Cobalt in Idaho and an Endangered Species

June 11, 2008 07:00 PM

DETROIT () -- According to the USGS, the U.S. did not mine or refine any cobalt at all in 2007. This may change in the near future.

After seven years of regulatory and legal wrangling Idaho's Lemhi Pass district, a formerly active copper and gold mining region is coming back as a minor metals storehouse; it is, for example, going to be the location of America's first primary cobalt mine owned and operated by Formation Capital Corporation . I was told that FCO will shortly indicate its transformation from being an investor, in the development of, to being the operator of a mine by changing its name to Formation Metals Corporation, which will operate the company's Idaho Cobalt Project (ICP) in central Idaho west of the old mining town of Salmon.

It has been 7 long expensive years since Formation Capital began the legal and regulatory process to get its cobalt rich claims in Idaho's Lemhi Pass district approved for mining. During this time it has been putting its capital, of course, into surveying and proving the cobalt grades, resources, and reserves on its properties, but it has spent much more on obtaining regulatory approvals than on exploration, geological studies, and process developments combined.

In all fairness this is now the American way of starting up a mining business. First you do some prospecting and find and patent a claim or claims. Then you make the decision to begin climbing the regulatory, principally environmental, hurdles which must be overcome before you can lift one ounce of ore from the claim for commercial purposes. The process usually takes years and it costs a huge amount of money. The developer must first become an expert in the local flora, fauna, climate and aquifer that may, even remotely, be affected by his future mining operation including any effects that may occur up to 50 years after the operation begins or ends!

If you think the above environmental challenges are a hurdle, just think about what this chart entails.

When FCO started this project in 2001, cobalt was selling for nearly $10/lb. Between then and spring 2003, the price of cobalt fluctuated and got as low as $6.75/lb before it rallied back to just below $10.00/lb again where the above chart begins in the late spring of 2003.

Whatever FCO's cost of producing cobalt was at the beginning in 2001, the only sure bet would be that this cost would be increasing with time. I spoke at length with one of FCO's directors, Robert J. Quinn, who is a mining lawyer, and he told me that in the first few years of the regulatory maze the company's executives would take Pepto-Bismol by the 'railcar' as the price of cobalt would go up and then go down, as metals did, by fairly substantial amounts, as the projected costs of operation only went up.

Everyone was ecstatic he said, for example, when cobalt went to $25.00/lb in 2003, but their mood quickly changed as it then edged down to half of that within a year. The $25.00/lb price wasn't seen again until 2005, and it is only in the last year that the price has begun a steep ascent now standing at nearly $50.00/lb. The amount of Pepto-Bismol consumed has gone down substantially.

I think that high cobalt prices are now sustainable, because of several factors. Chief among these is the political risk of sourcing cobalt from the Democratic Republic of the Congo (DRC), the fact that even if you assume that the political risk of sourcing from the DRC is zero there are now restrictions on exporting cobalt bearing ores from the DRC-they must be refined there, if at all possible-and the Chinese have stepped into the market in the DRC and are intent on obtaining as much cobalt as they can by working with the government of the DRC in ways that western private companies cannot and with vast resources, which far exceed any that can be deployed by a private western, non-BRIC, company.

A related factor is Chinese domestic demand for cobalt, which is immense, and the final factor is the decline of the U.S. dollar against the currencies of China, Australia and Brazil all of which are consumers of cobalt in their domestic OEM heavy industries, which for those countries are growing even as those of the U.S. and Europe decline. Note that the U.S. domestic market is no longer the driver for demand of many minor metals, since the items which are critically dependent on those metals. Such as cobalt, are being made here in lesser numbers daily.

Note well also that each nickel metal hydride battery for a Toyota Prius, or a Honda Fit hybrid, requires 3 pounds of cobalt. Look at the USGS commodity summary for cobalt and you will note that 2007 global production of cobalt was down around 10% when compared with 2006. Production or, at least, export from the DRC was down 25% and this accounted for all of the global decline. This shows you how important it is that the U.S. has little influence in the DRC.

In any case the need for cobalt just for hybrid nickel metal hydride batteries in 2011 will be 2,250 tonnes of new production. The principle use of cobalt is for the manufacturing of superalloys for a variety of uses and cutting tools utilizing cobalt as a cement for carbides and diamonds. Nations which have OEM heavy industries making durable goods highly prize cobalt.

The great fear of investors in mining projects in the U.S. today is not the length of time it takes to go through regulatory approval, and the concomitant exposure during those periods of the project to the ups and downs of metal prices, it is rather the fact that at any time during the process activist environmentalist can enjoin further work on the project claiming that environmental studies by the companies were flawed, incomplete or fraudulent. Only after permits have been issued does the ability to arbitrarily enjoin mining projects become a high enough hurdle to lessen this financial risk.

FCO was therefore elated when it was able to issue a press release on last May 29, less than a month ago, that began as follows:

"Formation Capital Corporation (Formation, FCO-TSX,) is pleased to announce that its wholly owned subsidiary, Formation Capital Corporation, U.S. (the Company) is in receipt of copies of the Biological Opinions for its Idaho Cobalt Project (ICP) completed by National Oceanic and Atmospheric Administration's National Marine Fisheries Service (NMFS) and the U.S. Fish and Wildlife Service (USFW). The finalized reports conclude that the ICP, as proposed, is not likely to jeopardize the continued existence of Endangered Species Act listed or regionally sensitive species and is not likely to destroy or adversely modify designated critical habitats for those species."

There is one more endangered species, which the press release didn't mention. This is the species that was until recently in danger of being totally wiped out by activist environmentalists, mining lawyers who defend mining entrepreneurs and defend them by swimming against the political currents of their own profession. This species of mining lawyers was until recently thought to consist of individuals beyond their reproductive years and so headed for extinction. The director of FCO to whom I spoke, who is himself a mining lawyer, told me that last year in Denver there was a mining lawyers' defence bar conference at which it was noted that there were for the first time in perhaps a generation a substantial number of young lawyers.

Perhaps the U.S. Congress in its wisdom will see fit to add mining lawyers of the entrepreneurial defence bar to the list of species threatened by mindless predators who leap from the darkness with injunctions based on conspiracy theories and cult like attitudes of the evil of any environment other than that which only ever existed in their minds.

I note that the Lemhi Pass district has precious metals, cobalt, nickel, copper, rare earths and thorium. Perhaps the mining jobs and the wealth that will flow from there will make Idaho an even better place to live than it is now. At least it looks like one endangered species is already making a comeback there.

About the Author

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.