Clean Teq - Derisked at the Macquarie Conference?
RODNEY FORREST
Forrest Equities
The Macquarie Conference each year throws up opportunities for re-ratings or new companies of interest to Institutional investors. Clean Teq Holdings Ltd (ASX: CLQ) was a company that presented at the Macquarie Conference last week.
We will show below in this wire:
- The CLQ Sunrise project, compared to other Australian deposits;
- Where CLQ sits on the ever important cost quartile;
- De-risking - a comparison of the Macquarie update to prior ASX announcements;
- Cobalt Supply and Demand - 2018-19 and beyond; and
- Broker consensus from Bloomberg with a $1.96 price target. Current price $1.00.
By way of introduction, Clean Teq Sunrise ("Sunrise") is the world’s highest quality and largest Cobalt resource outside the Democratic Republic of the Congo. Sunrise is arguably the only project in the world whose cobalt and nickel product are completely tailored to the Electric Vehicle ("ËV") battery industry with all of the cobalt and nickel being produced in sulphate form.
Deposit compared to other projects
Latest figures presented at the Macquarie Confernece by CLQ (below), show that combining the Cobalt (7,000 tonnes) and Nickel (25,000 tonnes) production figures as well as the Nickel / Cobalt ratio, it is the best in Australia.
At an upper level, current spot prices for Nickel and Cobalt, with an assumed premium for sulphate (+20%), and at full ramp, annualised revenue could be AUD$1.91b. If spot prices were to be 25% lower, then revenue is obviously diluted.
Source: CLQ Macquarie Conference Presentation, 3rd May
Derisking - cost curve
Where a Commodity business costs sits on the cost curve is all important. After all, for a Commodity business being bottom quartile in cost is most important.
As Warren Buffett says:
"When a company is selling a product with commodity-like economic characteristics, being the low-cost producer is all-important"
Or Mohnish Pabrai says:
“When you’re buying a mine or a commodity producer, cost of production becomes the moat and consistent low cost of production is the way to go about it. And so what I try to do, when I look at the miners – because obviously with commodities, you have no moat – is to create a moat by choosing a consistently low-cost provider”
Sunrise was shown by CLQ below at the Macquarie Conference to be at the bottom of the cost quartile of the industry, with sub $4 US/lb C1, before credits. An impressive feat.
Source: CLQ Macquarie Conference Presentation, 3
rd May
Derisking - Comparison to prior ASX announcements
The table below compares the project dynamics presented in the previous Toronto listing (CLQ is dual listed) with the Macquarie Conference update. The comparison demonstrates how far CLQ has come in de-risking the project.
After all risk is everything, as Frank Martin, a Master Investor says:
"Any look at the prospect for all types of investments would be grossly incomplete without a careful examination of the risks that one would have to assume to be in the game."
Source: Our Summary of Clean Teq ASX Releases, all in $USD * Slide 17 of CLQ Presentation, at current Cobalt spot price ** Current spot and premium prices; not the advised prices by CLQ (DFS by the end of the Quarter will outline CLQ view on long term prices) *** 50% of current spot price from mineralprices.com **** Our research on Premiums
Cobalt Supply and Demand 2018-19 – In Deficit?
There are differing views by Analysts and a range of Institutions on whether Cobalt will enter a surplus or deficit in future years. We thought this is an important build of consideration, so below are some factors we believe should be considered in forming a view of where the Cobalt price (having risen from a low demand base of $10 USD/lb in 2016 to some 400% higher at $40.37 USD/lb) will be moving forward:
- With EV battery demand accelerating and being responsible for the major part of cobalt consumption we believe analysis for cobalt supply and demand needs to be bifurcated, that is analysed according to the demand for high purity cobalt sulphate and that for cobalt metal. The London Metal exchange has recognised the need to price the two products separately with discussion about the development of a spot index for cobalt and nickel sulphate, which attracts a 20-35% premium. None of the recent analyses we have seen discusses what wastage is involved in converting cobalt metal to sulphate or what the pure cobalt sulphate demand might be through 2025.
