The strategic decision of Cobalt Blue Holdings Ltd (ASX:COB, OTC:CBBHF) to focus on the development of a cobalt sulphate refinery at Kwinana in Western Australia is a logical step and makes sense, according to a research piece recently published by Blue Ocean Equities.
Blue Ocean makes this statement because “a merchant refinery arbitraging between relatively low MHP payabilities (feedstock from third parties) and higher cobalt sulphate payabilities for US IRA compliant battery-ready product would be a capital efficient, low technical risk and highly profitable proposition.
“We remain adamant that as the US seeks to reindustrialise itself via the IRA (Inflation Reduction Act), Australian mid-stream critical mineral producers are presented with the opportunity to leverage further into the EV battery value chain.”
Target (NYSE:TGT) price up to A$1.45
Blue Ocean maintains a ‘Buy’ recommendation for COB and has increased the target price to A$1.45 compared to the current share price of A$0.275, reflecting an implied return of around 346%.
Following are excerpts from the Blue Ocean Equities research report:
US Inflation Reduction Act - one year on
The US IRA was signed into law in August 2022 and has so far led to +US$110 billion of capital investments for clean energy manufacturing projects, including +US$70 billion on EVs and battery supply chains (14 new battery gigafactories).
The IRA is the largest climate spending package in history (may exceed US$1 trillion) and was designed to position the US as the global leader in clean energy by attracting capital to re-establish US supply chains.
The IRA relies on subsidies and tax incentives and, so far, has mainly benefited downstream and midstream industries (ie Tesla (NASDAQ:TSLA) and Panasonic).
Miners and processors (in FTA countries) mainly benefit from higher demand for critical minerals (higher price and funding support to develop projects) although the bifurcation of supply chains away from “foreign entities of concern” (incl. China) within a short period of time may eventually push some of the benefits towards miners.
The US has the scale and internal market to reindustrialise itself, however, it does not have the endowment of critical resources and depends on allies (FTA countries) for most critical minerals.
Summary of IRA incentives
This is Australia’s key advantage, particularly on cathode materials (lithium, nickel, cobalt, manganese) and there is potential to leverage further into the value chain if the Hiroshima Compact is ratified by the US Congress.
As such, if Australia is deemed a domestic source producer under the US Defence Production Act, it will effectively treat Australian production of battery materials (not only critical minerals) as if they were manufactured in the US.
This will allow more significant IRA benefits to flow to Australian companies as EV OEMs and LiB manufacturers scramble to secure IRA-compliant material, in turn capturing downstream economic benefits.
In addition, we understand the Albanese Government is preparing a package to provide further incentives for value-adding to critical minerals and supply chains associated with clean energy.
For COB, policy and market tailwinds are extremely favourable.
The current short-term cobalt price weakness is expected to be over before first production from the Kwinana refinery and BHCP.
COB’s strategic pivot to Kwinana Refinery
We believe that the pivot to developing a cobalt sulphate refinery at Kwinana ahead of BHCP makes sense due to:
We have updated our model to reflect the NPV of the Kwinana Refinery, have updated cobalt price assumptions (reversion to the LT average ahead of the refinery’s first production in CY25, and higher following the re-emergence of supply/demand deficits and premia for 'US IRA' compliant battery ready cobalt.
Following our model update, we have increased our price target from A$1.35 to A$1.45 per share, reflecting a 346% potential return.
Near-term catalysts
We expect several material milestones and catalysts over the next 6-12 months, including:
- Testwork on Flin Flon tailings and potential strategic agreement with Hudbay Minerals Inc.
- Testwork on multiple third-party samples of MHP for Kwinana Refinery and 1:50 scale-up within Broken Hill’s Cobalt Sulphate Demonstration Plant circuit.
- Ratification of Hiroshima Compact by US Congress effectively making Australia a domestic source under the US Defence Procurement Act.
- Australian response to US IRA.
- Completion of BHCP and Kwinana Refinery DFS.
- Outline of Kwinana Refinery JV with Japanese Strategic Partner, financing and FID.
We have updated our financial model to reflect:
- NPV of A$80 million, including a 40% risking factor, attributable to a notional 50% interest in a 3,000 tonnes per annum cobalt sulphate refinery in Kwinana which commences operations 2H CY25.
- We assume BHCP goes ahead as guided by management (construction CY25-CY26, commissioning and ramp up 2H CY26) and continue to assume that COB sells down 25% of the project (for 70% of NPV based on LT Co price) to assist in funding the capex associated with the mine and process plant (to MHP) at Broken Hill and the expansion (to 7.5ktpa) of the cobalt sulphate refinery in Kwinana.
- Updated cobalt pricing assumptions to reflect the longer than previously expected period of weak cobalt metal prices until 2H CY24.