A New “Dumb and Tiny” Personal Speculation

by Travis Johnson, Stock Gumshoe | October 26, 2016 3:17 pm

Early Friday File: Will we see more stocks benefit from a "battery bubble?"

Getting a bit of your usual Friday File commentary out on the early side this week, since I made a personal purchase that I thought might interest my favorite Irregulars.

And by purchase I mean “dumb speculation,” really — I picked up some shares of a junior miner that’s way too small to take seriously, and which owns an asset that isn’t worth that much at the moment… all because I think we might hit a wave of speculative bubbliciousness for electric cars and batteries over the next few months.

I know, I know, I’ve pooh-poohed the lithium bubble a little bit in past articles — or, at least, I’ve been a bit skeptical of early-stage lithium exploration plays. And I wouldn’t consider any early-stage lithium exploration company to be a real investment. But sometimes a guy’s got to speculate with small amounts of money, even if it’s only to give himself some lottery-ticket daydreaming or a gambling outlet and help him avoid doing something stupid and aggressive with a large chunk of his actual retirement savings.

So, with that said, what did I do?

Well, as I mentioned in some recent articles about teased lithium stocks, I essentially tried to predict the next bubble — and I think the next bubble won’t be lithium, which has already enjoyed a nice run and has huge and accessible reserves, I think it might be cobalt.

Probably not the actual metal, you understand — but the stocks. And it is important to separate the two, otherwise you’ll turn a “greater fool” speculation idea (“someone is going to get excited and pay a lot more for this story stock in the future, even if the fundamentals are weak”) into a “fundamental” strategy where you buy in as a long-term investor and start to believe the hype… that’s when you might become the “greater fool.”

Cobalt does have real fundamental promise, to be sure, but it’s extremely hard to suss it out. About half of cobalt demand is for batteries, and the vast majority of cobalt production comes from nickel-copper mines in Russia and the Democratic Republic of Congo (DRC). The former is politically challenging, perhaps, but the latter is a potential boycott away from becoming a crisis because of the extent to which “artisanal” cobalt mining with child slave labor reaches public attention that might equal the distaste for “conflict diamonds” in years past.

And like lithium, cobalt pricing is not terribly important to battery makers or automakers — but production is. A Tesla might require 30 pounds of cobalt in its batteries, and most other lithium-ion battery designs will probably have similar requirements… so demand could spike up fairly quickly.

Unfortunately, cobalt pricing is not terribly important to cobalt miners, either — because most of them produce cobalt as a byproduct of the nickel or copper that actually pays the bills… and nickel and copper are experiencing a weak enough price cycle right now that some of those mines are being paused or downsized or, in the case of new mines, not being built with any enthusiasm. Even if cobalt prices go up by 500%, that’s not likely to change the economics of most copper or nickel mines very dramatically.

So cobalt’s rise in price, which is widely anticipated because of rising demand for electric car batteries (and perhaps other batteries, though the tonnage required for electric cars outpaces most other demand growth potential I can imagine), probably won’t lead to an increase in cobalt production… unless nickel and copper prices are also rising. Some folks do expect that (Altius Minerals and Sandstorm Gold, my two mining royalty investments, have both bet on copper “bottoming” over the past year by funding significant copper projects with royalty/streaming deal purchases), but I don’t know if it’s wise to count on it happening anytime in the near future.

Which means, to me, that we might have a real price spike in cobalt.

Which usually means that junior miners who have a connection to cobalt see big price moves — and sometimes as we saw a few years ago with rare earth minerals, and then with graphite, and marijuana stocks and lithium stocks more recently, these things make the headlines, a few big investment newsletters get excited about recommending cobalt stocks, then a bunch of junk companies change their name to “Cobalt Inc.” and start paying promoters to tell their story, and before you know it you have a couple dozen penny stocks going crazy.

