by Travis Johnson, Stock Gumshoe | May 29, 2018 4:33 pm
Sometimes it seems like investment newsletter teasers run in trends… last week we were inundated with “smart metal” pitches, this week the questions are pouring in about Doug Casey’s “Super Metal.”
I guess we shouldn’t be surprised, so many newsletter ads try to implant a short little phrase in your head that harnesses their investing idea… smart metal, super metal, liquid metal, whatever, as long as it’s short and sweet and sounds a little big mysterious and exciting, maybe someone will bite the hook.
This time, it’s all about cobalt… which has been one of the hotter “niche” stories in resource investing over the past year or so, mostly because the blue metal is an important component in most lithium-ion batteries, and the demand surge that’s predicted from electric vehicle adoption is driving demand for everything that goes into those batteries.
So we’ve seen the electric car pitches for lithium, to be sure, and even for graphite, which accounts for most of the weight of a battery… but it’s arguably cobalt that’s got the best story.
How so? Well, not only is cobalt genuinely rare when it comes to finding highly concentrated deposits, and not only is the world almost bereft of “pure” cobalt mines (it’s almost all mined as a by-product in copper and nickel mines, which means that no one expands cobalt production if copper or nickel prices are low), but there’s also a “guns and corruption” aspect… almost 2/3 of all the cobalt currently produced comes from the highly un-democratic Democratic Republic of the Congo (DRC), and so prices and supply fluctuate pretty dramatically whenever Apple pushes to avoid cobalt mined by children and slave labor or the London Metals Exchange pushes “principles for responsible sourcing” … or when the DRC’s “leadership” cracks down and raises mining royalties and taxes, as has also been done this year.
So even as the DRC’s huge and very concentrated deposits of copper and cobalt continue to generate interest from the big mining houses, led by giant Glencore, the world has also been looking for non-DRC cobalt sources to meet the demand spike that everyone thinks is coming from the next wave of battery “gigafactories” around the world.
And, to be fair, I should note that the world is trying awfully hard to use less cobalt, too — there are other battery chemistries and improvements that are being used or tested that require less cobalt, or no cobalt… the highest profile attention to those advances came, as you might guess, from Elon Musk, who generated headlines when he said that as part of reducing battery costs for the Model 3 and future vehicles, “we think we can get cobalt to almost nothing.”
Of course, “almost nothing” and “nothing” are very different concepts, and Tesla still buys a lot of cobalt, but we should assume that any metal that rockets higher in price will send its customers looking for alternatives — even as we acknowledge that “next generation” battery technologies and advancements tend to get adopted pretty slowly. And cobalt has certainly surged, going from about $12 to $42 in just two years — though Musk’s comments and other sober sentiment did flatten out the curve a bit over the past month or two (the recent peak was around $45 in mid-March, though Cobalt had a somewhat similar run from $15 to nearly $55 back in 2006-2007).
So that’s the back story — what is it that Doug Casey is pitching?
The ad is actually signed by Justin Spittler, who helms the International Speculator newsletter for Casey, and the headline “86,900%” number when it comes to potential gains is from Casey’s history — that’s his all-time best investment and luckiest trade from one of the uranium bull markets about 20 years ago, when Paladin went from a penny to $8+, the same trade that Rick Rule also often refers to as his all-time best bull market bonanza.
Even if we ignore the point that this was a hugely fortunate once-in-a-lifetime trade, and you should never go in looking for 10,000% gains (a sentiment that even Casey and Rule would agree with, I’m sure), that obviously doesn’t teach us much about our current situation — Paladin in the late 1990s was about bottom fishing in a completely hated commodity, uranium, that had done nothing but go down for 20 years… cobalt was arguably bottoming out a few years ago, but is one of the hottest commodities around right now and is pretty close to historical highs.
But it serves its purpose, which is to get us to start drooling. Mmmm, mmmm, 86,900% gains… that would be so delicious… where can I get some?
So, without further ado, and assuming that you’re not eager to spend $1,995 for the “free” report that comes with your International Speculator subscription, let’s jump right to the clues….
“Right now, there’s one cobalt company that’s our hands-down favorite. Our research shows that it’s entirely possible to see this company’s share price soar 10- to 30-fold. But the key is getting in early—while most of the money is still on the table.
“In my brand-new report, The Cobalt Blueprint: How to Earn 86,900% Gains From America’s Next ‘Super Metal,’ I lay out the full details on this company, including how much I think it will be worth, when to buy, and what to look for as this cobalt story unwinds.
“But again, the time to act is now. This company is expected to make an important announcement before the end of June.”
There’s quite a bit of talk about June in the ad, which is typical — if you don’t include a fairly close deadline, people won’t panic into subscribing… copywriters know that if you don’t make a decision RIGHT NOW, then you’re probably going to think it over for a while and maybe even talk to someone before you enter your credit card numbers, and that’s terrible news for them. So they’ve got a “deadline” of June 15 for getting your “blueprint” from Casey about the idea that could be poised, they say, for a “massive windfall.”
Which gets us started, but it doesn’t quite get us a name — what other clues do they drop?
“Like Paladin, this tiny overlooked company is trading for practically nothing…
“… but what most investors don’t know is that this same company is sitting on a massive pile of a rare and special metal called CO-27…
“CO-27 is a metallic super-element so powerful that just a swimming pool of it could power an entire city for 10 years….
“And because CO-27 is still generally only known to energy and mining insiders, shares are still trading under $2…
“It won’t stay that way…in fact, we may be just weeks from a big announcement that will likely send shares sky high…”
And he goes on to talk up the fact that Casey looks in the “incredibly secretive” filings that resource companies make with the Canadian government to find the hidden stuff….
“… these companies are incredibly secretive. They don’t say a word more than legally required.
