Cobalt Pure-Play Hitched to Electric Vehicle Boom

The Energy Report: Would you bring us up to date on what's happening in the cobalt market?

Anthony Milewski: A few weeks ago was LME Week in London, which is the annual gathering of producers and consumers for not just cobalt but for a variety of base metals. It's an international gathering with people from all over the world—China, United States, Europe, Africa.

And I would say that it's really the mating season for cobalt. What that means is cobalt contracts are typically 12-months long, although there's a lot of variation. Many of the next 12 months of contracts are set during this week or discussed, if not signed. It's a major week for the consumers and producers to get together and have a meeting of the minds around what the next 12 months will look like for cobalt.

TER: What was the outcome of these meetings?

AM: The first takeaway is that there's tremendous new demand coming into the market because of the electric vehicle. All of the talk and all the meetings I was in was around the impact of electric vehicle sales and penetration on the cobalt market.

A second conversation that's going on is about future supply, security of supply, where does supply come from to meet that new demand that's coming into the market and going to come in large quantities in future years.

And then, finally, the questions are really about ethical sourcing out of the Congo and making sure that conflict cobalt doesn't make its way into the value chain. Not all cobalt is sourced equal out of the Congo. You have first-tier producers like Glencore International Plc (GLEN:LSE) that produce a high-quality, trustworthy material. The issues associated with conflict cobalt are more focused around individuals, artisanal mining and some of the related problems.

TER: Let's talk about your first point, how cobalt is tied to electric vehicles. Is the growth of electric vehicles the main factor behind the projected demand growth for cobalt?

AM: The market, until recently, was seeing modest growth. The superalloy industries, which are jet engines, were seeing 7–8% year-on-year growth. But because of electric vehicles over the last few years, we saw a twinkling of what the future of cobalt might look like. To put it in perspective, the market today has 100,000 metric tons (100,000 mt). If you believe the consensus view of electric vehicle penetration in 2025, which is 8–12%—that's the banded range from Wall Street today—we're going to need something like 200,000 mt of cobalt with 100% of that going into the electric vehicle market. In other words, the newfound demand is tremendous, and it's going to materially impact the industry.

Now, there's a lot of discussion about battery chemistry changes and some things that will make it a little bit more achievable. But on its face, we are seeing a tremendous impact on the industry from the adoption and sales of electric vehicles.

TER: Would you tell us about what's happening with electric vehicles batteries, how the movement in China is away from the lithium ion phosphate (LFP) battery to the nickel manganese cobalt (NMC) battery and what that means for cobalt?

AM: This is really about range. These LFP batteries, depending on the battery, were doing 30, 40, 50 miles; the range was tiny. The NMC battery is an energy-dense battery that can go, in some cases, over 400 miles. So that switch is really about what the consumers' preferences are, and the consumers' preference is a car that can basically go anywhere that a person goes in a single day. Remember, the overwhelming majority of commuters globally do not travel now in a day more miles than a single charge of a modern electric vehicle battery.

That switch was driven as a way of extending the range of these vehicles and was critical and is probably going to accelerate the adoption of the electric vehicle as it becomes a tool that doesn't really change your life. In other words, with any electric vehicle, you fill it up when you're sleeping at night. It's not impacting you because the range is sufficient for your daily needs. In fact, you could go a couple of days without charging it.

TER: And the NMC battery uses a good amount of cobalt?

AM: There are two basic formulations today in the market. There's an NMC, which is what most of the market uses, and there's the NCA, nickel-cobalt-aluminum, the preferred battery by Tesla Motors Inc. (TSLA:NASDAQ). The cobalt content in those batteries varies based on factors when you have cobalt in a given battery. If you think about a battery, think about an engine. Do you have a V-6 or a V-8 or do you have a turbo? There are different sizes and energy densities in batteries.

But the important factor here is the ratio. The current nickel-manganese-cobalt, which is the most common battery, is 6:2:2: 6 parts nickel, 2 manganese, 2 cobalt. The next generation of battery, which is probably two to four years away is 8:1:1, 8 nickel, 1 manganese, 1 cobalt. Those are the two primary chemistries that you will see in the coming year.

TER: I'd like to go back to something that you touched on a little bit earlier, which is about the security of supply. What's happening with the supply of cobalt in the world and Congo sourcing and what does that means for Cobalt 27 Capital Corp. (KBLT:TSX.V; CBLLF:OTC; 27O:FSE)?

AM: The key point about the Congo is ensuring that the material that goes into your electric vehicle or even your cellphone, which has a significant amount of cobalt relative to the size of the battery in it, is ethically sourced from the Congo. Over half of the world's cobalt comes out of the Congo. And so, the conversations are around how you do that.

If you're buying from a large producer, like a Glencore, there's no problem there. Where you run into problems are the allegations around certain Chinese companies taking artisanal material that ultimately ends up in batteries.

The industry is really responding and taking steps toward blocking this. One of the things I see, and I've seen it now over the last year to two years, is each of the major automakers actually have one or two individuals whose full-time job is to ensure a secure supply chain and to do everything they can to keep that material from entering the battery supply chain.

It's interesting to point out that automakers aren't making the batteries. Companies like Panasonic Corp. (6752:TYO) are making the batteries that go into the automobile, but still, the automobile company that's ultimately going to sell you the car is taking the onus of trying to prevent this material from entering the supply chain. I think the battery makers are doing it as well, as are people on the ground in the Congo. We're seeing an industry making an effort to combat this.

