By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
Earlier this week, the deal in which China Molybdenum Co. (603993:SHA) agreed to pay Freeport McMoRan (FCX:NYSE) $2.65 billion for FCX’s African copper assets reaffirms our view that asset shedding from the FCX project portfolio will continue (See the press release here).
FCX, with a $13B market capitalization, made a bad bet in diversifying into the oil business at the cyclical peak and now must reckon with roughly $20B in debt on their balance sheet. The debt maturity profile of the company is shown below:
While it’s a shame to have to part with such high quality assets, what really caught our eye was the fact that FCX has agreed to negotiate exclusively with China Moly on the FCX cobalt assets including the Kokkola Cobalt Refinery in Finland.
The potential cash inflow for FCX (forecast at $100 million) clouds the more significant issue of cobalt supply chain control. China is already the world’s leading producer of refined cobalt and, should the deal for the Kokkola refinery go through, will acquire another 15,000 tonnes per year of refined cobalt capacity as well as 870 million contained pounds of cobalt (on a consolidated basis) in top-tier assets in Africa.
Though we don’t believe the narrative that there is a cobalt crisis, we do see higher looming cobalt prices as China plays the “long game” to dominate the cobalt supply chain. This makes sound strategic sense when you consider the plan for increased lithium ion battery capacity in China.
One of the greatest misunderstandings about the lithium ion battery space is that Tesla Motors (TSLA:NASDAQ) is the only game in town. This couldn’t be further from the truth and while TSLA sucks all the oxygen out of the room with the plans for the Gigafactory, similar build outs are happening in Asia – specifically China. Our friends at Benchmark Mineral Intelligence have estimated that at least 12 lithium ion “megafactories” are forecast to come online by 2020 with 7 of them located in China.
It is for this reason that we think you’ll see higher cobalt prices in the intermediate term as refined cobalt chemical production will not match the anticipated demand from the battery sector.
Ultimately, we see a great deal of tension in the lithium ion battery space. This is exciting as it creates disruptive discovery opportunities. TSLA’s plan to accelerate production to 500,000 cars per year by 2018 and 1,000,000 per year by 2020, however absurd, is one example. The friendly take out of lithium ion battery producer SAFT Group (SAFT:EPA) by French oil and gas giant Total SA (TOT:NYSE) for €950 million is a much more significant move as it shows Big Oil coming to grips with lower oil prices and the need to diversify an existing business model into new markets. Though we’ve mentioned this before, the $200 million raised by lithium exploration and development companies year-to-date in 2016 is impressive for an oligopolistic industry that only generated slightly over $1 billion in revenues in 2015.
One of the reasons we’ve liked the cobalt and lithium stories is that the supply chains aren’t “owned” by China in the same way rare earths are. As the dust settles on the FCX/China Moly deal, the significance of this latest move should not be lost on us. China's "top down" strategy of acquiring assets with a vision of controlling the production of ore and higher margin goods along the supply chain is still alive and well despite the country's economic challenges.
DISCLAIMER AND INFORMATION ON FORWARD LOOKING STATEMENTS
The material herein is for informational purposes only and is not intended to, and does not constitute, the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.
The information in this report is provided solely for users’ general knowledge and is provided “as is”. We make no warranties, expressed or implied, and disclaim and negate all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose or non-infringement of intellectual property or other violation of rights. Further, we do not warrant or make any representations concerning the use, validity, accuracy, completeness, likely results or reliability of any claims, statements or information in this research report or otherwise relating to such materials or on any websites linked to this report.
The content in this report is not intended to be a comprehensive review of all matters and developments, and we assume no responsibility as to its completeness or accuracy. Furthermore, the information in no way should be construed or interpreted as – or as part of – an offering or solicitation of securities. No securities commission or other regulatory authority has in any way passed upon this information and no representation or warranty is made by us to that effect. Chris Berry owns no shares in any of the companies mentioned in this report.
All statements in this research report, other than statements of historical fact should be considered forward-looking statements. Some of the statements contained herein, may be forward-looking information. Words such as “may”, “will”, “should”, “could”, “anticipate”, “believe”, “expect”, “intend”, “plan”, “potential”, “continue” and similar expressions have been used to identify the forward-looking information. These statements reflect our current beliefs and are based on information currently available. Forward-looking information involves significant risks and uncertainties, certain of which are beyond our control. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but not limited to, changes in general economic and market conditions, industry conditions, volatility of commodity prices, risks associated with the uncertainty of exploration results and estimates, currency fluctuations, exclusivity and ownership rights of exploration permits, dependence on regulatory approvals, the uncertainty of obtaining additional financing, environmental risks and hazards, exploration, development and operating risks and other risk factors. Although the forward-looking information contained herein is based upon what we believe to be reasonable assumptions, we cannot assure that actual results will be consistent with this forward-looking information. Investors should not place undue reliance on forward-looking information. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by securities laws. These statements relate to future events or future performance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. For a more detailed disclaimer, please click here.