Global Cobalt (TSX:V.GCO, Stock Forum) CEO Erin Chutter has been racking up the frequent flyer points of late, as her company continues to advance its southern Russian Karakul Cobalt Project, with which it hopes to supply a voracious and nearby Chinese appetite for cobalt.
Here, Chutter talks to Midas Letter about cobalt demand, the progress at Karakul, their upcoming NI 43-101 and the partnerships that protect the project from Russia’s erratic political situation.
James West: So Erin you are developing cobalt assets primarily in the USSR, why don’t you give me an update of what you’ve accomplished in 2013 and what we’re going to look forward to in 2014?
Erin Chutter: Yeah, no problem at all James. Yes global Cobalt’s flagship project is the Karakul Cobalt Project which is located in the southern Russian republic of Altai.
Our project itself is about a 100 kilometers from the Chinese border by road and as I’m sure your audience knows that China is one of the major consumers of cobalt. They refine more than 50% of the world’s cobalt for the battery market, lithium battery market.
Through 2013, we were very much focused on advancing that project. We acquired the rights to it in June of 2013. Through the Fall and Winter, we ran a conformation and infill drill program to understand the data from the historic resource on the project, the builder owned geological model and to ultimately prepare for the first western resource on the project which we’ll be releasing in an Ni43 101 resource format this Spring.
So it was a very busy season for us. We were able to get on to the project, execute on that program on time and under budget and we’re very much looking forward to the results from that program which will allow us to move forward with the pre-feasibility study planning for the project.
James West: I’ve got to ask given all of the turmoil surrounding Russia and Ukraine lately, has there been any negative impact on your ability to move forward with the project?
Erin Chutter: At this point we have not experienced any difficulty having access to the project, any difficulty with title, any difficulty even transferring funds back and forth to Russia. We are monitoring it very closely and we’ll continue to do so.
Our projects are about 4,000 kilometers from Crimea and so at this point we feel pretty confident, they will continue to be able to operate in Russia without any difficulty.
James West: Okay, so then in terms of your ability to continue and access financing, have you had any negative impacts or negative feedback from your investors?
Erin Chutter: I think that the situation in Russia has certainly made people nervous about Russia in general as a jurisdiction. But I’ll be honest, people were nervous about Russia as a jurisdiction before this happened and our shareholders and investors for the most part have already accepted that risk in exchange for what they feel is the upside that comes with being active on one of the largest primary cobalt projects in the world that’s located so close to the largest buyer for the project.
The other thing too is we’re fortunate in that our funding partners have supplied most of the projects funding that we’ve required and that is unlikely to change with the instability in Russia that we’re currently seeing.
So at this point where we’ve seen some effect is from a market perception perspective and we’re working very closely with our investors and shareholders to reassure them that our access to title is secure and our access to ongoing funding is secure.
James West: Okay, so now in the case of your institutional shareholders, are many of them Russian or Chinese or Asian or European?
Erin Chutter: Our strategic partnerships, which include our funding partnerships, are primarily European. Our title funder is the European Bank for Reconstruction and Development and they with a European syndicate have provided much of our project funding to date.
We do have agreements in place with two Chinese based groups and the focus from them is on optic side and on funding the feasibility study side.
There is a really interesting geopolitical development happening between Russia and China in terms of cooperation over natural resource extraction and funding of those projects.
And in a way, we are well positioned to really take advantage of that. We have the rights to Russian strategic resource and we have various strong funding relationships out of China. So again, that gives us a little bit more strength in a time that is uncertain.
James West: Okay, so tell us a bit about the nature of your agreement with the administrator of the resources in Russia? I’m sure it’s quite a bit different than Canada and the U.S. but just we’re looking — what kind of assurances do you have that the Russian sort of regulatory regime and mineral resource rights regime is going to be — observe the rule of law completely?
Erin Chutter: Well we’re earning into the resource. The resource has been owned by a European company since 2006. So this is not a new development for a foreign investor to be working on this project and have the access rights to this project.
One of the questions that we get a lot is around title security and I think the key thing to remember is that we have a key shareholder and a key funder, the European Bank for Reconstruction and D evelopment.
They are one of the largest sources of foreign capital into Russia and they have enormous political clout and sway in that jurisdiction and they provide for us a sense of political risk insurance as it were. I don’t know if I would be comfortable operating in that region without that kind of senior banking relationship working alongside of us.
James West: So you are saying that because of their financial influence and clout in Russia that that Russia is unlikely to try to tinker with your title and your rights there?
