Fortune Minerals President and CEO Robin Goad shares insight into the main factors driving the cobalt market, government funding for critical infrastructure improvements, and the company’s strategic financing partnership with PricewaterhouseCoopers.
Fortune Minerals Limited (TSX:FT; OTCQX:FTMDF) is focused on becoming a vertically integrated cobalt chemicals producer for the lithium-ion battery industry. The company owns the shovel-ready NICO cobalt-gold-bismuth-copper deposit in Northwest Territories and is planning to build a metals processing plant in Saskatchewan to process concentrates from the mine to value-add metals and chemicals. The unique polymetallic composition of the NICO deposit includes mineral reserves containing more than one million ounces of gold as well as 12 percent of the world’s bismuth reserves.
The NICO project recently reached an important milestone with the announcement of federal funding for the planned Tlicho All-Season Road. The construction of this public road to the nearby community of Whati will enable Fortune to transport its concentrates south for processing and is needed for NICO’s mine operations. This, together with the strong price performance for the cobalt market supports Fortune’s efforts to secure project financing for NICO’s construction. In January 2017, the company engaged PricewaterhouseCoopers Corporate Finance to aid in arranging the financing for the estimated C$600 million in capital costs needed to develop this vertically integrated project.
Investing News Network: Fortune recently announced federal funding for the Tlicho All-Season Road to the community of Whati near your NICO cobalt-gold-bismuth-copper project in Northwest Territories. What is the importance of this road for the NICO project?
Robin Goad: The Tlicho road is a critical piece of infrastructure that we have been working on in collaboration with the Northwest Territories and Tlicho (indigenous) governments for close to a decade. The road has just received federal funding as well to support the P3 (private public partnership) funding model Northwest Territories Government is proposing to construct and operate this road. The 97-kilometre long road to the community of Whati will provide a socioeconomic link to the public highway system to lower the cost of living and improve the quality of life in that community and extend the winter road season to communities further to the north.
Fortune plans to build 50-kilometer spur road from Whati to the NICO project, giving us all-season road access to our mine site and completing the transportation solution needed for delivery of the NICO concentrates to our planned refinery in Saskatchewan. The Tlicho road is a project that demonstrates how government and industry can work together to provide important legacy infrastructure for public benefit, while also enabling economic projects needed to provide commutable employment, tax and royalty revenues and contracting opportunities. It also provides better access to the nearby Snare Hydro Complex, lowers the cost of hydro expansions, and improves access to the Bear Province and Indin Lake Belt, where there is an advanced gold project that will benefit Nighthawk Resources and other exploration companies.
NICO is essentially shovel ready with a positive feasibility study and more than $116 million in expenditures to date. We have already test mined the project to validate deposit grade, geometry and mining conditions. We have completed a Front-End Engineering and Design study with sufficient detail engineering for procurement. We already have environmental assessment approvals – both in Northwest Territories for the mine and concentrator as well as in Saskatchewan for the refinery. And we have piloted the proven process methods to verify the process flow sheet, metallurgical recoveries and the products we will produce. This is a high margin project with greater than 50% margins and EBITDA’s of about $100 million per year, making this a highly attractive project to invest in.
The announcement of the federal funding was a critical step for us toward securing project financing, and with the cobalt market aligned, we have announced PricewaterhouseCoopers Corporate Finance as our advisor to help us secure the project financing needed for construction of the NICO project.
INN: Please tell us more about your engagement with PricewaterhouseCooper (PwC) and your strategy for financing the NICO.
RG: We wanted an advisor that had a global reach and PwC is located in nearly every country. In addition to that we are looking for project financing from a number of different sources and working with a group that is about relationships as opposed to simply running an auction is what is needed to bring in the various components of the project financing concurrently. We have a project that is very attractive to a much more diverse group of potential investors than a typical mining project which would otherwise be just seeking a debt and corporate equity type of transaction. This project can also be characterized as a chemical plant with a captive source of raw material or, a vertically integrated mining project. That really opens up the potential possibilities for partnerships by tenfold, and to some additional private equity investors that may not be interested in investing in a mining project, but do invest in processing plants, particularly one that is focused on battery-grade cobalt chemicals. The long-term vision of the plan is to also be a toll processor of concentrates from other mining projects and to diversify into the metals recycling business.
