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1、Global Research12 August 2019CobaltUBS Evidence Lab inside: Is it time to get bullish?Cobalt supply/ demand fundamentals improve: price risk now firmly to upside We update our cobalt (Co) supply forecasts to reflect the recent developments (eg Mutanda closure, slower Katanga ramp up etc) & use UBS E

2、vidence Lab satellite images to evaluate progress at the other major cobalt projects in the DRC. Our demand forecasts are broadly unchanged, with Electric Vehicle (EV) penetration still expected to reach 17% by 2025. We now expect the cobalt market to be in only a modest surplus in 2019-23 which we

3、believe can be absorbed by OEMs & battery-makers building inventory. As a result, we believe the risk/reward to the spot cobalt price is now firmly to the upside; we expect the cobalt price to increase 60% over the next 18 months, back to US$20/lb. We see further material upside in 2024/25 when the

4、market is set to move into a deficit (albeit we see potential for further DRC projects to fill the gap).DRC politics still risk to supply: currently there is an uneasy calm after election In our view, DRC politics remain a key risk to Co supply near & medium-term. Felix Tshisekedi became President i

5、n a contested election in Jan-19. He appointed Sylvestre Ilukamba as Prime Minister in May-19 (under a political agreement with former President Kabila) but is still to appoint a cabinet HYPERLINK /news/2019/05/dr-congo-president-tshisekedi-names-prime-minister-190520150351040.html (news). Mining co

6、mpanies, including GLEN, still dispute the new Mining Code but negotiations have not yet restarted.UBS Evidence Lab inside: new images of 2 key privately-owned cobalt projects UBS Evidence Lab satellite images improve our understanding of 2 major privately- owned Co projects: Mutoshi (+13kt) & Deziw

7、a (+10kt). Development work continues at both despite the fall in the Co price. Both projects look set to ramp up in H2-20 with Mutoshi slightly behind schedule. The latest production data from the DRC Ministry of Mines suggests RTR (+21kt) has had ramp up issues similar to Katanga (+30kt).Stocks: G

8、LEN & China Moly key producers; stocks down on weaker Co prices GLEN is the largest cobalt producer globally (29% mkt share) followed by China Moly (10%). GLEN has underperformed peers by 35% in 2019 due to its commodity mix (no iron ore; weak thermal coal/ Co prices), ongoing concerns over DOJ inve

9、stigation & DRC issues; it also suffered more as trade war concerns escalated due to its higher leverage & base metal exposure. We expect the market to remain sceptical on GLENs H2 volume recovery/ African turnaround/ 2020 coal price until visibility improves.MutandaTenke KatangaCDM RTREtoile / Usok

10、eMTMCoral Bay/ TaganitoTO BE PLACED ON CARE & MAINTENANCE AT END-19Figure 1: Largest cobalt producing mines globally, 2019e, kt051015202530Source: WoodMac, Darton, UBS estimates HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS AG London Branch. ANALYST CERTIFICAT

11、ION AND REQUIRED DISCLOSURES BEGIN ON PAGE 20. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this repor

12、t as only a single factor in making their investment decision.CobaltPIVOTAL QUESTIONSQ: Will cobalt supply contract in 2020 when Mutanda is closed?No. Glencore announced on 7-Aug that it will place Mutanda, the worlds largest cobalt mine, on care and maintenance at the end of 2019. We update our sup

13、ply forecasts and still expect DRC cobalt supply to lift by 7kt in 2019 with the closure of Mutanda (26kt) offset by the ramp up of Katanga (+13kt) & the other key copper/cobalt growth projects (Mutoshi, RTR, Deziwa, & Pumpi). We expect supply outside of the DRC to be broadly flat y/y in 2020.Q: Wil

14、l cobalt demand increase materially over the next 5 years?Yes. We forecast electric car penetration to reach 17% or 17m vehicles in 2025, and for cobalt demand to grow from 130kt in 2019 to 270kt in 2025 (13% CAGR). This assumes cobalt chemistry intensity in batteries for electric vehicles falls fro

15、m 0.20kg/kWh in 2018 to 0.15kg/kWh in 2025 with NCA, NCM622 & NCM811 share lifting from 33% in 2018 to 83% in 2025.Q: Will DRC politics result in material additional disruption?Probably not. The DRC is at a major inflection point politically with Felix Tshisekedi being elected President in Jan-19 af

