US Cobalt Inc (CVE: USCO)
More often than not, investors remain oblivious to many of the most promising investment opportunities of the times. Unfortunately, even the most obvious of opportunities can get overshadowed by hot news stories or over-hyped achievements, leaving the most opportune investments unnoticed or ignored, even when the markets associated with that trade are ripping higher. (OTC: SCTFF) (USCO.V)
For some investors, too much time is spent focusing and investing on the media hype, placing stakes in the covered companies that often are involved in some six-degree financial association with the network or its affiliates. While those investors rely on the self-professed wisdom of the talking heads, the astute investors look elsewhere and work hard to find the emerging companies that are primed to deliver substantial gains. For the fast buck investor, following the smart investors take more time and diligence, so for the most, taking the natural approach and listening to paid commentary is their quickest means to compile investment ideas. But, while following the herd can lead to returns if the timing is right, it’s the investors that find and take advantage of emerging companies and markets that usually realize the greatest gains. And, that’s the style that my team follows.
The world we live in is evolving rapidly, and understanding where the direction is leading plays just as important of a role as knowing where we are standing today. In that respect, while returns get made from investments that focus on traditional commodities like gold, silver, and oil, they leave out the obvious that will undoubtedly play an integral role in the future of the worldwide economy. And, this multi-billion dollar opportunity is summarized in a single word: Cobalt.
Cobalt is a tradeable metals commodity as are the precious metals. However, unlike gold and silver, which have both industrial and aesthetic value, cobalt has quietly positioned itself to become one of the hottest and most sought after industrial use products of our generation. While understanding the significance of cobalt itself is important, investors also need to focus attention to where the opportunities to profit from cobalt-related investments exist. Finding potential in unknown or emerging companies, and then taking appropriate action to capitalize on that potential is vital to investment success. And, as it stands, investors have a unique and almost ground floor opportunity to seize an opportunity in the cobalt related trade that can potentially deliver superior investment results. That’s why when the time came to find a company that is well-positioned to take advantage of the spiking, global cobalt market, smart investors were led right into the corner of U.S. Cobalt Inc (USCO.V) (OTC: SCTFF).
Acting On Cobalt Opportunity Now
It’s no secret that I spend a good amount of my investment research time trying to find and introduce emerging companies that have positioned themselves to generate substantial growth in the near term. When the idea of investing in cobalt attracted my attention, I began to dig into the matter and found U.S. Cobalt, an emerging, and stable company that trades under ticker symbol USCO. From what the company has told the markets, many investors believe that USCO is not only undervalued but is simultaneously positioned to capitalize on and command a significant portion of the rising demand in the cobalt market.
Now, many may still be wondering: what is the primary use of Cobalt? Although most people may now know that the sought-after metal is a critical component in the making of rechargeable batteries utilized by the likes of Tesla, Apple, and Samsung, they may not be aware that cobalt demand is also growing in several additional high-profile industrial markets. The diversified cobalt demand story becomes more compelling because even though most investors are well aware of the growth in the EV market, few are paying enough attention to the enormous need of cobalt to serve the rechargeable battery market that serves a tremendous number of products in the technology and services sector. These industries will need tons of the metal just to keep pace with the current demand of new devices and products.
U.S. Cobalt Inc. has risen to the top of the focus list at many investment desks, not only because of its growing asset base, but because of the leadership team that is heading the charge toward capitalizing on this billion dollar market opportunity. Led by Wayne Tisdale, an incredibly successful investor who has delivered over $2.5 billion to investors through his recognition of undervalued opportunities, USCO is one of the few North American companies positioned to become a significant contributor and supplier of cobalt to the market. At USCO, recognizing the opportunity is only the first step; acting on that opportunity is the critical component. The progress that is gaining momentum at USCO originates from the fact that the leadership team is acutely aware of industry trends, the need to acquire and develop the right assets, and the necessity to surround themselves with a team of professionals to guide the company forward in an aggressive but orderly fashion.
Following alongside Wayne Tisdale may not be a bad idea, especially when investors account for his track record of success. In 2015, for instance, he helped start a company named Pure Energy to take advantage of the spiking lithium market that was then pricing the metal at roughly $5,000 per ton. Getting in early paid off, as lithium prices skyrocketed to over $23,000 per ton within the next two years, providing Pure Energy with substantial gains in share price. The spike in prices did more than just allow Pure Energy and its investors to reap the benefits – the price increases triggered a modern day rush to create new lithium companies, which drove prices well upwards of 1000% higher in some markets. The price of lithium went up for a couple of reasons. First, the mad dash to get into the market caused investors to speculate on increased price traction for the product. Second, and more applicable to the case of USCO, prices skyrocketed because investors understood the importance of the metal in the EV market. Now, USCO believes that a similar bull case, which follows the lithium dynamic, can be made for cobalt.
