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Winston: Geovic Mining – A World Class Cobalt-Nickel Play

Geovic Mining (GMC, TSX; GVCM, OTCBB)  A World Class Cobalt-Nickel Play

Geovic has been on my radar screen for a couple of years now. The company first caught my eye due to their stellar economics and the fact that it is perhaps the only primary cobalt resource in the world.

Two years ago cobalt prices soared to $50 per pound and nickel at the time was trading well over $15 per pound. With these prices, Geovic’s deposit in Cameroon Africa was destined to become one of the most profitable mines in the world with projected rates of return of over 100%.

Last fall Geovic was ready to start raising development capital when the global recession hit. The prices of cobalt and nickel have fallen steeply since then however the economics of this deal are still outstanding due to reasons the market still isn’t aware of.

The key reason why Geovic’s cobalt play has always been one of the highest potential mining projects in the world has been due to the geology of the deposit. This hasn’t changed. The cobalt mineralization in Cameroon is higher grade than any other laterite cobalt deposit you will find. The cobalt itself has large grains which are unusual. Given the unique structure of the cobalt and the ease of mining it, the ore grade is increased by a factor of 3 by using low cost mining methods which triples the rate of return for the company.

After processing the course concentrate on site, the end product would be pure enough to send directly to a battery manufacturer or other industrial user.

The untold story behind this project though is the fact that the management have been working on ways to optimize the development and operation. A couple of years ago the focus was on their Nkamouna deposit that was slated to produce 9 million pounds of cobalt per year and 7 million pounds of nickel over 19 years starting in 2010.
The projected grade of the cobalt at the time was 0.25%. However Geovic now plans to introduce more through solution-processing technologies that will improve the ore grade to 0.7% and perhaps as much as 1.2%.

This may not sound like much but in an analysis by Gord Selko of MineralStox.com, this improvement in the minable grade could equate to an added profit of $176 per ton or an overall 71% increase in the project’s cash flow.

While the engineers have been working on new processing improvements, Geovic has also been drilling the Mada and Rapodjombo deposits. The grade is the same as Nkamouna but there are many high grade areas that can be mined first to get a quick payback on the mine. The present schedule would see production begin in 2012.

An updated 43-101 resource calculation is expected to come out this fall. The expectation is that the resource numbers will be larger, the grade higher and so greater profitability for the mine.

Though the effect of the recession has slowed the development of Geovic’s mine development, a multi-billion dollar benefit has emerged in Geovic’s favor. Over the last several months, the capital costs for mine construction have dropped to around $350 million from the $420 + million of a year ago. This is a significant advantage for Geovic who are planning on having their financing in place by mid 2010 in order to build their mine.  And capital costs around the world continue to drop.

The Properties

The Nkamouna deposit is the first of seven deposits to be developed. It has proven and probable compliant reserves of 54 million tonnes. Immediately north of the Nkamouna deposit is the Mada deposit which has a 43-101 resource of 145 million tons. Both these deposits will have revised 43-101 calculations by the fall of this year.

In addition there are five other deposits, so this project will be around for a long time – beyond anyone’s lifetime!

Conclusion

Geovic is now trading at cash value and no credit is being given for holding one of the world's largest primary cobalt deposits which is ready for construction. There is no research coverage on Geovic by any securities firm in North America or Europe, where its capital has been raised.  It is not even mentioned as a comparable in cobalt statistics issued by brokerage firms and mining companies.  Geovic seldom appears in mining trade publications.  And even though Nkamouna is scheduled to produce approximately 7% of the world’s cobalt supply, the company is almost invisible.

Geovic’s share price had been trading quietly all year until June 1st when a huge 3 million share cross took the stock up to 70 cents, up from the established floor price of 50 cents. Though the source of the buying has remained a mystery, it did raise a few eyebrows on the street.

I would expect the stock to drift down again to the 50 cent range over the summer.

The major news announcements to watch for are the new resource calculations due out this fall. Next year, the financing is projected to be done by mid-2010. And by the end of 2012, full production is expected.

The company has stated that a number of groups have been interested in off- takes of the production, particularly from Asia. Some have also interested in partaking in debt and equity financing. By all accounts, there should be no problem in either financing this project or finding buyers once production begins.

The best time to buy a stock is when no one has heard of it or wants it. Geovic is one of those sleeper stocks that could provide triple digit returns for the patient investor.