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Cobalt Blue attracts Speculative Buy rating with A$0.65 price target as Canaccord Genuity initiates coverage

Last updated: 01:27 21 Sep 2021 EDT, First published: 01:12 21 Sep 2021 EDT

Cobalt Blue Holdings Ltd - Cobalt Blue Holdings initiated a Speculative Buy with a 65 cents price target by Canaccord Genuity

Cobalt Blue Holdings Ltd (ASX:COB, OTC:CBBHF) has been given a Speculative Buy rating with an A$0.65 per share price target in initial coverage from Canaccord Genuity (TSX:CF, LSE:CF), more than double the current price of A$0.32.

The broker highlighted that in comparison to global cobalt projects, the pure-play cobalt exploration and project development company’s Broken Hill Cobalt Project (BHCP) screens as “one of the most capital-efficient projects” to produce cobalt tonnes.

Broken Hill Cobalt Project

Cobalt Blue’s BHCP in Far West New South Wales differs from other projects in that cobalt is the primary revenue stream.

The project presents as a cobalt-focused project with low capital intensity of US$120 million/ktpa capacity, while delivering a meaningful volume of material into the market.

Cobalt Blue is currently piloting its process in Broken Hill before progressing to a demonstration plant in 2022 and final investment decision (FID) in late 2022/early 2023.

The broker highlighted that the company’s process flow sheet was unique and that it delivered a balance between operational costs, capital expenditure, cobalt recovery and environmental impact.

“We believe there is value in the flowsheet IP, which may present further commercial opportunities,” Canaccord added.

Cobalt market

The cobalt market is relatively small at 128,000 tonnes in 2020, but highly topical when considering the lithium-ion battery supply chain.

Supply is dominated by the Democratic Republic of Congo (DRC) with around 70% of global supply. The metal is largely mined as a by-product of copper.

Demand has traditionally been driven by portable device batteries (LCO cathodes) and alloys.

Canaccord, however, expects this scenario to rapidly shift to demand-linked to electric vehicles (EVs), consuming 32% of cobalt by 2025 and 50% by 2030 and doubling demand to 272,000 tonnes despite thrifting and a shift to low/no cobalt cathodes.

Its pricing forecast assumes a rapid increase in pricing from 2023 as the market tightens and given the market’s relative illiquidity, prices tend to rapidly adjust to market dynamics.

The broker said: “We expect the market to be balanced on a knife's edge until 2024 when it enters a structural deficit.

“As the deficit approaches, we expect to see a scramble to secure supply and rapidly rising prices.”

It anticipates US$14-30 billion of investment is required to balance the market and there are limited opportunities to invest in an ex-DRC/ Indonesia/China cobalt supply chain.

Canaccord has set a long-term price forecast of US$40/lb, which it believes will be sufficient in stimulating additional supply to come to the market via improved economics of laterite and copper deposits, artisanal mining and recycling.

It noted that there have been some early movers amongst the EV original equipment manufacturers (OEMs) to secure offtake.

Much of this supply is sourced from the DRC, which has a “questionable ESG record or from planned Chinese-backed Indonesian HPAL projects”.

Further, refining supply is dominated by China and without a concerted effort, OEMs are likely to be locked into a DRC/Indo/China supply chain.

Portable electronic manufacturers (Apple, Samsung, Xiaomi, Oppo, Lenovo, HP) may need to adjust sourcing strategies or face material shortages and not just higher costs, of the raw materials that enable their businesses.

It anticipates prices moving towards previous peak pricing of US$42/lb by 2024 and set a long-term price that would enable additional supply to be brought online.

“We also expect to see a rise in partnership activity over the next two years,” Canaccord added.

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