Battery Metals: A Shocking Introduction (pt1/7: Cobalt)

An open charging port on a dark grey electric car.

I, like many investors, possess a stalwart belief in the EV revolution and expect charging Teslas to occupy every street corner in the near future. As a consequence, it seems prudent to consider investing in the battery metal market.

Bloomberg’s 2019 Electric Vehicle Outlook report demonstrates the rapid growth of the market, with two million electric vehicles being sold globally in 2018, up from a few thousand in 2010. Their projections further confirm this could be a good time to seek out a winner, with predicted sales rising to 10 million in 2025, 28 million in 2030 and 56 million by 2040. (1)

Furthermore, the International Energy Agency have released their Global EV Outlook for 2019. The results demonstrate a 63% increase in global electric passenger car stock in 2018, and a 44% increase in the installation of electric LDV chargers. Projections under the EV30@30 scenario place EV sales at 44 million per year by 2030. (2) These are just two examples from a swathe of encouraging studies showing the rapid growth of the EV market.

However, the preeminent question for any potential investor still remains to be answered: how on earth can I make money out of this? The answer lies in the heart of the vehicles themselves: battery metals. Here’s how to get started.

Lithium-Ion Batteries – The Misconception

A widely perpetuated falsity about EV batteries is their apparent simplicity. When individuals hear the phrase ‘lithium-ion batteries,’ their minds often retreat back to a rudimentary high-school physics lesson, where paper planes circled the room like a warzone, and batteries were presented as simpler than tying shoelaces.

In truth, batteries feature a variety of metals. These metals are important to the EV economy. More importantly, these metals can make you money.

Today, we’re starting with talking about one of the most controversial battery metals, cobalt.

Cobalt

A photo of a pile of small blue shards of cobalt.

Cobalt appears in the majority of commercial lithium-ion batteries. It is also the most expensive component. In spite of its prevalence, it is worth nothing researchers have developed rechargeable batteries that don’t require cobalt. Moreover, Tesla’s battery supplier, Panasonic, have announced they are developing batteries that don’t need cobalt; Elon Musk tweeted last year: ‘We use less than 3% cobalt in our batteries & will use none in next gen.’ (3) Tesla have reduced the amount of cobalt in its NCA (nickel, cobalt, aluminium) formula massively in recent years.

…yeah, we think we can we can get the cobalt to almost nothing.

Elon Musk in a letter to shareholders

There are a variety of reasons behind the desire to reduce cobalt use in batteries. The majority of cobalt is sourced from Africa, pre-eminently the Democratic Republic of Congo. There are numerous ethical concerns regarding the procurement of cobalt, such as child labour, and artisanal workers employing dangerous methods of extraction. Therefore, companies are being pressurised by human rights activists to reduce their consumption of cobalt, and even discard it altogether. In recent years, companies like Apple and Samsung have been pressured into joining the Responsible Cobalt Initiative.

Furthermore, from an investor’s standpoint, the cobalt market has notable issues. While it is rarer than other battery components, such as lithium or graphite, cobalt is not especially scarce and is typically produced as a by-product of nickel or copper mining. Therefore, if nickel or copper are suffering from low prices, cobalt will too. Investors should be aware that cobalt is not necessarily a fully independent market and is instead reliant on the success of larger nickel and copper markets.

However, attempts to remove cobalt have caused a variety of issues for manufacturers. Cobalt is currently integral to the life cycle of cells within batteries. A reduction in cobalt results in significantly reduced longevity for batteries.

There are also safety concerns that have yet to be addressed. One need only look at the international overheating controversy surrounding the Samsung Galaxy Note 7 to see some of the issues pertaining to cobalt reduction. A reduction in cobalt requires an increased amount of nickel, which can cause cells to overheat and eventually combust. While this is unlikely, it remains an at-present unavoidable risk.

In addition, any formulation with low cobalt levels requires specific dry, costly environments for production. Last year, irrespective of its work to reduce cobalt, Panasonic tripled its consumption for Tesla batteries. It is clear that despite reduction being a long-term aim for many, cobalt is still a crucial element of batteries and will not be going anywhere soon, a position that has been supported by Nobel Prize winner John B. Goodenough.  

There are numerous companies who still feel cobalt is an exciting opportunity for investors to chase paper. Crux Investor has recently interviewed Canada Cobalt Works, (https://youtu.be/V2puGQDRwAk) and Jervois Mining (https://youtu.be/U6GUKdLH_5I). Both offered intriguing arguments as to why it is still an exciting commodity for investors to put their hard-earned cash into.

We investors need to make our minds up about the EV revolution. If we think, like many of the experts and industry players, that it is inevitable, we need to pick some winners. Remember, don’t invest in anything you don’t understand; have a clear view about what your investment thesis is. I want to find out more as there will be clear winners and losers.

As of today, cobalt sits at $38.58/kg , a 34.55% since the beginning of 2019 (4). The all-time high is $105/kg in March of 2018 and the record low is $23.98/kg in February 2016 (5). Huge swings are possible which is all part of the excitement of investing.

Be sure to check out the next article in the series, which will discuss the technological conundrum: vanadium.

  1. https://about.bnef.com/electric-vehicle-outlook/#toc-viewreport
  2. https://www.iea.org/publications/reports/globalevoutlook2019/
  3. https://twitter.com/elonmusk/status/1006968985760366592?lang=en
  4. https://tradingeconomics.com/commodity/cobalt
  5. https://tradingeconomics.com/commodity/cobalt

Company page: http://www.cruxinvestor.com

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

European Lithium (ASX: EUR) – A Giga Factory JV with a Junior Lithium Developer?

Interview with Tony Sage, Non-Executive Chairman of European Lithium (ASX: EUR, FRA: PF8, VSE: ELI)

Can European Lithium plug in to the European EV and battery revolution? They talk about how they think they can attract EU debt funding and a strategic equity partner. Will that partner be prepared to pay more for buying local / greener? Tony talks to us about the realities of how junior miners attempt to get funding and why he believes European Lithium is in a unique position in Central Europe. We are interested in understanding the terms and conditions to their recent €10M convertible note funding facility. If you are a shareholder, do you like terms?

We get his take on the Lithium pricing cycle and timing for recovery. Their Feasibility numbers need the price of Lithium to rise significantly to be economic. Do you agree with him?

We are also fascinated by the fact that European Lithium sits on the ASX (ASX:EUR), Frankfurt Exchange (PF8), Vienna Stock Exchange (ELI) and NEX UK (EUR). Find out which exchanges work for them and why.

Interview Highlights:

  • Overview of the Company
  • The Background Story of European Lithium
  • New Shareholders: Who Are They Targeting?
  • Lithium Market and Geopolitics
  • Standing Out: Can They Get Financing in Today’s Market?
  • Cash Position
  • What Are The Board Preparing For? What Are The Main Concerns Going Forward?

Click here to watch the interview.


Matthew Gordon: Why don’t you kick off with a 1 minute history of the business.

Tony Sage: mine was developed by the Austrian government back in the 1980s. They were looking for uranium but they found Lithium. Unlike any Western company, they actually went out and built the mine straight away without doing all of the work that is required before you start building a mine. What they did is they followed the Lithium from the ceiling of the opening and just followed it all the way down. It’s a beautiful structure inside the mine. But unfortunately, when we took over in 2012, there wasn’t data to prove how they found it. So what we’ve done in the 6 years that we’ve owned it, is mine it So we mined 1,500t. And we also drilled. So that proved, as all Western companies need, is a JORC compliant resource. So we know we’ve got 11Mt of ore there. That that will last 22 years as a mine life. And we completed in that time frame a PFS. So a Pre-Feasibility Study has been completed. It was completed by one of the leading engineering groups in the world, DRA. So that’s basically the premise of our story.

Matthew Gordon: How this has come about? You’re involved with Cape Lambert. Cape Lambert is a shareholder in this project.

Tony Sage: It’s a very interesting background. It started off with a cocktail party. One of my colleagues met The Count of that district in Austria, near Wolfsburg. And they got talking and he’s introduced himself. He was in mining. And The Count said, ‘I’ve got a mine on my property’. That’s where it started. So in 2012, we had a look at it, and invested in his property. We paid him a lot of money for access. And then over time, he enjoyed what we were doing, and he became a shareholder of the company. I didn’t have the funds myself personally. So I used my investment vehicle, Cape Lambert Resources, and we invested some money in. And since then, we’ve got other investors in. In 2012, Lithium wasn’t flavour of the month but in 2016, it became flavour of the month. We kept it private for 4 years. And then we listed it on the Australian Stock Exchange back in 2016-17. At the time Lithium was exploding around the world. But in Australia, there were 41 separate ASX listed Lithium companies at the time. And a lot of those were in Australia, some of those were in Africa, and obviously some in South America. So we were being drowned out by all of the Australian ones. So if you’re an Australian investor, and you say I want to operate a mine in Austria, I would just say you’re crazy. Mining doesn’t happen in Europe. So listing in Australia was an error of judgment. But we got the money when we listed, and we were able to progress the project. But then in 2017, we listed it in Frankfurt, Hamburg, Munich, Stuttgart and Berlin. And from that moment on, it exploded. The investor base moved from 100% Australian shareholders to now 55% shareholding base in Europe. And most of those European shareholders are German or Austrian. There’s a splattering in UK, France, Switzerland. So we realised we hit on something extremely good. If you look at a lot of the social media, our company is clicked a lot more than some of the bigger companies in Europe because of 1. EV, 2. it’s a unique story that a mine is going to be actually reopened 20 years later in a little country called Austria.

Matthew Gordon: I do want to say over the management since experience and so forth, but you talk about shareholders and the split between Europe and ASX. Obviously, it’s a European asset. So you’d hope that people would be interested in Europe, but just looking at your share price. Lithium companies across the world have been absolutely hammered. In fact, what is the Lithium price at the moment?

Tony Sage: We’re going to produce is Lithium hydroxide, at its peak was $22,500 per tonne. And you’re looking probably at $15,000 – $16,000 a tonne now. So it’s dropped a lot in the last 12 months. The actual raw Lithium price, got to just over a $1,000 a tonne. It’s probably trading at $450 to $500 a tonne now. Hydroxide has gone down about 35% over the last 4 months.

Matthew Gordon: Most of the numbers I’ve seen from you is using $16,000 a tonne. So obviously that’s taking a bit of a hit. I’ve read various things from JP Morgan that suggest that it’s going to go lower. What do you think?

Tony Sage: We look at benchmark. We look at Roskill, but we also look at the broader world. China has just announced, it wants to build 1M electric buses. Now you just think about the amount of Lithium required for 1M electric buses. The slide started when one of the biggest producers out of Chile said that they were going to double production, because they had an agreement with the Chilean government to increase their production. It didn’t happen. But that was the initial scare. From that date that was announced the Lithium price actually fell about 15% on the day. Lithium stocks all around the world just went down 10%, 15%, 20% because they thought all this production was coming off. However, 1. that production is not coming on. 2. you’ve got countries like China, who are now announcing that they’re going to be a 1M electric buses. Now, there’s not enough Lithium around today to produce those 1M buses in the timeframe they want. The price will go up.

