibility study. I think that 39% is still a VERY good number - major mining companies will put mines into production with 15% IRR if they have a long life. Nkamouna is one of 7 cobalt deposits Geovic has the rights to, and its initial mine life is 19 years. You can see all the numbers yourself at www.geovic.net/pdf/GMC_Feasability_study_PR_Dec-4%20-2007.pdf
The market saw this as bad news in a bad market and the stock sold off hard. Had their been no prefeasibility study, and we just heard that the world's soon to be largest primary cobalt mine would initially produce 9 million pounds of cobalt a year for $3.12 a pound, with every cost and tax being included in that figure, the market would have been pleased, not shocked. That misconception is our opportunity.
At current metal prices, gross annual cash flow to Geovic would be around $200 million. The company has $75 million cash (that equals about 70 cents a share - almost half the share price), and all that money was raised at $2.50 and $4. This could be the bottom of the Geovic market.
The market is now a different place than a year ago, but our principles remain the same. Buy strong assets in companies that are well funded. Geovic fits that model.
Gord Zelko, Publisher
www.mineralstox.com
All statements and expressions are the sole opinions of the editors and are subject to change without notice. This article is neither an offer nor solicitation to buy or sell any securities mentioned. The information is based on information that is public and that we believe is to be factual and reliable and in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. MineralSTOX.com is not a registered investment advisor and does not offer investment related advice.
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