20/02/2008 - 22:00

Cobalt price surge as demand grows

20/02/2008 - 22:00

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Recent power-related cobalt supply constraints in central and southern Africa have combined with low inventory levels and a strong market for the metal to double the cobalt price, pushing it to $US50 a pound.

Cobalt price surge as demand grows

Recent power-related cobalt supply constraints in central and southern Africa have combined with low inventory levels and a strong market for the metal to double the cobalt price, pushing it to $US50 a pound.

In 2005, the Democratic Republic of the Congo was the top producer of cobalt with almost 40 per cent of the world share, followed by Canada, Zambia, Russia, Brazil and Cuba, where it commonly occurs as a by-product of nickel and copper.

Cobalt production has tripled in the past 12 years from 20,000 tonnes per year in 1995 to nearly 60,000t/year  in 2007.

A major shift to hybrid-electric vehicles in automotive technology is set to dramatically increase the demand for cobalt-based, rechargeable batteries. Newly emerging demand, combined with increases in cobalt use for other types of turbine engines and gas-to-liquid catalysts, is underpinning the recent lift in cobalt use and is expected to drive cobalt consumption to much higher levels.

Market studies indicate that an additional 3,000t/year of cobalt will be required by 2010 and at least 6,000t/year by 2015 just to meet demand growth generated by hybrid vehicle production.

Several local companies produce cobalt. BHP Billiton and Rio Tinto obtain significant bi-product credits, as do nickel miners Independence Group, Mincor, Sally Malay and Jubilee, among others.

Albidon will gain small cobalt credits from its Zambian mine when it commissions in the second half of 2008, while CuDeco and Exco Resources have cobalt credits with some of their mineralisation in Queensland.

By the middle of 2008, Compass Resources should be cranking up its 50 per cent owned copper oxide plant in the Northern Territory.

Briefcase estimates that, by 2009, this project will produce cobalt at a rate of about 1,300t/year, along with about 10,000t/year of copper.

At today’s prices, Compass’ Browns Oxide project will earn more for the sale of its cobalt than for copper, with estimated revenue of about $108 million from cobalt and about $82 million from copper.

Compass is set to generate earnings of over 30 cents per share from the Browns oxide project at today’s copper and cobalt prices. Project oxide ore reserves contain about 13,000t  of cobalt along with 77,000t of copper, while the underlying sulphide mineral resource contains about 82,000t  of cobalt, with an insitu value of $A10 billion, along with substantial amounts of copper, nickel, uranium and lead.

Havilah Resources is  working with a Chinese JV partner to develop its Mutooroo copper cobalt project in South Australia, where initial reserves are estimated to contain about 130,000t of copper and 11,000t of cobalt, contained in an iron sulphide host.

Havilah’s initial plan was to work towards a quick and cheap, heavy medium separation plant, but recent market and metallurgical work highlights an attractive option to produce high quality copper and cobalt flotation concentrates.

Briefcase expects a development plan will be in place by mid 2008, leading to production by early 2010.

At current metal prices, revenue from Mutooroo’s copper and cobalt sales would be about equal, at $90 million a year, with the project estimated to generate earnings for Havilah of about 40 cents per share at current metal prices.

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In recent weeks, we have seen two critical situations develop in global energy markets that are likely to have long ranging and negative impacts on the outlook for Australia’s resources-led boom.

After a decade of more than 10 per cent annual economic growth, China may well be coming up against restrictions to this expansion. Severe winter weather in China has disrupted local coal mining and distribution, which combined with higher prices for imported coal, resulted in power shortages.

At its height, Chinese power demand was said to outstrip supply by up to 70 gigawatts, which is equivalent to the total installed generating capacity of the UK. No doubt this situation, even if temporary, will affect Chinese economic growth this year.

All eyes will be focused on China this year in the lead up to the Beijing Olympics in September. Authorities will need to deal with atmospheric levels of nitrogen oxides and suspended particles, which are two to four times the levels seen at games in either Seoul or Athens. This could mean a partial shutdown of industry in the region for several weeks prior to the games, further restricting Chinese growth this year. Australian resource companies could face weaker markets into 2009, resulting from the US economic malaise and any China related knock-on to trading partners.

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Internationally traded coal prices have doubled over the past three years. Economics 101 tells us that demand will fall when prices rise. Added to this, regulated power prices in both China and South Africa are limiting the ability of generators to supply additional power at a profit. Governments in both jurisdictions now face the unpopular task of raising power prices to consumers so as to ensure longer-term availability.

In southern Africa, studies show that at least 2,000MW a year of new installed capacity will be required for the foreseeable future, requiring 8 million tonnes of coal each year to fuel this added capacity. Regulated power charges will need to be abandoned to encourage new capacity into the market.

Australian company, Aviva Corporation, has wisely set up operations in Botswana, adjacent to the South African border. Drilling so far at its 90 per cent owned Mmamantswe coal project has outlined resources of more than 1.2 billion tonnes. The company estimates that, after washing and processing, this resource can produce over 350mt of saleable thermal and high-grade metallurgical coal product, well in excess of the 180mt required to fuel a 1,500MW power project for 30 years.

Aviva has raised $21 million to progress this power project and a 400MW power project based on its coal reserves in Western Australia’s Mid West, where power will be required to run new iron ore processing facilities.

Botswana is classified as the lowest risk country in Africa in which to do business. The country is well run and has its own stock exchange. Miners pay state royalties and corporate tax. By comparison, miners operating in South Africa have to contend with the Black Economic Empowerment (BEE) system.

BEE basically imposes a company which is owned by black South Africans, as a 30 per cent, non-contributing partner on non-BEE explorers and developers in South Africa. This system, which is meant to open up business opportunities to historically disadvantaged black people, is clearly wide open to corruption and cronyism.

Briefcase doubts that much of the wealth created by this mechanism will ever filter down past the local Mercedes dealership, to the poor, black inhabitants of that country. Indeed, BEE is likely to become a source of division in the country as the favoured few, well-placed individuals enrich themselves at the expense of the vast majority of citizens.

Companies such as Equinox Resources and Albidon Ltd, operating in Zambia, along with Platinum Australia, will need to secure reliable power to run their operations. Zambia has long sourced adequate power from its own coal and hydro-power projects. Industrialisation is eating away at southern Africa’s power surplus, resulting in brownouts on the Zambian copper belt and the Witwatersrand. Briefcase expects that this situation will get worse before it gets better and would thus be cautious about mining projects, other than coal mining, in southern Africa.

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• Peter Strachan is an AFS Licensed research provider and author of weekly, subscriber based newsletter, www.stockanalysis.com.au. The author holds shares in Havilah Resources.

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