Matthew Gordon: You’re projecting that. I think like most supply demand stories, there’s two sides to it. We accept that the demand is probably going up because of the whole EV story.  But likewise, as soon as the demand goes up, new entrants come into market or production, which is sitting idle at the moment or on a very low level, goes up. JP Morgan would suggest that there’s going to be double the amount of production out of South America alone into the marketplace. So that is going to affect pricing. It’s a question of where it settles. Production is not going to stay as is. It would be insane to think that. I think people will be attracted to come into the Lithium market again. It’s a question of can they do it economically. And we’ve spoken to a lot of Lithium businesses. You’re right, in the ASX lithium is a dirty word at the moment because people’s shares are underwater. It’s a question of when does the price start to move again? You’re going to get through this cycle into the next cycle. Can you get financed at current levels?

Tony Sage: I think we can. I wouldn’t be pushing ahead, spending already $12M-$13M on the Pre-Feasibility Study (PFS). Spending another $10M on the definitive or bankable, unless I was very confident. We’ve been in discussions with project financiers, quite large ones, European-based. What you’ve got to understand is the broader geopolitical situation. You’ve seen it now with Rare Earths. China has said to the world, we’re not going to export any more Rare Earths. At the moment China produce over 80% of the Cobalt required for EVs and 85% of the Lithium for EVs. Now, if they’re going to build 1M electric buses. And of course, with cars and obviously battery storage… how many batteries do you think they’ll be exporting in 10 years time? So the EU has made Lithium and Cobalt critical minerals. There’s only a few players in Europe that can produce in Europe. 25% of the world’s Lithium ends up in Europe. They produce none at the moment for electric batteries.

Matthew Gordon: Let me understand the terminology. You say critical minerals need to be produced from within Europe. Or have they got the ability to buy out in the wider market?

Tony Sage: Well, OK, let’s go into Hydroxide and Carbonate production. All comes from China. They’ve built one plant here in Western Australia. Who owns it? The Chinese. At some point like they have done with Rare Earths, they could say for their own critical needs, that they can’t export any more Lithium Hydroxide or Cobalt Hydroxide, or Cobalt Carbonate or Lithium Carbonate. At some point, it might not happen, but the security countries like America and Europe as a whole need to have is some production in their own backyard. Ours isn’t going to anywhere near create the supply that is needed by BMW, Volkswagen.

Matthew Gordon: So again just so I understand. Are you talking about production or are you’re talking about processing?

Tony Sage: I’m talking about production of Lithium Hydroxide or Carbonate in Europe.

Matthew Gordon: Right. Because it’s a fairly abundant resource, isn’t it? That’s the problem.

Tony Sage: It is. But mining it economically is the key point. So it is abundant everywhere. So, for example, we just take Pilbara Minerals, for example, 4 weeks ago, they were in big trouble. They got rescued by the Chinese because the price has fallen down, because they’re in a remote location. We’re in Wolfsburg, right near the railway line, 40km from Graz, where Samsung have a battery factory. We’re in an industrial area in Europe where we can export to any country in Europe by train for very little compared to having it from Australia or South America, shipping it to China to get produced in China. All China does buy it for $450- $900 a tonne, and sell it as Hydroxide at $16,000 a tonne to battery makers in Europe. The EU have recognized that. They’ve recognized that with Rare Earths. They were scared by the Rare Earths announcement by China on 2020 no more export. So they’re madly, as with the Americans now, trying to find Rare Earths. But it’s the same problem that will be with Lithium Hydroxide and Carbonate. Forget the raw stuff. I mean, there isn’t a plant in Chile that produces Hydroxide or Carbonate. They ship the raw product to China to get the Hydroxide.

Matthew Gordon: Are you’re saying that Europe is coming up these protectionist policies to be able to produce and process their own Lithium in their own backyard?

Tony Sage: Encouraging policies, encouragement for European mines to be able to produce Hydroxide, Carbonate for the European market.

Matthew Gordon: An encouragement! We’ll talk about the funding program launched by the German ministry, which you mention, in a minute. But if I’m Gigafactory producing batteries, I’m going to go to the cheapest supplier, aren’t I? I’m going to go to the South Americans. So how do you stack up against that?

Tony Sage: Well, 1. the freight cost. We’re not paying $22 – $25 a ton to ship it from there to Europe. 2. if you look at and read our Pre-Feasibility Study (PFS), our cost structure is very good. The number is $6,500 -$7,000 a tonne, whereas 12 months ago we could have got $22,000 for it. Now we can get $15,000. It’s still a very big margin of profit, excluding financing costs, for our shareholders. So we believe we can produce for the European market a safe green, very green supply of Lithium Hydroxide to the European market without any problem with geopolitics. If the suppliers, for example, as we saw 7 months ago, the Argentinian government slapped a tax of 10%-12% on every export, including Lithium. So if you’re a Lithium producer in Argentina, you’ve just dropped 12% of your profit.

Matthew Gordon: Yes, but they’re also producing at $3,000, so they got some margin. Lowest quartile producers.

Tony Sage: Well, in Chile they are, Argentina not so. But in Chile. Yes. Chile is very un-environmentally friendly.

Matthew Gordon: Meaning what?

Tony Sage: Well, they’re producing this from brines, which takes up a lot of water. And which is causing all the grief with the local population. And they don’t want any of those mines to be increased, because if you’ve seen a brines production facility, it’s pretty ugly to the environment. So environmental, ours is all underground. So we can get a big green tick and we’re producing Hydroxide for EVs or other environmentally friendly industries. So I think we get 1. a big green tick 2. the German car manufacturers for example, I think one got into a bit of trouble investing in a Cobalt mine in DRC.

Matthew Gordon: That’s a well-trodden path with regards to Cobalt and DRC and child labour and so forth. Let’s stay away from that. Let get into this. So what I want to understand is how does your project get financed today? I know you did a raise earlier in the year. What are the terms of that. $10M was mentioned. But it was a bit more complicated than that, wasn’t it?

Tony Sage: So it’s a financing facility that we can draw down on. It’s complicated because it depends on the share price at the time. They get a 10% discount to the market. Say we are trading at $0.10. They get it at $0.09. And they don’t do it all at once. So we’ve got the facility there. They can do it when they feel like. So, we’ve only drawn down on that facility $2M and so we got $8 million left.

Matthew Gordon: And you can drawdown in $1M tranches upon conversion of all the notes from previous rounds. That’s the way it works?

Tony Sage: So when they finished when they finished selling those to recoup their money, we can then draw down the next one.

Matthew Gordon: Got it. So it’s a real stagger. It’s not $10M per se. It’s a facility, as you said.

Tony Sage: It’s a facility and it can last 3 years.

Matthew Gordon: So let’s come back to financing, because that’s where the fascinates me. At $15,000-$16,000, you’ve shown your what the economics are here for you. But if I’m a banker, I’m discounting today’s price by up to 40%. So it becomes a question of, can you persuade people that your thesis about price going up is true? And if you can, that’s great. If you can’t, then what are your options in terms of getting this thing finance? Once your DFS is complete?

Tony Sage: Well, 1. the DFS will say whether we’re robust enough. So if the DFS comes out saying this is a very marginal project, I wouldn’t go to any bank with this. That’s one scenario. We’re expecting the opposite because the Pre-Feasibility Study (PFS) was very robust. So I’ll have a very robust DFS. So I go to the bank and I will say, ‘this DFS proves there’s a 40% margin in this. How much can you project finance this?’. They will say, ‘this much’. We will seek some EU funding, whether it’s a soft loan, whether it’s a…

Matthew Gordon: Tell us about that? You talk about the German ministry putting a battery production funding program together of €1Bn. That’s quite a lot of money. But how much of that would be applicable to you? How much of that €1Bn would be set aside for mining?

Tony Sage: Unknown. If we, for example, link up with a battery manufacturer, as a joint application for use of these funds, it might be a larger number. As a miner, by ourselves, I don’t think we would be able to do it. We’d have to link up with maybe an end user. I’m just throwing out names. An automotive maker in Germany or a battery maker in Germany. We can partner up and then apply for that. But separate to that there’s EU funding. It’s called Horizon 2020, and under that, there is a direct application for us as a critical mineral for Europe. We may be able to get a soft loan. So that soft loan might be €50M at a very attractive interest rate, which is probably almost zero repayable over X amount of years. So at the same time, say the number is $400M that we’re looking for. We would do $70M of that in direct equity, and the rest in project finance and or funding from a source like Horizon 2020, or from the €1Bn fund from the German government.

Matthew Gordon: How does someone like Horizon 2020 assess your project and the economics of a project like this.

Tony Sage: The credibility of being the… the PFS is done and the DFS is coming. We would have to present a case to them that 1. it’s very good for Europe. 2. it will create jobs in Europe. 3. it is green. We’re not going to hurt the environment by doing what we’re doing. The three key criteria in Horizon 2020. We take every one of those boxes.

Matthew Gordon: It’s interesting that none of those criteria are about the economics.

Tony Sage: No. Again, it’s about creating jobs. If you look at virtually any government around the world, it’s not really about economics. It’s about creating jobs. This is a fiscal investment by the EU into something that’s going to create jobs and solve the problem, albeit in a small way of producing a critical product for the European industry, rather than being reliant on China.

Matthew Gordon: So potentially that type of money is quite important, because it’s… I’m not saying dumb money but it’s money which is a different set of values or needs from institutional money, who does care about the economics, because they’re buying shares in your business, presumably on the equity side, and want some guarantees that you’re going to be able to mine economically and pay back the debt. So have those conversations been had? How do you know that Horizon 2020 is interest in investing in something like you?

Tony Sage: Well, because we’ve applied, and we’ve talked to the right people at the right agency. And we will await the outcome of the DFS. They’ve got a stringent programme as well. We’ve got to have a document that shows that we will be economic. We will create jobs in a low job area, especially for youth near Wolfsburg in Austria, where we are. So that would create long-term 300-400 jobs, short-term 1,500 during the construction phase. So we are going to create jobs in that. And if you go to the local government in that area, we’ve got two sets of competing mayors who want us to build the plant on their side of the fence. So we’ve got so much support from the local government. We’ve got so much support from the Austrian government. So now it’s one step higher, which is the EU in total. And they’ve got so many other factors to look at geopolitics, which we’ve talked we’ve touched on environment, which we’ve touched on. And most important jobs.

Matthew Gordon: Most important for them. But I’m talking about shareholders wanting to come in and invest.

Tony Sage: But if we get that money. That’s a big chunk of shareholders who will go, ‘wow, that’s great’. That’s $50M, $70M. How are you going to get the other… $300M. $70M of that is going to come directly as direct equity. So that’s roughly 25% of it. We’ve done the numbers with banks. What they’re looking at for the project finance side, and they can project finance probably 60% of the project.

Matthew Gordon: So let me get this straight. I want to get the numbers right. You say $400M required. You’re getting potentially, let’s just say for a second argument, $50M of debt from Horizon 2020 on a 70/30 debt / equity split.

Tony Sage: Half of that.

Matthew Gordon: So I’m just trying to think as a retail /high net worth /family office investor looking at your company going, ‘I think this is a great story. I’m going to invest. How do I feel about Horizon 2020 coming in?’. I guess if they’re putting $50 million towards the debt. Great. But it’s still costing the company, whatever nominal rates that these people are charging…near zero. You’re suggesting. That’s great news. Do I look at that as some kind of endorsement of the project? I guess not. It’s about job creation, and is it green etc. So I’d need to some see who else would be involved with this, is what I’d be thinking. You talk about advanced stage discussions with some of the off-take agreements as a means of… would that be pre-funding in terms of the off-take? Who are some of the names involved with this who would give me some comfort around the validity of the project?

