Green Energy

Labor strife, rights issues in Congo spur Canadian mining firms to seek other sources

TORONTO — A handful of Canadian miners are ramping up operations to mine cobalt, betting on demand for a socially responsible source of the metal that is in high demand as a key component of electric cars.

Most cobalt currently comes from the Democratic Republic of Congo, where supply is threatened by political, legal and labor issues. That means car makers and battery suppliers are increasingly looking elsewhere for the mineral.

Miners in Canada such as Vale SA, which has a cobalt-producing mine in Sudbury, Ontario, Sherritt International Corp., and smaller firms such as Royal Nickel Corp., First Cobalt Corp. and Fortune Minerals Ltd. are raising funds and engaging in exploratory drilling.

Mainly through operations led by Vale, Canada is the world’s third-biggest producer of cobalt, after the Congo and China, accounting for about 6% of the world’s supply, according to the U.S. Geological Survey.

The metal is a crucial component of lithium-ion batteries, which are used to power electric vehicles as well as portable electronic devices due to its ability to conduct electricity when stacked with other metals such as lithium and nickel.

The demand for socially responsible sources of cobalt comes as the price of the metal has soared to $75,000 a metric ton on the London Metal Exchange, more than double the price from the start of 2017.

BMO Capital Markets expects current cobalt prices to double in the next two years as demand for electric-vehicle batteries continues to outstrip existing supply of the metal, the bank said in a report released in December.

The Congo produces roughly two-thirds of the world’s cobalt, or about 66,000 metric tons a year, but mines there have been criticized over reports of child labor and unsafe conditions.

Amnesty International released a report in 2016 that found thousands of children, some as young as 7 years old, and adults, mine cobalt in the country and work in perilous conditions without basic protective equipment. The organization was able to trace the sale of that cobalt to Chinese refiners, which then resold the mineral to battery component manufacturers.

In addition, a major mine there that is jointly owned by state mining firm Gécamines, and Belgian-based Groupe Forrest International SA, has been caught up in a labor-contract dispute. And an analysis by the Carter Center, a human-rights nonprofit, found nearly $750 million in royalties, bonuses and proceeds from asset sales that are estimated to go to the Congolese government are missing from Gécamines’s accounts. Gécamines has disputed the report and declined to comment.

Volkswagen AG and nine other leading car makers, including Ford Motor Co. and Daimler AG, whose supply chains include cobalt buyers, in November set up a “raw materials observatory” that aims to address ethical and labor-rights issues in sourcing raw materials, including cobalt.

A Volkswagen spokesman said the company remains in “intensive discussions” with its suppliers to determine how to improve the sustainability of its supply chain, especially for raw materials used in electric vehicles.

Electrovaya Inc., a battery maker based in Toronto, is in discussions with Canadian cobalt miners, including Fortune, to lock down supply contracts for the coming years, said Chief Executive Sankar Das Gupta. “All our customers want ethical sourcing,” Mr. Gupta said.

A Fortune spokesman said the company has signed numerous confidentiality agreements with partners they are in discussions with, and declined to provide further comment on Electrovaya.

For Robin Goad, chief executive of Fortune, which is developing a mine in Canada’s Northwest Territories, that may be an opportunity.

Mr. Goad said that early next year he plans to announce project financing for the mine, which is expected to produce 2,000 metric tons of cobalt annually, as well as a refinery it plans to build in Saskatchewan estimated at a total cost of 650 million Canadian dollars ($516 million). He declined to give further details about the financing.

“You can draw a straight line from our mine in the Northwest Territories to the refinery in Saskatchewan and know that is being produced here,” Mr. Goad said. “When you get [refined] cobalt from China, you don’t know where it’s being sourced from.”

Miners outside of Canada are looking to cash in on demand for cobalt. Toronto-based Sherritt International has nickel-cobalt mines in Cuba and Madagascar that produce about 7,000 metric tons of cobalt, roughly 6% of the world’s total production.

“Market dynamics are right now in our favor with respect to cobalt,” said David Pathe, Sherritt’s chief executive, adding that the company is in a good position to source cobalt from mines free of conflict and labor violations.