TER: Let's talk about Cobalt 27. The company began trading on the TSX Venture Exchange in June. Can you tell us about the genesis of the company?

AM: Having experienced the uranium bull market—and uranium, which is completely different but it shares some qualities, namely that it was hard to invest directly into the physical commodity—and having had that experience of scarcity of supply, it got me thinking about how you would invest in cobalt.

We looked at the electric vehicle. A couple years ago we took the view that this was going to be mass adopted, and that we needed to understand how it was going to impact basic materials. But we also understand that the impact on the given basic material takes place at a varied penetration rate. What I mean is electric vehicles are ultimately going to impact copper but not for five or six more years when the number of vehicles really compounds.

However, on the other end of spectrum, for cobalt, the impact is going to be immediate and exponential as we go forward. We understood that and wanted to find out how we could play cobalt. What we realized immediately was there was no way to play. There are certain large-cap companies that have a small percentage of their EBITDA as a function of selling cobalt. That didn't work. The exploration companies by and large didn't meet our risk profile, namely the binary outcome risk of exploration.

And so what I wanted to do was marry a Uranium Participation Corp. (U:TSX)-type vehicle with the financial innovation of a Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE); in other words, create a hybrid that was underpinned by physical cobalt and have the growth come from large streaming transactions.

TER: You currently own 2,000 tonnes of physical cobalt and a portfolio of cobalt royalties, correct?

AM: We own 2,160 tonnes of cobalt, making it what we believe is the largest position in the world except for the Chinese strategic government supply. We have a handful of royalties. I look at them as options. They're deep out of the money options. We have a growth strategy that's focused on large streaming transactions.

TER: Would you tell us about the royalty and streams that you already have and how you're looking ahead to getting new ones?

AM: The royalties and streams that we have today are on early-stage projects, which are options. But the strategy going forward, and where we're spending our time and effort today, is on large, producing assets, long-life assets that are producing cobalt today that will be material streams for the company going forward and add market cap and add balance sheet to the company. The company is focused on executing the business plan, and our business plan includes streaming transactions.

TER: In June, when you went public, you completed a $200 million public offering. You've recently filed a $300 million shelf prospectus. Would you explain what that is?

AM: As just indicated, our strategy is a growth strategy. With any growth strategy, you need to raise capital. A responsible capital structure includes a shelf, which allows you to act quickly when opportunities arise. That shelf is in place so that the company is able to quickly act on any streaming transaction which, at some future date, hopefully comes to fruition.

TER: Please tell us about Cobalt 27's senior management team.

AM: Justin Cochrane is the president and COO. He's been in streaming since its advent, since streaming transitioned away from royalties. He spent a decade at an investment bank in Canada and then later ran Sandstorm Gold Ltd.'s (SSL:TSX; SAND:NYSE.MKT) business development, corporate development group; Sandstorm being a streaming and royalty company. He's transacted on something like 40 or 50 streams and royalties, a material dollar amount as well. He's widely regarded as an expert in the field, and he's a tremendous value to the team.

Nick French is a company director. He is probably one of the preeminent cobalt traders known globally for the last 20 years. He has deep insight into the markets and into the trading environment.

I am the chairman and CEO. I've spent my career in mining funds. I think the value add for myself is having worked across a large number of transactions. I'm able to create shareholder value through my investment skills.

I'll just quickly highlight that we have a fully independent board. One of our board members, Frank Estergaard, is a 37-year partner at KPMG. We have other people like John Kanellitsas from Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX), Jon Hykawy, a well-regarded and known analyst, and Nick French is another director.

We also have a very sophisticated advisory board, which includes Dr. Prabhakar Patil, the former CEO of LG Chem Ltd. (051910:KSE; 051915:KSE; LGCLF:OTCPK), as well as Ted Miller, a senior member of Ford Motor Co.'s (F:NYSE) battery team. We've tried to pull together top individuals across the battery value chain such that if we have a question about a nickel laterite deposit because cobalt is often a byproduct of nickel lateralite, we'll ask Phil Day. He's regarded widely as an expert in nickel, and he sits on our advisory board. If someone asks me a question about a battery, I ask Dr. Patel. He's one of the original people working on this for LG Chem. We've tried to put together a very experienced group of individuals around the management team to augment our knowledge.

TER: Are there catalysts in the short or medium term that investors should look out for?

AM: I would look out for cobalt prices. Watch what the big automobile companies are doing. Look at all the announcements around the model commitments and sales numbers of electric vehicles because that's a leading indicator to a move in cobalt. You could have some alpha by watching that because that might happen before the move in cobalt price. The reason I say that is because when you see the cobalt price moving, ultimately that's going to impact our share price, and you're going to see us go up. So if you have any insights that help you take a position on what's going to happen with the electric vehicle adoption rate, if that's going to accelerate, then that will give you a basis to have a view around the cobalt market, which ultimately will be a knock-on effect into our stock.

TER: Thanks for your time, Anthony.

Anthony Milewski, chairman, CEO and a director of Cobalt 27 Capital Corp., has spent his career in various aspects of the mining industry, including as a company director, advisor, founder and investor. In particular, he has been active in the battery metals industry including investing in cobalt and actively trading physical cobalt. In 2016, The Mining Journal named him a Future Mining Leader.