Interview with Joe Kaderavek, CEO of Cobalt Blue Holdings (ASX: COB). Cobalt Blue Holdings Limited is a cobalt exploration and development company.
The Company is focused on developing the Thackaringa Cobalt Project in New South Wales. The Company focuses on achieving commercial production of cobalt and commercializing technical advances in the use of cobalt. The Thackaringa Cobalt Project covers an area of approximately 60 square kilometres and is located in western New South Wales.
Matthew Gordon: Firstly, the question we are always asked about Cobalt is: they're phasing Cobalt out of batteries, why should I look at Cobalt? Is that true?
Joe Kaderavek: It is. They're phasing Cobalt out of batteries for 2 broad reasons: 1 is it's expensive, and if you ask a boffin, why is Cobalt in the battery in the first place? The answer is, it doesn't add to the electro-motive properties of the batteries, it just makes it stable. It's in your interest to have less of this high-value product and make it a better battery. Unfortunately, there's only so much you can thrift out of a battery. In some areas in particular, the more commoditized EVS, the lower-price point EV's such as hybrids, where battery weights and scale don't really matter, you can get away with non-Cobalt batteries and their inherent lower-energy densities. However, in the mass market, particularly in cold climates, which is the other issue - non-Cobalt batteries don't fare as well in cold temperatures - but in the mass-market, mid-range to upper-range vehicles, a Cobalt cathode is needed, and you can't get away with that.
Matthew Gordon: Cobalt has different use cases, different types of battery designs and uses by different automotive manufacturers. Looking forward, will the Cobalt Market grow, remain static or is it in terminal decline?
Joe Kaderavek: Just under 60% of Cobalt demand goes into batteries, this is chemical Cobalt, of that remaining 40% there is a large chunk in super-alloys, which are effectively Cobalt as an additive to Steels, Aluminium aircraft-grade frames, gas turbines, etc. There's no doubt that part of that model will take a big hit. Not many new aircraft are being sold and operated in this environment. But on the battery side, it's game on, effectively led by EVs with a much broader range of product, a much higher quality of product, led by infrastructure rollouts in all the key countries, and more recently, EV subsidies. These big 40-50 kwh batteries are going to consume a lot of Cobalt.
The other part of the battery industry is consumer goods which chugs along with GDP growth rates. That includes phones, laptops, etc. Then the small but growing part of that is energy storage systems, which is utility, but also household-scale storage, particularly for photo-voltaic or wind turbines. The battery part of that has a very exciting future.
Matthew Gordon: We've talked about it being opaque, volatile and all of those wonderful things, so you need to get your data in different ways. Are you hearing anything on the ground? Looking at the infrastructure and the planning required by all of these battery manufacturers, they need to have a view 5-10 years out of what the supply capability is. Are you having those conversations? Are you getting enquiries and a sense of what the future demand is?
Joe Kaderavek: It's a great question - right now it’s very topical. When I spoke last year about the potential effects of those EV subsidies, because of Covid and its effect on the auto industry, it's nice to speculate on how policy will impact industry, but what we're seeing, particularly in Q4, is that EV makers are starting to ramp up their expectation of sales, particularly on a 22-23 and beyond basis due to these subsidies. That's transferring into demand, signalling to battery makers, and bear in mind, with a lot of newer models, battery makers have to prequalify their designs, so that puts further pressure on them. The battery makers are then asking their upstream precursor cathode makers, etc, which leads to our door and all doors of Cobalt producers to say: when are you in production? What are you making in the quality, and interestingly enough, can we help shape that quality? No 2 battery makers make the same recipe. We're seeing that now, and the phone really has started ringing in the last 2 months with people saying, I've got a sudden deficit. I didn't have one 2 months ago, but now I've got a deficit on a 2022, 2023 view. I need additional supply. What can you do for us? And if you can't do that timeline when can you and what's the quality?
Matthew Gordon: Give us a run through of what you achieved in 2024 as we look towards the future.
Joe Kaderavek: As a broad description, we got on with business in 2020, at a time when it was difficult to do so. It was difficult to maintain focus on the Cobalt market given that it was collapsing and there was a big question mark by some industry participants over its future. For Cobalt Blue, we started 2020 early and on the right foot because we completed the purchase of our project: The Broken Hill Cobalt project. We moved to 100% ownership. That's a massive step forward and also simplifies our interactions going forward.