First Cobalt sees potential in abandoned open-pit silver mines just outside Cobalt, Ontario, which is located approximately 300 miles north of Toronto and is named for its historic links with the metal. More than 50 million pounds of cobalt and 600 million ounces of silver were mined in the region before miners abandoned the area shortly following the World War II after exhausting the region’s silver mines.

Now, there is enough pink-hued oxidized cobalt shown in discarded rock piles in the 25,000 acres of land claimed by First Cobalt to conduct exploration drilling, said Trent Mell, president and chief executive of First Cobalt. Initial drilling activity shows enough potential for a high-grade cobalt-silver vein system in some mines, he said.

“Next year, we gotta drill the hell out of this thing,” Mr. Mell said.

Australia, home to the world’s second-biggest cobalt reserves, is seeing a rush of interest in projects still years from production as makers of batteries used in electric vehicles (EVs) seek supplies of the metal from a more costly but less risky source than top miner, the Democratic Republic of Congo.

As auto makers seek to develop greener cars, shares in Clean TeQ – owner of one of the largest cobalt deposits in Australia – have trebled this year. Minnows Cobalt Blue , Australian Mines, Artemis Resources and Aeon Metals have also seen shares surge.

On Friday, Aeon, developing a copper-cobalt project in Queensland, raised A$30 million ($23 million) from institutional investors.

Investor interest has surged further since Amnesty International reported as much as a fifth of the DRC’s cobalt was artisanally mined in dangerous conditions, involving women and children. Giants like Toyota and Volkswagen pledged last month to uphold ethical standards in buying cobalt and other minerals needed for EVs.

“We have 10 (battery making) firms in discussions,” said Australian Mines Managing Director Benjamin Bell, citing advanced talks with firms from Germany, Japan, China and South Korea to secure offtake for its Queensland Sconi project. Sconi is expected to produce 2,500 tonnes of cobalt and 17,500 tonnes of nickel annually after production starts in late 2019.

“The reason they are contact with us is they can see that cobalt out of the DRC is probably not going to be acceptable for their users over time,” Bell told Reuters.

Australia is rich in cobalt, mined as a by-product of copper and nickel, holding some 1.1 million tonnes of reserves or 15 percent of world supply. That’s less than a third of the DRC’s reserves, but around five times that of Canada, according to the U.S. Geological Survey. “To be honest, costs in Australia are much higher than DRC, but half our revenue is cobalt and half nickel. The battery makers are talking to us saying that they would take both,” Bell said.

Cobalt prices have gone ballistic in 2017 with the metal quoted on the LME touching $75,000 a tonne a week ago, a 127% surge year to date and a more than 20% jump just over the last month. Lithium carbonate prices began its run up two years ago, going from $6,100 per tonne to average above $20,000 a tonne in November this year.

On Friday luxury vehicle maker BMW said its needs for car-battery raw materials such as cobalt and lithium will grow 10-fold by 2025. Markus Duesmann, purchasing executive for the German marque, said the company is close to signing five and 10-year supply contracts.

BMW plans to offer 25 electrified vehicles by 2025, while VW is targeting a 300-model battery-powered lineup by 2030. “We’ve been intensively focusing on how to manage future cobalt supply for about a year now,” said Duesmann. “Before, it wasn’t clear just how quickly demand will accelerate.”

“By 2025, we’ll need up to 10 times as much of the battery raw materials than we do currently,” Duesmann said, noting that Munich-based BMW is set this year to sell a minimum 100,000 cars that are at least partly powered by the technology. “Today we are a leading manufacturer of electrified vehicles, so a 10-fold increase until 2025, for us, is enormous.”

Volkswagen will invest more than $40 billion in the next five years as part of a push into battery-powered vehicles and autonomous-driving systems. Daimler AG is spending 10 billion euros on 10 battery models by 2022. The boom in electric cars could more than quadruple demand for cobalt to in excess of 450,000 tons by 2030 from less than 100,000 tons last year, according to Bloomberg New Energy Finance.

