In late May, the Democratic Republic of Congo (DRC) reinstated an export ban on cobalt concentrates. However, the DRC government will allow miners which receive waivers to continue to ship product. The DRC mined about 100,000 tonnes of the brittle metal with strong magnetic properties in 2019, or about 70% of the amount mined worldwide.
Such government action/interference seems likely to cause cobalt buyers to seek supply from other regions and enhances the position and importance of First Cobalt Corp. (TSXV: FCC). It owns the only permitted cobalt sulfate refinery in North America – located north of Toronto — and its main cobalt exploration project, Iron Creek, is in the U.S. state of Idaho. Iron Creek could contain 25 million pounds of cobalt.
We note that the DRC government banned exports of concentrates eight years ago in an effort to encourage miners to build refineries in the country. However, this effort has been largely unsuccessful. In April 2021, the DRC Ministry of Mines adopted a policy of granting individual exceptions based on applications submitted by individual companies.
Another issue for western buyers of cobalt, such as electric vehicle (EV) battery makers, is China’s outsized influence on the industry. (Cobalt is a key component in the cathodes of EV batteries.) Over the last few years, China has purchased a significant quantity of cobalt mining rights in the DRC. After cobalt sulfate is mined in the DRC, it is typically shipped via truck to South Africa’s port city of Durban and then shipped on to China for processing before its ultimate sale to EV battery makers or other buyers. About 80% of refined battery grade cobalt sulfate is produced in China.
First Cobalt’s Refinery
First Cobalt’s Canadian refinery has been on “care and maintenance” since 2015. First Cobalt hopes to restart it in October 2022 after a US$60-million capital expenditure program is completed. The hydrometallurgical refinery (with near-zero carbon emissions) would produce 25,000 tonnes of battery grade cobalt sulfate annually and could generate around US $30 million of annual pretax cash flow at current cobalt prices.
The company is in advanced discussions with lenders for a US$45 million debt facility. As of mid-May, the proposed debt facility was in the due diligence phase. A further US$10 million of construction costs will be covered by investments made by the Governments of Canada and Ontario. In December 2020, those two bodies announced they will contribute toward the refinery’s construction costs.
First Cobalt has signed a five-year contract with Stratton Metal Resources Limited which allows the company to sell up to 100% of the refinery’s cobalt sulfate once it enters production. The sales price will be based on market prices at time of shipment. The actual quantities to be sold to Stratton are First Cobalt’s decision (which must be made prior to each calendar year), subject to a minimum amount.
Solid Balance Sheet
As of March 31, 2021, First Cobalt had cash and marketable securities totaling $19.5 million and convertible debt of $6.7 million. The entire debt amount, which was held by Glencore, was converted to First Cobalt common shares on April 7. First Cobalt’s cash and market securities balance reflects the sale of a portion of its silver and cobalt exploration assets to Kuya Silver Corporation (CSE: KUYA) for a combined $3.7 million of Kuya shares and $1 million in cash.
First Cobalt’s spending has been relatively well contained. Its operating cash flow shortfalls were $2.2 million and $2.3 million in 1Q 2021 and 4Q 2020, respectively.
|(in thousands of Canadian $, except for shares outstanding)||1Q 2021||4Q 2020||3Q 2020||2Q 2020||1Q 2020|
|Operating Cash Flow||($2,181)||($2,337)||($1,296)||($1,335)||($1,508)|
|Cash & Securities- Period End||$19,500||$4,174||$4,718||$3,581||$4,637|
|Debt – Period End||$6,724||$6,664||$6,978||$6,973||$7,001|
|Avg. Shares Out. (Millions)||468.8||409.3||391.5||387.3||387.3|
If First Cobalt were to be unable to complete financing discussions for its refinery or if the start date were to be delayed beyond the target October 2022 date, its shares could be negatively affected.
In less than 18 months, First Cobalt could be operating a unique and valuable asset, the only cobalt refinery operating in North America. Given the central role that cobalt plays in the EV industry and the strong cash flow the refinery could generate, investors could significantly revalue the company’s share price as they become more confident the refinery will commence service.
First Cobalt Corp. last traded at $0.30 on the TSX Venture Exchange.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.