Erin Chutter: That’s correct, I mean they are major investor and shareholder in all sorts of industries; mining, manufacturing, even oil and gas and we have not yet seen an example where an asset has been stripped from operating company, a foreign operating company when EBRD has been in equity or debt provider to that asset. They’re a very, very strong partner for us in the region.
James West: Oaky. All right, let’s focus on the asset and its development for now then? What’s the status of the project, in the best case scenario, what’s the path for production?
Erin Chutter: Sure a great question. So the project itself has a long history in terms of the resource development. We estimate that in today’s dollars about $60 million has been spent on the project in a variety of ways.
There’s been extensive drilling and trenching. There is a significant amount of metallurgical test work done on the project and as well, during the 1970s, three kilometers of underground workings were put along, following the mineralized horizon under surface.
So what that means is we’ve been able to step in and really be the beneficiaries of a very large amount of historic work. We have access to most of the historic drilling core and we have the data as well, from both the metallurgical as well as the other geological processes.
What we wanted to do as our first step was to westernize a portion of the resource area. And so, what we chose is to take a look at the open pitable portion of it and the close-by underground portion of it and really focus our attention on a western resource on that portion of it in order to be as efficient as possible and that’s sort of the first catalyst or milestone that investors will see this Spring when we publish that first resource estimate.
From there, during the course of the Winter drilling we discovered that the deposit appears to be wider and higher grade at depth and what we would like to do is get a better understanding of that material and how we can bring that material into resource and bring that material into mine planning as well.
So the summer program will be looking at that but also looking at, upgrading the metallurgical work. It was done again in the 1970s and there has been very significant progress with respect to higher recoveries on these sort of unique polymetallic deposits and then finally, those two pieces, the additional at-depth resource work plus the metallurgical work will feed into a PEA in the fall.
At the same time, however, we’re also working with BGRIMM which is an engineering and metallurgical team on a Chinese feasibility study that will be acceptable to Chinese funders. So we’re basically operating on two paths to move the project to a production decision.
Ideally, I would like to see that production decision be in hand this time next year, so early 2015, allowing us to determine the correct funding route, moving forward either through continued negotiations with our off take partners, western funding, perhaps through an EBRD-led syndicate or Chinese-based funding.
James West: Okay, so it looks like China is really the ultimate goal in terms of off take?
Erin Chutter: We need to keep obviously our options open, but given the proximity of the project to China, given their appetite for diversification away from Democratic Republic of Congo cobalt supply which is currently what they’re dependent upon, it does seem to be a logical place for us to go.
And interestingly China doesn’t seem to share western concerns to the same degree around doing business in that jurisdiction.
James West: I’m sure they don’t. Okay, so then how much cash is Global Cobalt currently got on hand?
Erin Chutter: We completed a $2.3 million financing in January, so that is sufficient to carry us through to June which is when we are expecting to be through the publication of the resource and then we will be able to at that point announce the next tranche of funding from our funding partner.
James West: Okay, great Erin. So give me a quick overview of the cobalt supply and demand outlook for the next 5 years?
Erin Chutter: Sure. James I think the cobalt market is one of the under-told stories and we’re actually starting to see more and more focus on it which we felt wasn’t inevitable when we started down this path a number of years ago, that eventually the world would catch up, or the investing community would catch up to the — yawning issues coming with the market.
Most of the world supply for cobalt is by-product format. It either comes from copper mines or it comes from nickel laterite projects. A big chunk of that comes from the DRC.
The main driver now for cobalt demand is from lithium and other batteries. Historically you know it’s used as a steel additive that’s still an important part of the industry but a much smaller portion.
Because of this demand coming from the battery space, we’ve seen cobalt demand on aggregate increasing by about 6% or 7% a year and the estimate is that even with new production that has come on stream in the last couple of years and new production that’s slated to come on stream in 2015, the Cobalt market will be in deficit by 2017 and at that point we should see the peak of the cobalt price come back.
So we’ve seen a gradual increase in the cobalt price from $10-$14 a pound over the last 12 months. That is slated to continue to creep up to about $17 a pound by the end of 2015 and then, from that point on it’s a big question mark, what will be the effects of that increased demand from the battery space and potentially limited supply.
James West: Sure. Okay, great Erin. Thanks very much. That’s a great starting point and we will continue to follow — we’ll catch up with you again in a couple of months and see how you are making out.
Erin Chutter: Super. Thank you so much.
James West: Thank you. Bye for now.