INDEPENDENT COBALT INDUSTRY REPORT for NORTHERN COBALT
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SECTION 5 – Independent Cobalt Industry Report INDEPENDENT COBALT INDUSTRY REPORT For NORTHERN COBALT LIMITED 27 MAY 2017 39 SECTION 5 – Independent Cobalt Industry Report EXECUTIVE SUMMARY Cobalt is a lustrous steel grey metal and one of only three naturally occurring magnetic metals, with iron and nickel, which possess similar properties to each other in terms of hardness, tensile strength, machinability, thermodynamic properties and electrochemistry. The uses of cobalt can be broken broadly into two groups - metallurgical and chemical. Metallurgically, cobalt is a critical element in alloys that need to endure severe temperature and mechanical stress, due to its properties of high temperature resistance, hardness and wear characteristics. These qualities make it ideal for superalloys, hard metals and diamond tools, special steels and alloys, as well as high temperature, high strength magnetic materials. The principal chemical use is in the cathodes of certain rechargeable lithium-ion batteries, as well as uses as catalysts in the petrochemical and plastic industries, colouring in pigments and ceramics; and as paint driers and use in the tyre industry. Most cobalt is produced as a by-product of copper and/or nickel mining operations, with cobalt being refined from a concentrate. Cobalt is only extracted alone from the Moroccan and Canadian Arsenide ores and there are only a few of these primary cobalt mining operations. Over 50% of the worlds cobalt is currently mined from the Democratic Republic of the Congo (DRC) primarily as a by-product of copper mining. Outside of the DRC, there are no other countries that could be termed significant cobalt producers, therefore with over 50% of the world’s cobalt production, it is a potential recipe to cause instability and volatility in supply and demand, particularly through political instability, such as in 2008. The DRC is also under scrutiny due to the use of child labour and poor working conditions – particularly with artisanal cobalt production which is said to account for ~20% of cobalt exported from the DRC. As more attention is being directed at material supply chain sustainability on both the International and National levels we have seen efforts such as that of the OECD, the U.S. Government (Dodd-Frank Act) and various industry coalitions focus attention on the chain of custody of a group of minerals defined as “Conflict Minerals.” Although cobalt is not a Conflict Mineral as such, it has on occasion been incorrectly associated with them, which has created some product uncertainty. Despite having some of the world’s largest mining companies producing cobalt, due to the lack of supply chain transparency in the DRC and the way cobalt is mined and traded, there will be questions of whether they are linked to the conflict in the country or illegal practices such as child labour. Due to this lack of transparency a number of end users of Li-ion 40 batteries (in particular, global organisations such as Tesla and Apple) have indicated their preference for using ethically mined cobalt from other countries, which could create a large supply deficit. China is the largest producer of refined cobalt by a large margin putting it in control of the majority of cobalt supply. China’s cobalt refineries mainly import its feed from the DRC as ores and concentrates to supply its burgeoning chemicals industry. China, with 38% global cobalt consumption, leapfrogged both Europe and North America (combined 27%) in 2015, with CRU estimating Asia’s consumption to account for 79% of global supply (China 39%) by 2020. Presently, 79% of the end use of the global consumption of cobalt is by chemicals and superalloys, however the demand for cobalt over the next 10 years is going to be driven by lithium-ion batteries especially in Electric Vehicles (EVs). CRU anticipates a 68% increase in cobalt consumption between 2015 and 2025. Lithium-ion batteries for EVs will drive an increase in cobalt demand in the order of 250% over this timeframe. CRU estimates that 30kt of cobalt will be consumed by 2025 versus 8kt in 2016. In 2014, lithium-ion rechargeable batteries accounted for 33.4% of the total rechargeable battery market, which Bernstein estimates to rise to 70% in 2025. Of the five main lithium battery types, three contain battery cathodes containing cobalt. In 2015, these cobalt based batteries dominated market share, representing 68% of the global lithium-ion battery market. Global shipments of cobalt based cathodes reached 223,400t in 2015, which is growing by 30% year on year. Despite the popularity and continued demand for mobile electronics such as smart phones, tablets and laptops, which has dominated the end user share for the last 20 years, the market share of mobile electronics batteries is predicted to compress by some forecasters, compared to the fast