Glencore is in the pound seats when it comes to supplying cobalt to the electric battery market and all the other transistor-powered tools of modern civilisation that rely on it. But there’s a snag. The cobalt is slap bang in the middle of the Congo. So who is really in the pound seats?
It is every mining firm’s dream: carving out a dominant position in an irreplaceable mineral where demand is stratospherically high. Happily for its shareholders, this is exactly what Glencore has managed to do in cobalt.
Glencore is expected to produce over a third – some 39,000 tonnes – of the estimated 110,000 tonnes of cobalt that will be produced globally this year, mainly as a by-product of its copper and nickel mining.
Cobalt is the most expensive material in the portable lithium-ion battery used in smartphones and electric vehicles (EVs), now representing about half of the market for the metal.
Research into substitution metals is underway, but so far nothing has been found that better extends battery life and prevents overheating. Handily, cobalt is also an essential metal for the defence industry.
A study Glencore commissioned to analyse what metals would be needed if EVs attained 30% market share by 2030 showed it would require an additional 4.1 million tonnes (Mt) of copper, 1.1Mt of nickel, and 314,000 tonnes of cobalt. Glencore plans to grow copper output 25% to 1.6Mt, nickel 30% to 142,000 tonnes, and cobalt 133% to 63,000 tonnes by 2020.
In the last two years, the price of cobalt has more than trebled in anticipation of shortages.
But there is one snag. Glencore’s cobalt mines are in the Democratic Republic of Congo (DRC), which has one of the world’s most arbitrary, corrupt and incompetent governments.
According to the latest Fraser Institute survey of the world’s best and worst mining jurisdictions, the DRC ranks fifth from the bottom. Some cobalt is filtering into the market from artisanal mining, where child labour is often used, leading to it being dubbed ‘the blood diamonds of batteries’.
Exane BNP Paribas said in a mid-May report that there was no way around the DRC for manufacturers of cars, iPhones and some defence equipment because the central African country holds 48% of the world’s cobalt reserves. It’s been described as Glencore’s “craft cobalt dilemma”.
The electric vehicle story had renewed investor interest in Glencore because of its exposure to battery metals such as copper, cobalt and nickel, but risks to supply, particularly of cobalt, were creating a dilemma for investors.
Glencore has spent most of this year trying to address investor concerns about three main issues in the DRC: a dispute with its fellow shareholder in Kamoto Copper Company (KCC), Gecamines, over recapitalisation; a dispute with DRC-based investor Dan Gertler over royalty payments; and a dramatic change in the DRC mining code.
Just as it seemed Glencore had allayed investors’ fears about the first two issues, the share price plunged again on news that the US Department of Justice (DOJ) had demanded documents relating to Glencore’s activities in Nigeria, the DRC and Venezuela from 2007 to 2018. The DOJ wants to check if Glencore is complying with the Foreign Corrupt Practices Act and US money laundering laws.
Some analysts feared that the disputes with Gecamines and Dan Gertler could have resulted in the expropriation of Glencore assets in the DRC and their transfer to Chinese ownership.
Glencore has invested close to $10bn in its African copper mines over the past few years. These are represented by its 100% of Mutanda Mining, 86.3% of Toronto-listed Katanga Mining, which holds 75% of KCC, and 73% of Mopani Copper Mines in Zambia.
It is no stranger to problems in southern African economies.
Last year, it suspended operations at Mopani, which employs thousands of people, in a stand-off over a sharp increase in electricity tariffs by Zambia’s Copperbelt Energy Corporation. This led to a compromise agreement. In South Africa, it put its Optimum coal mine into business rescue in 2015 after it failed to reach an agreement with Eskom over an uneconomic supply contract.
Although copper, cobalt and nickel have outperformed other commodities recently, Glencore actually produces and markets over 90 commodities over three business segments – metals and minerals, energy and agriculture. Yet it is the DRC exposure that has worried London-based investors the most. Some analysts feared that the disputes with Gecamines and Dan Gertler could have resulted in the expropriation of Glencore assets in the DRC and their transfer to Chinese ownership.
Chinese battery manufacturers have been big buyers of cobalt. China’s largest battery recycler and battery precursor material provider, GEM, recently signed a three-year deal to take one-third of Glencore’s cobalt production at floating spot market prices. China is already the dominant player in the global battery market. If it could corner cobalt supply, it would be in a very powerful position.
On 12 June, Glencore said Katanga Mining had agreed to settle the dispute with Gecamines over KCC’s capital deficiency, which arose because Glencore invested a significant amount in the operation in the form of debt to avoid diluting Gecamines’ 25% free carried interest.
