Has The Cobalt Price Hit Bottom?

January 21, 2009 06:00 PM

Analyst calls for $8 cobalt - Supply Destruction in Congo Continues

Market tops and market bottoms are often made by egregious analyst calls. Remember when Goldman Sachs said oil was going to $200 last year? That was the top.

Well, that has me thinking that BMO Nesbitt Burns in Canada may have set the bottom for cobalt, calling for a long-term price of $8 per pound in a January 2009 review.

Cobalt was trading at $20 per pound a couple years ago, spiked to $50/lb last year and is now sitting back just below $20/lb. Cobalt is a private market, and sales have been recorded as low as $14/lb.

But an $8 long term price is difficult to believe. Now, they did hedge themselves by forecasting a price of $16.50 this year and $20 in 2010. Significantly, the $16.50 price was unchanged from before October collapse in world financial markets.

Almost all - more than 95% - of cobalt is produced as a byproduct of copper or nickel. Nickel prices have dropped from $20/lb to $5, so new production is being delayed worldwide.

Copper prices have dropped from $4 per pound to $1.40. About two thirds of the expected increases in cobalt production over the next 3-4 years are projected to come from large copper projects in the Democratic Republic of the Congo, or DRC - new mines like Katanga, Camec and Kolwezi.

But the DRC is having huge economic and social problems. Civil war is breaking out again. Between that and low metal prices, one media outlet (http://www.articlebase.com/) reported that 45 of 75 copper and cobalt treatment facilities have shut down in Congo's southern Katanga Province mining heartland, which has been broadly spared the violence continuing in eastern Congo despite the official end of a 1998-2003 war.

Output forecasts for 2009, which had included major projects meant to come on-line during the year, have had to be revised.

Congo's mines ministry now expects 2009 copper exports of 365,000 tonnes, down from the pre-crash prediction of 410,000 tonnes, but still up from 2008's projected 289,169 tonnes due to expansions that have already come on-stream.

Cobalt exports are due to fare even worse with forecast 2009 output more than halved to 32,000 tonnes from a previous 65,000 tonne forecast and 25% from projected 2008 output of 42,449 tonnes.

The DRC was one of the last big areas of the world to jump on the bull market for copper bull market bandwagon. Billions of dollars in construction and development poured into the country, with mining promoters and operators telling themselves the political risk was waning; it was not that bad.

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