Milewski told Metal Bulletin that it’s still tricky to determine exactly which automotive firm might win in the race to develop commercial EVs. Yet China’s new dedication to improving the environment, plus its huge investment in personnel and the required capital in the electric mobility sector make it the likely leader, he added.
“I see a wholesale commitment inside China to EVs,” he said during an interview.
“It’s definitely happening; China is going to be the silicon valley of the EVs battery space. I don’t think anyone else will be even close over the course of the next decade,” he added.
Yet a drive to reduce pollution levels in China is not the only reason behind the country’s push in EVs. Milewski noted that the market has overlooked the magnitude of structural change within the automotive sector itself.
“When you talk to players in the auto industry they tell you that when they think of the future of the automobile, they’re thinking about autonomous vehicles, mobility as a service, and safety. When they think about these things, they need a technological platform, and that is being built into EVs,” he said.
“As the auto industry further subscribes to that world view, the basic materials that comprise the various components of that car – including cobalt, nickel, lithium and copper – become increasingly critical. I don’t believe that any of the automobile makers or any of the miners – even the smartest ones in the world – anticipated this on any level,” he added.
Even just two years ago, the use of EVs in the western world was still relatively limited, but data for 2017 shows an approximate 2% penetration rate, and month on month growth is continuing to expand, Milewski said.
“Today’s Wall Street consensus view is 15% penetration in 2025. If in fact what we’re seeing is an acceleration in the penetration rate, the numbers are staggering,” he added, noting that consumption of battery materials would be multiples of current levels.
“With cobalt, you could have demand for several hundred thousand more metric tonnes of cobalt. The only plausible explanation here is that people didn’t see it coming,” he told Metal Bulletin.
It’s not just EVs; energy storage is another source of demand for batteries in which cobalt is part of rising consumption trends.
At the end of last year, Elon Musk's giant lithium ion battery in South Australia responded to a power failure in just 140 milliseconds, its first test since installation as a back-up energy source. By comparison, a coal-fired plant would have taken 90 minutes.
“It was a complete change and put the need for these battery farms on the desk top of every single utility company in the world. Every single utility company I’ve spoken to since the Tesla event has said, ‘We’re thinking about it’,” Milewski said.
“I think there’s a fair argument by analysts that ultimately Tesla isn’t going to be an automobile maker, it’s going to be a battery maker. This is a transformational moment, certainly in my time as an investor,” he added.
Cobalt 27, of which Milewski is also chairman, is tapping into the electric mobility and energy storage revolution through its development into a pure-play cobalt company. The company owns over 2,982 tonnes of physical cobalt, which are stored in warehouses in Rotterdam, Antwerp and Baltimore, and is currently focused on growing a cobalt-focused portfolio of streams and royalties.
When Milewski recognized the burgeoning interest in autonomous vehicles and the changes in the energy sector, few people shared his view. After considering the various commodities that would be used in the car manufacture and energy storage industries, he opted for cobalt, “one of the most uniquely positioned commodities I’d ever looked at”.
“You had a market that was in balance with demand growing in aerospace and computer batteries, and then out of nowhere – in a market that no one really cared about even 18 months ago – a new source of demand came in and became real,” he said.
”If the auto-battery makers truly believed in cobalt 18 months ago they could have bought unlimited cobalt forever at $15,” he added.
Metal Bulletin’s benchmark high-grade cobalt price
has risen from a monthly average of $9.333-$11.333 per lb in December 2015 to $36.89-$37.94 per lb in January 2018, while its benchmark low-grade cobalt price
increased from a monthly average of $9.244-$11.317 per lb to $36.26-37.55 per lb over the same period.
While it's still unclear which automotive company will eventually emerge as the industry leader, Milewski said what he “had high conviction on, and remains highly convicted of, is that so long as you believe there’s going to be a winner and people are going to adopt this technology, then the basic materials that comprise the EV battery chain are all going to be winners in their own right and own time.”
After considering various approaches to investing in cobalt, Milewski was reminded of the last uranium cycle and the creation of Uranium Participation Corp (UPC) in 2005 by billionaire financier Eric Sprott. The Toronto-based firm invests at least 85% of the proceeds of its equity offerings in uranium and lends its uranium to third parties from time to time.
“Like all things you have to take an idea and innovate off it. I wanted to take UPC and combine it with (pure-play silver firm) Silver Wheaton – to take the physical component and combine it with royalties to scale the business,” he said.
Silver Wheaton, now known as Wheaton Precious Metals, is the world’s largest silver streaming firm.
With almost 3,000 tonnes of physical cobalt and a portfolio of seven cobalt royalties, which it has the right of first refusal to convert into streaming deals, Cobalt 27 is now looking to further scale its business. Its next phase of growth is set to be large streaming and royalty transactions.
“We’re working as hard as we can to achieve our business plan and our business plan says that this year we’d like to do one big net smelter royalty and one big stream. So we're doing everything that we can do to achieve that business plan,” Milewski added.
Buying more physical cobalt isn’t entirely out of the question. “If a strategic opportunity (to buy more cobalt) came along then we would absolutely consider it,” Milewski said, but stressing it would have to have scale, almost as a block trade, “because buying odds and ends is not interesting”.
The firm’s “next-year priority” is potential acquisitions or stakes in producing mines or exploration projects.
Mergers and acquisitions are something that the company might itself face in the future. The evolution of Cobalt 27 from a proxy for EV adoption at inception to a niche firm in the heart of the industrial side of the sector has already made it a takeover target for battery makers, its industry counterparties as well as car manufacturers, Milewski said.
“I think someday, somebody will make my shareholders an offer they can’t refuse. We’re here to make money and this is an investment vehicle so if ultimately that’s the outcome, I’m fine with that,” Milewski said.
“That was not something I had anticipated or planned for on day one. I was thinking about it from the perspective of an equity investor, creating leverage and so on, but what we’ve done is we’ve found ourselves very much in the industrial mix of this business in a way which I couldn’t even have imagined when I started down the path,” he added.
The firm doesn’t do business in the Democratic Republic of Congo (DRC), a conscious decision taken as a result of a number of increasingly highlighted concerns including political instability and child labour.
While dealing with known entities such as Glencore’s Katanga or Eurasian Resources Group’s Roan Tailings Reclamation (RTR) project in the DRC would not be a concern, Milewski said, Cobalt 27 sources the majority of its physical cobalt metal from Canada, Australia and Madagascar.
“There are definitely people you can do business with in DRC, but we’re offering an alternative,” he added.
“That said, 65% of world cobalt production comes from the DRC and the only two mines of note coming online in the immediate term are both there, which will concentrate global production to the 80% range in the DRC. If the world is going to use cobalt, it’s going to have to use cobalt from the DRC. There’s no way around that,” he noted.
Milewski predicted that 2018 will see Glencore and RTR enter into DRC supply deals with automakers.
“I predict in the next 12 months you’ll see RTR and Katanga do big offtake agreements. That will be great for the automakers who are the first movers to do so, because then they can have their supply for the next decade,” he told Metal Bulletin.
“Where it gets harder is once those deals are done, then what do you do? Do you as an automaker get yourself comfortable with certain types of artisanal mining? That’s very hard to do…I think the sole focus of auto companies today is securing supply from known producers,” he said.
But car firms’ investment in the mines themselves is less likely, both due to a lack of industry experience as well as intense internal competition for capital.
“Volkswagen wants its battery maker to have the cobalt, not itself, for example. The best place for automakers to be and where they want to be is in tripartite offtake scenarios where their partner of choice is getting the material they need for the next ten years,” he added.