Katanga will convert $5.6bn of KCC’s debt of $9bn into KCC shares, without affecting Gecamines’ stake. Katanga will also make payments of $150m and $41m to Gecamines to settle other issues. In return, Gecamines has agreed to drop all legal action.
One UK bank that is not permitted to be quoted by media said in a note the main impact of the Gecamines settlement was the once-off payments by Katanga and the financial impact on Glencore would be immaterial.
Paul Gait of AB Bernstein said this was a generally positive indicator for the DRC since it showed the government was not simply targeting expropriation and that commercial negotiations could have positive outcomes.
Glencore promptly followed up the Gecamines settlement by clearing up the uncertainty over the Dan Gertler lawsuit. Gertler’s companies, Ventora and African Horizons, were granted an injunction in the DRC affecting Mutanda and KCC for $695m and $2.28bn respectively, plus legal fees. The amounts were in respect of pre-existing royalty payments Glencore had not paid after the US government designated Gertler and affiliated companies as Specially Designated Nationals.
This meant it was illegal for US companies to have dealings with them. But if Glencore did not pay Gertler, he could have secured court relief that would have resulted in Glencore losing those two mines, which could have been transferred to Chinese owners or managers.
To resolve the issue, Glencore and Katanga will make these payments in non-US dollars, without involving US citizens, and Ventora has agreed to withdraw its injunction. Total royalties due are about $130m a year, which is not material to Glencore.
The bank described this as “a simple, well-measured solution”.
Changes to the DRC mining code affect not only Glencore, but also Randgold Resources and AngloGold Ashanti.
The new code lifts royalties on copper and cobalt from 2% of net revenue to 3.5% of gross revenue. Certain strategic minerals (which are likely to include cobalt) could attract royalties of up to 10%. It also provides for a windfall tax. More important, the DRC has nullified a ten-year stability clause enjoyed by the large miners that would have meant changes would have only affected them a decade later.
The DRC needs and recognises that it needs private investment. But changes to the royalty rate were likely to be permanent because the DRC, as one of the poorest countries in the world, needs revenues from mining.
The affected miners have said they would accept a progressive royalty rate, not a windfall tax, and a stability clause. Their last resort would be international arbitration, but that is a long-drawn-out process.
AB Bernstein’s Gait said in a note in mid-May he expected a pragmatic solution would ultimately be reached with the DRC government. The DRC needs and recognises that it needs private investment. But changes to the royalty rate were likely to be permanent because the DRC, as one of the poorest countries in the world, needs revenues from mining.
By mid-July Glencore’s shares were back to the same level that they started the year and, at 314p in London, were about 100p below their recent peak of 415p. But it was not all about the DRC. The shares are also influenced by copper prices, which have been knocked back by negative sentiment over trade wars in the last few months and fears that global growth is slowing.
It’s fair to say that the demand for cobalt, copper and nickel – the metals most important to EV batteries is here to stay with the likelihood of substitution relatively distant. The question is just how influential will EVs be on the market
Understanding that requires an understanding of China’s approach to EVs. According to Exane BNP Paribas, China’s leadership has made it clear that new energy vehicles must be one of the ten sectors where the country is leading by 2025 by means of ‘indigenous innovation’. This means China will develop its own technology and not depend on foreign assistance. Already there are indications it is highly serious about this approach.
Substitution of standard vehicles by EVs in the bus sector in China has been spectacular. In Shenzhen, for instance, a city with a population of 11.9 million, there has been complete conversion to EV buses by September last year. The focus is now also shifting towards EVs in passenger cars with policy-makers phasing out subsidies for standard vehicles and even hybrid vehicles, which are being viewed as transitory only while EV charging infrastructure is developed.
Globally, there are expected to be 6.9 million battery EVs in 2025, equal to 6.3% of global light vehicle sales, according to JP Morgan Cazenove research, although it differs from consensus on the degree of the take-up of EVs. Hybrid plug-in EVs will comprise a further 1.5 million sales or 1.4% of the total. This means battery EVs and their plug-in counterparts will have a 7.7% penetration rate in 2025, which compares to other estimates ranging between 10% to 14%.
“We forecast rapid growth of EVs, but wide regional dispersion tempers metals demand impact,” JP Morgan Cazenove said in a recent report. “Specifically, China is forecast to lift its EV share from 2.3% in 2017 to 12% by 2025, but its propensity for smaller battery packs with lower metal loadings is likely to mean its rapid EV growth has a lower correlation to metals demand growth than non-China OEMs (original equipment manufacturers),” it said.