The demand for cobalt in electric car batteries and portable electronic devices is a plus for this Canadian mining firm.
Once known primarily for nickel, the company now produces about 6% of the world’s cobalt as a by-product of its nickel mining. Over the past several years, higher cobalt prices have been reflected in rising share prices for the company. Its revenue was down in the last quarter, and it carries a high level of debt. Yet a further rise in cobalt prices is likely to spur fresh growth for this stock.
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SHERRITT INTERNATIONAL (Toronto symbol S; www.sherritt.com) is now focused on nickel/cobalt production, with operations in Cuba and Canada.
Cobalt is a crucial component of lithium-ion batteries, used to power electric vehicles as well as portable electronic devices. Over 66% of the cobalt used globally originates as a by-product from copper mining in the Democratic Republic of Congo (DRC). Most other cobalt production is a by-product of nickel mining.
Sherritt has nickel-cobalt mines in Cuba and Madagascar that produce about 7,000 metric tons of cobalt. That’s about 6% of the world’s production. Earlier in 2018, several investors approached Sherritt about purchasing a share of its cobalt production under a royalty-streaming deal. The company has indicated no interest in selling part of its cobalt production.
The price of cobalt surged from 2016 to mid-2018, before a surplus of cobalt chemicals pushed the price down. However, cobalt is up in the past month. A further rise in prices could spur the development of new mines and bring other operations out of mothballs. Rising demand would also accelerate efforts to produce other types of battery chemistries that do not require cobalt. Under those circumstances, Sherritt might still be encouraged to accept a royalty deal in the future.
Mining Stocks: Improved contributions from Madagascar nickel mine reduced losses
On the other hand, nickel prices are under pressure due to global trade/growth concerns. However, a proposal by Chinese stainless steel producer Tsingshan Group to build a big high-pressure acid-leach (HPAL) nickel plant in Indonesia has also held back prices.
Such a plant’s nickel output could be converted into nickel sulphate for use in electric vehicle (EV) batteries. If successful, that supply could undercut nickel prices in the expanding EV battery market. Still, many HPAL nickel projects have faced major operating issues. That could make Tsingshan Group’s project less of a threat to longer-term nickel prices.
In the three months ended September 30, 2018, Sherritt’s revenue fell 52.8%, to $29.9 million from $63.3 million. The decline was due to lower oil production in Cuba as its Veradaro West production contract with the Cuban government expired.
Despite the lower revenue, the company’s loss in the latest quarter dropped to $13.3 million, or $0.03 a share, from $69.5 million, or $0.24. That was due to much improved contributions from its holding in the Ambatovy nickel mine in Madagascar, off Africa’s east coast, and its Moa nickel joint venture in Cuba.
Sherritt’s long-term debt is still a high $686.0 million, or 4.1 times its currently depressed $164.8 million market cap. However, it holds cash of $207.1 million.
Recommendation in Stock Pickers Digest: Sherritt is a buy for aggressive investors.
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