Cobalt: Why You Should Invest Where Governments Are Spending

Overview

Jervois Global Limited is a mining and manufacturing company focused on nickel and cobalt. Led by CEO Bryce Crocker, Jervois has assembled a portfolio of assets across the nickel-cobalt supply chain, including a cobalt mine in the United States, a nickel-cobalt refinery in Brazil, and an advanced cobalt chemicals and powders facility in Finland.

Jervois' assets are strategically located in jurisdictions like the United States, Finland and Brazil that offer security of supply compared to riskier geographies. The company also benefits from strong government support in these countries, with funding and partnerships from agencies like the U.S. Department of Defense.

As the electric vehicle and lithium-ion battery industries boom, Jervois is positioned to capitalize through its long-standing relationships supplying cobalt chemicals to these end markets. After a period of challenges due to low cobalt prices and the pandemic, the company now aims to optimize its capital structure and operations to drive profitability and cash flow growth.

If Jervois executes on production expansion plans and a potential restart of its U.S. mine, its valuation could expand significantly from current levels that reflect primarily its early-stage assets. With its unique portfolio of geopolitically secure nickel and cobalt operations, Jervois Global merits consideration as a strategic investment in the critical minerals supply chain.

Key Assets

Jervois' portfolio comprises three key assets:

1. Idaho Cobalt Operations (ICO), United States: Jervois owns 100% of this cobalt mine in Idaho, which was nearing commissioning before operations were temporary suspended in 2023 due to low cobalt prices. The mine would be the only cobalt mine in the United States once operational. Jervois has invested $155 million in developing the underground mine and has stockpiled 30,000 tons of ore ready for processing.

2. São Miguel Paulista (SMP) Nickel-Cobalt Refinery, Brazil: Jervois owns 100% of this refinery near São Paulo which is the only nickel-cobalt refinery in Brazil and Latin America. The 25,000 ton per annum facility produces nickel and cobalt products including cut cathodes. It was shut in 2016 but Jervois plans to restart at 10,000 tons per year.

3. Kokkola Cobalt Refinery, Finland: Jervois' flagship operation, acquired from Freeport McMoRan, is the Western world's largest and lowest-cost cobalt refinery and chemicals facility. Jervois owns 6,250 tons of the 15,000 ton capacity and produces advanced cobalt chemicals and powders.

In addition, Jervois owns the Nico Young nickel-cobalt deposit in New South Wales, Australia which it plans to monetize.

Strategic Focus

Jervois has purposefully focused its business strategy on nickel and cobalt. CEO Bryce Crocker argues these are two of the most "critical" minerals demanded by major global industries and governments.

Cobalt is essential for lithium-ion batteries and superalloys used in jets and other high-performance applications. It has few substitutes. Nickel is also vital for batteries and stainless steel. Jervois believes having production assets outside higher-risk areas like Africa and Asia gives it a strategic advantage with customers looking to secure supply.

The company's vertical integration produces cobalt and nickel materials across the value chain, from mine concentrates to refined metals, chemicals and powders. This ensures exposure to different parts of the market and provides flexibility to meet changing demand.

Importantly, Jervois has shifted towards greater geographic diversification. Whereas it originally centered on the Australian Nico Young deposit, it now has global assets spreading risk while positioning Jervois in major economic regions.

Support from Governments

A key part of Jervois' investment case is the high level of government support it is receiving, underscoring the strategic value of its production assets.

In the United States, the Department of Defense (DOD) views cobalt as essential for defense systems and sees Jervois' ICO mine as critical to supply chain security. The DOD awarded $15 million to Jervois to drill and study future production potential at ICO. Jervois is also collaborating with the DOD on feasibility studies for a U.S. cobalt refinery.

In Finland, Jervois received a €12 million grant from the government agency Business Finland to expand the Kokkola cobalt refinery. This helps make Jervois the leading cobalt supplier in Europe.

Governments are clearly signalling through funding and partnerships that they consider Jervois' operations as strategically important. This security of support significantly derisks Jervois' investments.

Relationships with Customers

In addition to government backing, Jervois benefits from its well-established customer relationships in critical industries.

The company has supplied cobalt chemicals from its Kokkola refinery to lithium-ion battery manufacturers for over 25 years. It is entrenched in the electric vehicle supply chain that is projected to see dramatic growth in demand for cobalt in coming years.

Jervois' specialty cobalt powders are also sold into diverse industrial applications like biomedical devices, paints and petroleum catalysts. Its customer network provides market insights and stability through industry cycles.

Path to Profitability

In 2022, Jervois focused on shifting towards profitability and cash generation after a period of low cobalt prices, pandemic impacts, and cost pressures. Initiatives included:

• Returning the Kokkola refinery to positive EBITDA with Q2 2023 cash flow from operations of over $30 million. Stronger cobalt prices and working capital management drove results.
• Seeking partners for the São Miguel Paulista refinery in Brazil to leverage existing infrastructure and capture high nickel prices.
• Collaborating with investment banks on options to optimize capital structure across assets. This could include asset sales, joint ventures and spinoffs.

The company is also advancing studies and engineering for production expansion at Kokkola to leverage its low-cost position.

While remaining focused on profitability, Jervois continues to position for an eventual recovery in cobalt prices. It is disciplined about restarting ICO, and waiting for better economics, but nearby exploration results have been promising and the mine is on standby.

Investment Thesis

Jervois Global offers investors strategic exposure to critical minerals needed for the global transition to clean energy and rising defense spending. Its unique operational footprint and government relationships help de-risk its business model.

Near-term share price appreciation could be driven by:

• Improved financial performance at the Finnish refinery from higher cobalt prices, sales growth and cost optimization.
• Progress on partnering arrangements and capital structuring to crystallize value across assets.
• Advancement of growth projects, including the São Miguel refinery restart and expansion at Kokkola.
• Unique assets in geopolitically secure locations: Jervois' assets are located in the US, Finland, and Brazil, reducing geopolitical supply risk compared to competitors relying on Africa and Asia. The US mine will be the only cobalt mine in the country. The Brazilian refinery is the only one in Latin America.
• Strong support from governments: The US Department of Defense is providing $15 million in funding to drill at the Idaho cobalt mine, recognizing cobalt's critical role in technologies like batteries and defense. The company also received a €12 million grant from the Finnish government.
• Leveraged to electric vehicle growth: Through its advanced cobalt chemicals business in Finland, Jervois supplies cobalt to lithium-ion battery makers and has done so for over 25 years. Electric vehicle adoption will drive further demand.
• Cost improvements and production growth planned: The company aims to optimize operations and capital structure to drive profitability and cash flow growth. Potential expansion plans for the Finnish facility could boost production capacity.
• Attractive valuation: Jervois is currently valued based primarily on its early-stage assets. Successful execution at its cash-generating Finnish business and restart of the US mine could significantly re-rate the stock.

Jervois Global provides exposure to critical mineral supply chains needed for electric vehicle batteries and defense applications. Its operations in safe jurisdictions and relationships with governments help derisk the company. If Jervois executes production growth plans, its valuation may expand significantly. Longer-term fundamental upside exists if cobalt markets tighten and Jervois can restart the ICO mine to become the only U.S. cobalt producer.

Despite its position in strategic supply chains, Jervois trades at a discount to its potential. Successful execution could result in strong re-rating and shareholder returns. Jervois Global presents a compelling risk-adjusted opportunity in the critical minerals space. Its operations, relationships and potential make it a stock worth monitoring closely.