Tony Sage: We’ve signed NDA’s with these companies. But rest assured that a large German automakers and builders of batteries themselves is another company. And let’s go for one other one, which was in the industry of producing electronic tools. Now, the reason I don’t pre-sell the off-take now is, once this DFS is done and people see how robust the project is, you’ve got other suppliers around the world that will say here’s a foothold into Europe. So if we’ve already sold our off-take pre the DFS, we won’t be a takeover target.

Matthew Gordon: Ok.

Tony Sage: If I don’t and the DFS comes out, here we are. There’s a small player in Europe is only going to produce 11,000t of Hydroxide per annum. They are in Europe. They’ve got all these contacts. Wouldn’t it be great to have in our portfolio? So if we’d already sold the off-take is very much more difficult to have that story. I’d like to be in a position where we’re completely transparent. We’ve got no-offtake partner now. We don’t want one now. And we will wait until the DFS is done and we can sign 4 agreements today, if I wanted to. And a couple of those are outside of Europe, but I don’t want to sign one now for that reason.

Matthew Gordon: And I appreciate the insight into the strategy and the thinking. That’s well-noted. So, if I look at the project now, $16,000, which is what you’ve done the numbers on, and let’s say it’s roughly give or take that on any given day at the moment, you’ve got a 25% IRR, which is reasonable. But you’re right on the margin in terms of price in the market at the moment. So you’re looking for this price appreciation to drive not only the IRR, but the NPV of this project up. Are there institutions that you’re talking to or begun conversations with, in anticipation of what the DFS is going to tell you?

Tony Sage: Yes, we’ve got a couple of institutions already in the stock. They bought through the last equity raising we did. So they’re sitting back. I’m going to be completely honest now. Virtually everyone, the two major banks, European banks, and two off-takers want to wait for the DFS. The Chinese obviously don’t care about the DFS. They’ve seen the PFS. But we don’t want to send concentrate from Austria to China for $400-$600 a tonne, and it comes back in to Europe at $16,000-$17,000 a tonne. So we can take easy money now and breeze through the next 6 months, or we can hold tough like we have. Be true to what we want to be able to do, which is finish the DFS. And then go to the two major banks that we’ve talked to and say, ‘right, this is it now. You’ve asked us to be our clients. Can you raise X amount of dollars on the IRR based on this final report from DRA’.

Matthew Gordon: Those are an investment banks as opposed to debt providers. And the current investors are going to be very different from the types investors you’re looking for going forward, aren’t they?

Tony Sage: Absolutely. Yes. Completely different. At the moment, we’ve got, in Australia, we call them mums and dads; in Europe they are called family houses. So we’ve got a lot of family house investors in Europe based in Austria and Germany. We’ve got a little bit of investment, now that we’re listed in London on the NEX. And a few are coming through that. The reason we did that is to broaden our investments spread of investors from Europe, and a lot of family houses in London, and a lot of municipalities can’t invest unless you’ve got some sort of listing in London. So we chose the NEX because it was the quickest to get on. And since we were on, it doesn’t trade very well, because most of the family houses buy on the Frankfurt Exchange where we trade millions and millions a day.

Matthew Gordon: It’s cheap and quick on NEX, but doesn’t necessarily trade or give you the volume of liquidity you need. So how much cash are you sitting on?

Tony Sage: $1.7M in the bank right now. Our next drawdown is $1M, which should come through by the end of October, halfway through November. And that will continue. So in another 3 or 4 weeks, we can draw down another $1M or so on.

Matthew Gordon: So they let you know how they’re doing with regards to selling down the shares.

Tony Sage: Well, we see it because they have to come through us to convert their shares. We’ve obviously got the share register, so we know when they are selling it. So we’re okay for now. Would we want a different funding, partner? Maybe. So, there’s lots of different options on the table. We’re not going to say we’re stuck with this one, but this one will suit us for the time being until we finish the DFS.

Matthew Gordon: You mentioned part of your strategy is, you don’t necessarily want to take off-take partners on board yet, until you get clarity on the DFS, because then you’ll understand what your options are. You’re a small Lithium player. You’re in Europe. That’s a USP for you or your positioning it as such anyway. What are you doing? Some companies choose to hunker down until there is price discovery. The price gets back up. Or some people like charge on at 100 miles an hour. Some people JV. What’s going on with the board’s thinking. What are the things keeping you awake at night Tony?

Tony Sage: Well, the biggest one right now, believe it or not, is geopolitical. Because everything affects everything in this world. Trump’s fight with Xi Jinping, everyone should be worried about, the whole world should be worried about.

Matthew Gordon: We are. That’s why Gold has gone up.

Tony Sage: Yeah, $1,500. I’ve been reading reports over $3,000 an ounce by mid-next year. But if I’m thinking purely of business, that is my number one concern. China already has proven with this Rare Earth announcement that it will try and hold the rest of the world to ransom if it doesn’t get its way. Trump is belligerent on the other hand, and he wants his way. So, that negotiation is very important for a lot of things in commodity prices around the world. So that’s one thing that keeps me awake at night. I think part of the reason that the US now says, ‘I want to buy Greenland’, because I know there’s a whole lot of Rare Earths in Greenland. So that one maybe a parody or a joke from him. But he’s quite serious about getting investment in Greenland. And I think now with the Prime Minister going to visit Trump. He’s come out and said, ‘we want to really be involved in Lithium, Cobalt, Rare earths’, anywhere in the world with any Australian company. So geopolitically I think there will be a resolution coming up, whether it’s in Trump’s favour, China’s favour. Who knows? But that will settle a lot of the nervousness. You’ll see Gold maybe come down a little bit. But I think everyone then will think, right China’s ready to go again. We just saw the spurt in iron ore prices, for example. It went from $60 a tonne back to $125. Because they’ve got rid of their stockpiles and they needed it very quickly. If there is some sort of resolution, China will need to fiscally spend money again and that will increase the Iron Ore price. But that goes on to other things. If they’re building 1M buses, they still need Iron Ore. But they still need Lithium. I look at the whole of the world and think about things that can happen, cannot happen. For the board, we’ve got a very good project in a very good country. The government of Austria wanted to go ahead. The local government there wants to go ahead. We’ve had no environmental issues come forth for us. Being in Europe, you see every time there’s a new mine set up, there’s greenies everywhere trying to stop it. Ours is not like that. It’s all underground. I think we’re in a unique position to go ahead, finalize the DFS, have a document that we can present to project financers, institutions that will take chunks in an equity raising and obviously go to the $1Bn fund people out of Germany and also the Horizon 2020 out of the EU. I’m looking forward very positively and I believe that the Lithium price will start to move upwards from January next year.

Matthew Gordon: We shall see. I think lots of people want to see some movement there. And then it’s a case of what happens next. Do we get a slew of Lithium miners coming into market or not? And how do you take advantage of your unique position in Europe and capitalize on that? Tony that’s a great first introduction to the company. I would love to stay in touch and see how you get on.

Tony Sage: Thank you very much.


Company website: https://europeanlithium.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Argosy Minerals (ASX: AGY) – Technically Competent But Are They in Control?

Jerko Zuvela, Managing Director of Lithium explorer and developer Argosy Minerals (ASX:AGY) joins us for an introduction to the company. They have recently made a Lithium Brine acquisition in Nevada, USA. We ask why, and if this could be a distraction to their core Lithium business in Argentina. We appreciate the mitigation of country risk especially considering recent political and exchange rate turmoil in Argentina.

Jerko also gives us an update on their PEA (they have not updated the numbers since the drop in the Lithium price) and talks to us about Argosy’s hopes to convert the Mitsubishi relationship from an off-taker to a being a strategic partner.

Argosy Lithium has raised AUS$9M in April and have AUD$7.5M at the time of this interview. They also tell us about the need to raise an additional AUS$14.3M to finance their interim 2,000t plant and their hopes to get in to small but economic production. How will retail investors react to this dilution and what precisely does this prove and to what end?

Their main asset is in the Salta Province in Argentina which is a prolific low-cost brine Lithium region. Argosy has a team of chemical processing experts which was a key deciding factor as to why they took up the option to buy the Nevada project. It was a cheap option but possibly a distraction and a cost. They need to decide where they are going to spend their time. Jerko says it is low risk and low cost to move it to the next stage and at that point they will decide how to develop this option.

Jerko feels that new entrants to the space don’t have chemical processing expertise which will stop these newbies getting in to the market. Morgan Stanley suggests that Argentina, Australia and Chile will contribute to an additional 500,000 tonnes of Lithium in to the market by 2025, which is twice the current levels. The question then is, will demand outstrip supply or will this new tonnage drive the price down? Again Morgan Stanley is suggesting that the price will go to circa AUD$7,300 by 2021 (almost half the current rate).

Argosy Lithium has the usual small company problems in a challenging Lithium price market. Lithium is a dirty word in Australia and ASX Lithium companies are struggling with liquidity and to raise finance. Argosy is no different. Existing shareholders need to believe it will work but the share price has been dropping for over a year. Management hope that the upcoming milestones and deliverables will make a difference. That is the hope of many companies in the market.

Interview Highlights:

  • Overview of the Company
  • Recent Acquisition in Nevada: Why Was it Sold and Why Did They Buy it?
  • Why Invest in Argosy Minerals? What Makes Them Unique?
  • Company Financials and Cash Position: What’s Their Focus?13:00 – Deal with Mitsubishi
  • Argentina Asset: PEA Reassessment & Jurisdiction Challenges
  • The Lithium Market: How Does a Challenged Market Affect Strategy?

Click here to watch the interview.


Matthew Gordon: We’re very keen to talk to you about battery metals companies at the moment. It’s very topical. So can you give us a one minute summary on the business and then we’ll get stuck into it? 

Jerko Zuvella: Argosy Minerals is focused on its Rincon lithium project in Argentina in the Salta province. We’ve gone about it in a slightly unconventional way where we’ve gone to produce a pilot plant to produce lithium carbonate product. We’ve been doing that over the last two years where we’ve been in Argentina and really pushing hard to achieve these milestones over the last couple of years as stated. Also we’ve recently acquired a lithium brine project in Nevada as well. So we’re very much focused on the Rincon project, but also adding in the US project as an option down the track as well. 

Matthew Gordon: Fantastic. Let’s talk about the recent acquisition in Nevada. Why have you done that and what’s the problem you’re trying to solve by doing that? Jerko Zuvella: No problem to try to solve. I think what we looked at it for was another potential brine project in a world-class jurisdiction, which Nevada is. Further to that our expertise is very much in chemical processing. Many people think the lithium industry is very much a mining game, but given we produce an end product, lithium carbonate or potentially a lithium hydroxide, they are very much chemical products. And that’s where our processing expertise is via our local partner Pablo Alurralde who was a former director of Processing and Technology at FMC’s operations in Argentina. So with that background and with that knowledge and the fact that we’ve gone and produced battery quality lithium carbonate to date so far in our pilot plant in Argentina, we figured another project to take on that Argosy strategy, to fast track development of projects was a good option for us given the fact that the current vendors weren’t able to develop the project or advance the project. We were able to pick it up very cheaply and therefore we thought a cheap acquisition, a cheap entry point, a low risk opportunity. And if we can do something with it that takes the project further given it’s within 4km of Albemarle’s silver peak operation, the only lithium carbonate production operation in North America. We thought it was a good location adding to our experience and expertise that maybe we can do something with in the future. 

