DRC: will cobalt be the robbery of the century?

Publication en français sur Les Echos Le Cercle

The Democratic Republic of Congo has never seen a democratic transfer of presidential power from one political personality to another. As such, the outcome of the election of 30 December 2018 is important for the country, it will set an example for its neighbours and a new African order for the international community. This result will also be important for the future of cobalt and it is appropriate to observe the barometers of this market.

World cobalt production is just over 120 000 tons. About 95% come from international mega-mines of copper and nickel distributed around the world, of which about 75,000 tons are produced by industrial mines in the DRC. The balance, about 5%, comes from artisanal mining. Demand is oriented towards batteries, but eco-design and substitution are already very active.

The first barometer to be observed on the occasion of the election result would be a profound questioning of the industrial production of RDC’s 75,000t. However, whether or not the transfer of power obeys democratic rules, the risk of a reversal of the underlying trend in current production is low. In either case, mining groups will continue to produce cobalt between Kolwezi and Lubumbashi. Cobalt will continue to be exported to China which will continue to implement our concept of “competitive consumption”; it has a proven and well-known strategy of cheap procurement, and will remain the world’s leading consumer of cobalt without any major competitors for several years.

The second much-awaited barometer however, may be the improvement of artisanal mining in the two provinces of Lualaba and Haut Katanga. While its volume is marginal in relation to the world market, especially as it declines with falling prices, it can contribute to poverty reduction under two conditions. On the one hand, the mining industry must control the cost of international supervision of the “charity business”. On the other hand, it must free itself from its face-to-face relationship with illegal Asian traders by integrating itself into the virtuous approach of the official industrial trading centres mentioned here. But it is up to the new and next government to put them in place.

In a word, the cobalt mining industry will benefit from following the example of the reform of artisanal gold mining organized by the responsible mining movement described here. Obviously, it’s less glamorous than reading a fake-book about a bellicose China and Hi-Tech metals, but much more effective.

A third barometer is the unexpected. Two days after the presidential election, on 1 January 2019, the Financial Times published that the famous former “Navy SEALs”, Erik Prince, intended to set up a $500 million fund to acquire mining projects specializing in electric car metals: cobalt, lithium, nickel, copper. We would be tempted to say: “Geologists from all countries, your fortune is arrowed”. Mr. Prince will sell his fund to China after 4-5 years. In the DRC, it is expected to invest in copper and cobalt mining projects.

However, several questions arise. Could this fund become a kind of metaphor for oligarchic excesses such as those found in natural resources during the Yeltsin era in post-Soviet Russia? Does this fund really have a market entry strategy or is it a disguised exit policy: would projects (which suddenly cost much more since January 1) already eligible to become Chinese quickly use the fund, rather than having projects in the exploration phase enter it later?

The last barometer is the price

Take the example of the investment company Cobalt 27 Capital Corp. Listed under this new name on the Toronto Stock Exchange since April 6, 2017, Cobalt 27 is an investment fund specializing in cobalt.

The company finances mining flows and future production in Canada, Australia and Papua New Guinea. In return, it will receive royalties and/or cobalt flows in order to market the metal itself. In addition, it announces that it holds 2905.7 tons of cobalt in a vault – some of which may have come from the DRC – following two purchases: in particular 2160.9 tons ($180.3 million) in April 2017, then 720 tons at the end of 2017 ($58 million).

Given the evolution of prices, it is not uninteresting to calculate the acquisition cost of these nearly 3000 tons and then compare it to the current spot price. Since its peak in March 2017 at $95 500/t, cobalt has recently dropped to $42 000/t. Its bell-shaped curve does not encourage to consider a price increase right now.

The Cobalt27 model is as striking as it is simple, of course. But the complicated part begins when the “cobalt tank” is full. Then it is a question of selling it by facing competition, substitution, price increases and decreases. As for palladium in the 1990s, nickel in 2006-2007, rare earths in 2010-2012, the consequences are déjà vu.

It does not appear that the four cobalt barometers anticipate an immediate market tension. On the contrary, it looks more like a market that, for the time being, would have already been the robbery of the century.


Linkedin: Didier Julienne

Twitter:  @didierjulienne