“In the past three to four months, we’ve noticed that other manufacturers are seriously looking at cobalt supply,” said Duesmann. “It’s gotten more hectic and changed a lot over the past year, since so many more are looking for deals.”

Top cobalt producer Glencore said earlier this week it’s doubling its cobalt output to 63,000 tonnes by 2020. Annual production of the raw material is around 100,000 tonnes per annum with some 60% coming from the Democratic Republic of the Congo, intensifying supply fears. The Swiss-based miner and commodities traded commissioned a study to measure the impact the global shift away from internal combustion engines to an electric vehicle market would have on metal markets.

Based on an EV market share of less than 32% in 2030, forecast metal requirements are roughly 4.1m tonnes of additional copper (18% of 2016 supply). The move away from gasoline and diesel-powered vehicles would need 56% more nickel production or 1.1m tonnes compared to 2016 and 314,000 tonnes of cobalt, a fourfold increase from 2016 supply.

Almost 9,000 miles from the dusty Congo savanna, miners have hit on an entirely new source of cobalt — the rare mineral at the heart of the electric-car boom. And not only can they take coffee breaks, when they take a break, they can grab a donut at Tim Hortons.

Scientists working for American Manganese Inc., located in the suburbs of Vancouver, have developed a way to produce enough of the bluish-gray metal to power all the electric cars on the road today without drilling into the ground: by recycling faulty batteries.

It’s one of many technologies that entrepreneurs are patenting to prepare for a time when electric cars outnumber polluting petrol engines, turning the entire automotive supply chain upside down in the process. Instead of radiators, spark plugs and fuel injectors, the industry will need cheap sources of cobalt, copper and lithium.

“Mining batteries is much more profitable than mining the ground,” said Larry Reaugh, the president of American Manganese, which is patenting a method to draw out all of the metals in rechargeable batteries. “Rather than mining ore that’s 2 percent cobalt, you’re mining a battery that has 100 percent cobalt in it.”

Innovators like him have made so much progress that the likes of Tesla Inc. and Toyota Motor Corp. could count on recycling for 10 percent of their battery material needs through 2025 if companies roll out large schemes, according to Bloomberg New Energy Finance. That will ease pressure on lithium and cobalt, whose prices have more than doubled in the past year.

Finding new sources of cobalt, in particular, could be a game-changer because more than half of the relatively rare metal is sourced in the Democratic Republic of Congo. Not only is it one of the world’s poorest countries, doing business there is tough after decades of violence and corruption. Some artisanal mines still use child labor.

American Manganese wants to recycle the one in 10 lithium-ion batteries — used in everything from home electronics to smart phones — that fail quality-control tests and end up in hazardous-waste dumps. Doing this could yield as much as 4,000 tons of cobalt, according to Reaugh. If true, that’s equal to the material used in all electric vehicles on the road this year.

Add in the 311,000 metric tons of electric car batteries that Bloomberg New Energy Finance anticipates will stop working by 2025, and the potential trove of metals grows exponentially.

Recycling could have a “stabilizing effect” on battery metal prices, said George Heppel, a consultant at London-based commodity analysis company CRU Ltd.

After surging from $10 to $30 a pound in less than two years, cobalt’s price gains are poised to slow to $32 by 2021 and $41 by 2022, according to forecasts of Macquarie Group Ltd., one of the largest banks in commodities. Pressure on lithium, sourced mainly from Chilean brine lakes, will also abate as new supply starts getting produced in Argentina and Australia.

“Recycling will help to ease supply constraints that we see coming in the next couple of years,” said James Frith, energy storage analyst at Bloomberg New Energy Finance. “It will be a big deal mainly because you wouldn’t get all the wastage going into the ground.”

That doesn’t mean miners like Glencore Plc, the world’s top producer, will need to scale back production. As the number of electric cars on roads from Shanghai to Paris surges from 2 million now to 118 million vehicles by 2030, demand for cobalt will soar to 156,000 metric tons.