Matthew Gordon: People don’t tend to sell their good assets. So why were they a seller at this time? Is it because of the state of the lithium market? They didn’t have the expertise? They didn’t have the cash?

Jerko Zuvella: They IPO-ed off this project, Lithium Consolidated about three years ago. I think they obviously had limited funds, drilling and associated works in Nevada. Especially in that part of the world brine is not cheap andthey werecognisant of spending all their money on one project even, they’ve got a few other opportunities and they didn’t do a lot of work on it. So, I don’t think it’s quite a fair to say that they’ve given away a good project. We think we’ll turn it into a good project but they very much gave away at an early stage project to focus on other opportunities. 

Matthew Gordon: So you decided to mitigate your risk by moving jurisdictions. You’ve got Argentina. You’re now in the US. It’s slightly safer jurisdiction obviously with what’s going on in Argentina with regards to the politics and exchange rate, etc. Have you got enough money to develop that? What’s your cash position at the moment? 

Jerko Zuvella: We raised on just over $9M in April of this year. So we’ve still got, I think as per the last quarterly about AUS$7.5M in the bank. So that gives us enough funds to be able to do a first stage of exploration at the Tonpahproject in the US, which based on the existing gravity works or geophysical works that are being done. We don’t have to invest too much into the ground to understand the potential of the project. So again, low risk without too much exposure to understand what might be there. And if we’re lucky enough that we do find some good quality brine, as we’ve got obviously next door in the Albemarle project, that’s when we start putting the Argosy strategy tool and look at a fast track development strategy. 

Matthew Gordon: And what does fast track mean reality? Is it permitted? What do you need to get in place and how much cash are you going to need to actually move it to the next stage? 

Jerko Zuvella: Just that first part of your query there, fast track. What we’ve made it out to mean is taking a project from very early stage next to nothing in Argentina to producing battery quality lithium carbonate within the space of a couple of years. Now, when you look at our peers, there’s not a lot obviously in the South American space and given that Albemarle or Silver Peak operations have been in operation for 50 years, there hasn’t been too many other companies progressing into lithium carbonate or lithium hydroxide operations and production. Obviously Orocobre is their main peer and, and they’ve done that over the course of probably about 7-10 years. Obviously we’re not at their stage yet, but we think by proving the process in technology, which is the most critical part of the lithium business, prove your chemical process, prove your product. That means you can obviously fast track development to full commercial scale production at some point in the near future. 

Matthew Gordon: I appreciate you’ve done it in two years and when you compare it to others before you, that’s much quicker. Have you got unique or proprietary IP or do you think new entrants will get into production quickly too going forward? 

Jerko Zuvella: That is the challenge. I think that’s what’s halted a lot of those companies that have gone into Argentina and South America in general, and probably North America around that Clayton Valley area. They all get to the stage where they do feasibility studies and they stopped there. I think the critical part is they don’t have the chemical processing expertise to produce battery quality lithium carbonate product. Now, we’ve seen it in South America, you’ve had the big boys. You know, Poscohas been there for a long time, Eramet has been there a long time,The Sentient Group’s been there for a long time. These guys have been there well over 10 years and none of them are in production. The chemical processing is very much the critical component of this business. And if you don’t have that processing expertise or a person that’s been there and done that for numerous years, like our partner FMC, you just can’t take the project into production.

Matthew Gordon: So it’s not necessarily a proprietary technology, it’s a case of there’s very few people with the relevant experience and track record of doing it. That’s the major barrier to entry. So just coming back to what you’re doing in Nevada in terms of fast tracking that. $7M is not a lot of money. You’ve got two projects now. What’s your focus going to be? How you’re going to spend that money. Because you’re going to need to raise some money presumably at some point in the future too. 

Jerko Zuvella: Definitely our focus and priority and full commitment is still on the Rincon project. We’ve constructed the pilot plant and we’ve got a sales agreement with Mitsubishi Corporation in Japan for the product from that pilot plant. And we’ve also just announced last week non-binding heads of agreement with Mitsubishi again.

Matthew Gordon: I do want to come onto that, but I want to just want to finish off in Nevada because it’s a new thing. You’ve decided to do it. It is cheap but you’re going to spend some money and some time there. I want to understand why you’ve done that. What’s the thinking in terms of the strategy. Why Nevada? Why a new project? And how much time and effort you’re going put into this to take it to what point?

Jerko Zuvella: In the short term, we expect to do some geophysical surveys which won’t cost a lot of money, less than $0.5M. So we don’t need to spend a lot of money to understand what we may have there. Once we know what we have there, then we can set our strategy up. But in the short term or the immediate term, it’s really just going to be finding out what is there to then understand what we need to do thereafter. Without labouring the point, that is not a priority for us at the moment. 

Matthew Gordon: The board or the management teams made that conscious decision. Part of your strategy was to diversify. I appreciate where you say you are going to spend your time but given the current market, the lithium price is coming down, forecasts are coming down, as low as $7,000, if you believe Morgan Stanley, by 2021. The market is challenged. So why go and spend money, time and effort now on a new asset. What’s the strategy?

Jerko Zuvella: Well, the end game is to replicate what we have done in Argentina and obviously what we are looking to do in Argentina. So given there’s an existing operation within 4km or 5km, we think we can do something similar ultimately at our project in Nevada also. 

Matthew Gordon: And what is it that this nearby project is doing that you think is so good, that you want to replicate? 

Jerko Zuvella: It’s the only lithium brine operation in North America producing lithium carbonate. They produce approximately 4,000t per annum from the project and given what we’ve done and what we’re looking to achieve in the near term at Rincon, we think we can apply the same strategy and do the same at Nevada over the course of the next few years. 

Matthew Gordon: Are they making money? 

Jerko Zuvella: Very difficult to understand the financials of Albemarle and SQM at the moment. You don’t keep an operation going for 50 years if it’s not making money, so I presume they are making money. Presuming probably make more money prior to the price coming down. I presume there’s not too much cost there besides the operating costs so you think it’d be, based on industry standards, that it should be a profitable operation. 

Matthew Gordon: I understand that they have been a lowest quartile producer which helps. But as perhaps you don’t necessarily understand the full economics to be able to make that evaluation today. I’m not quite sure I totally understand that the logic of going and spending time and effort on the new asset, but you’re going to make an evaluation and come back to the market and tell them what you’ve learnt, right? So let’s move on to the existing operation. You’ve got a pilot plant, which is fantastic. You’re producing. That’s great. You’ve signed an off-take agreement with Mitsubishi. A big company, well known company. What was the point of doing that? I mean an off-take is just an off-take. It’s just an option, right? And given the market, there’s a lot of lithium around. Is this the beginning of a strategic partnership or is it just a pure off-take? 

Jerko Zuvella: We’d like to think it’s a strategic relationship. As I mentioned for the pilot plant, we signed a sales agreement back in March with Mitsubishi. And prior to that they’d been working with us to get to that point for the previous 12-15 months. We’ve established a good long-term relationship with them. We’ve made it very clear or I think the market has made it very clear, the lithium market, that you do need a strategic partner to develop a lithium project and the reason for that obviously is the limited funding options available. These large companies that we’re seeing enter into the lithium space want security of supply. That’s the trade-off. They’re looking for long term security of supply. We’re looking for finance to build a project and these small baby steps that we’re taking, given we’ve seen some difficulties arise in the lithium market, we saw in Nemaska earlier this year and some others, it’s very difficult to bring new lithium projects into production and therefore these baby steps, the pilot plant moving to the 2,000t per annum plant, which we signed the HOA for our last week. These are the steps to give comfort to these potential strategic partnerships. 

Matthew Gordon: I just want to clarify for your investors, because there’s a lot of chat and confusion in the chatrooms and forums around what it’s going to mean. Mitsubishi presumably have lots of options. Lots of off-take agreements because they are traders. They have lots of options. So it doesn’t necessarily mean that they’re going to give you the money to build a plant. Have you spoken to them or given them indication that that’s what you would like from that relationship? 

Jerko Zuvella: We’ve been very direct with them. Their Japanese counterparty Toyota and Toyota Tsusho have done the same thing with our Orocobre in the past. So we’re using that as a guide, what we’d like to achieve with Mitsubishi in the long run as well. So very much a comparable situation to reference and we’re hopeful that we can move along that same sort of pathway. 

Matthew Gordon: How much money are you looking for? What type of money and what would Mitsubishi’s contribution be to that? 

Jerko Zuvella: In terms of our Capex funding we did a PEA and released that back late last year, which outlined $140M CapEx cost for the full 10,000t per annum commercial operation. And we’ve also released information on this interim step to 2,000T per annum plant and we’ll need about AUS$14.3M Capex requirement to construct that. Now that’s a little bit lower than what we initially required, but that’s because we’ve already invested in the evaporation ponds. We’ve built enough evaporation ponds, currently 38hectares are in operation which can produce enough brine lithium concentrate to produce 2,000t of lithium carbonate product from the planet per annum. 

Matthew Gordon: The PEA came out late 2018. What numbers were you using for that? Because obviously lithium price was very different from what it is today. So the IRR, the NPV… it’s all changed. So have you reassessed those numbers? 

Jerko Zuvella: No, so obviously a lot of those numbers will come down because we use benchmark minerals as price forecasters and they set a price of $13,000 per ton. Obviously, it’s a lot lower now, so we need to revisit that and that’s the reason early this year we made the conscious decision to turn our attention away from moving to full scale production or an operation to this intermediate step of 2,000t. Just a smaller step, lower risk, less cap ex requirement, hopefully a little bit easier to achieve than waiting around for that $140M to come through the door. 

Matthew Gordon: And so you hope that gets you into some sort of cashflow, it won’t get you into positive cash flow presumably?

Jerko Zuvella: No, we expect it to be positive cash flow. We expect our costs to reasonably a little bit higher than what it would be for a full commercial scale operation. But, even at these lower prices, we think we can make some good profits on the stage two 2,000t per annum plant. 

Matthew Gordon: That’s based off of the pilot plant numbers. Can you give us an update on how that’s performing?

Jerk Zuvella: The pilots only been running for about a month and a half now. The first month was just getting things going in a continuous manner, ironing out the few little issues that you do have whenever you start a plant. But we’ve been producing lithium carbonite product. That’s still in its infant stages, but we expect over the next short while to produce at a consistent rate that we can feed into the sales agreement that we have. At the same time, given our limited human resources, we still need to keep fully focused on that 2,000t per annum plant. That’s where we think our best bang for buck is. The pilot plan really is to be able to show the customer that we can produce a consistent quality battery grade product and use the pilot plant for that means. The pilot plant was never really set up to be a continuous production operation. But given the state of the market, we felt that that’s been able to assist us to procure good quality customers and obviously show the market that what we’re capable of. 

Matthew Gordon: That’s going to show the market what you’re capable of technically. Can we talk about the economics around that? Tell us what you think you’re going to be able to do. You’ve got $7.5M in the bank. You’ve got G&A costs and some committed costs. So of the $14.3M for the interim plant, how much are you going to go need to raise to get that going? 

Jerko Zuvella: Well, we’ll need to raise the majority of that amount, if not the full CapEx amount, like you said, we don’t want to be left with minimal funds in play. The existing funds can be used as a bit of a contingency if required but we’d be looking to raise the full CapEx amount and that’s what we’re working on with various parties. Unfortunately, the lithium market is not what it used to be 18 months ago, where companies were making pre-payments and so forth. It’s a little bit more challenging but we’re working as best we can to bring that money in under the most favourable circumstances for our shareholders and try to avoid as much dilution as possible. But being able to bring a project into production, we are obviously very cognisant of some of the debt issues coming around with Australian lithium producers as well. So again, it’s a fine balance to consider the best way to fund this intermediate plan.

