Monday March 31, 2014, 4:20am PDT
By Charlotte McLeod - Exclusive to Cobalt Investing News
At the beginning of the month, Tesla Motors (NASDAQ:TSLA) sent shockwaves through the graphite and lithium markets with the news that it plans to construct a $5-billion lithium-ion battery “gigafactory” in the Southwest United States.
Cobalt, another metal that will be affected by the gigafactory, has received a little less attention. To get a better idea of how — and to what extent — it will be affected by Tesla’s news, Cobalt Investing News (CIN) got in touch with Erin Chutter, president, CEO and director of Global Cobalt (TSXV:GCO); Rick Honsinger, vice president of corporate communications at Formation Metals (TSX:FCO,OTCQX:FMETF); and Troy Nazarewicz, investor relations manager at Fortune Minerals (TSX:FT,OTCQX:FTMDF).
Below is a look at their thoughts.
GIN: What do you think about Tesla’s announcement?
GCO: Tesla’s announcement reinforces Global Cobalt’s mandate to develop a secure source of cobalt and other strategic metals used in the power supply of electric vehicles (EVs). The company is excited by Tesla’s efforts to mass market EVs and looks forward to the implications it will have for metals such as cobalt, lithium and graphite, amongst others.
FCO: We were quite excited to hear that the world’s largest rechargeable battery plant, which is going to need a lot of cobalt, is going to be built in the United States, the home country of our fully permitted Idaho cobalt project. The Idaho cobalt project could be in production in as little as nine to 14 months, pending the successful conclusion of mine financing, which fits in nicely with Tesla’s timing on building the gigafactory.
FT: Tesla’s Elon Musk has created mass market appeal for EVs through the development and mass production of an attractive, high-performance automobile. The announcement to build a massive lithium-ion battery factory to lower manufacturing costs for batteries to meet the anticipated expansion of EVs has important implications for cobalt as a critical ingredient in these batteries.
The lithium-ion battery has developed into the key power supply for consumer electronics; this application is the single largest use of cobalt, with about 43 percent of the market, and is expected to be the most important driver of the cobalt market for the foreseeable future. The pending proliferation of EVs further contributes to the demand for cobalt-based batteries. Tesla plans to produce 500,000 lithium-ion batteries, each containing about 10-percent cobalt, from its plant by 2020 — more than were produced globally in 2013.
GIN: How did the gigafactory news impact you as a company?
GCO: Unfortunately, and somewhat surprisingly, cobalt didn’t receive the market hype that was experienced by the lithium and graphite sectors. According to Robert Baylis, general manager of industrial minerals for Roskill, an additional 6,750 tonnes per annum of cobalt will be required to satisfy Tesla’s growing battery demand when operating at full capacity. Simon Moores, an analyst for Industrial Minerals, says cobalt is the highest-risk metal in terms of supply for Tesla. And yet cobalt has flown under the radar. Global Cobalt is trying to change that by creating awareness of cobalt’s critical role in the battery industry.
FCO: I’ve received a lot of calls from interested shareholders asking the same question, but with the twist how “could” the gigafactory news impact our company. The news of the gigafactory has the potential to have a very significant positive impact on Formation Metals. The rechargeable batteries Tesla expects to produce — a variance on the lithium-ion rechargeable batteries we are all familiar with — will require a lot of cobalt. They are likely to use lithium-nickel-manganese-cobalt oxide batteries, which contain 10- to 20-percent cobalt depending on the tweaking of the chemistry, or lithium-nickel-cobalt-aluminum oxide batteries, which are gaining importance in electric powertrain and grid storage. They all need cobalt.
We estimate each EV will contain about 18 pounds of cobalt per vehicle. Morgan Stanley’s (NYSE:MS) research report on Tesla puts forth a base case scenario of successful commercialization of three EV models (S, X and Gen3) surpassing 1.1 million units by 2028, with a combined volume of 150,000 Model S and Model X units by 2020. Gen 3 volume will reach 220,000 units by 2020 and 775,000 units by 2028. Under this base case scenario, with estimated future production from our Idaho cobalt project of 3.3 million pounds of cobalt per year, we could supply enough cobalt for all of their Model S and Model X production to 2020, and with what’s left over, 17 percent of their Gen 3 estimated production.
FT: The announcement of Tesla’s gigafactory in North America is a positive development for Fortune Minerals. Our NICO gold-cobalt-bismuth-copper project is located in Canada and is a proposed vertically integrated project; mining and concentrating of ores in the Northwest Territories and downstream processing of the concentrate at our proposed refinery in Saskatchewan will produce cobalt sulfate, which is needed to manufacture lithium-ion and nickel-metal hydride batteries — both of which require cobalt. The plant will also produce gold and bismuth ingots, needles and oxide, principally for use in products where bismuth is a nontoxic, environmentally safe replacement for lead in metal alloys and chemicals.
