Up 60% YTD, cobalt is looking to become the best performing commodity of 2017, and eCobalt Solutions (TSE:ECS) should continue to capitalize on this trend
David Bar | March 29, 2017 | SmallCapPower: With demand increasing along with decreasing global supply, as well as the single largest supplier to the market experiencing severe political unrest, it comes as no surprise that the metal cobalt is already up over 60% YTD, sitting at USD$24.49/lb as of March 27, 2017. As the Democratic Republic of Congo continues to gain market share for supply, its human rights violations come further into the public eye and restlessness in the country increases, uncertainty will continue to push the price up.
Adding to the joys of the cobalt market, or woes depending on your perspective, the United States Geological Survey (USGS) released that in 2016 global production of cobalt actually fell to 123,000 metric tonnes, from 126,000 MT in 2015.This is mainly attributed to low copper and nickel prices for the better part of the year as mines were shutting down. With 94% of all cobalt coming as a by-product of the production of the two base metals, this adds further risk to the supply of this increasingly important commodity.
Additionally, with Tesla’s Gigafactory in the ramp-up phase, and Elon Musk looking to deliver on the promise of producing 500,000 Tesla 3s by 2018, which equates to an increase in cobalt demand of 7,500 metric tonnes… Oh, and it’s all to be sourced from North America. That being said, between the United States and Canada approximately 7,960 metric tonnes of cobalt was produced in 2016, all of which comes as a bi-product of copper and nickel mining. As you can imagine that the entirety of North America’s supply is not going to Tesla, there is an obvious shortfall that will need to be addressed.
eCobalt Solutions Inc. (TSE:ECS)- A Potential “Quick” Fix
Now first and foremost, I say eCobalt Solutions Inc. (TSX: ECS) is a “quick” fix in quotations because nothing in the mining industry actually happens quickly. However, ECS’s Idaho Cobalt Project (ICP) is within 13 months of production once the funding is secured, and will be producing at full capacity eight months later. This for mining is considered a short timeframe and could put it online in time to help feed the growing demand.
As the Company expects to receive the initial results from its Feasibility Study in Q1 of 2017, we can expect to see those within the next two months (ECS’ fiscal periods runs March to February). This study is going to be a huge event for ECS, and if it returns similar findings to the PEA you can expect it to be turned around into a quick financing period.
With a 12.5-year mine life, averaging 1,500 metric tonnes of cobalt metal, in one of only two States (the other is Missouri) that can support a pure cobalt mine, the ICP is a well-positioned, vertically integrated asset, only 11 hours away from Tesla’s Gigafactory. Regardless of whether or not ECS secures an offtake agreement with Tesla, being situated in the United States gives the mine an advantage compared to others as there will be no import duty, so securing off-take agreements shouldn’t be a problem.
The truly amazing thing about the ICP, is that it could be the first pure play cobalt mine to be put into production in North America. That means the continued security of this supply then rests solely on the price of cobalt, as the secondary metals that are to be extracted will not determine its profitability.
Significant Upside for the ICP
When Samuel Engineering completed the economics for the PEA, they used prices of cobalt and cobalt sulfate heptahydrate, a precursor for cathode manufacturing and ECS’s product, at USD$14.50 and USD$19.50, respectively. With prices currently sitting 65% higher than the price used to calculate the project NPV, in analyzing the sensitivity analysis that accompanied the PEA, you can see how the value of this project explodes when the price rises. At a cobalt sulfate heptahydrate price of USD$24.50, which is lower than the current market price, the NPV of the project increases by 78%, bringing its value to USD$202.23mm (CAD$270.52mm).
If we were to look at the value of ECS’ prospects, let’s use the USD$24.50/lb price of cobalt sulfate heptahydrate scenario (NPV of CAD$270.52mm) to err on the side of caution by accounting for the potential of a price decrease. With a current market cap of CAD$146mm, this would translate into a current P/NAV of approximately 0.5x. At a conservative 0.7x multiple (base metal and cobalt miners trade between 0.7x-0.9x), that leaves substantial upside potential for the stock price. To give you a quick and dirty target, a 0.7x multiple amounts to a price of approximately $1.49 (see Table 1 below) which, as of close on Monday, March 27th represents a 25% return.
Table 1: Price Target Valuation of eCobalt Solutions Inc.
David Bar is an MBA Candidate at the DeGroote School of Business. With an interest in the mining and marijuana industries, he hopes to work in the investment industry focusing in these sectors.