Matthew Gordon: It is very challenging to work out how to do this because your existing shareholders will be say, ‘we’re anti-dilutory’. You’re cognisant of getting yourself into a position where this plant will produce. You’ll be able to sell, but is it going to be enough to be able to pay back any debt that you may be able to secure? It’s a tough one. It’s really, really tough. On the ASX, lithium’s a dirty word at the moment. A lot of companies are struggling at the moment. There’s a lot of new entrants thinking of coming in should the price recover. Forecasts suggest it’s not going to. Shareholder’s are a little bit disillusioned. How are you managing this? You’re trying to run a business, but you got to talk to investors. What are you saying to them?

Jerko Zuvella: Yeah, very hard. It’s very challenge.Very hard. It’s been challenging and perhaps that’s why we’re still in a position where we’re in at the moment. We haven’t secured that funding yet. We were lucky enough, we did a good capital raise like I said a couple of months ago to at least give us some options. Perhaps another reason for that optionality in Nevada as well to be able to move that project forward for little or minimal funds. But we feel very confident that we can go and raise hat 2,000t per annum Capex funds in the near term. And once we get that obviously we’re very committed to get up and running on that. We’re obviously started procuring and looking at solutions for plants and equipment. But how do you manage and keep shelve expectations high? Very difficult. What we keep selling to our shareholders is that we think we are one of the very few lithium production companies that we’ll get into production and that we do have the necessary skillset and expertise to take it all the way through. And I guess, the light at the end of the tunnel or the pot of gold at the end of the rainbow really is the fact that we can get into production. We will hopefully be a producing company and you can see with some of our peer comparisons, whether it’s Orocobre or the bigger guys, there is a very large a gap, a market share that could be created if and when we can do that. So the potential upside is still large enough to, to keep out shareholders reasonably satisfied. But obviously that’s very hard to achieve that at the moment, but that’s what we’re aiming for. 

Matthew Gordon: Morgan Stanley forecasts say that Argentina, Australia, and Chile could add as much as 500,000t of lithium into the market by 2025. That’s double what it is today. There’s a lot of new product coming in. It doesn’t bode well for the price. But if you can mine and process cheaply, maybe it’s not such a problem. Brines are well known for being cheaper to produce than a lot of the Aussie rock lithium. So, how are you adjusting your strategy given the change in the market since when you started to today? Very different market place. What’s the mindset here? What are you talking about? What’s keeping you awake at night and what are you doing about it?

Jerko Zuvella: I think we have to be dynamic and we’ve had to be flexible and we’ve gone down this intermediate step now, this 2,000t per annum plan. I think our $48.3M Capex is not insurmountable for a company our size, which is at the moment about AUS$95M market cap company. Worst case scenario eventuated we think we can raise equity to do that, obviously that’s not the ideal situation.  But if we can have a hybrid of structures for financing that we think that is a very much a near term potential goal and something that is achievable and that’s where we’ve had to be a little flexible at the same time. What’s keeping you awake? Obviously maximising shareholder returns, which means we can get our best bang for buck is getting into production of 2,000t per annum. From the discussions we’ve had with various strategic groups. I think that will de-risk the project greatly. It will be a pathway to the full commercial scale of the project, the 10,000t per annum, and sometimes you have to take a step back to go two or three or four steps forward. And we think this intermediate step, secure the funding, once we show that, again in the knowledge that it’s very difficult to do that and they perhaps won’t be as many companies around doing that at that point in time, the market opens up and our strategic partner or partners can see what we’ve achieved, and obviously the main issue is the product quality. And we will obviously be testing that with potential parties all the way through this pilot plant process. And as long as they get the quality specifications that they require, and I don’t think there’s any issue from going from 2,000t to 10,000t in an orderly fashion. 

Matthew Gordon: You’ve got to be able to do that economically, you got to be able to make money. For lithium companies it’s been a brutal year. It’s been especially difficult in Argentina, obviously with what’s gone on with the election, the political scene, the exchange rate has taken a hammering. People forget it’s a really good mining jurisdiction. What’s your perception of what’s going on in Argentina? How’s it affecting Argosy? 

Jerko Zuvella: Touch wood, it hasn’t affected us greatly today. We obviously came into the country in 2016 and President Macri had been elected, so he obviously opened up a lot of business opportunities for foreign investors. We’re obviously still at that position. We’ve got a very good relationship with our provincial regulatory bodies, which obviously control the mineral rights in the country. The provinces own the mineral rights. So we have a very good relationship with the mines department in Salta. They’ve been giving us all of our approvals in good time so we’ve got a very good relationship with them. We don’t see that changing, depending on whatever happens with a Federal election but as we’ve seen if there is a change of government, and what that’s causing in terms of currency devaluation, again, it doesn’t affect us too much.  Most of our costs are in US dollars. The chemicals that we buy, which is the largest of the operating costs, is all based in US dollars. Our local employees are paid in local currency, so when there is a devaluation in the short term, until inflation sort of catches up, it’s actually a benefit for us because our USD is getting us further than it was previously. So as long as the country doesn’t shut down and there’s no protectionist policies coming to play in the near term, we think it is business as usual and will continue being business as usual. And again, quoting Orocobre who built their project and did a great job at doing that, they did that during the former regime. So we don’t think there’s any issues that may impact us too greatly to build a project, no matter what the government at the time or whatever governments elected in a few month’s time. 

Matthew Gordon: Let’s talk about why investors invest in your business. They want the share price to appreciate and want it to grow. We’ve been talking about some dilatory components here. So why should current investors or new investors thinking of investing in you have reason to be hopeful about what the future looks like in terms of share price appreciation. 

Jerko Zuvella: We’ve had some great share price appreciation during the times when lithium was obviously a lot more in favour. But even in recent times, over the last, let’s say 12 months, we’ve been able to have our share price jump substantially based on good announcements, on achieving good milestones year. 

Matthew Gordon: But you’re down. Your year high is $0.28, you’re sitting around $0.08-$0.09 cents at the moment. That’s what people are going to be looking at, isn’t it? 

Jerko Zuvella: Well we think so and obviously our job is to try to get it back to those levels as quickly as possible. Even when we announced the Mitsubishi Sales Agreement back a few months ago, the share price jump from 9 to 16. Those sorts of things, for the short-term retail shareholders, there’s milestones that are coming up that can have immediate impact in the share price. But if you play a bit of a longer game, starting production and selling product to Mitsubishi from the pilot plant in coming months, getting started on the 2,000t per annum plant, again, another big milestone. And building that over the course of the next 12-15 months, we think the closer we get to production, the more the market will appreciate what we’re doing and start valuing us closer to our peers that are above us, which is obviously Orocobre the main one. But even Orocobre who’s in development at the moment, they’ve got a market cap substantially higher than ours, three or four times higher than us. So we think there’s some share price appreciation to be made based on developing our project further. 

Matthew Gordon: Those are hardly your peers though. You can’t compare yourself to Orocobre at this point. I think that’s a bit of a leap. I appreciate there are some good things happening. You’ve been active keeping some things moving, but do you think with the dilution component or your requirement to raise equity, it’s going to be enough to see a meaningful bump? You need to see a sort of three times, three and a half times bump in your share price today. And that’s not going to come from an off-take agreement off the back of an interim plant, is it? 

Jerko Zuvella: Well firstly, let me just say that obviously say we’ve been high share price, but some of our peers, even on the ASX in the spodumene market, they’re valued at probably 2-2.5X our value. Now, they’re probably behind us in terms of development of their projects. So again, sometimes you need to be flavour of the month to get that appreciation in the market, but once we start building and we can show, not only retail shareholders, but institutional shareholders or potential investors, what we’re looking to do and how we’re achieving that. I think once you get interested in the stock, based on what we’re doing, it’s achievable. Going from $100M-$200M market cap in the short term is very much our target and very much something we think we can achieve on the back of moving with those immediate milestones and achieving them in the short term. 

Matthew Gordon: If I look at the people like Millennial Lithium who seen great peaks and they’ve dropped off and they’re trying to do deals in Asia, but the share price has been hammered. I think the general perception in the marketplace, ASX especially, lithium is a lot of white noise, it’s all just chatter. But it’s out of favour. Is part of your strategy sitting back and hoping that the lithium space recovers? Or do you think you are in control of the moving parts? 

Jerko Zuvella: We can’t afford to wait for the lithium market to recover. Obviously that would be a very good advantage and a big advantage for us to do that but these are the times, and these tough times, that you can develop and build projects. And obviously perhaps don’t get the same reward in terms of value as you would have in good times but we think by doing it now when the good times do roll back around, hopefully not too far away, that our appreciation can be multiplied based on the work we’ve done in these leaner times. Now a lot of companies may sit back and wait or put their projects on standby. We’re very much focused on, again, using that word fast tracking our development, building that 2,000t plant, because that would put us in the category of a commercial producer, an economic producer and a profitable producer which gives us cashflow and it makes us very much more marketable to, not only retail shareholders but institutional and much larger funds, because we are going into a space that I think people do realise in the next, you mentioned 2025 the production sort of supply amount and so forth, but in that sort of time frame and sure that’s probably a lot longer than current shareholders would like to think, but there is a game changing event coming along and we have to be patient. But when that does come along, our focus can’t be just on near term share price appreciation, it needs to be on building a business and it’s very much our focus on building a business that’s going to be around for the next 20 years and we need to be able to be patient at times but also at the same time look to maximise value over the longer term rather than just immediate rewards for existing shareholders. If people believe in us, we know we can achieve it and when the good times do roll back we think we can really reward our patient shareholders. 

Matthew Gordon: So you’re looking for investors to get behind you, not traders? 

Jerko Zuvella: All shareholders are very good, whatever shareholders they are. But definitely if people can appreciate what we’re trying to achieve and have got that bit of patience, we think we can do very well for them, yes. 

Matthew Gordon: So what’s the only thing that’s going to stop you? 

Jerko Zuvella: Well, obviously securing the finance. We don’t want to be jumping into any dilutory equity raising, that’s very much last resort but again, sometimes, you need to take a step back to go step forward. But it really is just securing that funding. We are reasonably confident that that will happen at some point in time in the near term. We have a great relationship with Mitsubishi. We have a great partner with that processing expertise in Argentina. We think we’ve got the jigsaw pieces. We’ve been putting them together for the last couple of years, a few more to go. But we really think we can achieve that. I don’t think there’s anything that will stop us. I don’t think I’m being an optimist by saying that. I really do think we have all the jigsaw pieces. We probably even have them numbered so we know exactly where they go. It’s just that taking the time to put them in the right places to allow us to get to where we want to get to. 

Matthew Gordon: So you have all the permits that you need for now. Obviously, you’ll require further, secondarily, tertiary permits as you go forward. Your message to shareholders is, don’t worry, we’re not distracted by our new acquisition. We’re focused on core business. We think the pilot plan has shown us that we can produce and with this interim plant we can get into some kind of revenue, whether or not it’s economic, but it should show that we can move forward with a 10,000t per annum plant, if and when we get that financed. 

Jerko Zuvella: Yes. Our estimates show that based on current sales prices that the interim plant will be a viable proposition. We think that will really jumpstart us moving forward. But very much agree with all your other comments there and wrapping up and obviously we’re very keen to try to achieve that as quickly as possible. 

