“This tiny company holds the key to the U.S. supply of a strategic metal… and it just got final clearance to break ground on one of the biggest moneymaking mines the U.S. seen in decades.
“And it’s not even a blip on Wall Street’s radar… YET.
“How a looming supply shortage could launch this penny stock to $10… $12… even $18 by November 20, 2009”
How’s that for an opener? It takes me back to the good ‘ol days of 2007, when all commodities were in a wild bull market and we saw teasers every few weeks for some new mine that was going to corner the market for one strategic metal or another.
I think that was the last time I wrote about a cobalt miner — and that’s what today’s tease is about, cobalt. Back then it was a cobalt mine in Cameroon, not far from where most of the world’s cobalt is sourced … but today, the hook is that we’re dealing with what might be the only cobalt mine in the Western Hemisphere.
The tease this time is employed to get y’all to subscribe to Hot Stock Confidential — I wrote about them a little while ago when they were teasing some biotech companies, so we know they get around into lots of different sectors (and, of course, we know that they’ll charge you $499 a year to learn the answer to this teaser … that is, if you don’t feel like learning it for free from your friendly neighborhood Stock Gumshoe).
Our cobalt argument today is a little bit political and strategic once again — cobalt is an important metal for many kinds of high strength alloys, and it’s also part of most lithium and nickel batteries (thought not all), so there is an interest in making sure that the US has access to a steady supply of cobalt, especially when the Chinese and others are eagerly trying to tie up African resources.
It’s actually kind of similar to the arguments made about rare earth metals and magnets — rare earth minerals production is dominated by China, and there was a political and strategic push behind Lynas as they tried to mine a rare earths deposit in Australia and open up a non-Chinese strategic supply. They even went so far as to plan their own processing plant in Malaysia so they wouldn’t have to use Chinese refiners. Of course, with the economic downturn Lynas ran into huge funding problems with its creditors and essentially had to be rescued last week … by selling a majority equity stake to a strategic Chinese investor (hasn’t been approved yet, but that’s the plan so far).
So you never know what will happen — or how much of this “strategic” access to minerals is really a national priority. And with cobalt prices collapsing over the past couple years, the push to open new mines hasn’t exactly been overwhelming. That cobalt mine teaser that I unraveled a couple years ago was for Geovic, and the price spiked at the time to $4 or so … but is now down to about fifty cents.
Maybe they’ll be right this time, cobalt prices will recover, and this first US cobalt mine will go into production next year and make us all rich. Seems like we ought to at least figure out who it is, eh?
Right … on to the clues, then:
“… cobalt is usually produced as a by-product of copper and nickel mining.
“Much of the world’s cobalt supply currently comes from mines in the African copper belt that runs through the Democratic Republic of Congo and Zambia.
“Not the most stable of regions.
“Even so, you know China will be moving in hard to secure future supplies.
“Right now, at about 20% of world output, the United States is the largest consumer of cobalt.
“It considers cobalt so crucial that it’s been labeled a “strategic metal”—one with little or no domestic supply that the government considers essential for national security.
“And that’s exactly where this audacious little mining company comes in…
“The company I’ve found is about to open the only cobalt mine operation in the United States—in the entire Western Hemisphere, in fact—that will produce high purity super alloy grade cobalt metal.
“All permits, paperwork and red tape have just been finalized—and this tiny company recently pulled together over $8 million in private financing to get things started.
“Once operations come online in 2010, it will be the only super alloy grade cobalt mine-to-market outfit in the U.S.”
Sounds good, eh? There’s a little more, don’t worry …
“To give you an idea of this mine’s profit potential, consider this: Swiss-based Xstrata plc currently controls 40% of the world’s cobalt market and 85% of the high purity cobalt market.
“One of its best customers is the U.S.
“Xstrata has pulled every trick in the book to block this project.
“It’s because they’re scared. They should be.
“The mine our tiny micro cap owns has been estimated to have a 10- to 12-year potential to produce 1,525 tons of cobalt annually.
“That would equal about 3.3% of the global supply.
“Earnings projections based on just $22.52 per pound for cobalt, with a 7.5% discounted rate, suggest a net present value of $87.29 million with an internal rate of return around 22.3%.”
And of course, the promise — “If you get in now, you could ride this stock from pennies to $18 by the end of the year as operations at this U.S. facility ramp up.”
And my favorite marketing bit — the “don’t tell anyone” part:
“… it’s crucial that you play this close to the vest.
“We don’t want any false elevations occurring on this investing bonanza.”
Well, I can pretty much promise that we’ll get some “false elevations” on this stock — if not from the mighty hordes of the Gumshoe faithful, then from the push for this stock from the newsletter itself, or from some other hypester.
You see, this is indeed a tiny stock, the company has a market cap of about C$68 million and C$50,000-100,000 worth of shares tend to trade each day, so it wouldn’t take a lot to make the shares move in a hurry. The shares were trading down in the teens (18 cents or so, Canadian) back in mid-March, they got up to about 40 cents when I first saw this ad in heavy rotation a week or two ago, and they’re now a little bit below that.
Oh, and I didn’t tell you who it is yet: This is Formation Capital (FCO in Toronto, FCACF on the pink sheets — where the trading volume is a fraction of what you’ll see in Toronto).
They are indeed planning a cobalt mine — they call it the Idaho Cobalt Project, and it is indeed in Idaho. They also own the refinery complex that includes the Sunshine Refinery (you may have seen their silver bars), and they’re planning to expand or revamp that refinery complex to process the cobalt (the cobalt site is about 200 miles away).
From what I can tell, the tease stuff about the permitting process is accurate, but I would urge you to research that on your own — I’m far from an expert about this permitting stuff, and there could easily be hiccups along the way. The claim that the net present value of the mine is $87 million is taken straight from the company’s website (you can see their back-of-the-envelope finances for the project here). Cobalt has apparently been trending back up again a little bit, from what little I know about the metal, but pricing is still well below that assumed $22.52/pound price, and way below the highs of around $40 a pound that we saw back in 2007.
Oh, and the bit about Xtrata trying to stop the project? That’s true, too — or at least, some of the objections during the permitting process were from Xstrata, and the last announcement indicated that Xstrata’s appeal for “relief” was denied. I have no idea why they were appealing for relief, but I assume it probably had something to do with competing claims on the project.
So … will this strategic cobalt mine actually get built? Will it be worth what they project it to be worth? That’s an open question — right now, if you assume they’re correct, then the $87 million current value of the mine means that you might be getting a discount on the potential cobalt mine, with the silver refinery and their other properties thrown in (they have a number of other assets, mostly mineral rights in the US, Canada, and Mexico, most of which don’t look like they’re being worked or explored very aggressively). They are generating revenue right now, thanks to the fact that Sunshine is busily refining silver, but they’re not making any money. They did just raise that $8 million+ to move work forward on their cobalt project, but that’s a drop in the bucket — the latest report of theirs that I saw estimated they would need close to $140 million to get the mine to production (about 10% of that is for the actual mine development and the mining equipment, almost all the rest is for the hydrometallurgical plant and for the concentrator).
Sound good? Sound bad? I don’t really know — it sounds interesting, at least, on a dreary Wednesday morning … give a shout below if you’ve got an opinion on our cobalt mining friends.