The good news for investors may be that the demand of industrial-grade cobalt may still be an under-the-radar proposition to many traders, keeping the metal’s prices relatively tame with increases of only 20%-30% during the past 6 months. While those gains are respectable, they remain in sharp contrast to what lithium did, and the USCO management team believes that significant profit potential is for the taking, which is why they are by taking swift advantage of a cobalt market that is expected to grow significantly during the next few decades. Not all investors are naive to the massive demand increases that the cobalt market is experiencing. Several investment funds, including Pala Investments and China’s Shanghai Chaos, have been active in the market, purchasing and storing the metal as both a speculative and market driven strategy, amassing an estimated 6,000 tons of cobalt during the previous five years that now has an estimated market value more than $300 million. Thus, while the cobalt market has been relatively tame regarding price increases, it is only a short matter of time before those that control the major stockpiles make it a media buzzword and start the bidding wars.
The USCO Difference
For those that do some research on the uses for cobalt, it’s apparent that the market is growing rapidly. But, it’s up to investors to discover which companies are best positioned to deliver substantial returns on investment. With an estimated 60% of the global cobalt supply coming from the Democratic Republic of Congo (DRC), investors need to understand that an undercurrent to that DRC supply chain finds itself mired in what numerous reports cite as “unethical” production. Child labor issues are only one aspect of the DRC product. Complaints of worker death and almost slave-like conditions are reported and documented by Sky News and The Washington Post. Similar to “blood diamonds’, the industry is beginning to take sharp notice of the inhumane treatment at these mines, and companies like USCO are attracting increased interest for the need of a viable alternative to purchasing DRC product. Despite higher prices, companies like Tesla, Panasonic, Renault, and other significant users of cobalt have no choice but to take notice of the market and focus their trade to companiesoutside the DRCwhich provide premium grade cobalt while at the same time using ethical mining practices. Perhaps with so much attention now being directed toward the labor practices in the DRC, companies may have little choice but to accept the fact that inexpensive cobalt produced at the detriment of human life is becoming less of an option. With activist groups scrutinizing the markets and business practices of both publicly traded and private companies, supply choices may become a public issue and a potential liability to companies that support unethical mining.
The USCO difference is far more robust than just ensuring fair labor practices. The company is buildingan asset baseto help address a market which is expected to be substantially larger than both solar and wind power alternatives. Noting that solar and wind have production and storage limitations depending on the climate conditions,lithium0ion batteriesare relatively immune from such disruptions. With cobalt being an essential component that allows batteries to store energy, its use in batteries is diversified with applications in the home, automobiles, electronics, and recreational markets. See, it’s not just EV manufacturers, it’s a vast market that has an almost limitless use. As the debate about the use of fossil fuel continues to take center stage on a global scale, the interest in rechargeable batteries continues to grow and gain market acceptance as a reliable and efficient alternative to hard burning fuels.
As an exploration company, USCO is intent on securing assets thatwill allow them to contribute production-grade cobalt to the market. Although the rechargeable battery market has now grabbed almost 50% of the market share for available cobalt, the metal is also essential in supporting the production of magnets, pigments, super-alloys, and use in pneumatic systems. The industrial attraction to cobalt is enhanced by the metal’s high melting point of over 1495°C, which makes it ideal for industrial applications due to its ability to retain strength at extreme temperatures. Hence, the demand and market for cobalt are expected to experience exponential growth due to the relatively limited supply of cobalt available. Certainly, the supply/demand issues bode well for USCO.
Although not provided much attention, demand for cobalt has already exploded, withover 100,000 tons mined and sold in 2015 to a current market that is approaching 200,000 tons of demand. Estimates point to continued demand growth, with anticipated demand to eclipse 500,000 tons within the next fifteen years. As investors know, demand spurs price, and when supply is limited, it often causes a market frenzy. Additionally, with no sign of a workaround when it comes to using cobalt in producing rechargeable batteries, USCO may be positioned to benefit for decades from their current production projects.
In fact, as the demand continues to rise, production is not keeping pace. Historically, cobalt forms alongside copper, and due to depressed copper markets, the mining operations have been slowed or even stopped entirely as production cost outweighs the market price. In turn, an estimated 10% of worldwide cobalt production is currently offline, making USCO’s positioneven more valuable.
USCO and Iron Creek
The need for cobalt is attracting worldwide attention, and production in the United States currently only accounts for less than 1% of global supply. Other than the DRC, which claims over 50% of the 2016 total production of 124,000 tons, the combined production from China, Canada, Russia, Australia, and the United States account for less than 24% of last year’s total output. Thus, noting the issues facing the DRC product, USCO’s opportunity is strengthened, and they are taking advantage of the opportunity in the Cobalt Belt, located in the United States.
