After soaring past $83,500 per metric ton (MT) in March 2018, cobalt prices began this year at $55,000 per MT. That's a big drop, but it still leaves cobalt as one of the most expensive metals on the market, and it could remain that way for the foreseeable future. Cobalt is an important component of lithium-ion battery chemistries used in on-the-move applications, such as electric vehicles, but the metal has limited production sources.
While the Northern Hemisphere contains 68% of the planet's land mass and most of its advanced economies, it's home to just 17% of the planet's cobalt production. Fifty-eight percent of the world's output comes from the Democratic Republic of Congo, which isn't exactly known for stability or a robust regulatory environment. The supply insecurity has forced some lithium-ion battery manufacturers to search for alternative materials and chemistries, but cobalt is likely to remain an important material for the 21st century in niche applications regardless.
Given the concentrated production profile, there aren't many great investment opportunities for individual investors. Nonetheless, my picks for the top two cobalt stocks to look at for 2019 are mining giant Glencore (OTC:GLCNF) and precious metals streamer Wheaton Precious Metals (NYSE: WPM).
The world's largest cobalt producer
Glencore is the world's largest miner of cobalt, responsible for some 25% of the planet's total output in 2017 -- and that was before it embarked on expansion plans that would triple production in the three-year period ending 2019. As a $53 billion company, it has the financial heft required to operate in the cobalt-rich, high-risk region of Katanga, Democratic Republic of Congo. That's come in handy recently.
The company's most recent guidance called for hitting the mark of 39,000 MT of cobalt output in 2018, but a revised estimate of just 57,000 MT in 2019. That included a sharp reduction of 8,000 MT due to delays ramping production at its expanded facility in Katanga that produces both copper and cobalt.
More worrisome, Glencore had to halt cobalt exports after finding uranium in the finished cobalt hydroxide product produced from a part of the Katanga facility. That's not as unusual as it sounds, as many metals are found together (gold and silver, gold and lead, copper and cobalt, nickel and cobalt, and the like), but it's an unacceptable impurity for battery customers. Separately, a Chinese battery customer has stopped purchasing cobalt from the miner after market prices dropped below those outlined in the three-year supply agreement.
Growing pains aside, Glencore thinks it can address the uranium impurity by adding an additional processing unit at Katanga and believes it can work out its contract issue. It expects to ramp cobalt production to 68,000 MT by 2021, representing 74% growth from 2018 levels. If it hits the mark, and selling prices average a conservative $40,000 MT in a few years, then cobalt production would generate $2.7 billion in annual revenue. That would cement its place as the undisputed leader of the global cobalt market.
A less risky play on cobalt
Wheaton Precious Metals is precious metals streaming company. That means it enters into "streaming" agreements with mining companies to purchase a set volume of the miner's production at a specific price. Such agreements provide certainty for mining companies, while the streamer forks over cash in exchange for taking on much less risk stemming from regulations, social unrest, or delays inherent to mine development. In other words, miners move earth around, streamers move numbers around.
After dealing exclusively in silver for years, Wheaton Precious Metals has gradually diversified into gold, palladium (an important platinum group metal used in catalytic converters for automobiles and certain types of fuel cells), and soon cobalt. The company was part of a group that invested $690 million in the Voisey Bay nickel mine in Canada. That will help mining giant Vale, the owner of the mine, complete a $1.7 billion expansion. When that's finished in 2021, the streamer will be able to purchase 950 MT of cobalt per year.
While that may not sound like much cobalt, especially compared to Glencore's output, it's important to remember that streaming agreements provide tremendous upside for Wheaton Precious Metals. For example, the business delivered a cash operating margin of 68% for its gold streaming efforts and 71% for silver purchases in the first nine months of 2018. That really adds up across 514,000 gold-equivalent ounces produced in that period.
Wheaton Precious Metals leaned on its high-margin business model to deliver $369 million in operating cash flow on just $597 million in revenue in the first nine months of 2018. If the company's cobalt stream materializes in 2021, selling prices average $40,000 per MT, and a cash operating margin of 70% is achieved, then the stream would be worth an additional $30 million in operating cash flow per year. That makes the streaming agreement -- announced at peak cobalt prices -- highly dependent on selling prices a few years from now to make the payback period worth the cost.
Check out the latest Wheaton Precious Metals earnings call transcript.
Should you really own cobalt stocks?
There are plenty of buzzy headlines about the opportunities in cobalt, but the reality is far more pedestrian. There simply aren't many ways for individual investors to inject exposure to cobalt into their portfolios, and the limited selection of cobalt stocks haven't been great investments.
Case in point: Glencore and Wheaton Precious Metals have delivered a five-year total return (share performance plus dividends) of negative 17% and negative 3%, respectively. By comparison, parking your money in the S&P 500 for the last five years would have earned you a total return of 56%. In other words, these may be two of the best cobalt stocks for 2019, but individual investors should put their hard-earned money elsewhere.