We expect to secure part of the financing through streaming some of our gold, which can be converted into cash at any time. That frees up the project as a cobalt play, which is the dominant metal in the deposit. The gold is highly liquid and also counter cyclical to mitigate the risks associated with cobalt and bismuth price volatility. We are also considering strategic partnerships; for example, companies in need of a secure supply of cobalt that may be willing to pay for it. There will also be some supplier and either private equity or bank debt.
At the same time, we want to limit the issuance of corporate equity in order to minimize dilution, so we are looking at alternative funding sources. The key to the funding strategy is the synchronous arrangements of all of these components so that we are not discounted on any one element of the project finance and that is the role of PwC.
INN: Please share your thoughts on the reasons behind the current upswing in the cobalt market. What’s driving this market in 2017?
RG: Cobalt is a critical metal with a diverse range of uses, but the greatest use is in high performance rechargeable batteries; and specifically lithium-ion batteries, although cobalt is also used in older generation nickel-cadmium and nickel metal hydride batteries. The current size of the cobalt market is about 110,000 tonnes. It has been growing at a compounded annual rate of approximately 6 percent for 20 years. That growth rate is being driven primarily by the increased demand for batteries, which accounted for only about 1 percent of a much smaller cobalt market in the mid-1990s to more than 50 percent of the market today. We are now entering the fourth phase of battery commercialization with the transition from lithium ion batteries in portable electronic devices to their use in electric vehicles and stationary storage cells. Where a cellular phone might require a few grams of cobalt per phone, cars such as the Tesla Model S need between 10 and 20 kilograms of cobalt per vehicle and we are expecting accelerating demand.
The demand side of the cobalt market is very well understood. It is the supply side that that can lead to extreme volatility in the cobalt price, primarily because of any potential disruption in supply, and also because the current suppliers cannot keep pace with demand. The cobalt market has transitioned into a supply deficit and this has had a significant impact on price. The cobalt price was between US$10 and US$11 per pound in early 2016 and in March 2017 has escalated to approximately US$27 per pound of high quality metal cathode. Chemicals such as the cobalt sulphate Fortune plans to produce would trade at an even higher price for the cobalt contained, reflecting the value add processing. However, it should be pointed out that longer-term average prices for cobalt are typically around US$20 per pound and the price was at a discount during the five-year Bear Market due to Artisanal production in the Congo and some large copper-cobalt and nickel-cobalt projects in the Congo and globally that produced cobalt primarily as a by-product. There are concerns about the geographic concentration of the supply chain network in some unstable areas of the world. Currently, greater than 60 percent of cobalt mine production comes from the Democratic Republic of the Congo (DRC), a politically unstable country, and about 52 percent of refinery production occurs in China. In addition, up to 98 percent of global cobalt production is sourced as a by-product of copper and nickel mining. Hence, the market requires new sources of cobalt that are independent of copper and nickel mining as well as the DRC and China.
INN: What impact do expect the sale of the massive Tenke copper mine in DRC to China Molybdenum and private equity firm BHR will have on the cobalt market?
RG: Tenke is currently the second largest producer of cobalt in the World after Mutanda (also in the DRC) and has the potential to become the largest producer of cobalt in the world. It currently produces about 10 percent of global supply. This move by China will further exacerbate the problem of geographic concentration of the cobalt supply chain with an additional 10 percent of refined cobalt production now in the control of a Chinese company. China already dominates cobalt chemical production and with control of the Tenke-Fungurme Mine and Kokkola Refinery, it now controls about 84 percent of cobalt chemical supply. Clearly, the Chinese are being strategic in acquiring control of resources that are critical to where they see the demand going, and to support their national policies of the transformative evolution from vehicles with internal combustion engines to electric drive trains that are powered by lithium-ion batteries. Cobalt provides the energy density required for power, performance and charge life needed to get the range required for electric automobiles and the Chinese battery industry is transitioning from cathode chemistries based on Iron-Phosphate (LFP) to cobalt based chemistries such as Nickel-Manganese-Cobalt (NMC) and Nickel-Cobalt-Aluminum (NCA). Cobalt-based cathode chemistries are expected to remain the standard for the foreseeable future.
