As a strategic battery metal facing a potential supply shortage, new cobalt supply sources are needed to fill the gap between rising demand and current production capacity.
The global transition away from the internal combustion engine (ICE) to electric vehicles (EVs) is accelerating, putting pressure on cobalt supplies around the world.
Especially now that lithium-ion battery-powered vehicles are approaching cost parity with fossil fuel burners, more drivers and fleet owners are incentivized to make the switch, and the demand from drivers is reshaping the automotive sector as more automakers are adding EV models to their product offerings. The rising demand for EVs, in turn, is transforming the market for battery metals such as lithium, nickel, graphite, manganese and particularly cobalt.
Among these, cobalt is showing the highest potential for a coming supply deficit given that the majority of the metal’s supply chain is controlled by China and derived from the conflict-ridden Democratic Republic of Congo (DRC). Cobalt projects located in favorable jurisdictions that can be developed in the near-term offer investors the opportunity to participate in this growing market.
Cobalt supply and rising EV demand
The International Energy Agency’s (IEA) World Energy Outlook 2019 report pegged the number of EVs on the road today at more than 5 million following roughly 2 million unit sales in 2018 alone. The agency has projected annual EV car sales reaching 10 million by 2025 with more than 30 million in 2040. According to Allied Market Research data analysis, the EV market has the potential to grow at a compound annual growth rate (CAGR) of 22.3 percent from 2018 to reach more than US$567 billion by 2025.
Lithium-ion battery manufacturers are constructing more megafactories to keep up with rising demand from the automotive industry. At the 2019 Benchmark Minerals Week, Benchmark Mineral Intelligence analyst Simon Moores told the Investing News Network (INN) that there are 103 battery plants in the pipeline. While the majority will come online in China, 14 are planned in Europe and another five in the United States. Together, they represent about 2,028 gigawatt hours of capacity (or nearly 38 million EV batteries) by 2030.
Cobalt supply essential for EV production
Cobalt is an important material in the composition of lithium-ion battery cathodes. Today’s lithium-ion battery manufacturers preferred cathode chemistries are nickel-manganese-cobalt (NMC) and nickel-cobalt-aluminum (NCA). While nickel has proven to be the best metal for extending range out on the road, higher nickel content means higher thermal instability. Cobalt counteracts this instability and keeps the nickel-generated energy density from blowing up the battery. The metal also allows for repeated charges without an impact on the battery’s charge life.
“Cobalt delivers an essential balance between safety, performance, charge time and energy density. It’s becoming clear that NMC cathode chemistries are superior for long-term EV use when compared to other cathode chemistries. Tesla is reportedly switching from NCA lithium-ion batteries to NMC cathode chemistries, which contain more cobalt, for its Model 3 cars being built in China,” Fortune Minerals (TSX:FT,OTCQB:FTMDF) CEO Robin Goad told INN.
In Canada’s Northwest Territories, Fortune Minerals has developed its NICO cobalt-gold-bismuth-copper deposit into a shovel-ready project with open pit and underground proven and probable reserves that include 82.3 million pounds of cobalt and 1.1 million ounces of gold. The company is now looking to secure a strategic partner and the project financing needed to move NICO to the construction phase.
Tight cobalt supplies in recent years have placed upward pressure on cobalt prices, making the metal one of the most expensive battery materials to procure. Today’s NMC batteries contain nickel, manganese and cobalt in ratios of 6:2:2 and 5:3:2. To further increase the range and lower the cost of production, battery manufacturers are working to develop NMC cathodes with higher nickel to cobalt ratios with a goal of 8:1:1. However, investors shouldn’t discount the cobalt market’s potential. Despite plans to lower cobalt content in batteries, growing demand is expected to require more cobalt than the resources available in currently producing mines and known development projects.
“Cobalt plays a very important role in the battery — it gives the battery cell stability. So they can’t engineer it out completely, and even though most battery makers are looking to reduce the amount of cobalt they put in each battery, in the long run we’re going to be producing more batteries, so it becomes very much volume offset to lower consumption rates,” Head of Mining Research Reg Spencer of Canaccord Genuity told INN. “Unless we see a step-change in cathode chemistry or battery technology, we’re still going to need a lot more cobalt than what’s being produced today.”
Benchmark Minerals Intelligence expects cobalt demand to increase four-fold, rising to 219,679 metric tons by 2023 and 276,401 metric tons by 2028. Most of the world’s cobalt produced today is currently sourced as a by-product of copper or nickel mining, and the primary metal determines production criteria. Unfortunately, much of that cobalt comes from the conflict-ridden DRC.
Given a tighter outlook for supplies, the analyst firm expects to see a supply deficit hitting the market as early as mid-2020. “In the near term, other producers might be incentivized to increase production due to improved pricing, but the reality is that the long-term outlook has always been very positive for the cobalt market,” Benchmark Mineral Intelligence Senior Analyst Caspar Rawles told INN.
Conflict-free cobalt supply
Nearly three-quarters of global cobalt production originates in the DRC, where unsafe working conditions and the use of child labor in the artisanal mining industry are forcing manufacturers to source ethical alternatives. In addition, mines in the DRC are depleting their near-surface oxide ores that are amenable to leaching with sulfuric acid to recover the cobalt. This is forcing companies to mine deeper into sulfide ores that could require more expensive downstream processing and increase process costs. Further complicating the global cobalt supply picture, China controls more than 50 percent of the world’s cobalt production (including DRC-sourced supplies), 60 percent of global refined cobalt production and 80 percent of cobalt chemical supply.
These monopolies present both political and policy risks to the chemicals and automotive industries. Both the US and European Union have identified cobalt on their Critical Minerals Lists. The EV and battery manufacturers in these markets are now looking to the mining industry to diversify cobalt mine production.
“Responsible sourcing remains a key topic in the industry. Undertaking the correct due diligence to ensure the material you source is sustainable is absolutely paramount to automakers,” said Rawles. Ideally, there should be transparent custody of control from the mine to the refinery and the final product. Vertically integrated, reliable and ethical sources of cobalt outside of China and the DRC are in short supply, but a few projects are on the verge of making that possible. For example, Fortune Minerals’ NICO project includes a planned mine and concentrator in the Northwest Territories and a refinery in Southern Canada.
In order to provide an ethical source of cobalt, First Cobalt (TSXV:FCC,OTCQX:FTSSF) is developing the Iron Creek cobalt exploration project in Idaho, a large land package in the past-producing Canadian Cobalt Camp, and is working to restart operations processing third-party feed at the only permitted primary cobalt refinery in North America. Canada Cobalt Works (TSXV:CCW,OTCQB:CCWOF,FWB:4T9B) has fully permitted access to the underground working of its past-producing cobalt-silver Castle mine in Northern Ontario and a pilot plant to produce cobalt-rich gravity concentrates on site. The company has also developed a proprietary hydrometallurgical process known as the Re-2OX process for the extraction of metals without the need for a smelter to produce technical grade cobalt sulfate and NMC formulations.
Cobalt’s strategic importance to the EV and battery industries is undeniable. Facing growing demand and a looming supply deficit, the EV battery market could require new sources of cobalt that meet ethical standards. A number of resource companies are focused on cobalt projects in the US and Canada. However, only a few have advanced projects capable of providing timely relief to the coming supply pressure in the cobalt market.
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