On the funding side, we secured over AUD$2M of Australian government grants through the CRC project, which is the Australian government's way of saying: this is an interesting process that you have developed. Outside of your own project, we think there's an application to extract Cobalt from other pyrite deposits or tails situations around Australia, and we know that from our own experience in South Oz and Queensland where there's plenty of pyrite, either in tails or still in resource.
We also joined the Future Battery Industry CRC, which is a collaborative group of some big participants in the battery industry. To be a little indiscreet, Nickel West, is in there, which is publicly in the BHP arm, they're looking to make a Nickel Sulphate as part of their interaction with the industry. Our contribution to the FBI CRC is with Cobalt in the NCM precursor trial facility. We're looking to make a precursor in Australia.
On the government side, we delivered a Scoping Report and then we were granted the ability to start the State-significant development approval process in New South Wales. That's a fast-tracking process to get into development, and commensurate with the scale of what we're trying to do. On the technical side, we delivered benchmarks for 2 products: an intermediate product: an MHP, a mixed Hydroxide, which is the intermediate we spoke about last year, which allows us to make a Cobalt-rich MHP, which is an unheard-of product. Most MHPs are Nickel rich, and typically, a 22-25:3 ratio of Nickel to Cobalt. Our ratio is 37% Cobalt and 7% Nickel, so it is very unique as to be valuable in its ability to blend in the cathode. We also produced a benchmark Cobalt Sulphate product, which is the precursor-ready product at a 20.8% Cobalt purity. That's a very high spec, and with the right partners, we could improve on that purity. Purity is king in the cathode world.
During mid-2020, we delivered a project update, which enhanced and cost-optimized the PFS. We stripped capex and significantly improved opex. We now have a $9.00 C1 cash cost for a Cobalt Sulphate. We have a $12 All in Sustaining Cost for the Cobalt Sulphate, and that's a very, very tight series of economics. We've maintained low capital intensity: the projects as it stands is about 1/3 to 1/4 of the capital intensity, using a metric of capital, over all units than any other Greenfield project in the world.
On the pilot plant, we now have the ability to prove on a metallurgical or larger-scale metallurgical proof. We started designing sourcing and ultimately receiving major equipment. As we speak today, that plant is practically complete, we just need to energize circuits, do our first chemical fill and we will be commissioning within the next 3-4 weeks, on our way forward to proving up the project as well as enhancing partners.
One final thing, and I'm very be proud of this: we had a Community Day at Broken Hill in mid-December. We invited 50 of the local community, who are project supporters, both council members, business members and other interested citizens. I'm really proud to say that that went well. It's received very well locally, and I'm really looking forward to our interaction with the community and hiring as well as interacting with the local businesses there.
Matthew Gordon: What type of partners are you talking about? The pilot plant allows you to get samples out. I don't know how many people you're sending them to or hope to engage with, but you must have a specific type of partner in mind.
Joe Kaderavek: We targeted and knocked off a lot of the low-hanging fruit in that project update. As you say, we went from a AUD$12 C1 to a $9 C1. A partner is important for a number of reasons, specifically for further cost optimisation and our ability to prove on scale improved recoveries from this point. We've assumed an 85% recovery from inground to payable. We know that number on the lab bench can go as high as 90%. We hope that we can split the difference 1-3% more, but we need scale proof and investment in the processing plant, particularly in the demonstration plant. There are a number of other options on energy optimization: studies with respect to potentially sourcing gas, which is a big infrastructure issue at Broken Hill. If we source gas from the movement to Adelaide pipe, which is about 250km away. We compress our energy costs, and energy is a big factor; about 23% of our cash cost. With the right partner not only can we do the scale and rigour of test work that that additional capital and focus will make, we can also make the right product. As I said earlier, different battery makers have different purity specs. For us to align ourselves as the battery maker at the forefront of development batteries in the next 5-10 years, we can make the right spec and optimize the cost inputs. With the right scale of partner, we can also look at these capital additions. For example, the gas pipeline and being involved in a community of users will benefit us on opex as well. There are a number of these tweaks that we can implement that will make a lower-cost product, a better quality of product, and just as importantly, a product that's aligned with what the market wants in the next 5-10 years.
