Glencore signs term sheet with First Cobalt for US$45 M in loans to fund First Cobalt’s 100%-owned cobalt refinery

All figures in C$ unless indicated otherwise. For the purposes of this article, I assume that Glencore & First Cobalt will move forward together as laid out in their term sheet. In actuality, there are conditions in place that need to be satisfied along the way.

On July 16th, First Cobalt Corp(TSX-V: FCC, OTCQX: FTSSF) signed a term sheet with Glencore for a ​​non-dilutive, fully-funded plan to recommission its 100%-owned Cobalt Refinery in Ontario, Canada. The term sheet​ details milestones to achieving a mutually beneficial relationship. A restart would be tied to a long-term feed supply or exclusive tolling agreement.

This is a very important development for First Cobalt. With Glencore as a partner, the tremendous value of the Refinery will be on full display. This is a long-term asset with decades of use ahead of it. Glencore proposes to advance up to US$45 million, in stages, to get the Refinery up and running again at a run-rate of approx. 1,000 tonnes/yr. in 2020, and 5,000 tonnes/yr. from 2021 on.

Glencore deal hugely de-risks Refinery project & First Cobalt

This transaction will get the company safely through the next few years no matter what the cobalt price. With a Refinery possibly worth $100 million (Hatch, 2012) and a market cap of $56 million, First Cobalt could be one of the best remaining pure-play bets on cobalt prices. Why? Because downside could be protected by Glencore’s very active involvement, while upside is wide open if/when cobalt prices rebound.

​According to the press release, First Cobalt wants to create a partnership to supply refined cobalt in the N​.​ American market​.​ Phase 1 entails a $5 million secured loan to support additional metallurgical testing, engineering, field work​ ​& permitting​, including a​ Definitive Feasibility Study, ​(DFS)​ (expected later this year) for a 55 tonne per day (​tpd​​) operation​.​​ The loan would have a two-yr. term, extendable by a year at First Cobalt’s choice.

Phase 2​ contemplates​ restarting the Refinery at a feed rate of 12 tpd next year, to produce a battery​-​grade cobalt sulfate for pre​-​qualification ​with customers in the electric vehicle ​(EV) ​supply chain​.​ Phase 3 proposes an expansion to 55 tpd​ ​in​ 2021, as described by​ a ​​third-party technical report by Ausenco​​.​ Assuming ​hydroxide feed ​grading ​30% cobalt, the ​​​report estimated that the Refinery could produce 5,020 tonnes/yr. of cobalt in sulfate​.

That would be a meaningful proportion of the total finished (refined) cobalt coming from friendly, reliable, safe countries. Importantly, Ausenco recently lowered the operating cost estimate contained in their report by about 30% (~$0.69/lb.) due to lower reagent costs than previously assumed.

N. America needs cobalt refining solutions, First Cobalt has them

5,020 tonnes at $20/lb. equals ~C$290 M in gross annual sales of finished cobalt. However, we don’t know how the revenue or profits would be split with Glencore. For the first few years, most of the cash flow attributable to First Cobalt will likely be used to repay Glencore’s loans.

The First Cobalt Refinery is a hydrometallurgical facility in the Canadian Cobalt Camp, roughly 600 km from the U.S. border. It is the only permitted primary cobalt refinery in N. America, and has the potential to produce either a cobalt sulfate for the lithium-ion battery market or cobalt metal for the aerospace industry. Cobalt metal is also valuable in other industrial & military applications.

The Company recently completed testing of third-party cobalt hydroxide as a potential source of feed, confirming that the existing processes are capable of producing a high purity, battery-grade cobalt sulfate.

What cobalt sulfate price is needed for to operate the Refinery?

The question that astute readers are thinking of right now is; at what cobalt price is the Refinery project a go? At the current price of $13/lb., it’s probably a no go. But, if First Cobalt is earning a fixed tolling margin while it pays down the loan, and Glencore has end-user contracts to fulfill, refining is arguably less price-sensitive than a mining operation.

As the cobalt price climbs, prospects and sentiment will improve. At $18/lb.? Maybe. At $20/lb. it’s a go! So, why should readers care about last this Glencore / Refinery news with the cobalt price potentially in no go territory?

If one doesn’t believe that the cobalt price will return to $18-$20/lb. within 12-18 months, then one should probably not be investing in cobalt juniors, or vanadium or lithium juniors either for that matter. All three metals have seen dramatic selloffs. While cobalt has had a tough time, so has vanadium, down nearly 80% from its 52-week high. Cobalt is down about 72%.