growing cobalt-based batteries due to their applications in EV’s and energy / power storage utility systems. SECTION 5 – Independent Cobalt Industry Report EV’s are a key driver for cobalt-based lithium-ion batteries as there is a continued focus on global climate change issues and associated vehicle emissions, with many commentators claiming there is a significant buy-in to the argument that disruptive forces are now at play which will result in global demand for EV’s reaching ~7 million units in 2020 (compared to 800,000 in 2015). As well as specialist companies such as Tesla, traditional carmakers are also embracing EV and hybrid technology which will further accelerate the demand for batteries and their associated raw materials. Recent (2009–2015) cobalt price weakness has been responsible for the lower level of investment committed to existing or new mines. Examining all potential mine openings/expansions over 2016–2018F, there is expected be 23,000t gross of potential new supply (representing a 7.6% production growth rate 2016–2018F). Despite the positive numbers, it is considered highly unlikely all of this tonnage will actually be delivered to the market (typically a fraction of new production targets are met). On a net supply basis, (including existing supply curtailments) the cobalt market is forecast to grow (2015-2018F) by only a compound annual growth rate (CAGR) of 2.4% and (2015–2020F) 3.5% CAGR, a more modest supply picture. New projects are expected to boost cobalt mine production, but the timing of these projects ultimately relies on nickel and copper prices. Existing producers are unlikely to increase production of cobalt without an increase in the nickel or copper price, due to cobalt being a by-product of these primary metals. Weak prices in these two primary metals result in lower production of all three metals. As well as activities in the DRC, recent policy changes in countries such as Indonesia and the Philippines (two of the largest nickel producing regions with by-product cobalt) should also be monitored. In the last 10 – 20 years there have been many significant technical developments in the processing of copper- cobalt and nickel-cobalt ores. Together, these developments have helped to satisfy a steadily increasing world demand for cobalt. There is a wide range of cobalt recovery processes available, although each has pro’s and con’s and there is not an entirely satisfactory or obvious flowsheet for cobalt recovery. The choice of process steps is often driven mostly by the project owner’s requirements in terms of cobalt product and grade, and is constrained by other factors such as environmental compliance, logistics and risk. Ultimately, the opportunity exists for well-placed cobalt producing projects, producing a quality product, to be 41 successfully developed to fill a gap in future demand growth. This is therefore, a unique opportunity for projects with cobalt as the primary metal, as these operations have more control over their cost structure and are not exposed to fluctuations in copper and nickel prices. SECTION 5 – Independent Cobalt Industry Report 5.1 Introduction The objectives of this report are to provide an introduction and overview to the global cobalt industry. Particular description is focussed on the cobalt supply chain from global deposits, production, processing methods, applications, incumbents, future market balances and pricing. Since the early years of cobalt production, and particularly during the last century, the major source of cobalt has changed whilst the world’s cobalt usage has increased steadily. Cobalt is produced mostly as a by- product of other major metal extraction processes – mainly copper and nickel – and in recent decades the nickel industry has been the major source of additional cobalt. 5.1.1 Metal Properties Cobalt (chemical symbol Co, atomic number 27) is a shiny, steel grey, brittle metal with a close packed hexagonal crystal structure at room temperature that changes at 421°C to a face centred cubic form. The metal is rarely used as a structural material in the pure form but almost always as an alloy or a component of another system. 42 Source: Miningnews.com Cobalt is one of only three naturally occurring magnetic metals (with iron and nickel). The melting point of cobalt metal is 1,493°C (2,719°F) with the boiling point 3,100°C (5,600°F). The density is 8.9 grams per cubic centimetre. Cobalt’s high melting point allows it to retain its strength to a high temperature, making it ideal for cutting tools, superalloys, surface coating, high speed steels, cemented carbides and diamond tooling (see below). 5.1.2 Cobalt Uses The uses of cobalt can be broken broadly into two groups – metallurgical and chemical. Metallurgical Uses Cobalt is a critical element in alloys that need to endure severe temperature and mechanical stress, due to its properties of high temperature resistance, hardness and wear characteristics.