Matthew Gordon: What can you tell us about what your margins could be going forward? You reduced your c1 cost – fantastic - but this is about what people are prepared to pay, whether it be on contract or at spot, going forward. Given that the market is so opaque, how do you make plans and write contracts with partners in that environment?
Joe Kaderavek: Just to take a step back: it depends on the nature of the partner. If you're a battery participant, you don't overly care what the long-term pricing and margins are, you want X product of this spec at this particular cash cost, and you want it for a 15-20-year life. It's effectively a feedstock and a much larger capital investment downstream. Bear in mind that the ratio of capital deployed at the mine level in battery materials to the actual battery facilities is about 1:21-30. Thus, for every dollar we have, there is a huge downstream investment, which is important for battery makers. They just want long, high-quality, low-cost Cobalt, and consistency.
To answer your question about margins, with an All In Sustained Cost of AUD$12, let's assume we can get it around $11 or thereabouts with some further optimization, the long-term, 30-year Cobalt price, which doesn't include much influence from the battery market, other than the last couple of years, the long-term price is AUD$25/lb. The market today has multiple benchmarks because of the various products. In the chemical world we use the Cobalt Sulphate price, which is currently at AUD$19. Their latest metal price is around AUD$17 in Europe, and we've recently had some transactions over $20/lb in China. There's a bit of a China stocking effect ahead of Chinese New Year, so there's a little bit of heat in that number, but I'd say comfortably AUD$19 for metal and $19 Sulphate in the next 2-3 years to long term, then potentially, assuming the long-term number is $25, All in Sustained AUD11-$12, you can see you're making a fantastic cash margin through a cycle. Even today at AUD$19 we're making a fantastic margin, but we need to be able to justify the initial capital on the way through to that.
Matthew Gordon: You must have a view on the type of partner you want, as they need to have a balance sheet which can help you out. Presumably you've got to construct an agreement which works for you and for them as well.
Joe Kaderavek: It's a really important discussion for an up-and-coming business like ours. There's a trap among some developers to get into bed and straight away look at offtake because offtake is easy and will get you cash up front. It front-ends your requirements, and ultimately, you can live off those down payments for a number of years and not have to go to the market. The question is: how do you ultimately impair the project by giving away at AUD$0.10c -$0.20c in the dollar your Cobalt streaming later on? That's a major trap. We have started to put the idea to partners that we're all about project equity first. It's a come in and look at sharing project equity and ownership, and with that there will be a commensurate offtake. Whether they scale that offtake above their equity ownership - that's another discussion we can have, but equity comes first. With equity, the onus will be on the partner to create a balance sheet effect to us to help us guarantee our portion of equity going forward. A completion guarantee is a simple example: where their balance sheet steps into the market in front of the bank and says, we will guarantee completion by X date to these specs, otherwise we'll take the over run.
Another way of doing that is a cash overrun facility of x%, so it's a contingency that they'll guarantee. There's a pecking order of instruments that partners can provide to us, through us to the bank that will backstop the product as a whole. In that process, we will have to sell portions of the project at below long-term NPV value, otherwise the partners wouldn't be interested. That's a point you have to accept. In that process you may have to give away beyond their equity share of offtake, but as long as you're getting enough value from the revenue from that foundation period, the first 3-4 years is absolutely critical for the financing, that will then allow you the coverage and the covenant satisfaction that's required from the bank.
We're playing a game where we're thinking about step 8 in order to understand the consequences of step 1. We've hired some very smart people from the resource’s investment banking side in London where there's a wealth of experience with this sort of a dilemma to help us understand what the next steps look like and to have a commercially attractive package for a partner.
Matthew Gordon: If you bring the ethical component into play, it's even smaller because that seems to be one of the drivers for these big funds. Ethical and green investment is a big part of your message that you released last year. Also, because of your size, are you almost too small for some of the big players to care about? Do you meet their criteria?
Joe Kaderavek: In terms of size of our headstock, the answer to that is, absolutely. We were marketing the company in Q4, knowing that within a quarter we would be on this metallurgical proof via the plant, and the feedback was: we’d really love a position in this because we have faith in the Cobalt price, but your market cap is too small. Thankfully that's being adjusted as we speak. The irony is that as we grow into more of a normalised value, even without much of the upside built-in, assuming that Cobalt prices carry on as they are, I think we will come into the purview of some of these funds, particularly with this large-scale proof. Once we have the conversation that allows us to name partners, and hopefully partners come in and contribute, either on a non-monetary basis with some support, but hopefully longer term with some monetary support, that will unlock us in terms of the headstock. Given the NPV on the project: AUD$600M at a AUD$27 Cobalt price, the leverage is material from that point, I'm comfortable that the stock price will look after itself in the next 1-2 years.
