Understanding the Challenges of Cobalt Investing

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Investing in metals and miners can be challenging, frustrating, and — when your patience pays off — very rewarding.

Metals and minerals are all commodities. And strictly from that perspective, their prices are based on supply and demand. Were that the only consideration when considering an investment, the whole process would be a lot more straightforward.

But where government regulations are concerned, nothing should be straightforward. And that’s impacting one metal critical to the alternative energy movement …

Cobalt: More Demand Than You Thought

You might not realize it, but cobalt is one of the most critical metals when it comes to modern battery technology. That’s because cobalt helps increase battery life and energy density (the amount of energy that can be stored in a battery).

Today, in a typical 400-pound EV battery, you’ll find a little over 13 pounds of lithium — and over 17.5 pounds of cobalt!

And demand for cobalt goes far beyond batteries. According to the U.S. Geological Survey, cobalt is used in everything from industrial to commercial to military applications.

“Superalloys, which are used to make parts for gas turbine engines, are another major use for cobalt. Cobalt is also used to make airbags in automobiles; catalysts for the petroleum and chemical industries; cemented carbides (also called hardmetals) and diamond tools; corrosion- and wear-resistant alloys; drying agents for paints, varnishes, and inks; dyes and pigments; ground coats for porcelain enamels; high-speed steels; magnetic recording media; magnets; and steel-belted radial tires,” the USGS survey noted.

Add these points up, and it’s easy to see that global demand for cobalt is massive.

Further, the USGS estimated that the total world reserves of cobalt amount to 7.6 million metric tons. That’s about one-third the amount of the world’s lithium reserves. And given that a typical EV battery today uses more cobalt than lithium, that poses a potentially massive supply challenge.

In light of that, battery makers have been adjusting the chemistry they use to make batteries, so that in the future they will require less cobalt. But that doesn’t reduce the demand. It only extends it further across all the applications that require it.

And where does all this cobalt come from?

The World’s Persona Non Grata Supplier

There are a couple of challenges when it comes to meeting that demand.

The first problem is that roughly 80-90 percent of cobalt is produced as a byproduct of copper and nickel. That means the economics of the copper or nickel mines have to be compelling if any cobalt is going to be produced at all.

There is, however, a technique called “artisanal” mining that can yield up to 10-15 times higher grade cobalt than typical industrial mining. (And roughly one-fifth of the supply today is produced via that technique.)

And that’s the second problem. “Artisanal” is a euphemism for mining by hand, and it is used exclusively in the Democratic Republic of Congo. That mining is done by impoverished locals under severe conditions that violate a slew of human rights — starting with horrifically unsafe conditions and spiraling down from there.

Yet despite the primitive and dangerous conditions, the DRC has been and continues to be the largest producer of cobalt in the world.

In 2022, it produced nearly 145,000 metric tons of cobalt. (Roughly 74 percent of the world’s supply that year.) Its closest competitor was Indonesia which produced just 9,454 metric tons. The rest of the world pales in comparison.

The Biden Administration’s Inflation Reduction Act is really a sizable giveaway program (roughly $360 billion) for businesses operating in the renewable energy sector. But it comes with some sizable restrictions as well.

According to a 2023 report from the Cobalt Institute: “The Act stipulates that a certain percentage of the value of critical minerals in a battery be mined or processed in the US or in a country with which it has a Free Trade Agreement (FTA), in order to qualify for the credits, as defined below. In addition, batteries must not contain components that are manufactured or assembled by a foreign entity of concern (FEOC) as well as critical minerals that are extracted, processed, or recycled by a FEOC …”

And you’ve probably guessed by now that the two largest producers of cobalt (the DRC and Indonesia), which represent nearly 80 percent of the mined cobalt in 2022, aren’t in compliance with the IRA’s rules.

Unfortunately, the rest of the world’s production falls woefully short of what’s needed to refine cobalt feedstock in the U.S. or any other compliant countries.

Obviously, the idea of supporting the DRC’s horrible mining practices is repugnant. But trying to balance the global needs for the metal against the largest sources of its production, it’s easy to see the math doesn’t work.

And that would likely make any reasonably successful domestic mine worth a very close look for investors.