The global battery arms race is strengthening the investment case for cobalt projects.
The winners in the global battery arms race may be decided by access to new cobalt supplies.
Tesla’s (NASDAQ:TSLA) Nevada-based Gigafactory 1 is the only strategic asset in America’s electric vehicle (EV) supply chain. Benchmark Intelligence’s Simon Moores recently gave testimony to the US Senate Committee on Energy and Natural Resources that emphasized the need for the US to stop being a “bystander” in the global battery arms race. According to Moores, the US will need to develop its homegrown battery manufacturing capacity as well as its domestic supplies of battery metals such as lithium and cobalt.
In a recent interview with INN, Moores emphasized that investors should look to the battery plants in order to understand the market. The lithium-ion battery megafactory capacity in the global pipeline for 2021 is expected to reach 372 giga watts thanks to rising demand for EVs and larger energy storage units. Lithium battery manufacturers are scrambling to secure supply sources for essential metals like cobalt, especially in conflict-free jurisdictions outside of the unstable Democratic Republic of Congo (DRC).
Despite the recent price decline in cobalt, an increase in global production could help sustain a healthy lithium-ion market moving forward.
The global battery arms race
Tesla’s decision to construct its Gigafactory 1 in Nevada was a landmark development in the US lithium-ion battery manufacturing sector. However, since that decision, 71 lithium-ion battery megafactories have been announced around the world, with 45 of those now in production, according to Benchmark Intelligence’s tracking. China leads the pack in the global battery arms race with about 55 to 60 percent of the current megafactories tracked by Benchmark. Europe comes in second with 15 to 20 percent of global battery capacity. Tesla’s Gigafactory 1 remains the only such battery plant in the United States.
“Those who control these critical raw materials and those who possess the manufacturing and processing know-how will hold the balance of industrial power in the 21st-century auto and energy storage industries,” Moores told the US Senate Committee. According to Moores, the United States has a lot of catching up to do.
Nickel and cobalt: More energy density needs more thermal stability
Lithium-ion battery cells manufactured in today’s megafactories employ one of two preferred cathode chemistries: nickel-cobalt-manganese or nickel-cobalt-aluminum. What both these chemistries have in common is the marriage between nickel and cobalt.
Nickel has proven to be the best metal for increasing energy density, which translates to longer range out on the road. Long-range batteries are key to the widespread adoption of electric vehicles. But with increased nickel content comes increased thermal instability, for which cobalt is the best remedy. “There isn’t a better element than nickel to increase energy density, and there isn’t a better element than cobalt to make the stuff stable,” said Umicore Chief Executive Marc Grynberg. In essence, nickel increases the battery’s longevity, while cobalt keeps all that dense energy from blowing up the battery.
Once a specialty metal used to strengthen steel, cobalt now holds court as one of the most critical components in the EV battery industry. “Lithium accounts for two percent of the weight in a lithium-ion battery. Cobalt accounts for seven percent. Only within the past two years have people realized the importance of cobalt in the battery space,” Mitchell Smith, CEO of Global Energy Metals (TSXV:GEMC,OTC Pink:GBLEF,FWB:5GE1) told INN in an interview at the Vancouver Resource Investment Conference.
Global Energy Metals holds three pure-play cobalt assets in Nevada, Canada and Australia. “Companies like Volkswagen (FWB:VOW) have been talking about investing billions of dollars into developing batteries for EVs and in removing internal combustion engines from their fleets. They don’t want to have another ‘dieselgate,’ and cobalt is critical to that role,” added Smith.
Cobalt supply and demand fundamentals
Clean energy policies and consumer sentiment have led to a growing demand for EVs in massive markets such as North America, Europe, China and India. Now that energy storage is becoming a major global industry, the demand for cobalt as a battery material could be set to rise dramatically.
