Was in response to a comment in other thread, I started with a simple reply then went on and on, thought I may as well post a new thread.
Firstly I wouldn't bet my house or car on any spec stock and that doesn't change with the DRC, these are all specs producing zero cashflow.
However I do find investing in DRC specs to be sometimes similar to walking on hot coals, not easy or comfortable and a persistent burning sensation coupled with constant bombardment of hair raising articles in the press. I hope anyone with risk aversion also avoids the DRC, I will continue to stress this point, you need to be able to financially and mentally handle it.
Anyway this is for those who can deal with it:
Everyone is looking at the DRC as one big composite risk and through western eyes.
We should be looking at it from the Chinese cobalt chemical producers point of view.
They have billions of dollars of market capitalisation priced for growth dependent on securing more cobalt hydroxide feedstock and the only addressable source of near term supply is in the DRC.
To make matters more challenging for them the campaign against artisanal based supply has spooked end users, they will need to start acquiring deposits to not only grow but to replace existing artisanal supply. Huayou for example is largely using artisanal feed - an $11b company without a long term feedstock solution that meets larger end user requirements.
Further heating things up is that Gecamines is due to release audit results and commence re-negotiations with current JV operators. There is a lot of supply entangled in these JVs. The last time Gecamines had a re-negotation it went badly and the operation was shut down and now stuck in international arbitration (with Gecamines losing so far).
So not only is there pressure on the Chinese chem producers to secure feedstock for growth to support their lofty market caps (Huayou $11b last I checked), they ALSO need to replace current dependence on artisanal supply AND NOW they also need to think long and hard about Gecamines as a partner and diversifying from the colourful Mr Albert Yuma.
Nzuri has a drilled out deposit with 40KT of contained cobalt, that will be mined solely with mechanised means and will stand up to any supply chain audit that an Apple or Tesla requires and has no link or JV with Gecamines. And we own 85% currently which provides a control premium not available through Gecamines. Further to this they have ~300km2 of prospective mine series rocks on the same structures that host many other high grade deposits.
Is $77m market cap Nzuri really significant to a $11b Chinese chem producer? Well if you look at a scenario involving a tank leach / SXEW project, Nzuri could potentially output 4-5KT of cobalt hydroxide which is equivalent to roughly 20-25% of Huayou feedstock requirements for 10 years at current consumption rate, using just the resources defined (40Kt of cobalt metal, assuming just 25kt of contained resource is used) That is extremely significant.
Huayou recently spent equivalent to US$130m ($65m for 50%) on a deposit potentially containing 20KT of cobalt, not really drill defined on a tiny tenement with very little upside and guess what - the party they did they deal with is in a JV with Gecamines.
Now work backwards for 100% of a 40KT of cobalt, measured resource, huge exploration potential, control premium available, no Gecamines risk. The logical conclusion I have is that Huayou will take Nzuri out with an even more generous offer than received by the party in JV with Gecamines.
When though?
I think decision time will be when we receive the scoping study for a leaching project.
Nzuri board will need to either proceed with the simple low capex copper concentrate mine or go big on cobalt output.
The simple mine will see Huayou get zero cobalt supply from Kalongwe as the offtake will go nearby to Kolwezi where Huayou have no conversion facilities.
Logically Huayou will offer to enable Nzuri both financially and with grid power allocation to build the leaching project.
That process will be relatively straightforward - "Ok Huayou, we are going to pull the trigger on the simple low cost mine and send the product to a competitor unless you'd like to enable something more ambitious." And Huayou will need to make a decision, get the cobalt or not.
Now how will such a JV be negotiated, OR given all the factors I mentioned above where does the leverage lie in such a conversation?
It is in such a situation of leverage that a takeover at a decent price is possible. Nzuri have demonstrated they are self sufficient - they can develop the simple low capex mine, unless someone is giving them something more interesting, we can't be left out to hang and dry.
I hear someone saying "but wait - our market cap dictates our takeover premium" - nope, we have greedy private equity in complete control and it has to be worth it for them.
Doesn't matter what the retail market thinks. They could care less what you read in Bloomberg, the copper and cobalt market is looking lucrative and they have a really profitable mine they bought when copper was $2.20 and cobalt $10 at roughly 15c per share cost basis, why throw it away on a whim because retailers panicked when the DRC decided they could raise taxes and maintain FDI growth.
Back to Huayou - assuming they valued 20kt of cobalt at US$130m, with resource definition risk, with the encumberance of gecamines and no resource upside. I see no problem aiming for US$250m for double the contained cobalt, no resource definition risk, no gecamines and plenty of exploration upside.
This is with Cobalt heading to $40/lb BEFORE gecamines start their artful negotiations which will leave splatter marks all over the copper belt.
Where does the super profits tax figure here - it simply doesn't for me.
There's no discounting, we are all in the same basket, there's no alternative near term growth options for the chinese chem producers than inside these DRC tax brackets.
Sure some time in future Nickel price will start pumping and laterites will provide options (3-5 years out, with huge capex and execution complexity), and there are some small tonnage high arsenic deposits that can provide small supply, but this is where the big near term growth is, inside the walls of this mining code.
The supply needs and growth plan of the chinese chem producers outweigh the earnings impact of a potential additional 20% tax (you don't pay double tax, either super profits or regular).
Additionally as all the DRC copper belt deposits are both copper and cobalt and most copper FS are done at $3/lb or higher, we are not yet at a super tax eligible commodity price environment until $3.75 copper.
P.S What if we discover more cobalt resources in our drilling this year?
I think I need to reduce caffeine dosage.
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