Green Energy

Our increasing reliance on rechargeable batteries is making the Democratic Republic of Congo reconsider how it values cobalt. Once a forgotten byproduct, the price of cobalt has tripled in the last two yearsand the world’s largest producer plans to profit off the demand.

Lawmakers in the capital Kinshasa are currently considering increasing the royalty miners pay to export cobalt and other metals that will be recategorized as “strategic substances,” according to a Jan. 10 report from Bloomberg.

The new mining code will see the tax on base metals like copper and cobalt increase from 2% to 3.5%, and if the metal is classified as “strategic,” that rate could increase to as much as 5%, mining minister Martin Kabwelulu told the Congolese senate on Jan. 2. The code has already been adopted by the National Assembly and is currently being examined by the Senate. If it passes the upper house, it will be sent to president Joseph Kabila to sign into law.

The new law would allow the DRC “the flexibility to face unforeseen developments in the international market if the international economic situation demands it,” according to Kabwelulu. The minister sees cobalt’s role in the economy in particular as “not only strategic but also critical character.”

Those developments in the international market will be driven by consumers’ increasing reliance on rechargable batteries. Lithium-ion batteries in cellphones and the the growing electric car inudsutry make up roughly 49% of the cobalt demand, according to the US Geological Survey (pdf).

Last year, for example, Volkswagen put out a tender for a direct cobalt supplier for ten years from 2019, one of the largest procurement projects in the automotive industry, that signaled a $24 billion shift to electric vehicles. Lithium-ion batteries are also key to manufacturers like Apple and Tesla. Cobalt is extensively used in the production of cathodes which can make up between 35-40% of the total material costof any one battery.

While the law has not yet been passed, if it’s rubber stamped it will be enacted immediately to existing contracts. What’s more, the new code will also change contract stability from 10 years, to five years.

While doing business in the DRC remains lucrative for the mining multinationals, it also unpredictable. Last year, Toronto mining company First Cobalt pulled out of the country to focus on deposits in Canada. Other cobalt veins in Scandinavia and Russia are also being explored. For now, however, the DRC maintains the lion’s share of the world’s cobalt deposits, meaning it can pretty much do as it pleases with it.

Automakers have ambitious plans to fill their lineups with electric cars and hybrids, but they could face a major roadblock, according to Bloomberg. Because while the number of battery-powered cars automakers want to build appears to be limitless, the amount of metals that go into the batteries is finite.

When BMW announced electrification plans that included an all-electric X3 and Mini model last September, the going rate for 21 kilograms (46 pounds) of cobalt, which is the amount needed for the average electric-car battery pack, was under $600. It’s now approaching $1,700, according to Bloomberg.

The need for cobalt, which is typically combined with nickel and manganese in electric-car batteries, puts automakers in an uncomfortable position. Cobalt is relatively scarce; current reserves may not even be adequate to meet anticipated demand for electric cars. Replacing every car on the road with a Tesla Model X would require twice the current global reserves of cobalt, according to a study commissioned by mining company Glencore Plc. But automakers feel pressured to build more cars with batteries in order to meet stricter emissions standards, giving the suppliers a lot of power.

There are ethical issues as well. Most of the world’s cobalt comes from the Democratic Republic of the Congo, where corruption is rampant and so-called “artisan miners” mine cobalt by hand. Many of those miners are children. Automakers have made efforts to ethically source materials for electric cars, but given that the Congo accounts for 60 percent of world cobalt production, that might be tough.

Many of the mining companies working in the Congo are Chinese, as are most of the refineries that process it. The Chinese State Reserve Bureau reportedly stockpiles the metal. That could be a boon to China’s domestic auto industry, but could also make it more difficult for foreign companies to access the supply.

The news isn’t all bad, though. Bloomberg noted that a similar spike in demand for palladium occurred in the early 2000s but eventually died down. Palladium is used in catalytic converters, but automakers were able to find ways of reducing the amount needed. Changes to battery chemistry, such as increasing the amount of nickel, could reduce the need for cobalt. For now, though, automakers will likely be at the mercy of the cobalt suppliers.

The Democratic Republic of Congo may soon more than double the tax mining companies operating in the country pay on exports of cobalt, a key component in the lithium-ion batteries that power electric cars and mobile phones.

The African nation, responsible for about two thirds of global cobalt output, has been evaluating the measure since last month, when a major revision to the 2002 Mining Code was passed by the parliament’s lower house.

If also approved by the Senate, the new law will qualify cobalt as a “strategic commodity” and so the royalty on exports of that metal will increase to 5% from 2%. Taxes on base metals, in turn, would increase to 3.5%.

The most likely outcome of such tax increase would be a further compression in the amount of capital deployed into new mine construction and exploration in the DRC, Trent Mell, President and CEO of Canada’s First Cobalt.