INN: Now that the price of cobalt has reached over $27 per pound, the highest level in over six years, do you expect to see further price gains?
RG: The current high price of cobalt is really due to the fact that the supply side has not been able to keep up with demand as we enter the fourth phase of battery commercialization (lithium-ion battery use in electric automobiles and stationary storage). This transformative event saw validation with more than 420,000 pre-orders of the Tesla Model 3, each paying US$1,000 per order for a car that is not yet reached full production. Furthermore, Dieter Zetsche, Chief Executive Officer of Daimler Ag was recently quoted in January 2017 that, “At Mercedes-Benz we see the four key pillars for future mobility as connectivity, autonomous driving, car sharing and electrification”. There are similar quotes from executives at General Motors.
Additionally, Consolidated Edison recently installed battery backup to replace natural gas peakers in the California grid in order to mitigate electricity use volatility with off-peak charging from the electrical grid. Stationary storage also enables greater use of renewable energy generation from wind turbines and solar. All of these applications can be used on both an industrial/utility scale or even residential to make electrical supply more efficient.
Consequently, we believe that the demand for cobalt will really increase from the increasing demand in electric vehicles and stationary storage. The demand for cobalt in other applications such as super-alloys for jet engines, magnets, cutting tools and cemented carbides, prosthetics, catalysts used in rubber, plastics and petroleum refining, pigments and agriculture products are also expected to remain strong with growth at least as great as the growth of global GDP. With supply anticipated to remain constrained, we believe that the cobalt price will remain strong for the foreseeable future.
INN: Can you speak about the current political upheaval in the DRC and the potential impact on the cobalt market?
RG: The DRC has had a long history of political instability and I don’t believe there has ever been a government change without violence either, by war or armed revolt. The last civil war brought the Kabila family to power and Joseph Kabila, the current president, has defied the Country’s constitution refusing to hold elections in 2016 and cede power. The leading opposition candidate was also sentenced to prison in absentia. The DRC is a very corrupt country and the ruling family is involved in businesses in which corruption is rampant. The threat of significant violence was temporarily quelled with the promise to hold elections in 2017. However, if these elections do not occur, I can easily see additional violence and disruption of the country’s critical supply of cobalt.
This risk highlights the value of adding new vertically integrated sources of supply in politically stable countries like Canada as consumers look for more secure sources of cobalt materials.
In addition to the political instability in the DRC, there are also concerns about the Artisanal mine production, which is fraught with human rights abuses. Amnesty International wrote a report last year that was highly critical of the unethical sourcing of cobalt materials from Artisanal mines that employ child labor, have unsafe working conditions and unsustainable environmental practices. Battery and electric vehicle manufacturers have all made the case for the need for cleaner, sustainable sources of supply from conflict-free parts of the world and most are also members of the Electronics Industry Citizens Coalition (EICC), which has strict policies governing raw material procurement from ethical sources.
We see NICO as part of the solution to reduce the aforesaid risks by diversifying the supply chain. NICO will provide a Canadian supply of cobalt chemicals for the lithium-ion battery industry with supply chain transparency and custody control of these metals from ore through to the production of the final products. NICO has mineral reserves of 33 million tonnes, sufficient for a 21-year mine life at a production rate of 4,650 tonnes per day. The provision of approximately 1,615 tonnes of cobalt annually would place NICO among the top 20 global cobalt producers. There are also a number of untested mineralized zones where additional mineralized material could be identified as well as a 10 million tonne satellite copper deposit. In addition, the life of the refinery can extend beyond that of the mine as the refinery is designed to have flexibility to be able to toll process concentrates from other mines and to diversify production into the battery and metals recycling business.
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