Friday File Unlocked: Casey’s “Green California Goes Dark” CO-27 pitch

Re-posting an older cobalt article from the Friday File

By Travis Johnson, Stock Gumshoe, December 8, 2017

This teaser solution from October originally appeared in a Friday File for the Irregulars, but it has now been unlocked for everyone to see. This excerpt has not been updated or revised since it was first published on October 6, the two investments teased both ran up sharply since then and come back down to surrender more than half their gains (I have not traded either of them).

I have not seen the ad running more recently, though readers often ask about cobalt so it may be of some interest.

From the 10/6/17 Friday File

The latest ad for The Casey Report caught my eye this week, partly because I thought they might be following in teasing eCobalt (ECSI)… but it turns out that’s not the case, this pitch from E.B. Tucker about the next cobalt bull market being driven by lithium-ion battery demand is all about two other cobalt companies.

So let’s see what they are, shall we? If you’re new to this story, the short intro on cobalt is that demand is surging and expected to grow substantially in the next few years as battery demand rises, and the price has been rising as a result. Cobalt is one of the major ingredients in a lithium ion battery (along with lithium and graphite, both of which are far less rare than cobalt), and, as we are all quite aware by now, Elon Musk’s Gigafactory and the dozens of other large battery production plants are sucking up those raw materials like mad.

E.B. Tucker uses as his hook the blackouts in California that will be caused by a lack of storage capacity for their huge solar energy production infrastructure, and which have led to a mandate that the state must build lots of battery storage facilities, but electric vehicles, as a whole, are a far larger demand source for batteries… assuming, of course, that adoption of electric vehicles continues on the expected course (that seems a safe bet these days, with every automaker focused on electric vehicles and some jurisdictions, including China and California, considering further disincentives for gasoline automobiles.

And, to make matters worse, more than half of the cobalt currently produced comes from the Democratic Republic of the Congo, where political risk is high and human rights abuses, including child slave labor, scare off image-conscious buyers like Tesla and Apple.

Most cobalt is mined as a by-product in nickel or copper mines, so those metals have a big influence on cobalt production too — if nickel prices rise because of stainless steel demand, or if copper prices rise because of industrial development, that leads to more production from those mines, which also increases the cobalt supply… but there are not very many “pure” cobalt mines that were built primarily to get at that blue metal.

So that’s my lead-in — what are the cobalt stocks E.B. Tucker is recommending to potential Casey Report subscribers? Here are our clues:

“The first company we’ve got our sights on is sitting on a huge private supply of 2,158 tonnes that will soon be worth an absolute fortune.

“Based on what we’ve seen so far, I expect we could easily see 300%+ gains just within the next year.

“Over time, it’s entirely possible to make 10 to 30 times your money—or more. But the key is you have to get in early—now—while there’s still time.”

And we get a couple other clues about this one…

“INSIDE LOOK: THIS COMPANY IS SITTING ON 2,100+ TONNES OF HIGH-GRADE COBALT!

“A company located in Canada has one of the largest available stockpiles of high-grade cobalt – ready to hit the market at any time….

“Already, we’ve seen major buying from a private equity firm in Switzerland that specializes in rare metals mining… but it’s just the beginning.”

This one, dear friends, is Cobalt 27 Capital (KBLT on the Venture exchange in Canada, CBLLF OTC in the US), which is a very recent and opportunistic attempt to play the expectation that cobalt prices will continue to surge.

Cobalt 27 is not a miner, it’s essentially a financial company — they did their IPO just this summer, raising $200 million at C$9 a share, and spend almost all of it (C$180 million) on buying up barrels of cobalt, both premium and standard grade, that they put into storage in warehouses. They also spent about $1.5 million buying up a few royalties on “maybe someday” cobalt projects, but that looks like window dressing — those projects aren’t going to be built anytime soon.

There’s no leverage to speak of here, so the chances of really skyrocketing returns are essentially zilch unless they actually buy some streaming deals or royalties or properties that have some chance of being developed in the next 5-10 years, and that would, of course, also increase the risk. You don’t get leveraged returns without risk — they’re not a miner that produces the commodity at a certain cost and earns more money if the price goes up, they’re just an owner of the commodity itself — if prices go up by 1% a year or so, that will cover the administrative costs of Cobalt 27, and if cobalt prices go up by 20% or down by 20%, Cobalt 27 shares should also go up or down by roughly 20%, all they can really do at this point is raise more capital to buy more cobalt, or sell the cobalt they already have in storage, there’s no “value added” by turning reserves in the ground into cobalt or anything like that, it’s just about trading or holding the actual commodity.

Which makes it a lot safer, and a lot more boring — if cobalt prices double and everyone’s excited about cobalt, Cobalt 27 shares will probably double, or maybe a bit more if people decide to pay a steeper premium over their net asset value… but a junior miner finding new cobalt reserves during a cobalt bull market (or bubble) might go up 1,000%.

Right now, that cobalt is worth a little bit less than they paid for it a few months ago — Cobalt 27 has a recent investor presentation that puts the value at about C$173.5 million as of September 20, and cobalt prices have come down slightly from that US$29 level in the last couple weeks so it would be a little lower now. They have an additional C$18 million in cash on the books, so that means that the current C$237 million market cap represents roughly a 20% premium to the real NAV of Cobalt 27, ignoring the royalties (you could add a value of up to maybe $2 million or so for those royalties, since that’s roughly what they paid for them and they’re for early stage exploration projects, but it’s safer to assume that they won’t be worth anything). That’s a bit much for me, though that doesn’t mean it won’t work out as an investment if cobalt prices skyrocket.

To get 300% gains from this one, we’d probably have to see Cobalt prices go to about $100 a pound from the current $27 or so… that’s possible, sure, I have no idea what the future holds and there is the likelihood of a significant supply-demand imbalance, but that would put cobalt at twice the price it