By then, cars that emit less greenhouse gas than combustion engines will be everywhere. The U.K. and France plan to outlaw the sale of petrol- and diesel-powered cars by 2040. China, which is tackling one of the world’s worst air pollution problems, aims for electric cars to make up 10 percent of new sales in two years.

To really live up to their Paris Agreement goals for mitigating global warming, though, governments need to ensure that car batteries — in some cases weighing more than 500 kilograms — don’t leave a big environmental footprint when they die. At the moment, some companies burn expired batteries, giving off a range of toxic gases. Others even bury them in the ground.

“We expect recycling will take off in 10 to 12 years when the first wave of electrified vehicles will near end of life,” said Marc Grynberg, the chief executive officer of Brussels-based Umicore, one of the few companies capable of recycling electric-car batteries at an industrial scale at a plant in Belgium.

Umicore has agreements with Tesla and Toyota to recycle their expired batteries in Europe. It uses smelting to recover minerals to make cathode materials — the part of the battery that houses the chemical reaction and produces the electron.

At American Manganese, Reaugh says he can extract metals at a cost of about 30 cents a pound and resell them to battery manufacturers for up to $20 a pound.

Electric car batteries are harder to recycle than the traditional lead-acid variety because they comprise many materials and manufacturers often have different ways of building them. This could be a hurdle to rolling out standardized recycling schemes, according to Gavin Montgomery, a director of global metals market research at Wood Mackenzie Ltd.

British tech startups Aceleron and Powervault Ltd. are getting around this by transforming dead car batteries into packs that can be used in homes to store renewable energy derived from rooftop solar panels.

“We are not worried about these winding up in landfills,” said Louis Shaffer, renewable energy segment manager of Europe, the Middle East and Africa at Eaton Industries Manufacturing GmbH, which makes batteries. “Today, there aren’t a lot of big recycling centers set up. But like other batteries, once there’s enough out there, it will be a very good business to be in.”

Umicore and American Manganese say they’ve already overcome a major hurdle — they can now directly recover lithium from batteries, something commercial smelting hasn’t always been able to do.

Reaugh, who spent four decades working for miners of precious and base metals in the Americas and China, is patenting a technique that removes the battery casing with robotics and soaks the cell in a chemical solution for 30 minutes to bring out the pure metals. He plans to raise $6 million next year to build a pilot plant near Vancouver.

“This is an immediate market,” he said.

Cobalt supply constraints, coupled with a never-before-seen boom in the adoption rate of electric vehicles (EV) across the globe, have conspired to create an ideal market in which a pure-play cobalt investment and participation vehicle’s profits can outpace its peers.

Cobalt, a critical ‘energy metal’ used to make lithium-ion batteries, has become the backbone of the ‘Fourth IndustrialRevolution’ and has seen a 150% price hike over the last 12 months, something Cobalt 27 Capital chairperson, director and CEO Anthony Milewski saw coming a long way off.

“We took a look at cobalt several years ago and worked on a strategy on how best to invest in the EV uprising. Based on the metal’s supply constraints, we expected cobalt would be one of the first movers among the basket of energy metals,” he stated in an interview with Mining Weekly Online.

Cobalt is critical to battery chemistries; the cathode represents about 26% of the battery’s cost and is important for improving energy density and performance.

Milewski explained that the rising cobalt price is mainly attributable to political instability in the Democratic Republic of Congo (DRC), which, with about 49% of the global cobalt reserves, is the world’s largest producer. Questions over ethical resource sourcing also swirl around the DRC’s cobaltsupply. Copper and nickel mine closures have further contributed to lower supply, where it is mainly produced as a by-product.

China has tight control over refined output, currently producing more than half of the world’s refined cobalt and 85% of cobalt oxides, salts and other chemicals.

Drawing on his previous involvement and successful ventures, such as creating the Uranium Participation Corporation, which invests substantially all of its funds raised through equity offerings in physical uranium – the primary objective being to profit off of the appreciation in the value of its uranium holdings – Milewski helped create Cobalt 27 to provide a pure-play investment vehicle along similar tenets.