Matthew Gordon: Australia and China are not having good relations at the moment. Is that restricting your ability to have conversations with all the people you want to talk to?
Joe Kaderavek: No, actually, because our strategy is to integrate the mine refinery together and make a sulphate, our go to market was always to avoid the middleman refining complex that exists predominately in China. 80% of intermediate Cobalt is refined in China. That was just a decision on margin made 3-4 years ago. We want to keep the margin, and instead of selling a 20% Cobalt payable product, we want to sell an 80%-90%, in the case of the Sulphate, basically at parity with the Cobalt metal price. That commercially allows us to deal directly with battery makers in Europe, Korea, Japan, etc. Our commercial strategy and our hunt for the margin effectively allowed us to sidestep the Chinese refining industry, which in hindsight, particularly with what's happening at the moment has been very helpful for us.
Matthew Gordon: You're talking to all the people that you want to be talking to at the moment. What's the timeline between them receiving these samples and them making decisions about moving to the next stage, and what would that stage be?
Joe Kaderavek: A technical guy would say it takes 12-18 months for us to qualify as a supplier for some of these major precursor and cathode guys. It's a long time. They want to see multiple products on scale and ensure that what you produce is repeatable. It's basically a bludgeoning process of here's another 10kg, another 10 kilos, and they're looking at quality: impurities, crystallography, the Sulphate margin, the consistency within that structure. It is about a 12-month process. Parallel with that is all the DD that goes with your business: are they signing up with a partner who's credible and can produce that product at a longer date? I think that's the technical acceptance, the due diligence. The commercial acceptance, with the backdrop of what we've discussed is much nearer dated. I'm comfortable, this is not my company's view, but I'm comfortable that within the next 12 months we will be there commercially. Particularly as we start putting the product to the market on the pilot scale and then later next year, we have a much large demonstration plant, which will allow battery makers to make physical test batteries from that product. That's the final technical hurdle to get into that pre-qualification.
Matthew Gordon: For mining commodities it's all about timing; does what you've outlined in terms of the deliverables allow you to hit this cycle right?
Joe Kaderavek: I think so. The internal view is that next year we'll see a tightening. Looking at the market balance, we still have a fair bit of surface stock to get through, so I don't think we’ll see a big leap in the prices this year. Interestingly, longer-dated contracts are coming to the market, which is symptomatic of demand coming through. Our internal view is 2023 is the inflection point, that's still a couple of years away, and that's the point at which the Cobalt price will start to put significant pressure on sourcing and security of supply. That's consistent with what we're hearing from some of our commercial partners. They're relatively comfortable getting less with some of this demand coming through, but from 2023 onwards, the scarcity factor comes in.
Matthew Gordon: What happens at that point? I'm fascinated by this when people talk about ethical and green investing, but when push comes to shove and the supply doesn't meet demand, that goes away, doesn't it?
Joe Kaderavek: You do get an adjustment on the demand side, so you get an acceleration of thrifting, for example, certainly on the non-battery side, the lower economic value side, the hard facing tools, the magnetic tools, the dyes, etc will start to go elsewhere. 40% of today's market has some substitutability, and of that 40, you still have core of superalloys. They will get some relief in the next few years given Covid’s effect on airframes and gas turbines, etc.
In terms of substitution within the batteries themselves, on the energy storage side you can go to an LFP formulation, or a flow battery. In consumer electronics given the AUD$0.10-0.15c worth of Cobalt contained in an iPhone, that's unlikely to be subbed. Where the rubber hits the road – excuse my terminology - is the EV market: you can accelerate your 15, your transition to LFP batteries, etc, but that will be difficult. As a consumer, if you're paying $X, are you happy to take risk on a lower-quality outcome to try and save AUD$500,000 off the sticker price? With AUD$500,000 off, that's a pretty horrendous outcome from a Cobalt point of view. Therefore, I think the price flow-on effect from a much higher Cobalt price is one that the market will ultimately have to bear in the battery space as there are no alternatives.
