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The New Criterion: Testing investor appetite for cobalt

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By Tim Boreham

Northern Cobalt (not yet listed)

The latest cobalt offering is testing ongoing investor appetite for the battery ingredient, in a climate in which investors are becoming more educated and more discerning about battery wonder metals and blue-sky promises.

We saw the same trend with lithium and graphite.

Currently, about 50 explorers claim to have a cobalt exposure, of which perhaps 20 are the real McCoy (they all claim to be, which doesn’t help).

Few – if any – are likely to be in production any time soon.

Northern Cobalt’s advantage is that its Wollogorang ground – in the northeast corner of the Northern Territory – contains an initial resource so it won’t be drilling holes merely on a promise and a prayer.

The company is seeking to raise $5m-$6m at 20c apiece, with one attached option for every two shares subscribed for.

Wollogorang includes the Stanton deposit, which helpfully was extensively drilled by CRA (now Rio Tinto) in the 1990s. CRA was looking for copper – a quest that proved unrequited – but it unearthed a parcel of “exotic metals”, including cobalt.

The resource (in the lower inferred category) is rated at 500,000 tonnes, grading 0.17% cobalt, 0.09% nickel and 0.11% copper.

While these cobalt grades are decent, the size alone won’t float anyone’s boat, but it’s the starting point for Northern Cobalt which cites an exploration target of up to 10 million tonnes in the same geology.

The IPO is the sternest test of the cobalt market since sulphide nickel-cobalt explorer Ardea Resources (ARL) listed in early February, having raised a tad over $5m. Shares in Ardea, which is drilling the Goongarrie nickel-cobalt project near Kalgoorlie, have zoomed 375% higher.

A spin off from mineral sands developer Broken Hill Prospecting, Cobalt Blue (COB), listed in late January on the back of its Thackaringa copper-cobalt ground near Broken Hill.

The macro story remains supportive: the cobalt price has risen more than three fold since early 2016 and the metal is forecast to be 20,000 tonnes in deficit this year.

While traded on the London Metals Exchange and thus transparent, the cobalt market amounts to only 123,000 tonnes a year. That’s about the amount of iron ore Rio Tinto scoops from the ground every three hours.

Of this output, the Democratic Republic of Congo accounts for 60% and the undemocratic African country is on the nose because of the use of child labour to mine the stuff.

Come to think of it, the troubled nation is in a gnarly political situation generally, with the United Nations threatening sanctions against parties who delay a proposed election scheduled for late 2017.

On the demand, seismic shifts are occurring with global miner Glencore this month struck a deal with a Chinese battery maker to supply 20,000t of cobalt, with end user Volkswagen underpinning the arrangement.

Volvo, meanwhile, has declared that all its vehicles will contain electric engines by 2019 (it’s a moot point whether this makes their cars any less boring).

Cobalt is not a rare metal – it’s ranked number 33 in abundance and is widely scattered in the earth’s crust.

The thing is, though, there aren’t any decent pure-play deposits, with most of the metal produced as a by-product of copper or nickel mining.

Northern Cobalt lists 17 selected cobalt peers, ranging in size from Hammer Metals (HMX, market valuation of $9m) to Robert Friedman’s Clean Teq Holdings (CLQ: $344m).

The latter’s Synerston project in NSW is rated as having 109,000t of contained cobalt, at a grade of 0.1% cobalt and 0.65% copper.

Despite Ardea’s runaway success, not all the cobalt wonder stories have been successful. Cobalt Blue shares are slightly underwater, as are shares in Golden Mile (G88) which listed in June. The latter has started drilling at its WA Quicksilver nickel-cobalt project, which recorded encouraging grades under previous management.

In the deep dark DRC, Tiger Resources (TGR, market cap $98m) produces cobalt as a by-product of its Kopi copper sulphide mine.

Meanwhile, Northern Cobalt plans to hop into it straight away with a 230 hole, 20,000 metre drilling program before the end of the year. So investors who brave the offering ahead of the August 7 close won’t have to wait long to find out whether their punt pays off.

Whitebark Energy (WBE) 0.07c

The dawning of the battery era comes at a time when oil and coal are cheaper they’ve been for years. The resulting cobalt, lithium and graphite craze is thus being driven more by sentiment (environmental concerns) than supply and demand economics.

But did the Stone Age end because the Flintstones ran out of stones?

Like it or not, slimy hydrocarbons will remain dominant in the energy mix and that means fruitful rewards for those who find the stuff. As the reinvented Whitebark points out, this quest has never been cheaper because of lower drill rig costs and improved extraction techniques.

In its former guise as Transerv Energy, Whitebark missed on buying the producing Waitsia gas field from Origin Energy, which decided to retain the asset and then hive it off with other projects (this IPO still hasn’t happened).

Transerv and partner Berkshire Hathaway (of Warren Buffet fame) had put up $160m, so they weren’t mucking around.

After licking its wounds, Transerv changed it name to Whitebark and outlaid $5m for a 20% interest in a Point Loma Resources’ producing field in Alberta, Canada.

Point Loma chugs out 900 barrels of oil equivalent per day (boepd) across 65 wells, but extension drilling should increase this output to around 2000 boepd.

Whitebark chief David Messina says while Canada is a tad nippy there’s a lot for an oil producer to like about the place.

Costs (such as drilling rigs) are a fraction of those in Australia and the approval process is much faster. Pipelines conveniently criss-cross the tenement maps like a nasty case of varicose veins.

 “It’s not going to be a ten-bagger but it’s not going to go backwards,” Messina says of the asset.

What’s of more speculative interest is the Xanadu venture in the Perth basin, in which Whitebark has acquired a 15% interest. The hole, which will target a 160 million barrel prospective resource, will start offshore but meander horizontally to the target zone just offshore.

With a puny market cap of $5m Whitebark is trading at close to half its cash backing. Drilling at Xanadu starts in September and we guess there’s little downside if the hole is a duster.

Whitebark also has an interest in the Warro gas field in the onshore bit of the Perth Basin, in joint venture with Alcoa (which accounts for 23% of WA’s gas consumption).

The trouble is the ‘tight’ gas required hydraulic fracturing to extract, with the controversial practice subject to a moratorium imposed by the incoming Labor administration.

The ban is subject to a review and presumably it’s temporary, in which case the sky’s the frackin’ limit.

Tim Boreham edits The New Criterion tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Published: Tuesday, August 01, 2017


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