Matthew Gordon: Just finish off on that because you made the point, are you going to update your PEA financial assessment? I mean given the PEA’s can have a kind of big variance. Are you going to update that based on up to date numbers? 

Jerko Zuvella: It’s not in the immediate term at the moment. We’re very much focused on securing that funding for the 2,000t per annum plant. Once we do that, obviously if there is a strategic partner involved, we will work together with them on whatever is required to achieve the outcome for the commercial scale and if we need to update the PEA to a full feasibility, that’s what we’ll be looking to do. 

Matthew Gordon. Brilliant. Jerko, thank you very much for your time today. Honest appraisal of the situation. I appreciate it. We look forward to staying in touch and hearing how you’re getting on, exciting times. 

Jerko Zuvella: Thank you very much. Appreciate it.


Company page: http://www.argosyminerals.com.au/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Cobalt 27 (TSX-V: KBLT) – The Nickel Market Explained

In our second interview with Anthony Milewski, CEO of Cobalt 27 (TSX-V: KBLT), soon to be Nickel 28 due to a recent acquisition from Pala Investments. It’s been a bad year for Cobalt and we ask Anthony what he has learnt over the last 2 years. He tells us that demand outstripped their forecasts from the IPO but that the supply-side was unpredictable.

We also discuss artisanal miners, small metal market and pricing mechanisms, the need to educate analysts better so that buyers can make more intelligent investment decisions and the importance of liquidity.

The highlights:

  • Update and recent news – Pala Investments and Nickel 28.
  • The Cobalt market drop.
  • Big issue in the space and what needs to be fixed.
  • What would have been done differently? Lessons learned.
  • Difference between Cobalt and Lithium.
  • Nickel 28 and how the strategy reflects Cobalt 27.
  • Batteries and the evolving market of Green Energy and Nuclear Power.

Click here to watch the interview.


Matthew Gordon: It’s good to have you. We had a good chat last time. Now a few things have happened since.

Anthony Milewski: Yeah, one or two.

Matthew Gordon: One or two, so why don’t you tell everyone what’s happened?

Anthony Milewski: Yeah, since we were last in here, Pala Investments has made a bid for the company. And with that bid there’s a spin co, that will spin out some of the Nickel assets into a public company, Nickel 28. It’s really unexpected…

Matthew Gordon: 28th on the periodic table…

Anthony Milewski: Yes exactly, Cobalt 27. Nickel 28

Matthew Gordon: That is really clever, really clever. 

Anthony Milewski: What does that mean for Copper in the future? It’s an interesting time, a lot going on corporately. As you know, the circular is prepared in the coming weeks. Ultimately the circular prints, I think in probably, call it three weeks. And then the shareholders vote, probably mid to late August.

Matthew Gordon: Okay, well, we should get together around that time to get into the detail. That’d be fantastic. So why don’t we keep it broad? Last time we spoke you educated us about the marketplace. So why don’t we start with Cobalt? Obviously, it’s had a bit of pressure on it recently. What’s been going on?

Anthony Milewski: Yeah, Cobalt a year ago was $44, today, it’s probably $13.50 to $14. I think the outlook for Cobalt and my view of the outlook for Cobalt hasn’t changed. I mean, incredibly bullish.  Timing, of course, can change, right? And so, I think there’s a couple of key factors that have impacted the Cobalt price. One of those is simply the DRC in Congo.

Matthew Gordon: What’s happening there?

Anthony Milewski: Well what we saw was artisanal miners, which is literally someone showing up with a shovel, very hard to control. Last week, tragically 36 illegal miners died. So artisanal miners effectively are just digging up the material for their own kind of account and then they sell.

Matthew Gordon: Remind us why you think that’s not necessarily a good thing. So obviously they’re looking after their livelihood, but what are the impacts, just remind us?

Anthony Milewski: Well, there’s a few kind of aspects of that. One is simply health and safety. If you go dig a hole, and it’s not engineered, it can collapse.  So that’s part of it. Another part is just environmental damage. When you don’t have a Feasibility Study, when you haven’t properly engineered it, you can cause significant environmental harm. Then I think the third, and the one which has gotten the most attention is, of course, child labour. And we need to be clear, not all artisanal mining is child labour. Those are two separate issues. But all three of those are key issues. And what we saw was, when Cobalt ramped up into the $40’s, a wave, kind of tsunami of Cobalt came on. Now what we’ve seen on the way back down is, that Cobalt, that incremental artisanal producer, really dies out of the market, probably in the high $20’s. Around $29. So right now, artisanal mining has really slowed down compared to the peak at $44. But you have a pretty significant amount of material from that period that’s not able to be consumed yet, just because of one origin, but two, the market is not there for it. And then I think you had de-leveraging in China. What that means is consumers of materials, for your listeners, consumers will carry a stockpile and then they’ll borrow against that for working capital. And if for whatever reason, interest rates hike, or something like that happens, they’ll reduce their stockpile to help manage their working capital. So, you had de-leveraging in China and the artisanal material and what you’ve really done is created a situation where there’s a surplus in the market, temporarily.

Matthew Gordon: By de-leveraging – just to help everyone with the terminology here – you mean the Chinese running down their stock. What do they see, that we should know about?

Anthony Milewski: The read through was just the cost of capital. This is very much, “you are a business and you’re borrowing against your stockpile”, and there’s a cost of that borrow whether it’s 2% or 7%, or whatever it is. That’s just part of your working capital. And so, de-leveraging in this context means they’re reducing the amount that they’ve borrowed. And then a corollary to that is a margin cost. At $44 the amount you can borrow against this is one thing, at $14, it’s another. It’s really, we’re talking about managing capital structures, so that put a whack of material into the market. And then I think really, and most importantly, Congo, put a whack of material and then of course, the final factor would be new a mine ramp up and increased output.

Matthew Gordon: Quite a few moving parts there, but in terms of the total size of the market, how much does China, DRC represent?

Anthony Milewski: The official market today is around 110,000 metric tonnes.

Matthew Gordon: Is there an unofficial market?

Anthony Milewski: Well, I would say that the Congolese material that’s artisanally produced is definitely unofficial. I would say that consumed unofficial market – and no one knows for sure. You can look at export data, but it’s probably not that accurate. It’s at least another 20,000 to 30,000 metric tonnes. However, the amount produced in that run up period could have been, and most likely was, materially higher than that. It’s interesting because actually if I had sat here with you and projected EV demand today at the time of the IPO, what I would tell you is we were wildly wrong, we were too conservative. So the demand has actually outpaced any analyst’s expectations. It’s just that on the supply side, there’s been some bumps that probably mean that Cobalt is less interesting for the next three years, although ultimately the demand side is intact and more bullish than we’ve ever seen.

Matthew Gordon: That’s going to be quite scary. You’re saying we were wrong, but in a good way.

Anthony Milewski: Yeah the demand side. Yeah, we over-estimated demand.  That’s true.

Matthew Gordon: Let’s go back a couple of years. You’re saying, “Right, we’re doing our projections. Cobalt is…” and I remember these conversations from brokers. They were like, “Have you got anything in Cobalt in Africa?” as I’ve done a lot of work there. And that was the big thing two, three years ago, and you must have been having the same sorts of conversations then. And you think, Cobalt, battery market, Nickel, huge correlation, this has got to be a good thing. But obviously, the market has come down. It’s gone from $40 down and you’re saying it’s entirely due to Chinese, DRC actions, things you couldn’t predict?

Anthony Milewski: Well, I mean, there’s also an element of legality. The particular material like the child labour, conflict material in Congo, it’s a very complex issue. For instance, your refinery in China, even if 9 out of 10 of your sources are legitimate, if the 10th one isn’t and you are just combing all the material…Atoms are atoms, and it’s all mixed now. I think that what I thought on the front-side was that ultimately automakers, but also really consumers and battery makers would demand a higher level of transparency in that supply chain and it’s definitely started to happen. But I think the lack of supply chain transparency allowed for a huge amount of artisanal production to come into the market. Now, there’s been a great Wall Street journal article six months ago, and the FT has done some work on it. And I think they’ve brought this issue to light and there are a bunch of different groups working on ways, maybe using Blockchain or like a Kimberley style process, but that hasn’t happened. I think the lack of that process allowed for a huge amount of artisanal to come into the market that was not anticipated because I don’t think most people really believed that the Cobalt in their phone may have been dug up by a nine year old boy. 

Matthew Gordon: But those things are driven by a number of factors. Someone’s got to pay for the building of an AI or a Blockchain solution to be able to do this tracking. Is it necessarily in each of the relevant company’s interest or the industry’s interest to do that, because that’s another overhead at a time when it was quite tough. It’s also, and I think we touched upon this the last time we spoke here, is these things are driven in other sectors – whether it be environmental or otherwise – issues are driven by marketing initiatives and go “Well, this is a point of differentiation for us.” So the automotive industry would need to push this harder. The Chinese would need to push this harder.

Anthony Milewski: And diamonds is the example, right?

Matthew Gordon: Absolutely.

Anthony Milewski: Diamonds and also Tin is another example of that.

Matthew Gordon: Yeah. So, what’s got to happen? What’s going to give in this space because it’s a big issue? It’s one of the first things you look at.

Anthony Milewski: I think one of the issues was the automakers said, “Oh, this isn’t our problem, this is really the battery maker’s problem.” I think that was initially the case. And so ultimately, the consumer with all the reports in media, are saying, “Guys, this needs to be…Custody needs to be…Will it be shown all the way back to the mine?” So, I think the consumer is now driving that and the automakers are unable to just throw their hands up and say, “Well, it’s not us.” And you are starting to see some of that accountability flow all the way through, but I think it’s such an esoteric thing, including Lithium, but different issues. These are industrial materials that the automakers, by and large, had not used historically, at least not in large quantities. Unlike say Copper or Aluminium. I think they didn’t know what they didn’t know. That was that was part of the learning curve and all these factors which were hard to foresee created a scenario now where the market’s probably quiet for a few years.

Matthew Gordon: If I look in another space, plastics, recycling of plastics.  Huge push from the public. Lots of PR around it. We saw David Attenborough talking about it at the Economic Forum recently. I was listening to an article the other day about the UK – we ship a lot of plastic over to Turkey to be recycled. So forget the carbon footprint issue there. It gets to Turkey, only 30% of it gets recycled, the rest of it is landfill. We’ve just moved the problem, because of what you’re saying, there’s no tracking and no accountability. But the public feels there is. They’re filling up their recycling bins with great pride, but there’s no accountability in terms of, or visibility of where that goes or what happens, and therefore no one cares.

Anthony Milewski: That’s a great observation and I would just say the whole green revolution is intensely complex. 

Matthew Gordon: It is.

Anthony Milewski: And displacing Coal is great and we’re doing that. But you also have to think, “Okay, what are the implications of whatever the other things are that we’re mining? And what are the products we’re making?  And can you recycle them?” It’s intensely complex in a world with regulatory environments in every single country. Hopefully the WTO (World Trade Organisation), and some of these global organisations are working on initiatives that can actually be implemented. That’s why the consumer hopefully puts up the demand, because if the consumer buys the car, they’re voting with their pocketbook and that would be the most effective way. I think the way that the consumer does that is through, like I said, there’s a guy at the Wall Street Journal who has covered this really well – by making that information available to consumers, I think that they’re ultimately voting with their pocketbook. And if they’re not prepared to buy a car because the basic materials custody isn’t shown, then that’s a plus. On a practical level, that’s why I think it can manifest itself.