“But Doug knows the special clues to look for—the words that hint at big, big discoveries and stockpiles.”
Which, if you’ve been around junior resource companies for any length of time, sure doesn’t sound true… every mining company I’ve ever looked at is quite desperately trying to convince us of the vast riches they’ve found (or are about to find) — exploration and mine development, after all, is a horrible and expensive business, all of these companies are raising capital or about to raise capital almost all the time. If they’re keeping secrets, they aren’t about how great the deposit is.
But anyway, that gets to more clues….
“… one specific CO-27 company just filed a special document with the Canadian government at the end of last year…
“And on page 229 of that document Doug’s team found a few short magic words…
“Probable Reserve t’000 1,675”
“To you and me, this short phrase means almost nothing.”
Well, it means something if you look at the actual table and don’t take it out of context… here’s the table they’re talking about…
That’s actually just the top part of the mineral reserves table from that technical report, you can read the whole thing here, if you’re not feeling too sleepy, and see that the proven and probable reserves of cobalt are estimated at 34.5 million pounds in total.
And it’s a pretty reasonable-sounding project, certainly with cobalt at $40/lb — they did the cash flow summary for the life of the mine and concluded that net cash flow after tax would be about $10.43 per pound of cobalt… and that’s using a price of $26.66 per pound, so it would likely be more than double that with $40+ cobalt (capital costs and operating costs per tonne wouldn’t rise much, by-product credits would fluctuate as copper and gold prices move up and down… it’s really only the taxes that would be guaranteed to rise with cobalt prices).
But I’ve skipped a step, haven’t I? What is this super-secret stock? It is, dear friends, the oft-teased eCobalt (ECS.TO, ECSIF), a stock I used to own and which is developing what is now called the Idaho Cobalt Project — soon, they hope, to be the only cobalt mine in the United States.
It’s been a troubled project, in some ways — they started building this mine many years ago, when they were still called Formation Capital, but then the collapse in cobalt prices meant they ran out of money and enthusiasm, and the site sat idle for years. With electric vehicle sales picking up, and cobalt prices rising, they started to push forward more aggressively with more exploration and development work over the past year or two, leading to that latest updated technical report (feasibility study) last Fall.
And if you go by that feasibility study, which was fairly conservative (it still has the old 34% tax rate, for example, and uses $26 cobalt for the modeling), the estimate was that the net present value of the mine, using a 7.5% discount rate, is about $136 million. The estimate is that the initial capital cost of about $187 million will be paid back in less than three years.
So that sounds like a viable project, though I decided to sell my shares about a month ago because I prefer the valuation of another cobalt developer (Clean TeQ, in Australia). That’s mostly because eCobalt is a fairly small project, and the stock’s gains since I bought a while back already reflect a lot of the potential of the Idaho Cobalt Project — assuming, of course, that you stay fairly conservative and don’t assume that cobalt will be at $50 a pound for the next ten years.
The current NPV for the project is still well below eCobalt’s market cap of $160 million, and they will presumably still need to raise more money for development (they did already raise some money, selling about $30 million of equity in February, and presumably can use debt or off-take agreements with customers for a lot of the rest, but I haven’t seen any updates on the financing recently). The project is, of course, quite sensitive to those cobalt prices — if they realize cobalt prices of $34.50 a pound instead of $26.65, for example, then they calculate their net present value as being about $246 million… so trading above the “official” NPV is not necessarily irrational, not when cobalt is so far above their base-case price right now.
eCobalt’s mine is pretty small when compared to other global cobalt mines that are producing or in development, but it is a strategic project, being the only US cobalt mine that’s anywhere near development, and it should be able to ramp up to production fairly quickly — they already have permits and a mine plan and a lot of the equipment on site, and should have no trouble finding customers to do off-take deals to raise additional capital. The project could also get more attractive as they target improvements in the mine plan or extend those reserves (the deposit is still “open at depth and along strike,” which just means that they don’t think they’ve found the edge of it yet).
And, unlike most projects, they do have a pretty tight development timeline — all that work they did during the last cobalt bull market helped, and they are already doing a lot of the critical work on things like water management even though they haven’t formally made the “production decision” and begun mine development.
It would be pretty shocking if they don’t give the project a green light and go forward at this point, so I don’t know if that “production decision” will really end up being a catalyst for the stock or not — but that production decision is expected to come right around the end of the second quarter, and that would be June, so that’s presumably the big news that they’re hinting at in the ad.
If they do start official mine development in the third quarter, as they’re planning, they think they can have their initial production by late 2019 and start “full production” in 2020. That may well end up being critical, since high cobalt prices are bringing more projects into the pipeline and it might well be that pricing is a lot better for folks who can begin production in 2020 than for folks who might require another five years for exploration and development and permitting, but, of course, that all depends on where cobalt prices go.
So there you have it, dear friends — Spittler and Doug Casey are promoting little eCobalt as a big potential winner. It’s not particularly beaten-down at this point, so there’s no way it can possibly generate 80,000% returns from here… but they do have a well-advanced and appealing smallish cobalt mine that could be producing in Idaho within just a couple years and keep going for more than a decade, and they should be making their final “start development” decision in the next month or so. You can pretty easily conjure up a model that has the share price doubling or tripling from here if cobalt prices stay strong, they get some good offtake agreements and don’t need to raise more capital, and the development process goes well over the next year or so, so it’s not a ridiculous speculation (and it has been touted by other newsletters a few times in the past year), it’s just not a potential 10,000%+ gainer in my book.
With that, I’ll leave you to your cogitation and thinkifyin’ — sound like the kind of stock you’d like a piece of? Prefer other electric vehicle or cobalt plays? Let us know with a comment below.
Disclosure: As noted above, I own shares of Clean TeQ, and I also own shares of Apple among the companies mentioned in this article. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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