Summary
- Initial commissioning has begun at Idaho Cobalt.
- As America’s only Cobalt mine, demand is pulled away from the DRC where 70% of world production occurs.
- Due to use in modern applications, there is plenty of demand for Jervois to capitalize on, as long as prices remain favorable.
Introduction
Cobalt is a mineral that is essential in a wide variety of industrial applications from batteries to jet engines. However, most ore comes from mines in the Democratic Republic of the Congo, a country that has been exploited for over 100 years. Due to the inherent risks and ethical issues of dealing with the country, finding sources from outside the region is a top US priority. However, high concentration cobalt sources are relatively rare, and most production comes as a byproduct from other mines (nickel, iron, etc). This is why the Idaho Cobalt mine, owned by Jervois Global ( JRV:CA )( JRVMF ), is a ground-breaking new project.
After a long period of development, mostly from delays due to volatile cobalt pricing, the pandemic, and inflation, the Idaho Cobalt mine is now set to begin commercial operations. In fact, the Idaho Governor, US-Australian Ambassador, and members of the federal Department of Energy recently met for a commencement ceremony. While issues with the stormy winter, inflationary costs, and tough labor market are continuing to disrupt the project, it is good to finally see a new, essential ore mining facility on US soil. Due to the novel nature of the project, fundamentals such as revenues and profits are difficult to ascertain. However, Jervois offers investors rare exposure into the increasing-demand of the cobalt industry.
USGS
The Cobalt Market
As a commodity with a risky production base, cobalt pricing is very volatile. While the US typically consumes 8-12,000 tons per year, internal mining and secondary production only accounts for 20-30% of demand. We should also assume that this does not account for finished products that are shipped to the US from abroad, primarily batteries. By supplying cobalt internally, Jervois can capitalize on more efficient and ethical supply chains, and there is plenty of demand. Estimated cobalt production at Jervois’ Idaho mine is 3,000 tons by 2024. This would account for over 25% of internal US cobalt demand. At current prices, or $49,000 per ton, Jervois is expected to generate almost $150 million in revenues. However, Jervois is also vertically integrated, so refining and processing can drive higher margin product sales.
USGS
Financial performance moving forward will rely primarily on cobalt pricing rather than increases in production. Management likely wishes they had operations underway during the bull market of 2021/22, but instead are commencing operations in a bear cycle. Prices have fallen significantly over the past year for a variety of factors. First, cobalt prices are dependent on production in the DRC, and supply chain weakness, politics, and macroeconomics have all been risk factors. Also, despite China opening up over the past month or two, the market does not expect a large uptick in demand leading to a continued fall. Then, with the Idaho Cobalt project increasing the available supply to the market, prices should continue to see downward pressure.
Thankfully, demand is expected to continue rising due to secular technology growth around the world, and current analyst expectations are for higher cobalt prices through 2023/24. While prices are falling with the global economic slowdown, discussions by the US Fed suggest that the US market is stronger than anticipated. Although rates were only raised by 25-basis points in February, I expect that global markets will begin rebounding in 2023 rather than enter a global recession. This suggests that global cobalt demand will increase and this will increase prices from the current $40-50,000 level. Even a stabilization of prices in this range will fare well for Jervois, and positive sentiment is worthwhile.
Trading Economics
The Idaho Cobalt Mine
As an underground mine, Idaho Cobalt has a fairly small surface footprint, extensive remediation components (water treatment, tailings control, etc), but a high cobalt concentration. The underground mine has initial infrastructure completed, but surface development has not completed. Issues with winter storms, inflation, and lack of workers, has led to a 15-25% increase in construction costs. However, commercial production is still set to begin by the end of the first quarter of 2023, with the full ramp up complete by the first half of the year. While there is no major delay, cost increases will hurt project returns, although the full implications will not be known due to volatile cobalt pricing.
Jervois Investor Presentation
Other Assets
Jervois only recently acquired the Idaho Cobalt assets a few years ago. Instead, the company has relied on refining raw ores and selling higher margin cobalt chemicals. Their main facility is in Finland and they have sales teams around the world. However, to meet the increased internal supply created by Idaho Cobalt, the company recently acquired and is repurposing a cobalt refinery in Brazil. I expect that all production will have demand as major non-DRC suppliers, but the use of long-term contracts will help reduce volatility from cobalt prices. Also, the current Finland operations are a great source of cash flows for their capex requirements in Idaho, along with exploration underway in NSW, Australia.
Jervois Investor Presentation
Balance Sheet
Due to the capex required to finalize Idaho Cobalt’s commercialization, debt and dilution has been necessary. Losses have totaled over $100 million over the past year, and delays in the ramp up will likely lead to losses in the next quarter. Cash has increased as of the last earnings in late January, with cash now at $150 million as of the 31st of December, 2022. If cobalt prices continue to fall, the company will probably perform poorly and will likely require further debt and dilution. However, I believe that temporary weakness may just provide a better entry point for investors, rather than destroying the company and long-term investments.
Koyfin
Valuation
After the sell-off with the most recent earnings report, Jervois has fallen to a $350 million market cap, a level not seen since mid-July 2021. Considering that the Idaho Cobalt mine is now open, the lower valuation is not entirely justified. The problem is with the global slowdown and low cobalt prices causing analysts and investors to lower their outlook. However, the current analyst consensus expectation for revenues in 3 years is over $700 million, suggesting a sub-2.0x price to sales ratio.
Therefore, for long-term investors, adding shares on a recurring basis will likely pan out well, especially if the new-normal cobalt prices remain elevated. It is certainty a risky metal to place bets on, but Jervois is the best way to gain exposure to production and refining. As reported by High Country News , the opportunity is significant.
Demand for these minerals has ballooned in the last several decades. “We’re producing more metal than we ever have done at any other point in human history,” said Simon Jowitt, an economic geologist at the University of Nevada Las Vegas. “Modern life uses more metals and minerals than ever before.” And Idaho’s cobalt development comes amid a surge of interest in minerals used for electric vehicles, solar panels and lithium-ion batteries, in addition to everyday technologies like cell phones and laptops.
Koyfin
Conclusion
As many investors are seeking exposure to future-focused industries such as EVs, renewables, and other high technologies, the mining industry is an important way to play the secular opportunities. There are limited resources available, and the increasing demand will lead to favorable pricing movements in the future. This is especially true for Jervois, the vertically integrated cobalt pure-play. At current prices, the risk remains speculative, but risk-averse investors can accumulate and I expect a positive outcome within 5-10 years, especially now that it is known Idaho Cobalt will be commercialized.
Thanks for reading.
For further details see:
Jervois Global: Operational Cobalt Mine, America's First In Decades