Matthew Gordon: Yeah. Okay. But I would argue with the plastic example, they’re voting with their pockets to a point and then it gets grey, very grey. Conversation for another day.

Anthony Milewski: Yeah, it’s a good observation. It’s not perfect and we have 100 years now of carbonisation, of intense carbonisation around the world. And hopefully it doesn’t take a 100 years to decarbonise, otherwise you might find that our great grandchildren don’t have a place to live. But I do think that these are intensely complex issues. But, the technological advancements are happening at an accelerated pace and the battery revolution that’s happening in stationary storage as well is changing the economics of renewable energy. I think it’s all positive, but there are definitely going to be speed bumps, and we shouldn’t forget that some of these industrial minerals are coming from tough places and we should examine how they’re being mined. In the case, to be clear, in the case of Glencore or these more mechanised mines, I think it’s pretty transparent how that’s happening. And it’s okay. I think where it’s more complex is in a poor country like the Congo. Artisanal mining is not universally illegal. There are artisanal mining claims and so it’s breaking down that issue into the sub issues around child labour and environmental and permitting, that’s complex and maybe beyond the reach of someone who’s casually thinking about buying a car.

Matthew Gordon: You’re one of the smartest guys I’ve interviewed. You’re a bright guy. If we look at you, look back to two years ago. What would you have done differently then? What would you have demanded of the companies that you invested in, back then, which may have changed the…because we’ve all got a role to play in this. The public has got a role to play in it, but you’re one of the guys at the front of this. You’re in the mining space.

Anthony Milewski: We definitively did not invest a single penny and haven’t invested a single penny in the Congo.

Matthew Gordon: So that’s one thing.

Anthony Milewski: And I think that’s the key. That was the big thing because if you look at the trouble that Glencore’s had, and that’s a big-cap, major company, the feeling was always like, ”How are we going to do it if they can’t do it?” So that’s avoidance…

Matthew Gordon: …Of my question?

Anthony Milewski: No it’s the sin of omission versus the sin of commission. What wouldn’t you do differently without being able to predict the price? Maybe one of the ways would have been to get involved at the very beginning and bring to the forefront that artisanal issue.Be a voice in that because I think then maybe the demand for that material wouldn’t have been there and so you wouldn’t have had as much of it come into the market. To think you would have stopped it, is impossible. But at least if you had the battery makers, the Umicores, the Panasonics saying from the outset, “We don’t want that material. We don’t care how it comes to us.” If you had that from the beginning, maybe what would have happened was less material would have come out of the Congo. But it’s really hard to say because the flip side of this is you’re an individual, you don’t have a livelihood, and someone presents you with the way to make – whatever the number, I don’t know if it’s $20- whatever that number is a month, and that’s your only livelihood, it’s pretty darn hard to turn that down.That’s why these are intensely complex  

Matthew Gordon: I get it and I don’t think one person fixes it all, but it’s a case of we all have a role to play, people like you more than most.  You can’t predict the future, but you can learn from the past. You are obviously getting into a new venture. We’ll talk about that in a few weeks time in terms of what that structure is and what it looks like. Are there things that you’ve learnt? I said you’re smart, but are the things you’ve learnt in the last two years which make you think, “Well, I’m going to look at the market differently, I’m going to look at my company differently?”

Anthony Milewski: I think there are interesting things to take away from that, which is in a commodity like Nickel or Copper, where it’s a much bigger commodity, I think you have more efficient pricing mechanisms with more liquidity. I think the market is more efficient. And in Cobalt, but not just a Cobalt, in a lot of smaller, more thinly traded metals it’s more complex that pricing dynamic.

Matthew Gordon: Well, I’ve been interviewing a few Uranium people who would definitely agree with you on that one.  But there are many.

Anthony Milewski: And so I think one of the interesting things that I observed is even the difference between Cobalt and Lithium. If you look at it globally, there are how many Lithium projects out there that are interesting? There are plenty. And consequently, there’s enough market cap spread among a variety of players to allow for proper analyst education. And for a sell side community to really fully understand Lithium or to really understand at least at a pretty high level, they get the pricing and it’s industrial and it’s a chemical and hard rock. So they sort of have that. When you look at Cobalt, there’s no one else out there because actually, there’s no such thing as a primary Cobalt mine, with the exception of Manajem in Morocco. And so, what you’re really talking about with Cobalt is Nickel mining globally, or Copper mining. And what that means is even though we have a lot of analyst’s coverage, it’s very challenging for an analyst to be fully abreast of the changes because they’re not covering seven Copper companies. And with that comes challenges around misinformation. It comes with challenges around ultimately where the equity price is because buyers don’t necessarily have the best information because it’s not like… let’s just take Copper or even Lithium where I think you have a lot of different data points and that makes it a little bit easier to come to a more educated view. Whereas with Cobalt, for instance, to get one of the main pricing sources, you have to pay. If you just own $10,000 of the stock, you’re not going to buy the service. There’s that kind of dynamic which is interesting.

Matthew Gordon: That’s interesting, but what about you? That’s the market.  The question was, what do you think you’ve taken away from the market?

Anthony Milewski: Well the point is I think that there is value in liquidity. That’s really the message. And Nickel, I think one of the interesting aspects of Nickel 28 will be that, as chemistry shifts towards a more Nickel rich battery.

Matthew Gordon: Tell us about that because you did mention it last time in terms of the construct and the different inputs there.

Anthony Milewski: What’s happening is the original chemistry is at 111, save it for Tesla, which is kind of a different story. And today it’s a 532 moving into a 622 and an 811.

Matthew Gordon: What are people looking for? Why is this migrating…efficiency I guess?

Anthony Milewski: Yeah, the driver of the change is simple. It’s consumers, because consumers are demanding two things; range and recharge-ability. And so those chemistries are attempting to maximise energy density for range and recharging efficiency. And ultimately as you shift into these Nickel rich batteries, what they’re trying to do is have a car that can go as far, or further than current cars, and that’s really down to the size of the battery. Size of the battery also equates to cost, more basic materials you have. And then right now what they’re trying to do is get rechargeability down to be something more akin to a gas station stop. It’s getting that into that sub 15-minute level would be big.

Matthew Gordon: Yeah. Supercharge.

Anthony Milewski: Or maybe that’s not possible. I mean, they’re looking at other solutions in Israel right now. There’s a stretch of highway where they’re actually charging as you go. So there’s different ideas and different solutions. But back to Nickel 28, what is interesting about the liquidity aspect is, Nickel and Cobalt are intertwined, globally. What you see in Nickel 28 is exposure to a producing mine and you also still retain some Cobalt exposure, but you have the potential I think for a much bigger story in Nickel when the Nickel moment comes. And that comes as you see not only the ramp up in purchase of electric vehicles, but also that Nickel rich cathode…   

Matthew Gordon: Well, that’s what I’m asking. Because if we look two years back, you had a view on the Cobalt market, which was true at the time…

Anthony Milewski: Which is still true. Everything is true…

Matthew Gordon: Yeah. It’s outperformed in somethings, but things have affected the price. You think that from the investor’s point of view, the price was $40. It’s now a third of that and you can’t predict these things because like you say, the demand has outstripped even your expectations, but the market got hit. What’s the learning? You are going into the Nickel market now, you’re making your call today based on the data that’s available and this changing battery environment.

Anthony Milewski: Nickel’s at the bottom by the way. This is the moment for Nickel.

Matthew Gordon: Okay, this is the moment for Nickel.  Tell us about some of the hypothesis or thesis behind that.

Anthony Milewski: So Nickel is a 2.2M tonne market with, I would say over 70% today going into Steel. It’s a Steel market. But that market is really two markets. You can cut that market in half, with half of it really being like an NPI, a Nickel Pig Iron product and the other half being a class one Nickel that goes into things like batteries. And what the really critical thing for listeners is that the crossover price to create class one Nickel from NPI is probably double Nickel’s price today. There’s lots of Nickel sitting in Indonesia, but in order to take that and put it…

Matthew Gordon: That’s the pig iron version?

Anthony Milewski: Yeah exactly. In order to take that and put it into a battery, you’re talking about a huge CapEx, and you’re talking about the need for a double from here most likely. That’s the delta. It’s really interesting what happened in the last Nickel bull market was China came in, building like crazy, industrial Revolution. Nickel gets bid up, and then this new technology came out, which dramatically lowered the cost. And I think investors still feel the concern around that and so what that’s done, combined with the fact that HPAL – High Pressure Acid Leach – has been one of the truly great ways to destroy value in mining. Whether it’s Gora who I think might be six or seven billion, two billion intended, Ambatovy probably almost single handedly put Sherritt almost out of business. These HPAL cost overruns have been in the $2Bn to $5Bn range, so those overruns and then the experience of creating a process to dramatically reduce costs in the last cycle has meant that almost no inflows have come into Nickel in terms of building new production. It’s once again a constraint story and then you have to subdivide that market and you say there’s almost no production of any note that I can point to right now that’s going to be class one Nickel, adding that million tons. It’s all going to come online in the next three to five years.

Matthew Gordon: We’ve seen a couple of reports. What are the sources that people can go to just to understand the Nickel market a little bit better.

Anthony Milewski: I mean you can Google. You know, Benchmark has some great, Benchmark Minerals has some great articles that are free. Obviously CRU is great, but I think that’s paid. There’s been some great…  Annals Reports, McQuarrie…

Matthew Gordon: Worth looking at.

Anthony Milewski: Yeah, you can Google it. There’s a bunch of stuff out there.

Matthew Gordon: They all seem to be, give or take, predicting quite a significant growth, and a ways out. Not just short-term, but the long-term for Nickel does look very strong.

Anthony Milewski: Especially as the chemistry has become more Nickel rich and by all accounts, that’s how we’re going. And the other part which is interesting for investors – and this is not a criticism of Cobalt – but a realisation, is that there’s a wide range of things you can buy. You can buy Norilsk or Western Areas, larger cap companies. You could go buy Turnagain, which is at Giga Metals which is a Nickel Sulfide, huge undeveloped. $10M to $15M market cap, can easily be $400M to $500M in the next cycle. Or you can buy something in between, like a Nickel 28. And so, I think the ecosystem will be sufficiently large, that it will be able to attract much more liquidity across the full spectrum of opportunity.

Matthew Gordon: Let’s talk a little bit about Nickel 28. We’ve had Cobalt 27. We’ll discuss the deal in a few weeks time when the circular’s out. I’ve made my opinions public on it already. What’s the thought around what you’re trying to build there with Nickel 28? I’m going to assume Pala is going to be involved in some level?

Anthony Milewski: I think they’ll still be a shareholder for sure. But I think the key assets in that company and they are really three. The first and most important asset, of course, is the Ramu joint venture. This is probably the single best producing HPAL facility ever created. It’s operating above capacity. It’s almost guaranteed that your watch right there might have Cobalt in it from this facility. It’s going into all the batteries and automobiles, major automobile makers end up with this material. So this is a great asset, this is a world class asset and it’s run by a world class operator. It’s going to be our job to really tell that story to the market, Justin and I. Then you have a royalty over Turnagain. Turnagain it is one of the largest undeveloped Nickel sulfide deposits. It’s a personal favourite. I’ve bought in the market. I think I probably own around 4% or 5% of it now, personally, which is fully disclosed. And then there’s Dumont. Dumont is shovel ready. However it’s owned by a private equity firm by and large, and their intentions have not been made public as to what they’re planning to do with it. So you kind of have these three assets, which give you…

Matthew Gordon: We know it through RNC Minerals, obviously. We know a little bit about it. It’s a world class asset in terms of scale.

