Material Matters: Cobalt, Nickel, Gold, Kaolin & HPA

Commodities | Sep 08 2021

A glance through the latest expert views and predictions about commodities: Cobalt, Nickel, Gold, Kaolin & HPA

-Nickel/manganese/cobalt use forecast to double in 20 years
-Macquarie’s base case is for a significant over-supply of nickel from 2022 onwards
-UBS maintains a downward bias towards gold
-A significant new supply of kaolin needed to match demand
-HPA market is projected to grow at 17% annually over seven years

By Mark Story

Cobalt: Local players leveraged to a structural deficit

While the cobalt market has traditionally been in the form of lithium cobalt oxide (LCO) cathodes, Canaccord Genuity believes the rapid adoption of electric vehicles (EVs) and the use of nickel manganese cobalt (NMC) cathodes is set to push the market into deficit. The broker anticipates the total market growing at 8% compound annual growth rate (CAGR) until 2030, more than doubling in size from 128kt in 2020 to 272k in 2030, with a 31kt shortfall.

However, Canaccord expects the supply issue to become more acute as early as 2024 when the market enters a deficit, which the broker doesn’t expect to close without significant investment or demand destruction from high prices.

Supply of cobalt – which is largely a by-product of copper and nickel production -- is dominated by the Democratic Republic of Congo (DRC), which supplies 70% of the global market and Canaccord expects the DRC to maintain its market position out to 2025.

However, Canaccord notes social and governance risks in the DRC is constraining future investment, while a lack of infrastructure investment is handicapping supply expansion. The broker cites the world’s largest cobalt mines Kamoto, Tenke, Mutanda -- all based in the DRC – which may also reach the limits of production capacity. Beyond 2025 the broker suspects DRC growth may only come with improved economics from higher pricing.

Canaccord forecasts prices rising beyond the previous peak of US$42.52/lb and sets long term pricing at US$40/lb. But the broker notes as witnessed in lithium markets, as the supply demand balance tightens, pricing can react quickly, and the supply response can take years.

With Canaccord expecting a 31kt deficit in 2030, the broker estimates US$4-14bn of investment is needed to deliver additional tonnes and balance the market. Where will this investment come from?

Beyond the DRC, the next largest source of growth identified by Canaccord is likely to come from Indonesian HPAL (high pressure acid leach) projects.

But over the medium term (2024-27), there are several ASX-listed projects Canaccord expects to begin production, including Jervois Global’s ((JRV)) Idaho project in the US, Cobalt Blue’s ((COB)) Broken Hill Cobalt project, and Sunrise Energy Metals' ((SRL)) Sunrise project in NSW.

While these projects are expected to produce smaller amounts of cobalt (1- 5ktpa), Canaccord believes they represent an important ex-DRC/Indo/China supply source that is both auditable and accessible to consumers outside the current majors.

Each of the three companies, explains Canaccord present as a differing value proposition, either as a pure-play miner, refiner, or as a major cobalt/nickel project.

Firstly, the pure-play: Canaccord has initiated coverage of the Cobalt Blue project – which is leveraged to capital-efficient cobalt – with a speculative Buy and a price target of $0.65. What differentiates Cobalt Blue from other projects, notes Canaccord, is that cobalt is the primary revenue stream with low capital intensity (US$120m/ktpa capacity) while delivering a meaningful volume of material into the market (3.5ktpa).

Cobalt Blue is currently piloting its process in Broken Hill before advancing to a demonstration plant in 2022 and final investment decision (FID) in late 2022/early 2023. The broker also believes there is underlying value in the company's flowsheet intellectual property, which may present further commercial opportunities.

Secondly, the refiner: Canaccord has initiated coverage of Jervois Global – which is becoming an integrated miner/refiner with its Idaho Cobalt project in the US, and SMP refinery in Brazil -- with a speculative Buy and a price target of $0.60.

The broker notes Jervois’ business model is less aligned to mining and more akin to refining, which in the broker’s view offers a level of earnings margin stability. Once the SMP refinery is ramped up in 2024, Canaccord pegs Jervois on track to become the second-largest ex-China refiner of cobalt, with 8.5kt of capacity, while the recently acquired Freeport Cobalt business in Finland is yet to be factored in.

Then there’s the major cobalt/nickel project: Based on what Canaccord sees as value hiding behind a capital hurdle, the broker raises its price target on Sunrise Energy Metals to $3.00 from $2.50 and maintains a speculative Buy rating on the company.

The Sunrise Energy project – which envisages a large-scale nickel/cobalt HPAL operation, 25-plus year mine life, and peer leading earnings margins -- has a high cobalt-to-nickel ratio, is already permitted, and has undertaken a significant amount of process trialling/engineering.

Canaccord believes that if a funding solution is found for this large-scale project with high capital costs expects to be $2.6bn, then Sunrise Energy represents a leveraged exposure to cobalt and nickel of scale.

Nickel: Pending oversupply to set prices falling

Macquarie notes that the nickel market has pivoted to a large (125kt) deficit between supply and demand following extraordinary growth in nickel demand of 400kt and estimated stock declines globally totalling over 150kt year-to-date.

However, after factoring in an upward revision of the potential supply growth from Indonesia in 2022, Macquarie is projecting growth of almost 450kt year-on-year in 2022, which is sufficient to shift the market into large oversupply (of 176kt nickel).

While nickel prices have understandably soared since March – with nickel pig iron (NPI) and nickel sulphate prices having hit fresh multi-year highs -- to reflect a substantial shortfall in supply in the face of booming demand, the bigger issue for the market, notes Macquarie, is what happens next when supply dynamics change.

The broker’s base case is for emerging significant oversupply from 2022 onwards. Macquarie believes it is unrealistic to expect a repeat of 2021’s massive demand growth, particularly in the all-important stainless steel market, and notes growing signs that demand growth has stopped since mid-year.

Macquarie notes the market has been witnessing announcements of new supply additions in Indonesia almost monthly, with 2022 growth reflecting in part a catch-up from delayed production as well as the impact of new furnaces. The broker’s database of furnaces shows 102 operating at the end of 2020, 148 at the end of this year, and 200 operating at the end of 2022.

By 2025, Macquarie assumes around 300ktpa of capacity could be operational with production projected at 245kt nickel and around 25kt of cobalt. This list excludes numerous other projects in the feasibility stage totalling a further 200ktpa of nickel, which the broker suspects are likely to be commissioned post-2025.

Interestingly, the broker notes the economics of capacity additions in Indonesia compared with the rest of the world are such that practically little to no new capacity is being built outside Indonesia today.

Gold: Next stop US$1,700/oz?

UBS regards gold’s ability to holdup above the 100-day and 200-day moving averages as an encouraging sign for the precious yellow metal which has struggled to re-establish itself above US$1,800/oz.

But the broker believes the underlying lower gold narrative remains largely intact given the Fed’s expected policy path and the scope for higher real rates ahead. While UBS would not rule out a test higher in the short term, the broker maintains a downward bias towards gold and expects prices to fall towards US$1,700/oz by year-end.

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