Geovic looks to be the name in cobalt

Geovic Mining (GMC-T, GVCM-O) is looking to Cameroon to become the go-to name in cobalt.

The Delaware-based company is the holder of the world’s largest known primary cobalt deposits but getting them into production hasn’t been easy.

Geovic’s Nkamouna project was first acquired by the company back in 1995. By 2002 it had a mining convention in place and the following year its mine permit had been approved by the President of the country.

Everything was moving along swimmingly. By 2007 the company continued its good run by completing a feasibility study and getting government approval for its Environmental & Social Impact assessment. The path was clear, or so it seemed, for a new mine to be on its way.

But complications on the metallurgical side combined with collapsing financial markets to de-rail a project that had a hefty US$400 million price tag on it.

Geovic was left to try to get a better handle on the metallurgy and reign in costs so that it could bring the most economically viable project possible to financiers.

The fact that it undertook the process during the financial meltdown had some unexpected advantages, however.

Geovic’s VP of Investor Relations Andrew Hoffman explains that when the market was hot back in 2007 Geovic was having a hard time recruiting the mining and engineering talent it needed to advance the project to the next level.

“The first time we had a chance to optimize the feasibility study was last year when companies went out of business,” he says. “We had our money so we got the best people available.”

The money that Hoffman refers to was nothing short of substantial. At the beginning of 2009 the company found itself holding roughly US$60 million in cash thanks to a timely equity financing completed in March of 2007.

Currently the company has roughly $50 million left in the kitty – enough to take it through 2010 and into 2011 — and a team of experts that it previously longed for.

Those experts are busily updating the second feasibility study done on Nkamouna. The second feasibility study was done a year after the first one after it was determined that the extraction process in the first was flawed. The update to the second feasibility study is set to be finished by the third quarter of this year.

The gist of changes being made to the metallurgical process according to Geovic’s VP of corporate communications Barbara Filas, is that the new process is an atmospheric leach with pyrite as a reductant.

“It’s a simpler process,” Filas says, “because we won’t be doing things under pressure. That makes it more bankable….and it uses less energy, almost 50% less energy.”

It also means that instead of producing a concentrate grading 99.8% cobalt – as outlined in the original feasibility study – Geovic will instead be producing an intermediate concentrate.

The second feasibility study projected operating costs of US$2.04 per lb of cobalt after byproduct credits and by the net present value at $1.01 billion using an 8% discount rate.

And while Geovic has grappled with the extraction process, what has never been in question is the mining of the ore.

The company is blessed with a massive deposit rich and cobalt but also containing nickel and manganese. Its last feasibility study estimated that 66% of future mine revenues will come from cobalt sales with 19% coming from nickel and 15% coming from Manganese.

When considering the deposit the first thing that the investor has to grapple with is the shear enormity of it as Geovic’s mining permit covers 1,250 sq km.

Within that vast expanse of jungle the company currently has two deposits with significant resources: Nkamouna and Mada.

Nkamouna has reserves 54 million tonnes grading 0.25% cobalt, 0.69% nickel and 1.33% manganese, and a resource of 100 million tonnes grading 0.222% cobalt, 0.67% nickel and 1.26% manganese. The deposit stretches out over a 13 sq km. area.

As for Mada, resources stand at 222 million tonnes grading 0.21% cobalt, 0.58% nickel and 1.25% manganese. A reserve estimate is slated to come out as part of the feasibility study update later this year. The deposit stretches out over a 60 sq. km area.

Filas explains that ore at the deposits is encountered just 8 metres from surface and averages 5 to 6 metres in thickness. Both deposits are projected to be mined as open pits with concurrent reclamation programs being run alongside the mining.

But Nkamouna and Mada are only part of the picture.

Geovic has also discovered five other deposits on its property. And even those discoveries, when combined with the two outlined deposits occur in a 264 sq km area – which is roughly 20% of the companies total land package.

The amount of cobalt that Nkamouna could ultimately turn out is indeed staggering.

“We could supply the world market for the next 100 years,” Filas says.

Of course with such an abundance of resources Geovic has to be mindful of the cobalt market. If it were to unleash too much of the metal on to the market it could collapse prices.

As for the current state of cobalt prices, the metal has been trading in the US$20 per lb range this year, which is in line with its 15 year average.

That is a far better environment than in the recent past as cobalt prices – which are notoriously volatile. Cobalt has touched as low as US$6 per lb in recent years.

In an effort to bring more liquidity to the metal and iron out some of that volatility, the LME recently began storing and trading cobalt. By becoming part of the LME cobalt will now not only have more transparent pricing but also a forward price, allowing investors and users of the metal to protect against future volatility.

And while less volatility and more transparency are, no doubt, good things for the cobalt market, they won’t matter all that much to investors if prices don’t rise in the future.

The key driver to any future gains in cobalt prices is the battery.

While lithium provided one of the best market stories for 2009 thanks to its use in the batteries that drive hybrid cars, cobalt, an equally key component in the composition of such batteries, was largely overlooked.

An interesting situation considering that cobalt currently makes up a larger part of the battery market than lithium does.

According to the Cobalt Development Institute in 2008 roughly 60,000 tonnes of cobalt were used in the manufacturing of rechargeable batteries compared to 21,000 tonnes of lithium. The Institute estimates that by 2018 that tonnage will have increased to 125,000 tonnes of cobalt representing 45% of the market compared to the use of 42,000 tonnes of lithium or 34% of the market.

Of course seldom is a natural resource overlooked by the market for no reason at all.

Cobalt’s lack of attention is due, no doubt, in part due to its currently high levels of supply.

And with massive reserves waiting to be pulled out of the ground in the Democratic Republic of Congo’s copper belt, the feeling has been that there isn’t much worry on the supply side.

But as First Quantum (FM-T) has found out, getting ore out of the ground in the DRC is no certain thing.

And while Freeport McMoRan (FCX-N) and Lundin Mining (LUN-T) recently received assurances for their massive Tenke Fungurume copper and cobalt project, the difficulties they had in securing such a nod highlights the fact that relying on the DRC for future cobalt supply could be risky.

And it is on the political risk platform that Geovic holds a trump card.

While Cameroon is perhaps better known for exporting soccer stars than metals, the country has been one of the most political stable democracies in Sub-Saharan Africa over the last 40 years.

And its government is now looking to parlay that low political risk discount rate into more foreign dollars flowing into its natural resource sector.

Geovic’s ties to the count
ry go all the way back to 1995 – so saying that it is comfortable working in the country is an understatement.

Its good relations with the government is furthered by their partnership on the project.

Geovic Cameroon, the subsidiary that operates Nkamouna and Mada, is held as a joint venture between Geovic, which has a 60.5% stake, and the National Investment Company of Cameroon (SNI) – a state-connected entity – which holds a 39.5% stake.

SNI is fully funding its share of development costs.

With publicly stated presidential support for the project, all that is left now is for the financing to come through on the heels of the updated feasibility study.

On that front, Geovic says it plans to have debt and equity financing wrapped up by the end of this year. If it does, commercial production is slated for 2013.

A lot could change between now and then, but if the near future holds a combination of more hybrid cars and continued political risk in countries like the DRC, Geovic could find that the wait was worth the reward.