So what I’m doing today is NOT an investment, it’s a mild bet that we might see a wild run in cobalt-related stocks over the next year or so, and I’m betting on that. There is little justification for any of these names otherwise at the current price, so that’s why I classify this as a “Dumb” idea… and they’re generally super-tiny companies that even our little group here could easily send over the moon with just a little buying pressure, so do be careful if you’re at all inclined to follow my lead — remember to use limit orders, and remember, if you’re following my logic, that this is a dumb bet, not an investment.

Think of it like the roulette table, you might get 20X your money if a speculative bubble forms (or the ball falls on your number), but more likely you’ll lose your entire investment.

OK? Enough patronizing talk? These are the cobalt speculations I’m trying on for size today:

LiCo Energy Metals (LIC.V in Canada, WCTXF OTC in the US) — this tiny little company, one caught my eye because they just changed their name to incorporate both lithium and cobalt (it used to be called Wildcat Exploration), and because they are planning a small drilling campaign over the next few months so there may be some actual news that helps drive interest. Their lithium project, Dixie Valley, is almost worthless as far as I’m concerned, but it is real enough to put “lithium” in their name. They’ve optioned a set of lithium claims that are “conceptual” in nature, and very little exploration has been done, but they think it has the potential to be similar to the Clayton Valley Nevada projects as a lithium brine resource.

Their cobalt project they describe as a “high grade, advanced stage” project, which is a fairly ambitious description — they optioned the Teledyne property in Ontario, which was explored 35 years ago, but there was at least some actual drilling and some results (they say “Based on the 1979-1980 drilling results, probable and inferred reserves accessible from the current ramp are estimated to be in excess of 100,000 tons at 0.45% Co.) I wouldn’t put a huge amount of stake in that as a fundamental premise for investment, obviously, particularly since the owner, presumably not a moron, was willing to sell them the option for C$850,000 and 11 million LiCo shares (which would be worth a little less than C$2 million at current prices) just last month… but they are spending some money (a small amount but meaningful in the context of their tiny size at C$780,000, to drill and do other exploration work starting in the next few weeks, so there may well be news before winter slows things down. They’ve got a presentation all ready to get investors jazzed up, you can see that here if you’re curious.[1]

And second is the other junior miner I’m aware of that has changed its name to try to ride the cobalt train — that’s the more advanced and substantially larger Formation Metals, which changed its name to eCobalt Solutions (ECS.TO in Canada, ECSIF OTC in the US) and now carries a market cap of about C$60 million.

This one is not completely new to the world of Gumshoedom, and is probably the more likely to be subject to any big newsletter attention since it’s a potentially “strategic” asset (a cobalt mine in the US), and that’s always a fun story to spin, and because it has been around for a long time. The last time I remember it being actively pushed was in 2009[2], coming out of the financial crisis, and at that time the dream was that this $1 stock would soar to $18 on the back of strategic demand for a new cobalt supply from the friendly hills of Idaho.

They still own that project, called the Idaho Cobalt Project, and they actually spent a ton of money on it about five years ago, even ordering parts for a mill and completing most of the “earth moving” prep work on site… but then cobalt prices collapsed, no one cared, and they ran out of money. They’ve been raising smaller amounts of money lately, and have filed a shelf offering for up to $100 million so will probably have a very volatile share price as talk of capital raises hits over time, but they’re also expecting to have a bankable feasibility study within six months that will support raising capital to actually complete the mine construction (they expect it by the end of the first quarter next year), so this one gets onto my list largely because they’re the most “real” possible cobalt producer — they have a primary cobalt mine planned and partially constructed, their initial plans were reasonable when cobalt was at higher prices almost a decade ago, and they’re continuing with feasibility studies so we’ll have a better idea in a few months about whether the project, with a battery focus instead of an aerospace focus, is as compelling with $15 cobalt (or $10, or whatever it is then) as it was at $20 cobalt in 2007. You can see eCobalt’s description of their project and status update here.[3]

