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Investing in the World’s Largest Producer of Cobalt

We’re going to be upfront about this and tell you that our track record when it comes to dispensing investment advice regarding commodities isn’t the best. Our first foray into the subject was an article published in August of 2015 titled Don’t Invest in Lithium Mining Companies which focused on the fact that (at the time) revenues attributed to lithium were a small percentage of overall revenues for the 3 Lithium Mining Stocks That Produce 90% of All Lithium. While that was true back then, fast forward to today and we see that lithium revenues have all but skyrocketed along with the stock prices for these 3 companies (returns since August 2015 are seen below):

We also turned you on to a Chinese lithium stock that is up +86% since we wrote about it May of last year. Of course stock price appreciation says nothing about future prospects, so take it all with a grain of salt. Since lithium doesn’t have a spot price quoted on the commodities market, it’s tough to tell where prices are going at any given time. What we do know is that lithium is being used in all those batteries companies like Tesla are building, which explains why demand has been so high. Another such commodity that’s being talked about a lot lately in the same context is cobalt.

What is Cobalt

Cobalt is unique in that it is mostly produced as a by-product of copper and nickel mining. Numerous sources say that between 94% to 97% of all cobalt is produced this way, which means that the supply of cobalt is connected to the demand for copper and nickel. This also makes it very difficult to find a pure-play cobalt mining stock. Here is a breakdown of cobalt end uses according to a mining consultancy called CRO that specializes in analyzing these sorts of things:

It’s largely the increase in demand for lithium batteries that is driving up the price of lithium, specifically lithium batteries used in electric vehicles. Unlike lithium, cobalt actually has a market price we can reference to see that prices have gone through the roof over the past year:

Of course this means you can also buy Cobalt futures on the London Metal Exchange, but for retail investors this seems no different than speculating on the price of bitcoin. We’re interested in learning more about the companies that are producing lots of cobalt today.

Where is all the Cobalt?

Here’s where it may be time to introduce the concept of “political risk” which all international investors should be familiar with. As it turns out, most of the world’s cobalt is being mined in what is quite a dangerous place to travel.

Source: U.S. Geological Survey

What the above chart tells us is that 58% of the world’s cobalt is produced in Congo, which also happens to be where almost half of the world’s reserves are located. We had one of our MBAs try and get into Congo last year to interview some of the local cobalt miners, and all he came back with was this picture of Congo off in the distance:

Source: Nanalyze

Turns out that most people don’t speak American in Congo, and the odds of getting killed there are almost as high as a weekend out partying in the suburbs of Chiraq. That’s why we turned to an excellent investigative journalism piece by WaPo which uncovered something in Congo called “artisanal mining”. Remember how earlier we said 97% of cobalt is produced as a by-product of mining other metals? That percent that isn’t comes from a far more sinister source.

Apparently there is a whole lawless “artisanal mining” industry in Congo which largely involves about 100,000 Congolese, primitive mining techniques, a complete disregard for safety, and even the use of child laborers. Large U.S. corporations like Apple have been quick to distance themselves from this claiming it’s largely “the Chinese” which are the beneficiaries of such practices, and judging from this photo that might very well be the case:

Source: WaPo

The lawlessness of artisanal mining is being addressed by the government, since mining makes up such a meaningful contribution to the country’s GDP, and they have moved to address the situation by taking actions like this one:

Observing people’s rights is always a solid strategy for any government, so we’ll see how this pans out in helping to reduce some of the political risk. In the meantime, we want to figure out who is making all the money in cobalt today.

The World’s Largest Producer of Cobalt

When it comes to cobalt production, the company that is producing the most cobalt at the moment is a $74 billion Swiss multinational commodity trading and mining company called Glencore (LON:GLEN).  In 2017, Glencore produced about 27,000 tons of cobalt which is almost 3X as much as their closest competitor. According to their latest production report, Glencore plans to increase that number to 39,000 tons in 2018 to eventually reach 63,000 tons by 2020 (a 133% increase over 2017). Glencore clearly sees the opportunity here for cobalt as their yearly report is riddled with mentions of it. That’s because during 2017, Glencore commissioned a consultancy named CRU (the one we mentioned earlier) to model the metal requirements needed to realize the Electric Vehicle Initiative target of 30 million electric vehicle sales by 2030. Based on the findings of that report, Glencore sees global demand for cobalt increase to 314,000 tons by 2030.

Source: Glencore

 

When we look at the bigger picture though, Glencore’s revenues that will be attributed to cobalt will pale in comparison to broader company revenues as a whole. In 2017, Glencore saw yearly revenues of $221.4 billion. Back of the napkin math would show that with cobalt around $40 a pound, that would mean just around $5 billion in revenues for the  63,000 tons of cobalt they plan to produce by 2020. That’s about 2.2% of total revenues. Of course we said that before about lithium and things changed very quickly. The truth is that Glencore is also making money trading cobalt. The latest Glencore annual report lists 41,000 tons of cobalt as “selected marketing volumes sold” in 2017 (up 8% from 2016) which means they’re procuring cobalt from other sources in addition to what they’re able to produce in-house. They’re no doubt making money on those trades as well, and the risk is probably lower than having to mine the stuff.

Across the globe, companies are racing to secure their cobalt supplies. Just last week, Glencore raised some eyebrows when they decided to sell 30% of their cobalt output to a Chinese firm called GEM Co (SHE:002340). Apple is apparently trying to cut out the middleman and secure their own source of cobalt directly from miners in an attempt to avoid any more public relations fiascos, according to an article by Bloomberg that states 25% of global cobalt production is for smartphones. Here is a look at the supply chain of cobalt which shows just how difficult it is to trace the stuff:

Source: Washington Post

While Glencore is the largest producer of lithium at the moment, there are many new projects coming online. According to an article by Bloomberg on the topic, “more than 370 undeveloped discoveries and at least a dozen viable projects” represent additional capacity coming online. This number no doubt includes loads of risky junior mining stocks, many of which are no better than the over-the-counter (OTC) garbage you will come across that emerges around every single exciting investment theme. Proceed with extreme caution and try to diversify away your risk. For existing mining companies, dig into their financials to see what actual contribution to revenues comes from cobalt. Since cobalt is largely produced as a by-product of nickel and copper mining, don’t expect to find many pure plays.

The last thing to consider here is something you yawned through in economics class called “substitute goods“. An article by Greentech Media talks about how “cobalt supplies will not be a showstopper for electric vehicles, an expert says”. That’s because they claim that battery manufacturers are moving to using “more nickel” and “less cobalt” which would increase the demand for nickel instead of cobalt. Ironically, cobalt is a by-product of nickel mining, so everything goes back to equilibrium in the long run.

If you want to buy shares of Glencore, you can do so on the London Stock Exchange using British pounds so you can get some currency diversification as well. In order to do that, you’ll need to open an account with Interactive Brokers.

Most people don't know that Interactive Brokers is the biggest online brokerage firm in the U.S. and the only firm we know of that allows you to buy stocks directly on 22 different foreign exchanges. We've used IB for many years as a cheap platform to exchange currency, for trading stocks on foreign exchanges, and for trading U.S. shares at just $1.00 per 100 sharesClick this link to get started.

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