“We came very close to making a significant investment in the DRC in 2017, but reversed course as we concluded the geopolitical backdrop was getting worse. This surprising news is just one more reason for investors like us to look elsewhere,” Mell said.

His company is now directing all efforts on primary or by-product cobalt opportunities and refiners, battery manufacturers and energy material companies are already expressing interest in what First Cobalt is doing. “By looking for cobalt as our primary focus, with additional payable metals, such as copper, nickel and in our case silver, we have taken a new approach to exploration to offer investors better exposure to the metal,” Mell said.

Cobalt prices went ballistic last year, with the metal quoted on the London Metal Exchange ending 2017 at $75,500, a 129% annual surge sparked by intensifying supply fears and an expected demand spike from battery markets.

Top mining companies including Glencore (LON:GLEN), Randgold Resources (LON:RRS), China Molybdenum (HKG:3993) and Ivanhoe Mines currently operate in the DRC.

Through the chamber of mines, an industry lobby group, companies have opposed to the proposed reforms to the country’s 16-year-old code, saying that while it would boost government revenues, it would also make investments in the sector unprofitable.

The Democratic Republic of Congo is preparing to more than double a tax on two-thirds of global cobalt supply, potentially increasing the cost of the critical battery metal just as the world begins to embrace electric vehicles.

Congo, the world’s biggest cobalt producer, will increase the royalty miners pay on exports of the metal to 5 percent from 2 percent if it opts to categorize cobalt as a “strategic substance,” Mines Minister Martin Kabwelulu told the country’s Senate last week.

The new classification is part of an overhaul of mining legislation that is fiercely opposed by the industry, which says the law may deter future investment. Under the revised code, backed by the government and being scrutinized by parliament, the tax on base metals including copper and cobalt will increase to 3.5 percent from 2 percent. If approved by the Senate, the law will also allow the state to select “strategic” metals, likely to include cobalt, and tax them at a higher rate of 5 percent, Kabwelulu said.

A byproduct of copper and nickel mining used to harden steel, cobalt stepped into the global spotlight last year as prices surged. The metal’s efficiency in conducting electricity has made it essential for rechargeable batteries used in electric cars produced by companies including Tesla Inc. and Volkswagen AG.

Prices Triple

Plans to dramatically increase the production of electric vehicles resulted in the price of the metal more than tripling in the past two years as miners and automakers scrambled to secure supply. The boom hasn’t gone unnoticed in Congo, whose mines supply about two-thirds of global output.

The new legislation will guarantee Congo “the flexibility to face unforeseen developments in the international market if the international economic situation demands it” by permitting the government to declare certain minerals “strategic substances,” Kabwelulu told senators Jan. 5, according to a transcript of his remarks.

The minister singled out cobalt’s “not only strategic but also critical character” on the world market. Tantalum, a scarce mineral extracted from so-called coltan ore and used in smartphones, could also be taxed at the higher rate, Kabwelulu said.

The current mining law, which was promoted by the World Bank and adopted in 2002, attracted billions of dollars of investment from mining companies including Glencore Plc and Randgold Resources Ltd. While the economy has grown, the government says the mining industry hasn’t generated sufficient revenue for the state.

Windfall Tax

“If cobalt is declared strategic one day, naturally the royalty will climb to 5 percent,” Kabwelulu’s chief of staff, Valery Mukasa, said by phone Tuesday. “We haven’t said cobalt will be a strategic substance. We said cobalt can be,” he said, adding there are “considerations that need to be assessed from a technical point of view and in terms of the international market.”

In addition to the new royalty tax on strategic minerals, the draft law also:

• Increases royalties on gold from 2.5 percent to 3.5 percent;
• Introduces a profit-windfall tax;
• Doubles the state’s free share to 10 percent; and,
• Reduces the period during which contract stability is guaranteed to five years from 10 years.

Stability Clauses

While existing stability clauses mean companies with valid mining contracts, like Glencore and Randgold, won’t have to comply with most reforms for 10 years, the increased royalty rates will be applied to all projects immediately, Kabwelulu told senators on Jan. 2.

The royalty hike may have the biggest impact on Glencore, the country’s largest producer of both copper and cobalt. The company shipped about 213,000 metric tons of copper and 24,500 tons of cobalt from its Mutanda mine last year. That could rise to more than 500,000 tons of copper and more than 65,000 tons of cobalt by 2019 once production at its suspended Katanga Mining operation reaches full capacity.

The draft law was adopted by the National Assembly on Dec. 8 and is being examined by the Senate in an extraordinary session that started Jan. 2. If approved by the Upper House, it will be sent to President Joseph Kabila to sign into law.