16、ter 18 years of Kabila-rule. It seems the result has largely been accepted given no material increase in violence in the DRC so far in 2019. Kabila remains influential with his coalition dominating the national & provincial assemblies. The new Mining Code is expected to stay which creates some tensi

17、on with the key producers; however, this does not appear to have impacted the Chinese growth projects in the DRC. The fall in copper/ cobalt prices, higher consumables (eg acid), higher taxes, & oxide ore depletion are however materially impacting the industrys profitability and resulting in closure

18、s (eg Mutanda), project deferrals (inside DRC & elsewhere), & a reluctance to invest.UBS VIEWWe believe the cobalt price is at an inflection point and will increase 60% from the current level of US$12.6/lb (Metal Bulletin standard grade) over the next 3 years (to US$20/lb). In our opinion, the outlo

19、ok has materially improved following the announcement by Glencore that it will curtail Mutanda at the end of 2019. We do however note that there is significant inventory in the system (Glencore alone has 15-20kt in its Marketing and Industrial assets) which creates an overhang near-term though we ex

20、pect OEMs and battery makers to start to build inventories. This is slightly below the long-term average price since 1950 in real terms of US$25/lb, and a level which starts to incentivise cobalt projects to be built outside the DRC (albeit the economics also depends on the long-term nickel price).E

21、VIDENCEWe regularly track cobalt projects in the DRC, combining industry data with satellite imaging. We expect DRC mine supply to lift from 150kt in 2019 to 220kt in 2023 with the Big 4 projects alone (Katanga, RTR, Mutoshi, Deziwa) set to add 55kt by 2023. We expect Mutanda to restart in 2022/23.W

22、HATS PRICED IN?Cobalt prices have fallen materially from an overextended position and are now back to the low end of the trading range of 2012-15 when the market was in surplus. We now see upside risk to the cobalt price given the strong demand growth expected from EVs over the next 3-5 years. We al

23、so expect artisanal supply in the DRC to contract at current price levels.Figure 2: Cobalt supply demand outlook, ktFigure 3: Cobalt price since 2000, US$/lbSmall oversupply out to 2024 MB priceCobalt prices are down70% from peak in 2Q183006025050200150401003050020(50)10(100)200720092011201320152017

24、2019E2021E2023E2025EJan-00Jan-02Jan-04Jan-06Jan-08Jan-10Jan-12Jan-14Jan-16Jan-180SupplyDemandBalanceSource: UBS estimatesSource: Metal Bulletin, Bloomberg, Datastream, UBSCobalt market outlookWe have been cautious on the outlook for cobalt over the last 18 months HYPERLINK /shared/d2uXwdXqe9 (note)

25、as we identified a significant number of major growth projects being developed in the DRC and we expected the cobalt market to be materially oversupplied in 2018-23. As expected, this oversupply resulted in a sharp fall in the cobalt price since mid-2018 and prices are now back to the pre-bubble lev

26、el of $12-13/lb.Last week, Glencore announced that it is putting Mutanda, the largest cobalt mine in the world, on care and maintenance from the end of 2019 as it has become unprofitable due to lower cobalt/ copper prices & higher raw material costs; the operation is also suffering higher tax due to

27、 the new Mining Code in the DRC and is getting close to depleting the oxide reserve (so Glencore will need to invest in a roaster or concentrator to be able to process transitional or sulphide ores).In our opinion, this, combined with a slower ramp up of the key growth projects, materially improves

28、the outlook for cobalt prices over the next 18 months. We estimate there is now only a small oversupply in the cobalt market, and as a result we see potential for prices to increase materially (UBSe 60%) from the current depressed level over the next 18 months. We recognise there is an inventory ove

29、rhang but a large part of this is owned by Glencore and we expect it to be placed back in the market in a disciplined way. We also still expect OEMs and battery-makers to look to build cobalt inventories through their supply chain as they ramp up production to meet the growing EV demand over the nex

30、t few years.Figure 4: Cobalt market oversupplied until 2024, ktSmall oversupply out to 2024300We have been cautious due to the supply growth in the DRC but with the closure of Mutanda the cobalt market looks more balanced and we expect cobalt prices to increase materially from the current level25020

31、0150100500(50)2007200920112013201520172019E2021E2023E2025E(100)SupplyDemandBalanceSource: Industry data, UBS estimatesDRC cobalt supply developmentsWe set out below the latest updates with the key cobalt operations in the DRC (Katanga, Mutanda, RTR), using company data & other industry sources. We a