Cobalt 27 has amassed physical cobalt holdings of just under 2 200 t, which is valued at about C$187-million – the largest cobalt holding outside of China. It is not a miner or explorer, and was created specifically to give institutions and retail investors the opportunity to invest directly in the metal, excluding the significant exploration and development risks miners have to deal with.

EXPANDING MARKET
So hot is investment demand in the cobalt space that, when Cobalt 27 made its debut on the TSX-V Exchange in June, it raised C$200-million – the largest initial public offering since 2012.

“Everybody was waiting for India’s gross domestic productgrowth to prop up the next commodity super cycle, but, at the end of the day, no one saw that the next super cycle is indeed being driven by the emerging EV market,” Milewski said.

According to him, lower battery costs and higher productivity will support EV adoption rates going forward, and he is forecasting the deployment of 140-million EVs by 2030, increasing to almost 900-million by 2050, compared with the estimated one-million today.

Milewski also pointed out that the Paris Declaration on Electro-Mobility and Climate Change has set a target to have 100-million EVs on the road by 2030, the construction of which will require about four times the current cobalt output.

Demand is expected to rise by a compounded annual growth rate (CAGR) of about 6.9% from 2016 to 2020, with cobaltdemand in lithium-ion batteries expected to grow at 11.7% CAGR from 2016 to 2022, Milewski said.

The advent of mobile electronic devices such as smartphonespresaged the dramatic rise in cobalt demand, using on average about 5 g to 20 g of the metal per smartphone. However, EVs scaled that demand exponentially, using about 4 kg to 14 kg per vehicle. Seventy-three per cent of EVs sold in 2016 contained cobalt-containing batteries, he said, while massive grid-connected energy storage systems provide another avenue of growth for an already constrained market.

Milewski advised that forecasts point toward EVs reaching cost parity with internal combustion engines by 2025, and roughly 140 new Tesla-sized gigafactories will be required by 2035 to satisfy battery demand, in an optimistic scenario.

Cobalt 27 has also accumulated cobalt royalties on seven exploration-stage properties containing cobalt, providing another level of value upside for its investors. Milewski favours streams and royalties over other commodity investments, because of the exposure to earnings and dividends, resource growth and production growth, while avoiding direct exposure to increasing capital, as well as operating and environmental costs.

According to Milewski, global cobalt supplies of a hair under 100 000 t entered deficit-territory during 2016 and the supply gap is expected to widen significantly going forward. High-grade cobalt prices on Wednesday escalated sharply to $31.07/lb – the highest in nine years.

“Even significant increases in cobalt demand would likely preclude any material increase in production in the current environment, as new copper and nickel supply has been challenged,” Milewski stated.

Importantly, Milewski stressed that Cobalt 27 boasts one of the lowest expense ratios among its peers at ~0.9%, outperforming the likes of Osisko Gold Royalties, Sandstorm Gold and AuRico Metals.

Since July, Cobalt 27’s equity has gained about 36% on the TSX-V, to change hands at about C$12.40 a share.

How does your mobile phone last for 12 hours on just one charge?

It’s the power of cobalt, along with several other energy metals, that keeps your lithium-ion battery running.

The only problem? Getting the metal from the source to your electronics is not an easy feat, and this makes for an extremely precarious supply chain for manufacturers.

WHAT IS COBALT?

Cobalt is a transition metal found between iron and nickel on the periodic table. It has a high melting point (1493°C) and retains its strength to a high temperature.

Similar to iron or nickel, cobalt is ferromagnetic. It can retain its magnetic properties to 1100°C, a higher temperature than any other material. Ferromagnetism is the strongest type of magneticism: it’s the only one that typically creates forces strong enough to be felt, and is responsible for the magnets encountered in everyday life.

These unique properties make the metal perfect for two specialized high-tech purposes: superalloys and battery cathodes.