This is the long-term price chart for cobalt, by the way — the other half of cobalt use, other than batteries, is for high-end steel alloys used in turbine blades, medical implants and other end markets… cobalt was driven higher in 2006-2007 mostly because that demand was staying steady or rising but the supplies were shrinking. So if you get too tempted to buy in to the “shortage always leads to higher prices for a long time” story, remember to read a little history (here’s a story about that cobalt price boom from January, 2008) or revisit this chart:

Cobaltprice

Neither of those newsletters that pitched cobalt stocks back in 2007-2010 exists anymore (actually, even their publishers have disappeared), and those newsletter pundits are out of the business — one of them went to law school and is a lawyer now, no idea where the other one went. Another reason, perhaps, not to tie your tow rope too tightly to any hypothetical junior mining bubble.

There are other cobalt names that have come up over the years, including Geovic Mining (GVCM), which has interests in potential cobalt projects in Cameroon — given that the main argument for new cobalt mines is that people don’t like the DRC mining practices, I don’t see any reason to speculate on a Cameroon project (yes, I know they’re different countries, and that Cameroon is not facing the same turmoil and international outrage as the DRC, but it’s also not Canada or Idaho) … but Geovic might be a worthy cautionary tale for those who think of these kinds of “story” stocks that trade on speculative fervor are real companies or real investments — it was up around $2-3 when a newsletter pitched it as “Africa’s $10 Billion Secret”[4] because of that cobalt potential during the wild China-driven commodity bubble days in 2007, and it’s trading at about 1.5 cents right now (I have not checked on the company’s progress at all, and have no idea what they’re doing these days, if anything… it could just be a penny stock stub waiting for a promoter to change its name and claim that it’s “looking for investments in the burgeoning marijuana sector”).

And there are also several other “junior” cobalt names that are down in the $1-10 million market cap range and could also take off if there’s enthusiasm, and even some that have, like these two, gone so far as to change their name or actually plan some real mining work. It just so happens that eCobalt and LiCo are the ones that seemed most likely candidates for an irrational surge to me, with some potential catalysts to go with their stories that are tailor-made for a cobalt bubble if one happens to inflate… and I’d like to sell them during an irrational surge. Fingers crossed.

So that’s what I’ve got for you on this speculative Wednesday afternoon — as I said, there are other “story stocks” in cobalt beyond these two that I’ve chosen to speculate on, and there’s surely no guarantee that the cobalt story really will take off and drive bubble prices in the metal or the stocks again… but it seems worth a roll of the dice to me right now, given the slow ramp-up in stories about cobalt as the “forgotten” metal in the lithium-ion battery.

(And yes, graphite is the other “forgotten” ingredient in those batteries — but the last graphite/graphene bubble left a bad taste in quite a few mouths a few years ago, and graphite is also mostly tied to the steel industry and is far, far less rare than cobalt… I’m guessing that cobalt is more likely to ignite a speculative fervor, but this is all guessing).

Have any wild ideas to throw on the pile as long as we’re talking speculation? Let us know with a comment below.

Disclosure: I have small positions in both eCobalt Solutions and LiCo Energy Metals, both of which I consider risky speculations on a potential surge of interest in cobalt stocks. I don’t own any other stock mentioned above, and will not trade in any covered investment for at least three days per Stock Gumshoe’s trading rules.

Endnotes:
  1. see that here if you’re curious.: http://licoenergymetals.com/wp-content/uploads/LiCo-Energy-Metals-Teledyne-Presentation.pdf
  2. was in 2009: http://www.stockgumshoe.com/reviews/hot-stock-confidential/the-best-commodity-penny-stock-to-own-right-now/
  3. see eCobalt’s description of their project and status update here.: http://www.ecobalt.com/project/overview
  4. a newsletter pitched it as “Africa’s $10 Billion Secret”: http://www.stockgumshoe.com/reviews/breakaway-investor-defunct/africas-10-billion-secret/

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