In the lithium and vanadium sectors there are dozens of names that could come back to life if the underlying metals were to rebound. Not so in cobalt, there is only a handful of companies that I would consider investing in, even if the price rose above $20/lb.

First Cobalt offers an option on a moderate recovery in cobalt prices, which I believe is a reasonable expectation. Investors in First Cobalt probably need the cobalt price to retrace 25% of its precipitous decline. A move back to $20/lb. could potentially spark a significant move higher in the share price. If/when investment dollars return to cobalt juniors, there will be far fewer names to choose from.

First Cobalt needs a higher cobalt price, but not for 12-18 months

If Glencore and First Cobalt finalize the term sheet, the company would effectively be free-carried to an investment decision next year. That way, if the cobalt price is still under pressure, they haven’t blown their brains out.

Management would wait another 6-12 months for a more meaningful recovery. If the cobalt price was still not high enough, then all bets are off. At that point First Cobalt’s land in Idaho would need to be rezoned to grow industrial hemp!

This is a highly speculative bet, a bet on cobalt prices, on the global paradigm shift to EVs, and investor sentiment in battery metals overall. Experts like Benchmark Mineral Intelligence are still calling for significant increases in demand for cobalt, lithium & graphite early next decade, when a slew of new EV models hit the roads. I asked Senior Cobalt analyst Caspar Rawles of Benchmark for his latest views,

Fundamentally, the next 12 months or so are likely to be relatively unexciting for cobalt prices – but beyond this there still remains a significant undersupply issue in the market, which is not being addressed under current price conditions – a problem made worse with the issues seen in the legislative environment in the DRC and Zambia lately.”

Notice how the concern about African supply comes up pretty quick whenever analysts are asked about cobalt. Which brings me back to the attractiveness of a permitted, fully-funded cobalt Refinery in N. America. And, note that the “significant undersupply issue in the market” that Mr. Rawles refers to is only 2-3 years away. By then, First Cobalt’s Refinery should be operating at 5,000 tonnes/yr.

Few viable N. American cobalt juniors left to choose from!

Unlike dozens of smaller peers, who are dropping likes flies, First Cobalt doesn’t need peak pricing of $30+/lb. to survive. $18-$20lb. would still cull the cobalt herd, leaving just a handful of N. American juniors.

Then, guess what? The cobalt price would be much more likely to move higher, once the market recognized that next decade’s new project pipeline has been decimated. Spoiler alert — next decade’s project pipeline has been decimated — the market just doesn’t know it yet.

Combined, the investments in three phases is estimated to be $45 million​.​ Phases 2 & 3 are subject to the results of studies done ​in​ Phase 1. Capital would ​be repaid from Refinery cash flow under a long-term refining arrangement. Glencore proposes to provide 100% of the feed for both the 12 & 55 tpd scenarios.

Trent Mell, First Cobalt​’s​ President & C​EO​​ commented,​

Transitioning to cash flow as a N​.​ American refiner is our primary focus​, ​we are moving closer to achieving that objective. Glencore has been supportive throughout this process​,​ we look forward to working closely with their technical team​.​ This partnership will help First Cobalt achieve its stated objective of providing ethically sourced battery​-​grade cobalt for the N​.​ American ​EV ​market. An operating refinery in N​.​ America ​would​ benefit all ​regional ​cobalt projects, as it ​would ​significantly reduce the capital cost of putting a new mine into production.”

Conclusion

With eCobalt Solutions gone, (taken out by an Australian-listed company), and Cobalt 27 Capital Corp. being acquired by Private Equity firm Pala Investments (smart money buying direct exposure to cobalt at the bottom?) there quite literally are very few viable Canadian or U.S. listed companies to choose from. Several are down 90%+ and are dead men walking. Several more are listed only in Australia.

Most of the rest are not pure-play cobalt opportunities. Sure, you could play it safer with giant companies like Katanga Mining or Umicore SA. But those names, while far less risky, offer far less potential share price appreciation. First Cobalt Corp. (TSX-V: FCC, OTCQX: FTSSF) truly is one of the few left standing. Be like Pala Investments, consider a leveraged bet on cobalt when no one else will touch it!

DisclosuresThe content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER](together, [ER]) about First Cobalt Corp., including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of First Cobalt Corp. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned shares of First Cobalt Corp. and the Company was an advertiser on [ER]. 

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