Last month saw leading car maker BMW reveal plans to stop buying cobalt for its electric vehicles (EVs) from the Democratic Republic of Congo (DRC) in 2020/21. As it stands, the DRC provides around 60pc of the world’s cobalt supply, meaning the critical battery metal’s price is influenced heavily by the geopolitically unstable nation’s ongoing turmoil. With this in mind, could the promise of additional vehicle manufacturers following in BMW’s footsteps favour cobalt miners operating in more stable jurisdictions?
As reported by electrive.com, BMW board member Andreas Wendt announced the company’s plans to halt cobalt purchases from the DRC in an interview towards the end of March. He said the firm made its decision because cobalt demand has already decreased somewhat due to technical developments. It expects this dynamic to continue.
What’s more, Wendt added that there remains ‘enough [cobalt] deposits that have not yet been explored’. As such, the organisation expects to replace its Congo cobalt supply with materials and resources from other jurisdictions around the world.
The decision comes several months after BMW announced a collaboration with chemicals giant BASF, battery maker Samsung SDI, and development agency GIZ to improve cobalt mining working conditions in the DRC. The firms said that they were exploring ways to improve working and living conditions in areas where cobalt is extracted using manual labour.
Companies with operations in the DRC are currently facing challenges in the areas of environment, health and safety, and human rights when cobalt is extracted through artisanal mining. This dangerous practice makes up around 15-20pc of Congolese cobalt production. There are also concerns around the use of child labour in the nation, while the cost of doing business has also increased thanks to a recent mining code change that saw royalty costs shoot up to 10pc.
Cobalt prices have staged a massive rally in recent years due to an anticipated increase in the use of EVs around the world. Given that around three-quarters of electric vehicle batteries currently contain cobalt, the market for the metal is expected to double over the next four years alone and quadruple by 2028. To express this another way, 62pc of global cobalt demand is likely to come from battery manufacturers by 2020, up from 51pc in 2016 and 20pc in 2006.
Despite the continuation of this long-term trend, prices of the metal have slumped recently. Indeed, they have fallen from $25/lb to $13.61/lb in the first three months of 2019 alone. This has been driven by numerous factors, including a slightly slower-than-expected uptake of EVs, a rush to mine as much cobalt as possible, and a change in subsidies in China - responsible for half of global EV sales.
However, the price has arguably been most depressed by a large amount of new supply coming online from the DRC. The cobalt market’s current reliance on the country became clear in November when prices soared after Glencore abruptly halted sales of the metal from the country after discovering uranium at its key mine.
If more carmakers were to follow BMW in cutting off their ties to DRC’s cobalt market, then it raises the question of where supply is going to come from – especially if EV demand explodes as predicted. Indeed, there are still very few companies operating as a pure play on the metal. As it stands, 98pc of the world’s cobalt arises as a by-product of mining for other metals.
Aside from the price increases associated with supply threats, this dynamic would make the cobalt assets held by junior miners outside of the DRC look more attractive to both buyers of the metal and larger miners. In this situation, many firms could stand to benefit.
One example is Global Energy Metals (TSX-V:GEMC), which is currently preparing to build upon its strong UK shareholder base by co-listing in London. The firm is developing a diversified global portfolio of cobalt assets, including project stakes, projects and other supply sources.
The business’s flagship asset is the Millennium Project in the world-renowned Mt. Isa region of Queensland, Australia, where it executed the final agreements to take a 100pc interest last November. It is also in the process of acquiring an 80pc stake in two Nevada-based cobalt sites called the Lovelock Cobalt Mine and the Treasure Box Project. These are located just 150km east of Tesla’s Gigafactory. Finally, the business currently owns 70pc of the Werner Lake cobalt mine in Ontario Canada.
Also building a foothold in the cobalt space within the Canadian market is Forum Energy Metals (CVE:FMC). Although the firm’s most prominent focus is on the uranium and copper markets, it has entered Idaho’s cobalt belt with the acquisition of the Quartz Gulch exploration property. Its goal is to discover near surface mineral deposits by both exploring its 100pc-owned properties and developing strategic partnerships and joint ventures.
Another example is Kavango Resources (LSE:KAV), which listed in London last July. The business focuses on locating magmatic, massive sulphide orebodies in Botswana, with a particular focus on a 450km-long magnetic anomaly called the Kalahari Suture Zone (KSZ).
Last month, Kavango revealed that the first hole drilled at its Ditau prospect in the KSZ had encountered a 200m zone of intensely altered rock holding a 70m area containing significant sulphide alteration. This presented indicative cobalt values of up to 0.9pc and a weighted average of 0.2pc cobalt alongside elevated copper, zinc, lead, and nickel values. The company called the result ‘extremely encouraging’ and ‘suggestive of mineralisation at depth’.
Another firm looking to increase its battery metal exposure is African Battery Metals (LSE:ABM), which recently returned to trading with a refinanced balance and new management team after a period of difficulty. The firm, which is now led by industry veterans Paul Johnson and Andrew Bell, owns cobalt-prospective in the Cameroon and Côte d’Ivoire as well as the DRC. It is also on the hunt for new opportunities as it looks to take advantage of today’s poor funding climate for vendors.
Other outfits with exposure to cobalt include Phoenix Global Mining (LSE:PGM), which holds two prospective cobalt properties in Idaho, and Horizonte Minerals (LSE:HZM), which owns Vermelho nickel-cobalt project. Names such as Greatland Gold (LSE:GGP), IronRidge Resources (LSE:IRR), Keras Resources (LSE:KRS), and Mkango Resources (LSE:MKA) also have exposure to the metal in their portfolio.
The tactic of using battery metals to get exposure to the ‘EV boom’ is likely familiar to investors by now, given the unavoidable hype that has surrounded the sector for some time. However, if BMW’s decision to ditch the DRC catches on it could provide an exciting, fresh twist to the narrative that may work in favour of many of the businesses mentioned above.
Author: Daniel Flynn
The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
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