Richard Reinhard: Targeting a Tight Cobalt Market

The Cobalt Market

It isn�t as hot as Uranium or as precious as Gold but cobalt�s profile will continue to grow the coming months and years. The price has almost doubled from US$16 - $30 per pound these past few months due to supply issues and steady buyers. The issue at hand for investors though, is that there are precious few public cobalt companies.

It is becoming apparent that there is huge potential for companies positioned to provide a stable supply of cobalt. Demand is increasing into what is a very tight physical market, and there is real fear that current supply could be constricted.

This is from a recent story from www.metal-pages.com: �"It's just been non-stop," said one London trader.�This January is the busiest in 30 years." He has paid $26.25 for Russian metal, predicting the shortage of stocks will send prices higher still. Consumers are so desperate for metal they are calling him at 11 in the evening, he said. He predicted cobalt prices will rise above $30 before the end of the month.�

The only cobalt-focused companies on my radar screen are Geovic Mining Corp (GMC-TSXv) developing its open pit cobalt-nickel deposits in Cameroon, Africa, and Formation Capital (FCO-TSXv), developing a cobalt deposit in Idaho.

Cobalt inventories are low � one source suggested only a few days� supply. Cobalt is used extensively in batteries for hybrid cars (both nickel and lithium ion) and many electronic devices � cell phones, laptops etc., all of which are experiencing increasing sales. Inventories are low around the world, at a time when demand is picking up.

Since 1993 cobalt prices were held down largely by sales from the U.S. Government stockpile, and lower grade cobalt material coming from the former Soviet Union. With these sources depleting, the market has little inventory to draw from, now relying primarily on new production.

In late 2006 Russia-based Norilsk, already accounting for 20% of the world�s nickel and cobalt production, announced the buyout of U.S.-based OM Group�s (OMG) substantial nickel interests. OMG was the world�s largest producer and manufacturer of cobalt products as a by-product of their nickel production. Now, Norilsk controls a much larger slice of the pie, and the market remembers their recent resolve to withhold supply in an effort to buoy cobalt prices.

As part of their takeover agreement, Norilsk entered into a 5-year supply agreement with OMG to provide them with 6,500 mt/yr of cobalt in various grades, but there is uncertainty about how OMG will distribute these diminished supplies. The cobalt market is increasingly nervous that spot supplies will stall; when the Norilsk-OMA agreement was announced, market-savvy cobalt consumers immediately tried to increase stockpiles.

Then BHP Billiton stopped selling cobalt. Though it only controls two per cent of the market, that move quickly strengthened an already tight physical market. The market�s reaction to these events, coupled with already substantial and further expected increases in demand, drove the cobalt price from US$16 to nearly US$30 per pound during the last four months of 2006.

Although there is no tertiary market for cobalt like the LME or COMEX, price transparency is provided by quotations through sources like Platt�s Metal Week, Metal Bulletin and BHP Billiton�s Cobalt Open Sales Systems at http://cobalt.bhpbilliton.com/. Additional cobalt information is also available from the US Geological Survey (http://minerals.usgs.gov/minerals/pubs/commodity/cobalt/) and The Cobalt Development Institute (http://www.thecdi.com/).

Users obtain cobalt from traders, producers, government stockpiles and private inventories through negotiated agreements, bids and open market purchases.

Cobalt Use

Cobalt is an element that has many diverse applications:

During the last three years, cobalt use in rechargeable batteries grew by 284%. Nickel metal hydride and lithium ion batteries all contain cobalt and are used in hybrid electric vehicles (HEV), electric vehicles, laptop computers, cell phones, portable tools and electronic devices. The fastest growing segment of battery applications is for HEVs since they reduce air pollution and fuel consumption by at least 50% compared to conventional vehicles. The HEV �plug-in� option, which includes an extra battery that may be charged from electrical outlets, would further decrease fuel consumption and be even more environmentally friendly while increasing cobalt demand.

The Toyota Prius HEV was named 2004 Motor Trend Car of the Year and 2005 European Car of the Year. Toyota estimates sales of one million hybrid vehicles per year by 2012, and will offer all Toyota and Lexus models as hybrids. General Motors, Ford, Daimler-Chrysler, Mercedes and others are attempting to catch up with Toyota�s hybrid success. China anticipates that a high percentage of its domestic car market will be HEVs and electric vehicles by 2030.

Nearly all current HEVs use nickel-metal hydride batteries that contain about 22 pounds of nickel and 3 to 5 pounds of cobalt. Lithium-ion batteries containing 5 to 7 pounds of cobalt are expected to dominate future HEV markets because they charge in minutes rather than hours and offer many other economic and technical advantages.

Cobalt Supply and Demand

Cobalt consumption in 1995 was only 24,000 tonnes, but during the past 10 years has grown at an average rate of 12.9% per year, and continues to grow.

Approximately 41 percent of the world�s cobalt produced in 2005 was a by-product of nickel from sulfide and laterite deposits. An additional 53 percent was produced as a by-product of copper, mainly in the Democratic Republic of the Congo (DRC) and Zambia. The remaining 6% of cobalt production comes from small primary producers in Morocco and Uganda. Cobalt prices fluctuate significantly, partly in response to labor and political unrest as experienced recently in New Caledonia and historically in the DRC.

Demand profile:

Potential New Production Coming On-line

One newly-listed primary cobalt producer, Geovic Mining Corp., is developing a major Cobalt/Nickel deposit in Cameroon, Africa. The project is expected to reach an annual production rate of 4,000 tonnes (8.8 million pounds) of cobalt, and 3,000 tonnes (6.6 million pounds) of nickel over a 22-year life from the first of seven deposits located within their mine permit. The Company is poised to expand its cobalt and nickel production as market demand for these metals increases over the coming decades, as the hybrid vehicle market and other cobalt markets expand. Cobalt�s growth rate is expected to not only continue, but even accelerate with the expanding use of cobalt world wide.

The chart below suggests that the market will easily absorb increased cobalt production. The indicated supply deficits in 2007 and 2008 are a result of increasing demand and expected lag in production from projects proposed by other companies.

Source: Actual supply and demand by USGS, The Cobalt Development Institute and other independent research groups.

Projections after 2006 were developed by Geovic.

Summary

In this new wireless and environmentally conscious age, cobalt demand is going to increase as supplies are tightening. We recently witnessed the small universe of publicly traded Uranium producers / developers (4 of them) give investors phenomenal returns. Once the market becomes more educated about cobalt and industry analysts start talking about it, watch a flood of capital flow towards the very few publicly-traded primary cobalt companies available to investors.

Copyright � 2007 by Diversified Financial Solutions, Inc. All Rights Reserved.

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