Recognizing inherent production value, investors are looking to USCO’s Iron Creek Cobalt Project. . Located in Central Idaho, the USCO property spans more than 1600 acres of both patented and unpatented claims. Although historical claim assessments on the property should not be relied upon as currently accurate, Historical, non 43-101 compliant reports show the project has the potential to yield over 1.3 million tons of .59% cobalt. The USCO claims, located in the Idaho Cobalt Belt, were first discovered in 1940 and served as both an iron and copper producing mine. Explored and mined vigorously, the exploration area encompasses over 30,000 feet of deep diamond drilling and an additional 1,500 feet of completed underground drilling done previously.
USCO’s initial drill program is targeting high-grade underground cobalt which previous non 43-101 compliant reports indicatemore than one million tons of potential reserves grading .59%. The second region istargeting 229,000 tons ofsimilar grading material. Increasing the value, the historical grade of the projectis higher in quality compared to many other cobalt mining projects in North America.
The focus toward EV production is taking center stage. With companies like Tesla, Ford, and General Motors being forced to look for alternative sources of cobalt due to the controversies of DRC production, many are needing to make proactive decisions as to how to best secure cobalt with minimal production disruption. Tesla’s first Gigafactory, for instance, will require between 5,000 – 10,000 tons of cobalt annually once it begins to operate at full capacity. But, this cobalt requirement is only Tesla’s need, so USCO investors should embrace the fact that a significant number of additional manufacturers will be scrambling to ensure substantial cobalt supply. Because of the potential run for the metal, the cobalt market should see its deserved rise, especially if these same companies increase production or begin new projects that require the use of rechargeable battery powered vehicles or products. The lack of potential supply then begs the question, where will the supply originate?That is what USCO is banking upon.
As the USCO story unfolds, it’s apparent that USCO is well positioned.While the historic resource assessments of the Iron Creek project is reported to be roughly 1.3 million tons, USCO believes that the property may contain upwards of 10 million tons, which would make the market cap of USCO ridiculously low. In fact, even at the historical assessment level of an estimated 1.3 million tons, the current market cap of USCO is arguably significantly undervalued. Taking into account that USCO is fully funded to complete their entire 2017 exploration program, and the valuation becomes even more ridiculous. The mispricing is even more conspicuous when USCO gets compared to a company like eCobalt, who operates a property that is only twenty-fivemiles away from the Iron Creek project but sports a market cap of approximately $170 million, trading in a range of between 46 cents and $1.48 per share. For some reason, the markets have provided eCobalt with a substantial market cap premium that is roughly 385% higher than that of USCO. However, many believe that the valuation disparity will soon correct itself, and USCO will close the gap to the upside for a good reason.
USCO’s market cap of just $35 million appears to not factor inmuch value from the Iron Creek project, nor does the valuation pay attention to the strong current financial position of the company. For these reasons alone, this undervalued stock may soon find refuge in a valuation that recognizes the full potential of USCO to deliver on multiple fronts.
With just over 51 million shares outstanding, and a fully diluted count at approximately 63 million shares, USCO can generate substantial shareholder value once its production grade cobalt begins to reach the market. Insider ownership is high which aligns insider interest with that of the company’s shareholders, and also provides confidence that decisions made by management during production and expansion initiatives will get ratified with all shareholders in mind.
Mining For Value
While the current share price of USCO may reflect a micro-cap valuation, the company is in an entirely different class than most companies with similar market caps. Not only is the company managed by a remarkably successful executive team, but USCO has also capitalized on the perfect storm of opportunity. If the market provides a value similar to eCobalt, gains of more than 400% may be realized on that measure alone. Factor in historical reserve value and that multiple can be significantly higher. And, if the market wants to truly get into “valuation sync” with USCO, then it should apply value to some of the blue sky potentials which could ideally deliver a reserve of 10 million tons.
What is reassuring about USCO is that the demand for cobalt is not slowing down, and even if the company were to experience production delays, the value of their reserves would likely rise as supply remains tight. Investors should also keep an eye on the issues out of the DRC, as the inhumane work conditions continue to push companies toward suppliers with more ethical means of production. Just as the diamond industry underwent a significant shift in its supply chain due to unethical mining practices, investors tracking cobalt may experience the same change, which would be hugely beneficial to the market value at USCO based on the loss of DRC supply to the market. While those in the industry do not expect that the DRC will be completely shut out of the market, many expect that their market share will continue to shrink as more attention gets placed on the practices employed at many of their mining operations. Also important to note, if investors believe that North American competition is likely to emerge against USCO, think again. The likelihood for any company to get through the permit cycle within the next few years is extremely unlikely, which bolsters the market position of USCO even further.
Currently, USCO is small, but they may grow into a powerful player within the next twelve months. With drilling permits secure, and with cobalt demand set to skyrocket, this emerging company may provide investors with an opportunity that is hedged by consumer demand and technological reliance. Well managed and funded, USCO may very well become the North American star of cobalt production.
Disclaimer – I/We do not have any position in USCO nor plans to open a position within the next 72 hours.
This article was originally featured on CNA Finance.