32、lso use fresh satellite images provided by UBS Evidence Lab to review progress at Shalinas Mutoshi project and CNMCs Deziwa project. These are the 3rd and 4th largest cobalt growth projects in the DRC (after Glencores Katanga and ERGs RTR projects); there is limited visibility on these as both are p

33、rivately owned.16DRCCobalt growth ramping upGTLEtoileLUBUMBASHISomakiOperating cobalt mineCobalt growth projectP5277RuashiCDMMKM6 MIKASLIKASIShituruMTM MJM5KamoyaDRCMutanda4DeziwaKOLWEZISICOMINES1Boss8 COMMUSTenke9PumpiRTRChengtun2 10Katanga3 MutoshiFigure 5: Overview of key DRC cobalt operations37T

34、enke21Boss10KOLWEZI 164MutandaDDRRCCKamoyaMTM MJMLIKASI5MKM98RuashiCDMOperating cobalt mineLUBUMBASHICobalt growth projectEtoileSomakiGTLCobalt growth ramping upSource: Google Maps, UBS#1 Mutanda to be placed on care & maintenanceIn Dec-18 at its annual Investor Update presentation, Glencore announc

35、ed that Mutandas production profile was under review (including the copper/ cobalt scheduling mix) following drilling results that identified faster than expected transition to sulphide ores. It confirmed it is also undertaking analysis to determine the economics of developing the sulphide resource

36、base taking into account capex/ opex and the regulatory regime. In Feb-19 with its FY18 results, Glencore confirmed that it has re-optimised the mine plan of Mutanda which reduces the copper production to 100kt with cobalt unchanged at 25ktpa. It also said the sulphide resource feasibility study wou

37、ld be completed by the end of 2019. At this time GLEN made a number of contractors & expatriate workers redundant HYPERLINK /news/articles/2019-02-08/glencore-is-said-to-cut-workers-at-congo-copper-and-cobalt-mine (link).In Aug-19 with its 1H19 results Glencore announced that Mutanda will be placed

38、on temporary care and maintenance by the end of 2019, reflecting its reduced economic viability in the current market environment, primarily in response to lower cobalt prices. We understand the mine is EBITDA break-even at current prices and cash flow negative. It will continue to run the acid plan

39、t and sell acid to third parties which will minimise the cost of care & maintenance. It confirmed that the sulphide project studies (either roaster or concentrator), which have the potential to extend operations for many years, continue and they expect to be able to provide an update at its Investor

40、 Day in December.Glencore indicated in 2018 that Mutanda was running out of oxide ore faster than expected and then in Aug-19 decided to place the mine on temporary care & maintenanceIn our cobalt supply model and Glencore model, we expect Mutanda to restart in 2022/23, initially consuming the remai

41、ning oxide ore and using the cash flow from this to finance the sulphide project. We expect Mutandas cobalt production to return to 24kt by 2024 when the demand for cobalt steps up with EVs. This will however depend on obtaining the necessary licences from the DRC government and agreeing a tax/ roya

42、lty structure which makes the project economic.#2 Katanga: ramp-up slower than expectedGlencore successfully restarted its Katanga mine in Dec-17 after completing the US$880m Whole Ore Leach project (which reduces the impact of power outages on production) and upgrading the cobalt circuit to be able

43、 to process 40ktpa. HYPERLINK /media/Files/K/Katanga-mining-v2/operations/reportsoperational/technical-report-march-2018.pdf (Mar-18 Technical Study). The mine had been placed on care & maintenance in Sept-15 HYPERLINK /media/news-releases/2015/2015-09-11.aspx (release) as it was cash flow negative

44、during the downcycle.As illustrated below, the ramp up was progressing well during 2018 with Katanga producing 4.6kt of cobalt in 4Q18. However, in Nov-18 Katanga announced it would temporarily halt the export & sales of cobalt until further notice as uranium was detected in the cobalt hydroxide at

45、higher levels than permitted for export HYPERLINK /media/news-releases/2018/2018-11-06.aspx (release). At the time of the suspension, Katanga confirmed it would continue to produce cobalt, initially building inventory and then selling the inventory after an ion-exchange plant had been constructed; i

