Hackett Advisors in the News

Is Cobalt the Next Big Commodity Trade?

Justin Rohrlich APR 20, 2010 1:00 PM|

       The promise of one tiny company, Geovic Mining, and the risks that come along with the battery play.

Shawn Hackett, president and CEO of Hackett Financial Advisors, a Florida-based firm with a focus on commodities and small-cap value stocks, says he has identified an undiscovered opportunity-- cobalt -- and a unique way to play it.

Hackett warns that it “contains a much greater degree of risk of loss than does [his] typical recommendation,” and is only for one’s “highest degree of risk capital.”

Hackett’s pick?

Geovic Mining (GVCM), which is currently trading at $0.75 a share.

Three main battery technologies -- lithium-ion, nickel-metal hydride, and nickel-cadmium -- are currently used in cell phones by companies like Nokia (NOK), computers by companies like Apple (AAPL), and in electric and hybrid cars by companies like Toyota (TM).

No one knows which battery technology will be the ultimate winner. What is known, however, is that all three of them require cobalt.

As Hackett points out, this has increased demand for cobalt from 30,000 tonnes in 1997 to 60,000 tonnes in 2007 and he expects it to “continue to grow as far as the eye can see,” especially as we’ve barely scratched the surface with demand for electric cars, particularly in China.

“Everyone knows that 4 billion people in Asia are not going to be able to drive gasoline-driven cars due to pollution limitations and resource limitations,” Hackett says. “Small electric/hybrid cars are going to play a huge global role in allowing greater mobility to the emerging countries in a way that is more economical and more sustainable for the long-term growth these countries seek, given future crude oil resource availability limitations.”

An electric car battery currently needs three to seven pounds of cobalt, which is quite a bit of metal. Hackett also notes that, in February, “the London Metals Exchange launched the first Cobalt futures contracts ever traded. This is a proxy for the growing importance of Cobalt in the world and the increased global investment appetite in the future of Cobalt demand.”

So, why Geovic Mining?

Currently, 40% of cobalt production comes from the Democratic Republic of Congo, one of the most dangerous and politically unstable countries in Africa, where the government “has been threatening to take over foreign cobalt mining operations.”

Hackett says “the world is anxious to find an abundant and reliable supply source for cobalt from a more stable region in Africa,” which is where Geovic comes in.

The company owns a 60% interest in the Nkamouna and Mada cobalt deposits, along with the government of Cameroon -- one of the most stable and foreign investment-friendly countries in Africa.

Most cobalt is extracted as a byproduct of copper and nickel mining operations. Geovic’s operation would be the world’s largest primary cobalt mine, guaranteeing greater quantities and more stable supply -- feasibility studies have shown there to be 1.5 billion pounds of cobalt in the ground, along with 4.3 billion pounds of nickel and 8.9 billion pounds of manganese, representing, at current prices, $12 billion worth of tradable commodities.

“What’s exciting to me about Geovic, is that the opportunity is right in front of you,” Hackett tells Minyanville. “A lot of times, the opportunity has passed you by, by the time you hear about it.”

Hackett reiterates that investors must “be cautious,” but adds that Geovic “owns an incredible asset,” unlike, say, an Internet startup.

“There’s just a tremendous amount of metal there, which lends a high degree of comfort you usually don’t get with so-called ‘junior miners,’ ” explains Hackett. “The risk is in the execution -- that they don’t raise enough capital, that there are infrastructure problems… but if Geovic can execute, it will be the largest primary cobalt producer in the world.”

This is a unique position in which to be, as companies like Rio Tinto (RTP), which mine cobalt secondarily from copper and nickel operations, respond to those markets, while a company like Geovic can respond directly to the demand for cobalt itself.

“I’ve always been a strong believer in owning industries that are once removed,” Hackett says. “People tend to focus on the ‘headline companies,’ like the high-profile battery and auto startups, not the secondary and tertiary outfits. That’s why the real opportunity will be to buy the cobalt companies while we’re still at the very beginning stages of the world’s appetite for cobalt.”

As for the economics involved, Hackett says Geovic’s operations look “outstanding.”

“I don’t have to bank on $20 or $15/pound cobalt prices,” Hackett explains. “Geovic is looking at somewhere between a $2-$5 net cost production. Cobalt’s been as high as $50/pound, and at the very, very, very worst of the economic meltdown, prices were hovering between $13-$15/pound. If cobalt prices stay in a range anywhere from $13-$50, this is going to be an insanely profitable mine.”

Hackett says there are two real triggers for 2010 -- a final feasibility study and securing full financing.

Hackett predicts that, with demand ready to skyrocket, there will be a “cobalt mania” at some point in the not-too-distant future.

However, in his opinion, those investors will be late to the game. “When people start going crazy on cobalt,” he says, “I’ll already be long gone.”

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