A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that holds what could be the world’s largest private stockpile of physical cobalt, a 32.6% cobalt stream on the Voisey’s Bay mine, and 11 other cash royalties on cobalt production or streams.

Pat notes that demand for cobalt has risen along with the popularity of electric vehicles. But while the long-term demand for battery metals looks promising, this firm’s fate may be too closely tied to cobalt prices.

Q: Back in 2017, you recommended avoiding the KBLT (Cobalt 27) IPO and it turned out to be sage advice. The shares have now dropped considerably. Though there is still the risk that a new battery technology could upset the demand for cobalt, how do you view Cobalt 27 as an investment now?

Cobalt 27 Capital Corp. (Symbol KBLT on the Toronto Venture Exchange; www.cobalt27.com), holds what is believed to be the world’s largest private stockpile of physical cobalt at over 2,900 tonnes. The company also owns a 32.6% cobalt stream on the Voisey’s Bay mine. (Streams are where the company pays cobalt producers an upfront payment in exchange for a share of future cobalt output.)

In addition, Cobalt 27 owns 11 other cash royalties on cobalt production or streams.

For centuries, cobalt has been used to give glass a blue or green tint. Starting in the 1900s, the metal has also been added to other metals to manufacture aircraft engine parts and other corrosion- and wear-resistant products. In its radioactive form, cobalt is used in the treatment of cancer. Still, it’s the metal’s use in making batteries—including lithium-ion batteries for electric vehicles—that has significantly increased its demand.

Cobalt 27 first began trading on the Toronto Venture Exchange under the symbol KBLT in April 2017 after changing its name from Arak Resources and moving into the cobalt business.

Swiss mining firm Pala Investments Ltd. owns an 18.54% stake in the company and its managing director of investments, Anthony Milewski, is also Cobalt 27’s CEO.

In June 2018, the company acquired what it believes is the world’s first pure cobalt stream on Vale SA’s Voisey’s Bay nickel-copper-cobalt mine in Labrador. Cobalt 27’s $300 million U.S. purchase means it receives 32.6% of Voisey’s Bay’s cobalt production starting January 1, 2021. This is expected to result in deliveries to the company of roughly 1.9 million pounds of high-grade cobalt metal each year.

Inner Circle: Other battery-related metals contribute to the portfolio

Apart from that metal, Cobalt 27 continues to branch out into other battery-related metals such as nickel and lithium.

It made other key acquisitions in 2018: a nickel-cobalt royalty over the Canadian-based Dumont project; a nickel-cobalt royalty over the Canadian-based Turnagain project; a nickel-cobalt-scandium royalty over the Australian-based Flemington project; and a scandium royalty over the Australian-based Nyngan project.

As a further part of its diversification efforts, in January 2019, the company agreed to buy Australian explorer, developer and miner Highlands Pacific Limited for $96 million. Highlands’ key asset is its 8.56% interest in the Ramu nickel-cobalt mine near Madang, on Papua New Guinea’s north coast. Once Cobalt 27 closes the Highlands acquisition, it will likely repay Highlands’ outstanding Ramu construction and development loans. That will increase the company’s interest in the Ramu mine to 11.3%.

The Metallurgical Corporation of China Ltd. is Ramu’s controlling owner. It’s now considering a $1.5 billion U.S. expansion of the mine, and Cobalt 27 will have the opportunity to participate in the expansion. The Metallurgical Corporation financed, constructed and commissioned Rama in 2012 at a cost of $2.1 billion U.S. That was at the time China’s largest overseas mining investment.

Shortly after the Highland acquisition was announced, Cobalt 27 added to its portfolio once again by acquiring a royalty on the producing Mount Marion lithium mine in Australia.

Note that due to child-labour concerns, Cobalt 27 plans to avoid investing or sourcing cobalt in Africa—especially from the Democratic Republic of Congo.

The battery industry currently uses 42% of global cobalt production, a critical metal for lithium-ion electric vehicle batteries. The remaining 58% is used in diverse industrial and military applications (super alloys, catalysts, magnets, pigments, and so on) that rely exclusively on the material.

About 97% of the world’s supply of cobalt comes as a by-product of nickel or copper (mined almost exclusively in the Democratic Republic of Congo).

Longer term, demand for cobalt should continue to rise as auto manufacturers ramp up production and deliveries of electric vehicles (EVs). However, as prices for cobalt rise—as they did in early 2018—it spurs the development of new mines and brings closed copper/nickel mines back into production.

More important, though, it boosts artisanal production (small-scale mining by individuals or small groups, usually with hand tools) in the Congo and accelerates production at the country’s four mines—Katanga, Roan Tailings Reclamation, Mutoshi, and Deziwa.

All in all, cobalt production will now likely remain in oversupply at least through 2023.

Price increases for the metal also accelerate efforts to produce other types of battery chemistries that do not require cobalt. For example, electric battery giant Tesla has been investing in research to try to remove cobalt from its batteries and add nickel instead.

Still it has been difficult to reduce the amount of cobalt used in EV batteries because of the metal’s ability to improve battery stability and capacity. That could, however, change quickly.

The outlook for nickel prices is also uncertain. The prospect of Chinese nickel producers building big high-pressure acid-leach (HPAL) nickel plants in Indonesia would hurt future prices. These plants would produce an intermediate nickel product that could be converted into nickel sulphate for use in electric vehicle (EV) batteries. If successful, supplies from those facilities could undercut the higher nickel prices that are forecast as the EV battery market grows.

Cobalt 27’s fortunes—up or down—will be tied directly to uncertain prices of cobalt and its other metals. As well, the company’s attempts to acquire new royalties or streaming deals may prove unsuccessful.

Recommendation in Pat’s Inner Circle: Cobalt Capital Corp is not recommended.