Matthew Gordon: Other policies that have been put in place which allow you to survive because it allows you to compete in a decidedly unfair way because there's a bifurcation of pricing if you can prove throughout the supply chain that it has been mined ethically, processed ethically, there's been no blending, etc, does that happen with Cobalt now?
Joe Kaderavek: I think there's a natural transition. We've seen subsidies and incentives at a government level for a number of years now. Let's go back some years ago: emission standards on vehicles tightened over a period of time, and we initially introduced some hybrids and low carbon emission vehicles, and there was an inherent subsidy in that program through penalties. If you filed to make the portfolio standard of emissions, you were penalized by the regulator. That happened particularly in the EU, where that was very onerous for the likes of VW and others. A few years ago, we transitioned from a penalty/subsidy by governments. A penalty in terms of emissions, a subsidy in terms of industry subsidies. Last year we saw an acceleration of those subsidies to direct purchase, and some of those subsidies went into industry. For example, France is still negotiating a massive 1-off retooling for Renault in order for it to become the national champion and reach towards a low carbon future.
In terms of industry participants and market dynamics, the customers have for a number of years signalled their ability to pay a premium for ethical sourcing and low carbon footprint. They are market forces and they've been in from day 1, but they're accelerating as these products that are available to target those particular needs become more mainstream. 10 years ago, there were 1-2 models of EVs, which effectively were glorified golf carts. Today there are adequate substitutes and quality substitutes for ICEs, so your ability as a consumer to demand a lower carbon footprint, the industry’s demands are now there, so those market forces are in play and they'll continue to benefit those participants. We are a beneficiary; we benefit from the decarbonization angle, we also from the ethical sourcing side of that. For us to prove source and providence shouldn't be difficult and we should be able to ultimately get a premium for a product that the battery maker can prove to a consumer electronics business or an EV business, that is an ethical source of Cobalt.
Matthew Gordon: Have you got enough cash to see you through this pilot phase, or if things get delayed, will you need to go to market?
Joe Kaderavek: No, I'm happy to say that we identified long lead-time items for the pilot, which was effectively our leaching autoclave circuit. That was designed in mid-2019 and ordered in Q4,2019. It arrived around Chinese New Year 2020 and we got it into stride before Covid become an issue here. The ability for us to look at long lead-time items has meant that today, plus or minus a week, we're on track for commissioning in late February and therefore product.
The capital raise in Q3, this year was entirely to get us through this pilot plant. We are spending AUD$2.5M locally of that in the Broken Hill area. It gives us sufficient building blocks to prove at small scale, and that will get us through to mid-year. We've got enough cash to keep treading water, but we don't believe in treading water. We haven't done that in our existence. We want to then move on to a larger demonstration scale. The demonstration scale plant is around AUD$10M, of which $2.5M has already been spent. There's another AUD$7.5M incremental and that gets us into a 223t proof in terms of production of the intermediate, or the Sulphates. That scale of money will get us through all the way this year and ensure that we can tick all the boxes by fitting in a Feasibility Study, but also towards our commercial de-risking.
Matthew Gordon: Where is that money coming from? Would that be through a partner or through the market?
Joe Kaderavek: That's the $64 question - we've intentionally front-end loaded the smaller pilot plant in order for us to go out and see if there's a partner who will help us with funding. I'll be really clear on this: if I have my way and if interest is there, we won't be going back to the market. That's the risk; if you're an investor and you look at us thinking how do I time my entry here? My goal is to not come back to the market. My goal is to ensure that we can prove ourselves up, find a partner for which these funds are very small fry in order for them to be getting a first mover optionality over a project of this quality, and find a partner that gets us all the way through the BFS. That’s the goal and I'm pretty sure that we'll have the tools to do that in the next 2 months.
Matthew Gordon: I look forward to hearing about it. We're spending a lot of time in the Cobalt space at the moment. It's getting exciting. I think 2021 will be about who does what. We might even get a sense of where the Cobalt price will get to this year. Thank you so much for coming on and talking us through your project. Stay in touch.
Joe Kaderavek: Thank you, it's always a pleasure to talk with you.
To find out more, go to Cobalt Blue Holdings' Website.
As of 25 February 2021
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