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Lack of ETHICAL COBALT Undermines Tesla Debt Issue

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Lack of ETHICAL COBALT Undermines Tesla Debt Issue

The lack of rail links, poverty, violence and corruption in the DRC hinder the expansion of cobalt production

In the 111-page draft prospectus of Tesla’s proposed $1.5bn senior note offering that came out this past week, the word “cobalt” appears only once. On page 29 you will find a mention of the metal, in a list of potentially at-risk materials including steel, copper and so on. This cursory mention of the electric carmaker’s dependence on the metal must have passed a formulaic test of what securities laws require. It may not, however, pass a laugh test among those familiar with the Democratic Republic of Congo, which accounts for more than 60 per cent of world cobalt production and is the principal prospective source of new supply. Tesla has always been a company of the future funded by investors’ equity. The problem with a debt issue (the $1.5bn note matures in 2025), is that there is a more certain date with material reality. It has become more apparent that cobalt supply could be the choke point for the mass production of electric vehicles that are capable of replacing the standard car or light truck. Cobalt is a critical component for the high energy and power versions of lithium-ion batteries. Over the past year, the spot price of cobalt on the London Metal Exchange has soared from $26,200 per tonne to more than $56,500. Price is not, however, the most significant barrier. That would be physical availability. There is not enough cobalt production from existing mines, or mines under construction, to meet the demand projected by Tesla along with Chinese and European auto manufacturers over the next five years. And it usually takes a lot longer than five years to bring a new mine into production once the sponsors have made the initial commitments. Most cobalt is produced as a byproduct of copper or nickel mining. Even a doubling of the cobalt price is not enough, in itself, to lead to a significant increase in production. The miners and their financiers would have to see sustainable higher prices for copper and nickel to justify the cost and risk. There are cobalt-rich mineral resources around the world, including significant deposits in Australia and Canada. In the past decade, though, their economics were crushed by the Tenke Fungurume mine in southern DRC. The Tenke Fungurume deposits were first delineated in the late 1950s and early 1960. It took a series of optimists to develop the mine. After a succession of false starts, Phelps Dodge, Lundin Mining and the DRC’s Gecamines committed to construction in late 2006. Phelps Dodge was bought by Freeport-McMoRan in early 2008. An investor friend of mine recalls a visit in 2006. “It’s basically bluish oxidised copper and cobalt lying all over the surface. Tenke has so much cobalt that it was estimated back then that it would throw off the entire market. Phelps Dodge said the price of cobalt could go to zero, but because it had an average grade of 3 per cent copper the project would still make a profit.” Freeport-McMoRan bought Tenke Fungurume into production about 50 years after the initial surveys in 2009. Freeport, in turn, last year sold its interest to China Molybdenum. Only two of the originally planned four phases of the property have been developed. One has to wonder why anyone would ever think of selling what is undoubtedly one of the greatest mining assets in the world. Could it be the lack of rail links, the horrific poverty, violence and corruption of the country, or the necessity for big power developments (possibly coal fired) to accompany any expansion of production? OK, to make the progressive buyers of electric vehicles happy, we’ll build huge new mines in Canada or Australia. It should not take more than seven to 10 years to get the permitting, financing, construction and power lines done, since the customers are so well connected. Unfortunately, while those mines are being promoted and built, some ruthless developer could build a new mine for cheap, rich DRC ore and undercut the economics of the eco-friendly, ethical mining companies. Until then, the largest new source of cobalt will come from the re-commissioning of Glencore’s Katanga mine, which is expected to open next year with a capacity of 22,000 tonnes per year. The next large resource, Eurasian Resources’ restarted Metalkol project, also in the DRC, should provide 14,000 tonnes per year starting in 2019. After that, it is not clear what cobalt sources will be developed. Both projects are dwarfed by prospective demand. The electric-vehicle optimists and promoters will counter that lithium-ion batteries’ cobalt requirements can be engineered down. Not without more years of development and testing, and not without sacrificing performance or insurable risk. With enough demand, though, there can be supply. In the future, we may not need countries for our minerals. From Venezuela to the DRC, we may only require a perimeter fence around the resource, the supply lines and the willingness to shoot anyone who approaches. Even low-carbon minerals have ethical burdens.