- Rerouting material currently going to Chinese refineries, addresses many North American concerns related to reliance on China for supply chain continuity and trade issues.
- FCC is focussing on chemical business, which mitigates many risks to them growing as a company and shortens lead times
- Investors should be watching the flow sheet as FCC works to meet the specifications of German and North American auto companies.
- US government to build a rare earth processing facility to secure the domestic supply chain. Cobalt may be included.
Trent Mell has held various C-level positions in the Mining & Resource sector and participated in more than 100 transactions ranging from a few million to more than $10 billion dollars. Mell has vast experience in both precious and base metals and today he speaks to Lara Smith as the CEO of First Cobalt. First Cobalt is focused on building a diversified global portfolio of assets, leveraged to the cobalt industry. The Company has just released a positive definitive feasibility study on the 4th of May. The following is a transcript of the interview where we discuss some aspects of the study and the cobalt market outlook:
Lara Smith: Hi, I’m Lara Smith from Core Consultants. I’m sitting here with Trent Mell, from First Cobalt. How you doing, Trent?
Trent Mell: Very well. Good to see you again, Lara.
Lara Smith: Good to see you. And congratulations on the feasibility study put out yesterday.
Trent Mell: Thank you. This is the first interview I’ve done since putting that out about 24 hours ago. So nice to catch up with you.
Lara Smith: Oh, that is great. So I’ve got you in good time. But you had a live webinar conference, no?.
Trent Mell: We did. Yeah. We put the results out in the morning, we had a webinar, over 200 people participating from around the world, so it was a great, great attendance.
Lara Smith: No, that’s excellent. You’ve actually done an interesting thing. When I looked at it I was very interested to see your results, 25,000 tons and you’re deciding to toll treat, and you’ve actually negotiated a very high payable. Maybe we should explain what a payable is for the audience and then we can speak about that because well done on that. It’s very, very high.
Trent Mell: Well, and so what we did in this is we hired Benchmark Minerals to do a bit of a market study for us. And so the economics of treating cobalt, I mean, first we’ve got to look at the market, it’s largely, DRC, you know, two thirds of the cobalt’s coming out of the DRC in the copper belt there they’re producing cathode copper cathode that goes to market and then hydroxide largely finds its way to China.
And so the market we’re seeking to enter into, the cobalt sulfate market for electric vehicles or batteries generally, and that’s China, that’s 79% of the refining capacity is in China, the rest Japan and Finland, and so, yeah, what happens you produced the hydroxide and then you’re paid a percentage of the cobalt content and it ranges from about 59 to maybe 80% and it moves in tandem with the price of cobalt.
And so we made an assumption, long term assumption on cobalt of $25 a pound, and then we bumped up the payability, which moves in an equal fashion up to 70%, and then we applied our engineering and our network on an asset level basis to show what the refinery could do if it was, you know, if it was on par with the Chinese now, but you’re right, Lara is ultimately these asset level economics, we’re going to have to overlay another commercial construct. It is going to be a toll. And so we’re showing, you know, 39 million cash flow in year one, that’s going to be shared between us and Glencore, because the arrangement we have with them is that they are going to toll treat, we’ll earn a margin, we’ll push for upside exposure, and so these asset level economics just helps us sort of set the backdrop for how we’re going to proceed with our partner.
Lara Smith: Yeah. Okay. And why I was very surprised at the 70% payables is, as you quite correctly said, it moves in tandem with the cobalt price. And what we saw in the last sort of two years is we had the payables as high as 90% on hydroxide, which was amazing, and then that came down to 50% when the cobalt prices dipped. So what you’re actually saying is that you’re a long term cobalt bull and that you’ve actually managed to negotiate this and put this out of sight. So maybe just speak a little bit about where you see the cobalt market because that part says everything, and let’s go from there.
Trent Mell: Sure. Yeah, just to clarify, I think what we have here is really, it’s more of an economic model. So there’s a set of assumptions. So you know, if you look at Benchmark, whom we used for this study, they’ve got a long term cobalt price, I think it’s at 26.80 or so, so a little under $27 a pound, long term payability assumption of 70, so we scaled it back to 25. It’s low compared to today. Right? Fast Markets were under 17 today. And I think we even dipped under 16 for a bit. Not quite sure where it sits today. So, but we’re coming off a multiyear low and their projections, in fact, seven of the next nine years is even higher than their long term price.
So I think we’re in line with their projections, you know, scale back. We’re in line with MacQuarie, RBC, Barclay’s, and a few other long term price assessments. It’s a tough market, as you know, it’s a small market, so it’s a little bit volatile. But ultimately this is merely, it’s a straw man, it’s a straw man with some assumptions that Glencore was happy that we use, but the commercial, I guess we get a lot of catalysts now, now that we’ve got the economic analysis and the technical work done, we now need to do some optimizing because I think the economics here get better. And we need to understand precisely what that commercial contract is going to look like with Glencore and, to be a hundred percent transparent, it’s not going to be a payability factor, it’s going to be total rate. So the framework agreement we have with Glencore, and this is, this is the way we get out of the gate from junior to cashflow without diluting our shareholders, is they’ll provide all of the feed and then in exchange for a hundred percent of the capital, they get all of the offtake products. So it limits our upside but it also is a great eloquent way for us to get to cash flow on a debt basis. And, you know, within four to five years we have that paid off.