Anthony Milewski: It’s a big CapEx as well.

Matthew Gordon: It’s a big CapEx. They’ve got a few things to work at. I think they upgraded their DFS recently, made an announcement on that, but now people are looking for guidance as what they’re going to do next.

Anthony Milewski: Yeah, that’s why Turnagain is great. Turnagain’s CapEx is more like a $500M to $600M CapEx. So you kind of have the spectrum. You’ve got earlier stage in Turnagain. You’ve got Dumont, which really needs to work out its CapEx. I agree with you. And then you’ve got production. And the important thing here is Nickel is the primary on all of those, but every single one of them also has the potential, or is a significant Cobalt producer.

Matthew Gordon: See that comes back to your strategy with Cobalt 27.  Certainly when we spoke last, you were trying to cover a bunch of bases, kind of blend that risk profile. And it sounds like you’re doing the same thing here again, right?

Anthony Milewski: Yeah, exactly, and also world class assets. I mean, if you look at that asset base, I can really arguably only think about one or two other assets, which by the way aren’t even available, that are out there for that portfolio. And so once again, when people buy it, it’s going to be an expression of not just the adoption of electric vehicle, but also the transition in chemistries. You see CATL and some of the others really pushing this 811, and Valet has been a big proponent of this, what’s going to happen in the Nickel market, and so I think as you see that shift, Nickel will come into favour in a big way in the coming, I even think by later this year in terms of people’s interests will come into favour, but certainly in the coming years.

Matthew Gordon: People need to believe in the Nickel story. They need to believe your model.

Anthony Milewski: They need to believe in the EV story because this is really still driven by batteries.

Matthew Gordon: Okay, so let’s talk about batteries for a second, because again, you’re great at educating people on these things. The battery story is evolving, Nickel is becoming a bigger proportion of that story. You’ve got things like Vanadium coming in for these longer storage batteries, where they can take renewable energy and keep it for a little bit longer. There’s a whole evolving universe around batteries. There’s a lot going on. And there’s going to be new technologies as well. There always is. Things come on right.

Anthony Milewski: Yes. I’ll tell you how it looks today. On the EV side, definitively unaware of any major push outside of the Lithium-Ion battery. So that’s electric vehicles. On the industrial side of electric vehicles, like auto buses, and…

Matthew Gordon: Boats, planes…

Anthony Milewski: I would say with buses and potentially like trucks at mine sites, fuel cells are interesting, because you’re on a fixed route. Okay, so infrastructure, so there’s that. And then if you shift over to home use, Lithium-Ion batteries are interesting for home use. But then you have all these other applications, like if you want to talk about renewable energy, then Vanadium Redox Battery is intensely interesting because of its size, its recyclability.  

Matthew Gordon: Absolutely.

Anthony Milewski: And also the cycle length.  Right?   

Matthew Gordon: It’s fantastic.

Anthony Milewski: Yeah, so what you’re going to see inside of the storage market is a multi segmented market. Let’s pretend that you’re in a remote place in the Congo. Well, flying in Lithium-Ion batteries probably makes sense.  Let’s pretend you’re a massive solar wind farm where you can drive a truck up to it, Vanadium Redox is probably going to make sense. And by the way through the cycle, as this is really a transformation as it occurs, you’re going to see things like the Lead acid battery is going to have its place and there’s going to be a Zinc battery. And so there’s going to be multiple, well, the technology exists, there are multiple technologies that will have multiple applications across that grid storage. You know, for instance, if you go to a neighbourhood where everyone’s house is already built, you’d probably put a solar roof on and a Lithium-Ion battery. If you’re building a new subdivision, you’d probably put a solar roof on, have a transformer and then you’ll have a Vanadium Redox battery. And so what you’re going to see is, unlike the electric vehicle which is very well set for the next decade in terms of technology, with these applications you’re going to have multiple technologies. And I actually believe – and I wish I knew how to monetise it – but I actually believe that in America, every single person is going to be an energy trader. And what I mean by that is I think over the next 20 years everyone’s going to have solar roofs. And you’re going to be able to buy and sell energy credits, because you’re going to have battery technology. People in Arizona are going to be selling people in the North east energy.

Matthew Gordon: There is a little bit of that going on. We’ve had conversations with traders here in Europe about trying to build up an ecosystem around that where they can they can trade across borders…   

Anthony Milewski: Well, right now in the States, you can actually, depending on the utility, you actually can sell — it’s a two-way meter and you sell in and you draw out. But I actually envision something very different where this technology is advancing so quickly that, and maybe it will come in the form of a token. I don’t know what it will look like, but we’re all going to be, If you own property, you’re going to be buying and selling energy, like a personal trader thing. I think that these are the evolutions that are going to go. But a key point on the Vanadium Redox Battery and batteries more generally is, and I don’t know how close you’re following this, but it’s dramatically reducing the cost of green energy. And the reason is because if you couldn’t store the energy, there were times when you couldn’t put it into the grid. So now with batteries, you’re able to balance that out more and push it into the night or draw off from the night or put into the day. You’re able to do different things.

Matthew Gordon: Yeah, more constant stream. Yeah, that’s very exciting. A completely opposite view of that yesterday was put to me by someone, was that a lot of this renewable energy is actually prolonging the life of fossil fuels in a way because there’s so many different solutions out there which have their own issues. I think this guy was referencing wind for instance, or solar…

Anthony Milewski: Was this the Uranium guy?

Matthew Gordon: He may have been the Uranium guy. I said you were clever.

Anthony Milewski: I tell you, the Uranium thing is interesting, but unfortunately for folks, the problem nuclear is, and it’s totally irrational because if you look at the number of deaths in coal mines versus nuclear, it’s not even close. But people are emotional. And when something goes wrong in a nuclear power plant, it’s scary and it’s a huge media event. But I agree with the premise that nuclear would be the cleanest form of energy and maybe they’re able to kind of figure out how to make it safer. Although they would argue it already is extremely safe and factually, they would be correct.

Matthew Gordon: Yeah, I agree. It was an interesting conversation because everyone talks about what’s happened in the Cold War and weapons and the fact that the difference between nuclear for power versus nuclear for weapons is such a significant difference in terms of the enrichment process, but, it is a clean energy, zero carbon. But the thing that people really can’t answer the question on, including the Uranium guys, is where do you store this safely? What do you do with the waste? Some people say you can prolong it a bit and create more energy out of the waste now with new technologies. There’s much longer life reactors. But what do you do with the waste? I think that is the bottom line that needs to be answered before we get comfortable again, right?

Anthony Milewski: Don’t they turn it to glass? I grew up in the west near the Hanford Nuclear Reservation and they had a facility there.

Matthew Gordon: There’s a bit of that but people still, there’s an education process that needs to go on, but that’s for the Uranium guys to deal with not, not us.

Anthony Milewski: But I would say that I kind of reject this idea that somehow this is positive for Coal. I think it’s a false narrative.

Matthew Gordon: Yeah, I’d agree. Not with the numbers I’ve seen, that’s declining.

Anthony Milewski: Even for a different reason. Look at the mandates of endowments and different investment proposals in America.

Matthew Gordon: It’s problematic, for sure.

Anthony Milewski: Yeah. They’re saying you cannot invest in companies that invest in Coal or you can’t be more than a certain percentage. And on the one hand that will create some opportunity for some hedge funds to get a little bit of money, but the reality is that will hasten the decline of Coal companies, or the use of Coal, because it just won’t be bankable. Coal’s not going away tomorrow. But, you know, we’re in China all the time and what I see in China is a real demand to clean up the air, specifically the air quality. And this requires burning less carbon next to major cities.

Matthew Gordon: Well, they’ve also just created the world’s largest, it’s like a vacuum cleaner, which is a large sort of tower which sucks in and filtrates the air. It’s fascinating. I mean, they are are dealing with it, but one for another. Just very quickly before we wrap up, you said there, Vanadium, fascinating, really interesting. How interesting? Interesting enough for Nickel 28 or just a Nickel company?

Anthony Milewski: It’s just Nickel and Cobalt but I would say that Vanadium, there’s two things about Vanadium. I think the technology is interesting. It’s not been rolled out and commercialised on a broad scale yet. And I think what will be interesting is to see what happens with the Vanadium price. By the way, Vanadium is similar to Cobalt, there’s Steel and there’s two types of Vanadium.

Matthew Gordon: 90% and 10%.

Anthony Milewski: Yeah. And so I think before it gets commercialised on a large scale, I think people have to figure out if they feel comfortable around the pricing, and if they’re able to get that material in large scale. Now with Cobalt, for instance, I will tell you, that because Cobalt is sitting at high $13’s, now low $14’s, there’s almost no discussion about substituting it out. I mean, that conversation has died. Now the transition in cathodes is still happening, but that’s not being driven by Cobalt price. And so with any of these new technologies, Lead, Zinc, one of the big factors will just be the luck of the draw on what is the commodity price when it gets rolled out. Because now that Lithium-Ion is dialled in to that Nickel Manganese Cobalt chemistry style, you are kind of hostage. But you’re not hostage in those early days and I harken back to VHS and Betamax. So Betamax by all accounts, may well have been a better technology, and VHS won.

Matthew Gordon: Not as good at marketing.

Anthony Milewski: And by the way, the same thing happened with CD players. I can’t even think what was the other? 

Matthew Gordon: CDs and DVDs.

Anthony Milewski: No there was another competitor at the time.

Matthew Gordon: Blu Ray.

Anthony Milewski: It was something. So just because technology is better doesn’t necessarily mean it’s the one that’s adopted. I think in terms of some of these other applications, in particular for the broader grid and the storage, I think there will be an element of luck about which commodity.

Matthew Gordon: Well it’s what you said at the the beginning. It’s timing.

Anthony Milewski: Yeah and you can’t control it.

Matthew Gordon: Like this whole industry. Some of it won’t work. Timing.

Anthony Milewski: You can be really cynical about the mining business and say as long as you’re long in anything, when the commodity price moves like a high tide floats all boats.

Matthew Gordon: Every single expert quotes me that.

Anthony Milewski: And by the way, you can be long in the best in class of whatever it is and when that thing halves, the stocks going down.

Matthew Gordon: Again, the uranium guys.

Anthony Milewski: So I don’t know that you can get away from that. But what I would say is, obviously that’s for people in the equities because when hypothetically when Gold goes up 5%, the equities go up.  

Matthew Gordon: Silver’s looking for a pop.

Anthony Milewski: Yeah.

Matthew Gordon: It’s all correlated, but it’s all timing as well. Anthony…

Anthony Milewski: Thank you very much for having me.

Matthew Gordon: I really enjoyed that.  And now you promise you’re going to come back and see us or we’re going to speak to you when the circular goes out.

Anthony Milewski: Yeah, when the circular is out.  We can’t talk about the details.

Matthew Gordon: It’s an exciting story.  I think it’s an exciting story.  I’ve told people what I think, I think it should be something people are looking at. Maybe between now and then we can help them with some pricing information too.

Anthony Milewski: Okay. Cool. Thanks a lot for having me.  

Matthew Gordon: Thank you.


Company page: www.cobalt27.com

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.