Source: Zig Lambo of The Critical Metals Report (8/30/11)
Most people don't know or care about cobalt. But, as with a number of metals we seldom hear about, we would certainly miss cobalt if it were not available for use in many cutting-edge applications. In this exclusive interview with The Critical Metals Report, Rick Mills, editor of Ahead of the Herd, talks about the supply and demand for critical metals and tells us why cobalt is the "King of Critical Metals." He also tells us why he likes two emerging cobalt producers that could reward investors looking to participate in this very tight market dominated by China.
Companies Mentioned: Formation Metals Inc. (TSX: FCO, Stock Forum), Puget Ventures Inc. (TSX: V.PVS, Stock Forum)
The Critical Metals Report: Most resource stock investors are focused primarily on the precious metals and copper and, to some extent, the rare earth elements (REEs), which have gained increasing coverage in the past few years. Base and industrial metals such as nickel, manganese and cobalt seem to attract little investor interest. Why is that?
Rick Mills: Well, let's focus on cobalt, which has never been on the radar screens of most investors. It is something new and investors have to get their heads around exactly what it is, and just how important it is to the functioning of a modern economy, in the green movement and in defense applications. Cobalt is going to undergo a massive sea change in perception among investors because it is so much more than an industrial metal. I call it the "King of Critical Metals." Cobalt is an emerging story we can expect to hear more and more about as critical metals are the sexy new story.
TCMR: Why don't you give us a definition of critical metals so everyone's on the same page?
RM: There's been some controversy over what is and isn't a critical metal, so let's lay it out for our readers based on three reports published in the last year or so. The U.S. Department of Energy says materials used in four clean energy technologies: wind turbines, electric vehicles, solar cells and energy efficient lighting, are critical now. The American Physical Society's Panel on Public Affairs and the Materials Research Society coined the term "energy critical element" to describe elements that are essential to one or more of the new energy-related technologies. The European Union commissioned a report that identified 14 materials critical to the EU.
Only four metals or element groups made all three lists: REEs, platinum group elements (PGEs), lithium and cobalt. So there is absolutely no dispute that cobalt is a critical metal.
What exactly is it that makes a metal critical? Well, the availability or lack of these elements can have major impacts on energy systems, and significantly increased demand could strain supply. That could cause massive price increases or even unavailability and, therefore, discourage the use of new technologies.
Most of these critical elements are produced as byproducts in the production of other metals, so ramping up production can be extremely difficult and the Chinese are tying up supplies. There's a relentless demand for high-tech consumer products in emerging countries. We have ongoing material research that is exploding uses for these critical metals; there's very low substitutability and virtually none of this stuff is recycled.
TCMR: Cobalt is in short supply, or at least in limited availability, at this point and that is why people should be looking at it, right?
RM: Absolutely. Cobalt has all the criteria we've talked about, but let's look at a few more reasons. Because of the relative scarcity of critical metals, their extraction often involves processing large amounts of materials, which sometimes causes unacceptable environmental damage and, because critical metals are often a byproduct of the production of other metals, the timeline required for new production is dependent on the price of those other metals. Critical metals also have a very high supply risk, because a large share of the worldwide production comes mainly from a handful of countries. Much of cobalt production comes from the Democratic Republic of Congo (DRC).
TCMR: Certainly not a politically stable source of supply.
RM: The geopolitical situation in the DRC directly affects the price of cobalt.
TCMR: That makes sense.
RM: Well, the DRC is the world's largest supplier.
TCMR: That doesn't leave the rest of the world in a very good position. Can you explain the industrial and energy applications of cobalt, and how China fits into the picture in terms of tying up cobalt supply?
RM: Green initiatives have become a global focus point for many investors. Cobalt holds a critical role in the future green energy economy, mainly for its use in rechargeable lithium-ion batteries used in electric vehicles and consumer electronics. But cobalt is also used in solar panels and in the blades and magnets for wind turbines.
Cobalt is also used in high-speed, high-strength wear-resistant alloys that are used in aerospace and military technologies, so there are critical defense applications. Cobalt also has many industrial uses such as a catalyst in desulfurizing crude oil and in hydrogen generation oxidation. It is used in natural gas-to-liquid technology, orthopedics and life sciences.
But it is rare to find it in economical standalone deposits; even though it is one of the 30 most abundant elements in the earth's crust, it has an extremely low concentration, just 0.002%. So, cobalt is almost always produced as a byproduct of copper and nickel mining. There are very, very few primary cobalt deposits in the world today.
About 40% of the cobalt consumed in the world originated as a byproduct from copper production in the DRC. China went in and made a deal with the DRC. It gave the DRC something like $9 billion and built roads, a couple of dams, hospitals, schools and railways. In return, China got the rights to most of the production from the most prospective areas in the Congo for cobalt. So, China has literally tied up a majority of the world's cobalt. The leading global producers of refined cobalt are China at 39%, Finland at 15%, and Canada at 8%.
It has been forecast that close to 40%–50% of the incremental cobalt production over the next five years is going to come from the DRC. China is extremely short of cobalt itself and needs to import it. China uses what it needs and then exports it to everybody else, making it the leading supplier of cobalt imports to the United States. So, again, like the REEs, we have a situation where most of the world is relying on China for its critical metal supply. This is an untenable situation.
TCMR: Obviously, China is looking at it from the standpoint of insuring adequate raw material supply.
RM: True, and China does deals differently than we do. We'll go in and finance a company. We'll talk on a company-to-company basis. China goes in and talks on a government-to-government basis. It wants offtake agreements in exchange for building the infrastructure that a country needs. It's very hard for us to compete on that level.
TCMR: We used to be worried about "Japan Incorporated" because it was the industrial-government complex in Japan, but now we've got "China Incorporated" and it is an even bigger force.
RM: It is by far. A few years ago China's state-owned enterprises and sovereign wealth funds were armed with hundreds of billions of U.S. dollars from the country’s foreign reserves and sent out to scour the globe for resources. They deal in straight cash and don't mind operating in high risk areas, and they want offtake agreements from early stage development projects in exchange for cash and infrastructure.
TCMR: What has happened with U.S. production of cobalt and other strategic metals since the big investment push for them in the early 1980s?
RM: The U.S. used to be a leading producer of a lot of the strategic/critical metals and even the rare earths. But domestic production and research dropped off in the 1980s and 1990s because China ramped up production so much and undercut prices. China could produce at a much cheaper price than anyone else could because it had low production costs and non-existent environmental regulations and oversight. It could get away with anything it wanted. Dump waste/tailings in the bush, drop them in a lake, pump them into a river. They didn't care. Just produce and undercut everybody.
China basically stole all the production and drove everyone out of the markets. We got complacent because we could get it from China cheaper than we could ever produce ourselves. Now China has this stuff locked-up and they're increasingly cutting back exports. It's critical to us as well and we've got to get our own supply. The security of supply situation has to be remedied.
TCMR: Do you expect that there is going to be a strong demand for cobalt and the other critical metals for as far as we can see into the future?
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