Commodities | Sep 08 2021
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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.
But despite UBS expecting gold to trend lower over the medium to long term, as the Fed normalises policy, the broker does not anticipate a similar ‘taper tantrum’ to that previously experienced by the market.
UBS expects gold strategic positions to be more resilient amid a broader investor base and given the nature of macro uncertainties that lie ahead. But in the near term, the broker believes gold faces headwinds amid expectations real rates should move higher from here, not necessarily just because of taper expectations, but because rates have been quite low relative to the phase of the cycle.
Overall, UBS expects gold market to find support from physical demand as the market enters a historically strong period for buying from key markets such as India and China.
However, while physical demand from key markets for the remainder of the year should be sufficient to provide the gold market with underlying support, the broker believes it is still unlikely to move the needle in terms of price trends.
Kaolin and HPA
Canaccord Genuity believes there are numerous ways to play the underlying demand for kaolin, also known as China Clay — versatile material with wide-ranging applications — which is in plentiful supply in Australia. Two markets, paper (37%) and ceramics (34%), account for over 70% of kaolin’s end-use, while other categories also include applications such as adhesives, animal feed, medical, crop protection, household products, and remediation.
Data from the US Fed suggests the kaolin price index has risen from 100 in June 1984 to 230 today, implying a compound price increase of an inflation-like 2.2% annually. Canaccord views this stability as a positive for Australia’s kaolin developers and their investors as it provides on insight on a key area of potential risk when assessing the potential outcomes for a project.
Based on Grand View Research, the macro-outlook for kaolin demand is GDP-like, with forecasts estimating volume growth of 4.5% annually between 2020-25 with the market’s value rising at 8.8% annually over the same period
The researcher suggests this implies positive pricing and mix trends over the forecast period.
While the market for kaolin is large and mature, the broker believes a net incremental 1mtpa of supply is needed to keep pace with demand. That's good news for local investors, adds Canaccord who have several ASX-listed stocks in the kaolin space to choose from.
The largest of these by market cap is Andromeda Metals ((ADN)), which offers exposure to the rare halloysite grade of the material. Canaccord also notes Suvo Strategic Minerals ((SUV)), which has a profitable operation at an ex-Imerys site at Pittong in Victoria and is developing a project in WA.
Two additional kaolin plays Canaccord has an eye on includes WA Kaolin ((WAK)), which has the largest deposit and is readying for production start-up in Q1 2022, and Latin Resources ((LRS)), which has also published promising study results.
The broker notes that in addition to numerous moving parts which will create opportunities for new market entrants, some operators, notably Andromeda Metals (confirmed JORC resource) and Latin Resources, which is in exploration, also have potentially commercially relevant deposits of halloysite. What this offers, adds Canaccord, is possible future applications in concrete strengthening and handling, carbon capture and storage, and nanotechnology.
Canaccord believes Strategic Minerals, WA Kaolin, and Andromeda Metals either have or are in the process of negotiating off-take agreements for their products, often with distributors or users in the Asia-Pacific region. The broker also notes capex is relatively low, while payback periods are fast, mostly measured in months.
Canaccord also notes that high purity alumina (HPA) aluminum oxide, is also an emerging application for kaolin, with the most common use today being in lighting and other applications using LED technology.
Industry forecasts project the HPA market to grow at 17% annually over the next seven years, which to the broker suggests supply will need to grow to match that demand.
The broker notes HPA also has potential critical applications in lithium-ion battery (LIB) separators and electrodes helping to improve battery safety and performance.
While alumina, like kaolin, is an established industrial mineral, the broker notes emerging applications in electronics and LIBs require ultra-pure grades, which calls for a re-evaluation of the HPA production process.
In a market amounting to tens of thousands of tonnes per annum, raw aluminium metal, explains Canaccord, has been the expensive starting material for HPA production while kaolin offers a potential solution as a long-term, cost-effective feedstock.
Two ASX-listed companies, Altech Chemicals ((ATC)), and FYI Resources ((FYI)), offer exposure to this relatively new process. A third company, Alpha HPA ((A4N)), explains Canaccord, solves the problem using a fundamentally different process but producing promising results with comparable, and possibly lower, unit costs.
Canaccord notes while the HPA market enjoys dynamic growth potential over the next five years, the projects tend to require significant capex running to hundreds of millions of dollars – while HPA pricing is projected to be an order of magnitude higher than for kaolin.
Canaccord Genuity remains ‘not rated’ on any of the kaolin or HPA stocks reference above.
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