And so the market still has to wait and see what those economics are gonna look like.
Lara Smith: And Glencore, interestingly, they took Mutanda offline.
Trent Mell: Yeah, they did, they took Mutanda off and they bought the balance they didn’t own of Katanga, and so they’ve got two big commercial operations and that’s where the feeds going to come from.
And, and you know, I’ve told investors time and time again, as much as we may have issues with the DRC, and rightly so with respect to the geopolitical matters and issues of provenance, child labor and so forth, those issues don’t exist with Glencore. I mean, these are just a big commercial operation, not unlike anything you would see elsewhere around the world, and sourcing our material, they’re a great partner because there’s never any doubt if it’s coming from one single commercial operation and that our refinery is treating only their material from an end user perspective, you get pretty comfortable that we’re not going to jeopardize your brand by blending in material from a questionable source.
Lara Smith: Yeah, and actually I think that’s not very well understood by the market, unless you’re actually in the cobalt game, is that you can actually get specific brands.
It’s not like coal where everything gets mixed together, you can actually ask for Tenke material or Mutanda material, a very specific material which does not get blended. The issue comes more on the processing and sort of more downstream with not getting mixed up and that’s where there’s earned a bad name and a bad reputation for child labour and everything else. But, but even if it’s got DRC material, or you mix up with Glencore or something, that doesn’t mean that they don’t have a clean supply chain.
Trent Mell: That’s right. And that’s been essential for us, you know, eventually sure we’d like to have North American feed stock for our refinery, but you know, this continent is not, we’re not there yet. We’re still a few years away. Idaho looks extremely promising, as does the recycling market a few years out.
So until we have that, the next best thing we can do is to take material and reroute it. Stuff that’s currently going to China, bring it to North America. And there’s a lot of advantages. And for that reason, we’ve got the interest of governments on both sides of our border, Canada, US, because it addresses the critical minerals, it addresses, you know, Chinese trade concerns, trade war issues. And now with covid, there’s a real focus by our sector, the auto sector on trying to shorten the supply chain so that when borders shut down, you’re not closing your plant because of some other jurisdictions woes.
Lara Smith: Yeah. So, because of covid, I’m wondering, would you start to focus on America or is it really just a few years away?
Trent Mell: I guess we’re staking our reputation for the next year or two on the chemical side of the business. It’s an odd match, even though they’re complimentary. A chemicals business is very different from the mining side of the business. And so this is our nearest term opportunity to, you know, to graduate in terms of where we sit and the cap tables, the league tables, and it’s easy in so far as it’s you don’t have the risk of permitting because it’s a permitted facility. You don’t have the long lead capital blowups that you see in mining projects where you’re building roads and power lines. It’s already there. And thirdly, you don’t have that risk of a mine plan where until you pull it out of the ground, you don’t quite know how it’s going to work in your facility.
We’ve got two big established operations, we’ve got known specifications, and so we’re going to be taking a known existing product and running it through a hydrometallurgical facility. So the risk profile is low. The execution timeline, it’s relatively short. We can have production in six months if we move on a small scale and you know, another year for the big scale. And the confidence in the flow sheet that we still got to do more work, but I think that’s what investors should be watching. Can we meet the specifications of a German or North American auto company? And that’s going to take our focus for the next three months as well.
Lara Smith: Okay. So what are the next steps? You’ve mentioned processing and flow sheet. What else?
Trent Mell: Yeah, so you know, in our refinery, our feasibility study, the economics were great. Out of the gate, we’ve got you know, after tax IRR, a 53%, we’ve done an after tax NPV of 139 million Canadian, a 1.8 year payback and yet there are so many opportunities to improve this.
We limited ourselves to a 93% recovery, we’ll get over 95, and that was a function of a bench scale, single batch lab test. So recoveries alone give the economics a good boost on the NPV side. We also have a very expensive sodium treatment solution, we’re using a sodium re-agent.
And so we either need to switch out that re-agent or find newer, maybe somewhat novel technologies because it’s a $9 million capex on 56 and it’s roughly 70 cents of a 272 operating costs. And so there’s a bunch of optimizing that we’re going to do. We also ran our economic model on 11 years, even though our stage one dry stack tailings has 17 years, so we can probably stretch that out. So we’ll optimize. Number two, I would say we’ve got to sit down with Glencore and work up the commercial terms as we’ve already discussed. Related to that though is, there’s an underlying assumption, they provide a hundred percent of the capital we’ve got a dozen people under NDA that would be willing to co-fund with Glencore.
And that just reduces our reliance on a single partner, which I think is good for our interests. We’ve got talks going on with the government for a loan guarantee, which would lower our cost of capital. And then we’ve got all the work with the end users. Now that’s, Glencore is leading that, but we’re very much in the flow.
