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…


“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 had during the last spike in cobalt prices in late 2007. And, of course, if cobalt prices quadruple like that then you’ll likely see gains of far more than 300% from some of the cobalt-levered miners and explorers.

This is quite similar in concept to Uranium Participation (U.TO, URPTF), a company that stockpiles uranium — and that also trades at a bit of a premium (15% or so) right now to its net asset value, though uranium has been in an ugly bear market for years and is more difficult to value than most commodities (it doesn’t often trade on the spot market).

Which brings us to the next teaser pick… here are the clues about Tucker’s second recommendation:

“The last time a cobalt shortage occurred, mining stocks associated with the metal soared… some as high as 27,000%+ for Katanga Mining.

“Even the “smaller” gains went into the triple-digits… [here they cite Freeport McMoran, BHP Billiton and the other multi-commodity majors at those 2007 peaks in last China-driven bull market] ….

“The second tiny company Doug and I have found sits on what could be the world’s largest cobalt find…

“The TINY $0.80 Company Set to Soar on Australian Cobalt Find

“The Financial Times recently wrote this find was ‘Australia’s largest cobalt deposit.’

“But it could actually turn out to be one of the biggest in the world…

“And a single company is sitting on it.

“Right now, it’s selling for less than $1 a share.

“When cobalt prices begin to soar… the stock price could shoot up 10-fold…

“It’s a $48 million company… sitting on a potential $3.2 billion deposit.”

This is almost certainly Ardea Resources (ARL in Australia, ARRRF OTC in the US), a spinout of Heron Resources that was originally intended (less than a year ago) to be a gold explorer, but refocused on its cobalt potential just a few months later and is planning a prefeasibility study for its large and relatively cobalt-rich Kalgoorllie Nickel Project.

That prefeasibility study is likely to be the next meaningful catalyst, and it is expected to be released in the first quarter of 2018… though they are also drilling in preparation for the PFS, so who knows what they might find or release. It is a small company, with a market cap now of about US$58 million at yesterday’s closing price of 72 cents a share in the US. And it’s worth noting that US OTC trading is not very fairly priced, and will be pretty illiquid — those numbers are at a pretty significant premium to the valuation on its home market in Australia (ARL.AX), so do note that unless you can trade in Australia the odds are good that you’d have to overpay to buy these shares on the US OTC market, the stock closed the night before at 86.5 cents in Australia, which should be about 67 cents here in the US.
So remember to check those currency exchange rates (I use and use limit bids and patience if you’re investing in Australian stocks OTC in the US, and keep in the back of your mind that the big premium you might pay to buy shares could turn into a big discount if you wan to sell shares on a day when US investors are not terribly enthused about the company — like, if it happens to be going down.

Ardea is an interesting story, and it’s good that they’re moving fairly quick in this hot cobalt market (and that nickel, their other major metal, is also in increasing demand from battery manufacturers and no longer relies entirely on stainless steel demand in China), but this is very much an exploration stage stock even though they do have some historic resources from a 2012 JORC compliant report — we’ll know a lot more once their prefeasibility study comes out, and they’re envisioning, according to their latest presentation, an unusually rapid development timeline starting as soon as 2020.

There’s also a little tickler thrown into their investor materials that indicates they could be spinning off or developing their other projects, particularly Mt. Zephyr and Lewis Ponds (which were, a year ago, probably more exciting than Cobalt and Kalgoorlie).

So it’s quite risky, and quite small, but perhaps worth some more research if you’d like a pretty fast-moving exploration-stage cobalt-focused investment. That FT article that mentions the stock is here, in case you’re curious, and there was some additional coverage earlier this year from CNBC.

To his credit, Tucker inserts the (probably lawyer-required) disclaimer about these being risky investments…

“So remember, don’t bet the farm on any trade. And you shouldn’t put your emergency expense funds, your kid’s college tuition, or any other money needed to pay the bills in speculations, either.

“That being said, the two companies I’ve just mentioned are sitting on a battery boom that’s just beginning.”

So there you have it… a teaser pitch from back in October for those of you who might be looking for cobalt-related names… more to come on this topic in my new Friday File to be released after the market close today as well.

Disclosure: I own shares of eCobalt Solutions (ECSI) among the stocks noted above. I will not trade in any other covered stocks for at least three days per Stock Gumshoe’s trading rules.

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