According to Benchmark Intelligence’s February 2019 Assessment, the lithium-ion battery capacity in the pipeline for 2019 to 2028 has risen from 289 GWh to 1,549 GWh. This figure represents about 24 million EVs. Yet today, cobalt is a niche market with annual production at a mere 110,000 tonnes. Cobalt’s supply/demand imbalance pushed prices up 400 percent from 2016 to a peak of US$93,250 per tonne in April 2018, compared to US$13,300 per tonne for lithium. However, the battery metal’s price soon took a significant dip. According to Benchmark Mineral Intelligence analyst Caspar Rawles, there were several factors putting pressure on cobalt prices. For one, the price of hydroxide out of the Democratic Republic of the Congo (DRC) became uneconomical for Chinese buyers. The elimination of Chinese subsidies for battery manufacturers took a toll on prices as well, not to mention the market volatility of US-China trade relations.
These short-term issues could soon give way to long-term demand forces. As the electric vehicle market gains global strength, cobalt demand is expected to rise four-fold by 2028, Moores told the US Senate.
On the floor at the 2019 PDAC conference, Moores told INN, “We are starting to see supply chain restrictions, pressures on the biggest battery factories.” These delays are a result of a pressing need for the expansion of raw materials supply chains.
He continued, “They are going from niche to mainstream. No one has done [this] before; no one has produced lithium, cobalt, graphite anode or nickel chemicals [at the scale that’s going to be needed].”
For the cobalt industry, this supply/demand imbalance calls for a rapid increase in the production capacity of this key battery material. For the United States, this represents a justification for building out its own domestic cobalt resources.
The US needs homegrown cobalt supplies
Nevada’s Tesla Gigafactory 1 is the world’s largest battery factory and was the fourth largest battery producer in 2018. Five more US-based battery megafactories are in the planning stages. At present, the United States relies heavily on imports for battery materials to supply that production. In fact, there are no active cobalt producers in the US and the nation imports 100 percent of its cobalt consumption.
The lopsided supply/demand picture for battery materials is creating an opportunity for cobalt-focused resource companies in the United States. Global Energy Metals has plans to advance exploration at two high-grade cobalt properties, the past-producing Lovelock cobalt mine and the adjacent Treasure Box project, located approximately 150 kilometers east of the Tesla Gigafactory. Previous exploration work in the region has shown strong enrichment for cobalt, nickel and copper.
A few other companies developing cobalt projects in the US include First Cobalt (TSXV:FCC,OTCQX:FTSSF,ASX:FCC) and eCobalt (TSX:ECS,OTCQX:ECSIF,FWB:ECO). International Cobalt’s flagship project is Blackbird Creek in the Idaho Mineral Belt in Lehmi County, Idaho. The property is adjacent to eCobalt’s fully environmentally-permitted Idaho Cobalt Project which hosts a measured and indicated resource of 45.7 million pounds of cobalt, 65.8 million pounds of copper and 68,000 ounces of gold alongside an inferred resource of 16.7 million pounds of cobalt, 29.4 million pounds of copper and 27,000 ounces of gold.
Global alternatives to the DRC
On the global stage, battery and automakers are being pressured by consumers to ensure they only source materials from conflict-free zones that don’t carry the stain of child labor. However, 65 percent of the world’s cobalt comes from the conflict-ridden DRC and that number is expected to rise over the next few years. Ethical issues aren’t the only challenges associated with sourcing cobalt from this region. Political insecurity and rampant Ebola outbreaks also pose serious potential supply disruptions for the market.
“The world’s automakers are now well versed in the risks the DRC brings, yet at present there is no other option for a large-scale supply of cobalt to come from other countries — new resources will need to be developed,” Moores told Congress. “Cobalt remains the highest risk lithium-ion battery raw material, both from a supply structure perspective and a geopolitical one.”
Cobalt companies like Global Energy Metals and 21C Metals (CSE:BULL,FWB
CR1,OTCQBCNNF) are establishing strategic footholds in mining jurisdictions outside of the DRC. Global Energy Metals’ portfolio includes the Millennium cobalt project in Queensland, Australia, and the past-producing Werner Lake cobalt mine in Ontario, Canada. 21C’s flagship Tisova copper-cobalt property in Germany is located within 150 kilometers of several of Europe’s EV battery plants.
Takeaway
The global battery arms race is here. Battery manufacturers are in a race to secure supply lines of key materials such as lithium, nickel, copper and especially cobalt. Cobalt-focused exploration companies with geographically diverse portfolios could be well-positioned to take advantage of shifting supply dynamics in the battery materials markets.