NICO is positioned to become a reliable Canadian source of cobalt and bismuth, both of which have supply concerns from dominant mine production in the Congo and China, respectively. Tesla is potentially an important customer as NICO will also benefit from the North American Free Trade Agreement and similar trade relationships with the European Union. The refinery also has the potential to enter the metals recycling business, including the recycling of metal contained in rechargeable batteries.
GIN: Tesla will require a stable supply of materials for its factory. What will that mean for juniors?
GCO: When operating at capacity, Tesla’s gigafactory will require a tremendous amount of these metals. To feed this appetite, Tesla and its partner Panasonic (TSE:6752) will require a steady supply of these materials. Global Cobalt has already put in place an offtake agreement with Beijing-based Easpring (SZSE:300073), China’s largest supplier of battery-grade material to Panasonic.
FCO: I think it will affect the junior producers of the raw materials required for the manufacture of rechargeable batteries — especially cobalt and graphite — in a very positive way, especially those companies with North America-based programs capable of providing a stable supply of material.
What is critical here is that Tesla plans to build these batteries from scratch under one roof to reduce the costs associated with dealing with several suppliers of the various components of the battery. That in turn implies it will be sourcing out the raw materials needed for its batteries, and what comes into play here is being able to follow the supply chain to ensure the materials are ethically sourced, are non-conflict, are environmentally sound and provide safe working conditions for the people involved in extracting the minerals, which fits in nicely with Tesla’s corporate image of environmental and corporate responsibility. North American projects not only fit this bill, but also provide an added advantage on reducing the OPEX of the plant by reducing the raw materials’ transportation distance and eliminating potential tariffs.
FT: Cobalt is a critical metal with growing economic importance, but it is susceptible to supply disruptions and scarcity. The Democratic Republic of the Congo accounts for 60 percent of cobalt mine supply, and refining is primarily based in China, which has about 43 percent of refined cobalt production. As such, companies with advanced cobalt projects in stable jurisdictions will receive increased attention. Fortune’s NICO project is well positioned to become a reliable North American source of cobalt having recently received environmental assessment approval for both its mine and refinery. In addition, project financing negotiations for NICO’s development are ongoing.
GIN: Why do you think the announcement of one factory has caused such excitement in the market?
GCO: Tesla’s gigafactory is more than just a “factory” — the gigafactory announcement fundamentally changes the EV industry and proves that EVs are here to stay.
FCO: The goal of the gigafactory is to help reduce Tesla’s EV costs from the $70,000-plus area to the $30,000 to $35,000 range, where I believe they will be embraced by the general population. Certainly, that seems to be what Morgan Stanley’s analysts believe, judging by their $320-per-share target price for Tesla.
FT: Cobalt prices recently hit two-year highs, in part due to Tesla’s announcement. Cobalt is used to manufacture various types of lithium-ion batteries, including the specialized nickel cobalt aluminum cathode chemistry from Panasonic used in the Tesla Model S.
The demand for cobalt from its usage in rechargeable batteries has grown from 1 percent of the cobalt market in the mid-1990s to over 40 percent today, primarily as a result of the use of these batteries in smartphones and other portable electronic devices. The additional demand resulting from the production of batteries for Tesla’s EVs would be significant given that typical lithium-ion car batteries contain 2 to 6 kilograms of cobalt.
GIN: If there is one thing that investors should take away from Tesla’s plans for a gigafactory, what is it?
GCO: Achieving economies of scale for the battery plant will not only require Tesla and its battery-making partners to supply batteries for Tesla’s fleet of vehicles, but also to manufacture power storage devices for other vehicles, electronic devices and the renewable energy industry. That equates to further increased demand for battery-grade materials, including cobalt.
FCO: The investor should focus on near-term, North America-based mining projects that could help supply the raw materials for the rechargeable battery gigafactory. The possibility for these projects to get financial assistance to build their mines through offtake arrangements with Tesla could fast-track them to production and cash flow.
FT: Significant amounts of cobalt are used to manufacture lithium-ion batteries, and Tesla plans to build the world’s largest lithium-ion battery plant. The announcement of this $5-billion plant is a significant indicator of the future growth in the use of rechargeable batteries and their need for cobalt.
Stay tuned for an update on what’s next for the interviewees.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Global Cobalt and Formation Metals are clients of the Investing News Network. This article is not paid-for content.
Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.