We’ve got specs from a half a dozen companies, and it’s a question, as you know, it’s a chem specialties business and the residual deleterious elements at a cobalt sulfate, the tolerance levels for each manufacturer is going to be slightly different. We can meet on all the specs we have. We need most of them, of any one spec, but we haven’t tried to target a particular spec of sort of company X, and that’s going to be the next stage as well.
So lots of catalysts. I want to get most of these things done over the next 60 to 90 days so they can come to the market with a go forward plan. And part of that go forward plan is going to be, while you aim for the outcome outlined in this DFS, there is going to be a startup scenario, a small scale pilot plant, a demonstration plant using existing permits and facilities.
And I haven’t described that in great detail yet because there are a lot of contingencies we’re still working on right now.
Lara Smith: Right. Okay. I thank you very much for that clarification. Maybe just getting back to North America, we’ve seen a lot of research and a lot of policies on America backing critical metals and wanting to back their domestic supply chain.
What do you feel needs to happen in America for them to compete and for it to be a viable jurisdiction and for them to actually secure their supply chain?
Trent Mell: Yeah. So there’s a couple of interesting things that have happened. Of course, late 2017 cobalt, among others, was added to the list of critical minerals by executive order. And that created a little bit of an impetus to turn their attention to what we’re going to do. But, you know, the decree alone doesn’t matter if you’re not going to put the meat on the bone. And so I’ve had a lot of engagements in DC, with all kinds of different agencies, whether they be regulatory, state department, white house advisors around how do you move that forward?
Now one step which we saw in rare earths was a further decree, it’s basically a defense procurement, a proclamation by the president on rare earth, which has led to government money going into rare earths. So you’ve got, I think three or four days ago, relating to mountain pass and the U S government trying to build a rare earth processing facility.
And so that’s step one and rare earths, you know, it’s medical devices, it’s aerospace, it’s military, it’s also EVs. So these are the batteries or the magnets rather. So if you take that to its logical conclusion, then you know, cobalt, they find its way there. And my advice to my feedback to the U S policymakers is there’s two ways you can help us.
One is obviously money is always hard to come by in this market. Number two is going to be regulatory regime. America is a fabulous place to run one. I know a darn hard place to permit a mine. And so let’s focus on permitting, let’s get ourselves de-risked because America has got a competitive advantage that I think is underappreciated, and that’s the Idaho cobalt belt.
You’ve got primary cobalt deposits, they’re high grade, you’ve got the issue of federal lands and a lot of these deposits, and I added an issue of arsenic that you need to contemplate in your flow sheet. But if we can focus on that and they’re starting to, well, maybe you’ll see production, but I do, I would say it’s probably two or three years away.
There’s basically ourselves and Jervois out of Australia that are the most active in that area.
Lara Smith: Okay. Thank you. Maybe just expand cause a lot of people, not all of us know what federal lands actually means. If we’re investors from outside of North America.
Trent Mell: Yes, no fair point. And so US land, if you have it, private land as we do, the permitting process is shorter cause you’re typically dealing with the state.
But, under US colonial days, as they were expanding westward jurisdiction for lands was assumed by either the BLM, the Bureau of Land Management or the US Forest Service. And so you’re under one or the other. And this current administration has made some big strides to lighten the regulatory burden and we’ve seen, look at, you know, the pebble deposit up in Alaska is, it’s controversial, but a classic where you’re going on for decades to try to permit.
Yeah. You don’t know if it’s going to take a year to five years or never, when you’re on federal land and forest service, I think we have some work to do, BLM is getting better, but the big focus is when you’re dealing and you got to go back to DC for a permit in Idaho. Yeah. That distance creates its own bureaucratic process that tends to grind things to a halt. There’s a big, big push to push the authority down to the state level and there’s still some work to be done there.
Lara Smith: Okay. Alright. Thank you very much for that. Anything else you want to add before we wrap it up?
Trent Mell: Yeah, look, I think this is an exciting time covid aside. We saw it in the UK, right? Auto sales were way down in March. Not surprisingly, EV sales were up, and so we’re going to take a pause here, but the EV revolution, as I call it, it’s not going away, and I think the timing of our stories that are 12, 18 months out aligns really well with what we’re seeing in the market.
So it’s a fun space and it’s a space where mining has a real difference, right? Blue skies in a cleaner environment and so I just invite your viewers to follow what we call the electric metals. It’s going to be a fun few years ahead.
Lara Smith: Yeah, and as one of our other speakers said, during covid, one good thing is that we saw a world without pollution.
Trent Mell: And I showed my kids some of the pictures of New Delhi and you know, and Shanghai and LA and I’m proud of that. I’m proud of that. What we’re doing here in the electrification space can realize that you don’t need a pandemic to get blue skies, we just got to change our ways and you know, it’s in front of us, it will happen. It’s just a question of how quickly we get there.
Lara Smith: Yeah. Trent, thank you so much. Best of luck with the next steps.
Trent Mell: I appreciate your time. Thank you.
Lara Smith: Take care.