- It is anticipated EV battery demand will make up 61% of the cobalt demand in 2022, according to Wood Mackenzie. Almost all cobalt output is in a metal form and the large majority of the cobalt EV battery demand will need to be met from cobalt metal being converted to sulphate form. The conversion process results in about 10% to 15% loss of metal volume. These discounts to supply do not appear to have been factored into the supply surplus thesis.
- Almost without exception current responses to the demand and supply analysis has been to include all of the current and upcoming mines in the Democratic Republic of Congo in their supply estimates – in other words to accept that the supply will be at the maximum capacity of the DRC. We believe many of the world’s top car manufacturers will baulk at obtaining supplies from the DRC because of ethical considerations relating to child labour. CNN recently did a research piece showing how conflict, corruption and child labour are rife and disrupting supply.
- The challenged DRC infrastructure, recent tax imposts and changing political contexts means that a real analysis of supply and demand would allow for a discount of Congalese capacity at the very least between 10% and 15% to provide for a more realistic assessment of the supply/demand dynamics.
- Only 2% of cobalt is produced as a standalone product, the remaining 98% is a by-product of nickel production. Cobalt supply is therefore inelastic to price and it is potentially unrealistic to assume large supply increases as a result of rising prices.
It is therefore accurate in our view, that the way the latest demand estimates by CLQ were presented at the Macquarie Conference. They suggest that battery based cobalt demand will increase from 77,000 tons to 215,000 by 2025 or by approximately 19,000 tons a year, with Nickel rising by 400%.
Source: Macquarie Conference Presentation, 3
rd May
There is also the Global Metals Corporation estimates of cobalt demand which will pass 120,000 tons in 2020 and with the estimated battery demand growth will not be less than 160,000 tons by 2022. Bringing total current supply with increased production from Glencore of 34,000 over 3 years, cobalt supply will still be in deficit.
Indeed, if all car manufacturers adopt the ethical purchase policies, following the recent CNN story showing the damage being done to both society and the environment (
see link), the deficits for cobalt will be even more substantial.
For all these reasons we believe the estimates of any cobalt surpluses are very wide of the mark and cobalt sulphate deficits are likely for the foreseeable future. This is also particularly evident as one Chinese factory has already an off-take agreement to purchase 50,000 tons from Glencore over the next three years.
Further when you consider that Electric Vehicle production could well accelerate to over 13.7m cars produced by 2020, or a penetration rate of 37% taking a linear liner on car manufactures announced commitments (see below), any over-supply in our view will not materialise. With only half of Cobalt’s demand going to EV's in 2017 (only approximately 3.5m EV's were produced worldwide), we are looking at nearly a 400% increase in 3 years.
Source: Car Manufacturer Stated Committments and Forrest Equities
Like any forecasting, it is always of course fraught with danger. It only takes an exogenous event to throw the thesis out the window. So as a reminder, its important to consider the opposite view of Investors, who ignore commodity businesses. This quote from Bill Ackman is a good reminder.
"We have generally avoided commodity-sensitive businesses. With commodity businesses, it's very difficult to predict the future price of the commodity"
Current Bloomberg Consensus - Valuation
Bloomberg Broker consensus (below) shows a 12-month price target of $1.96, coverage by 4 Analysts all with BUY ratings.
From our reading of the broker papers, it is important to consider that the majority use an 80% weight of the Discounted Cash Flow (DCF) output, as well as not account for the sulphate premium to spot (+20/35%), or yet account for the higher output from the latest Macquarie Presentation, or bring forward in production.
Source: Bloomberg Broker screen, 4th May 2018
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Co-authored with Dr Jon Hall. Previous Associate Research Director Sydney University, with expertise in asset analysis and demand supply dynamics research. Also a co-investment analysis of Forrest Equities.
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Disclaimer - The information contained is general information only. Any research should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. No person, persons or organization should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Forrest Equities Pty Ltd, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained. Both Dr Jon Hall and Forrest Equities hold positions in Clean Teq (CLQ).