46、t was also exploring other options to remove the uranium to mitigate the impact on sales. The ion-exchange plant will take 6 months to build (subject to necessary approvals) and cost US$25m. Other copper/ cobalt mines in the DRC Copperbelt have also had similar uranium issues.In Dec-18 at its Invest

47、or Update call, Glencore flagged there were plant ramp up issues & lower assumed cobalt recoveries, and trimmed its 2019 cobalt production guidance by 8kt (to 26kt). In Aug-19 with its 1H19 results, Glencore again cut 2019 cobalt production to 14kt; this followed the completion of an operational rev

48、iew of the business; Katanga now targets steady-state production in mid-21.Figure 6: Katanga quarterly cobalt production, ktWe expect Mutanda to restart in 2022/23Katanga successfully started to ramp up at end-17 but in Nov-18 cobalt sales were impacted by excessive levels of uranium and in 2019 pro

49、duction has been cut due to ramp up issues987654321Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 H2-19e 2020e2021e0Source: Katanga Mining, UBS estimatesFigure 7: Kata

50、nga cobalt production guidance, kt2019e2020e2021eDec-17 Investor Call343536Dec-18 Investor Call263238H1-19 results142731Source: Glencore, UBSFigure 8: Katanga Operational Review: Production plan: targeting annualised steady state towards mid-21Source: Glencore (Aug-19)Figure 9: Katanga operational r

51、eview: production plan targeting annualised steady state towards middle of 2021Source: Glencore (Aug-19)Figure 10: Katanga operational review: plan transformation pillarsSource: Glencore (Aug-19)#3 ERG RTR project: ramp up slower than expectedERG successfully commissioned Phase 1 (70kt copper, 14kt

52、cobalt) of the Metalkol Roan Tailings Reclamation (RTR) project which is adjacent to Katanga in the DRC in late 2018. According to the DRC Ministry of Mines the smelter produced 570t of copper cathode in Dec-18. RTR expects to reach initial annual run rates of 77kt copper & 14kt of cobalt in 2019 HY

53、PERLINK https:/eurasianresources.lu/en/pages/bdp/metalkol-rtr-the-roan-tailings-reclamation-project (link) with Phase 2 (105kt copper, 24kt cobalt) to follow. The timing of Phase 2 is unclear although we note ERG signed a 10-year electricity supply agreement for RTR in two phases: first 62MW until Q

54、2-19, second 78MW for the remainder of the contract HYPERLINK https:/www.erg.kz/en/news/1006 (release); this implies it was initially planning to move to Phase 2 sometime in H2-19 or thereafter.There are reports HYPERLINK /account/people (news) that the RTR plant was not operational in most of 1Q19

55、due to plant issues with its cobalt hydroxide having high uranium content (similar to Glencores issues at Katanga). This is consistent with DRC government export data which suggest there were no cobalt exports from Metalkol in 1Q19; it appears that these issues have been resolved with cobalt exports

56、 reported at4.2kt in 2Q19. There were also reports HYPERLINK https:/www.eurasianresources.lu/en/news/MetalBulletin%20-%20ERG%20resumes%20some%20cobalt%20metal%20production%20at (news) in Jun-19 that ERG had partially restarted the Chambishi smelter in Zambia using cobalt hydroxides from RTR as feeds

57、tock. This smelter was shut down in Feb-19 after ERG suspended production at its Boss mine in the DRC HYPERLINK /web/erg-will-suspend-copper-cobalt-output-congo-mine-month/ (news) as oxides reserves were almost depleted and the economics of the mine were impacted by the new DRC Mining Code & 5% impo

58、rt tax on concentrates imposed by the Zambian government. ERG is carrying out feasibility studies on how best to treat sulphide ores.The processing plant that ERG has refurbished consists of a standard SXEW plant with a capacity of 70ktpa copper and 10-14ktpa of cobalt in hydroxide. ERG is using hyd

59、raulic mining of the tailings and transporting the resultant ore slurry by pipeline to the plant. As illustrated below, recent satellite imagery of the RTR plant in 1H19 shows that the hydraulic mining of the Kingamyambo tailings has begun with the pipeline and pumping stations operational.The Kolwe

60、zi tailings project started commissioning in Q4-18 however reportedly operations were affected in Q1-19 but now appear to be up and running with 4kt of hydroxide exported in Q2 Metalkol Plant Pumping StationHydraulic mining Luilu Plant (GLEN) Kingamyambo Tailings Kingamyambo TailingsMusonoi Tailings