Superalloys

High-performance alloys drive 18% of cobalt demand. The metal’s ability to withstand intense temperatures and conditions makes it perfect for use in:

• Turbine blades
• Jet engines
• Gas turbines
• Prosthetics
• Permanent magnets

Lithium-ion Batteries:

Batteries drives 49% of demand – and most of this comes from cobalt’s usage in lithium-ion battery cathodes:

The three most powerful cathode formulations for li-ion batteries all need cobalt. As a result, the metal is indispensable in many of today’s battery-powered devices.

• Mobile phones (LCO)
• Tesla Model S (NCA)
• Tesla Powerwall (NMC)
• Chevy Volt (NMC/LMO)

The Tesla Powerwall 2 uses approximately 7kg, and a Tesla Model S (90 kWh) uses approximately 22.5kg of the energy metal.

THE COBALT SUPPLY CHAIN

Cobalt production has gone almost straight up to meet demand, and production has more than doubled since the early 2000s.

But while the metal is desired, getting it is the hard part:

1. No native cobalt has ever been found in nature.

There are four widely-distributed ores that exist, but almost no cobalt is mined from them as a primary source.

2. Most cobalt production is mined as a by-product.

This means it is hard to expand production when more is needed.

3. Most production occurs in the DRC, a country with elevated supply risks:

(Source: CRU, estimated production for 2017, tonnes)

THE FUTURE OF COBALT SUPPLY

Companies like Tesla and Panasonic need reliable sources of the metal, and right now there aren’t many failsafes.

The U.S. hasn’t mined cobalt in significant volumes since 1971, and the USGS reports that the United States only has 301 tonnes of the metal stored in stockpiles.

The reality is that the DRC produces about half of all cobalt, and it also holds approximately 47% of all global reserves.

WHY IS THIS A CONCERN FOR END-USERS?

1. The DRC is one of the poorest, corrupt, and most coercive countries in the planet.

It ranks:

• 151st out of 159 countries in the Human Freedom Index
• 176th out of 188 countries on the Human Development Index
• 178th out of 184 countries in terms of GDP per capita ($455)
• 148th out of 169 countries in the Corruption Perceptions Index

2. The DRC has had more deaths from war since WWII than any other country on the planet.

Recent wars in the DRC:

• First Congo War (1996-1997) – A foreign invasion by Rwanda that overthrew the Mobutu regime.
• Second Congo War (1998-2003) – The bloodiest conflict in world history since WW2 with 5.4 million deaths.

3. Human Rights in Mining

The DRC government estimates that 20% of all cobalt production in the country comes from artisanal miners – independent workers who dig holes and mine ore without sophisticated mines or machinery.

There are at least 100,000 artisanal cobalt miners in the DRC, and UNICEF estimates that up to 40,000 children could be in the trade. Children can be as young as seven years old, and they can work up to 12 hrs with physically demanding work, earning $2 per day.

Meanwhile, Amnesty International alleges that Apple, Samsung, and Sony fail to do basic checks in making sure the metal in their supply chains did not come from child labor.

Most major companies have vowed that any such practices will not be tolerated in their supply chains.

OTHER SOURCES

Where will tomorrow’s supply come from, and will the role of the DRC eventually diminish? Will Tesla achieve its goal of a North American supply chain for its key metal inputs?

Mining exploration companies are already looking to regions like Ontario, Idaho, British Columbia, and the Northwest Territories to find tomorrow’s deposits:

Ontario: Ontario is one of the only places in the world where cobalt-primary mines that have existed. This camp is nearby the aptly named town of Cobalt, Ontario, which is located halfway between Sudbury – the world’s “Nickel Capital”, and Val-d’Or, one of the most famous gold camps in the world.

Idaho: Idaho is known as the “Gem State” while also being known for its silver camps in Couer D’Alene – but it has also been a cobalt producer in the past.

BC: The mountains of British Columbia are known for their rich gold, silver, copper, zinc, and met coal deposits. But cobalt often occurs with copper, and some mines in BC have produced cobalt in the past.

Northwest Territories: Cobalt can also be found up north, as the NWT becomes a more interesting mineral destination for companies. 160km from Yellowknife is a gold-cobalt-bismuth-copper deposit being developed.