Cobalt Blue Holdings (ASX:COB) initial public offer is heating up as the metal cobalt continues its run and hits US$30,000 per tonne on the London Metals Exchange.
The company is raising up to $10 million and will be the only pure cobalt play on the ASX as it looks to develop one of the world’s largest undeveloped cobalt resources, the Thackaringa Cobalt Project, located near Broken Hill.
Cobalt is trading up 35% since February, 2016 and with evidence that demand is now beginning to grow faster than supply, the market is forecast to move into deficit.
Supply pressures from cobalt exist as only 2% of the metal is sourced from cobalt mines with the remainder being produced as a by-product from nickel and copper mines, which are in decline.
Furthermore, there are potential ethical concerns for end-users of cobalt such as Apple Inc with 60% of current cobalt supply coming from the African copper belt, where mining practices are questionable.
IPO background
Cobalt Blue plans to list in December 2016 through the offer of between 40 and 50 million shares priced at $0.20 to raise between $8 and $10 million.
The Thackaringa Cobalt Project is strategically located 23 kilometres south-west of the world class mining centre of Broken Hill within New South Wales.
Cobalt is a necessary metal for the production of the latest generation, high density lithium-ion batteries.
Due to its high run-time properties, the use of cobalt has risen dramatically as portable lithium-ion battery usage accelerates and electric vehicles become a reality.
All leases are 100% owned by Broken Hill Prospecting Ltd (BPL) and are subject to a farm in agreement with Cobalt Blue who can earn up to 100%.
BPL’s recent exploration activities have more than doubled the resource to 35.7 million tonnes grading 0.084% cobalt for 30,000 tonnes of contained cobalt.
The total JORC resource consists of three defined outcropping cobalt deposits, which remain open at depth and along trend: Pyrite Hill, Big Hill and Railway.
The large, near-surface deposits at Thackaringa also make the project suitable for large-scale, open cut mining methods.
Cobalt market moving into deficit
According to Research in China, global cobalt demand was up 9.9% in 2015 and reached 89,000 tonnes, however, the industry was still in oversupply.
The market has swung into balance during 2016, and is forecast to swing to increasing multi-year deficits as demand for battery materials, superalloys, magnetic alloys and hard alloys increase by a forecast 8% compound annual growth rate (CAGR) between 2015 and 2020.
With net supply growth forecast at a modest 3.5% CAGR, the market is witnessing the beginning of a multiyear deficit.
Looking over the 2011-20 decade, the market is forecast to report a cumulative deficit of more than 22,000 tonnes, creating pricing incentives to deliver semi-finished and previously unreported inventories into the market.
Further, the maturing of the cobalt derivatives market with larger customers increasingly enthusiastic to hedge supply risk over longer time frames will encourage positive spot price pressures.
Further supply pressures
Further risks of supply pressures continue to be presented by the political and economic risks associated with the Democratic Republic of Congo (DRC) and the closure of nickel and copper mines.
The DRC hosts 47% of the world’s cobalt resources and 98% of cobalt is sourced as a by-product of copper and nickel mines, which are in decline due to pricing pressures.
Against this global backdrop of modest supply and robust demand, the 2016-20 cobalt price is forecast to reach US$50,000 per tonne.
With only 2% of cobalt supply coming from cobalt mines and cobalt bearing pyrite ores, a subset of primary cobalt ores, contribute only a fraction of global supply, Cobalt Blue offers a rare investment opportunity.
Analysis
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With this week being the last opportunity for investors to bid for stock in the Cobalt Blue IPO, the ASX is expecting to welcome its first pure cobalt play at an opportune time.
Cobalt Blue provides investors the opportunity to gain exposure to an aspiring top five, ethical, global cobalt producer in a pricing environment experiencing supply-demand pressures.
Post-offer the company will have a tight shareholder register with 95 million shares on issue for an undiluted market cap of $19 million.
This is a compelling valuation when compared to some of the recent transactional activity in the space, such as the US2.65 billion purchase by China Molybdenum of Freeport McMoRan’s 56% interest in a DRC cobalt asset.
Canadian listed cobalt company, Ecobalt Solutions Inc (TSE:ECS) has experienced over 400% price appreciation year to date.
Similarly, Fortune Minerals Limited (TSE:FT) who produced premium battery-grade cobalt sulphate samples earlier in the year are trading up 450% year to date.