Jervois Mining (JRV) - Cobalt Player Embedding Itself Into US System

It has been several months since we last spoke to Bryce Crocker, CEO of Jervois Mining. This ASX-listed cobalt developer also provides 'significant nickel and copper exposure' to investors. The company's assets are spread across the world with projects in Australia, Uganda and the United States.

Matthew Gordon talks to Bryce Crocker, October 2020

Last time out, Crocker spoke candidly about how COVID-19 had crushed cobalt demand. China was down c.80% in Q1/20 and the West was down 40%-50% in Q2/20. Some companies were losing as much as "US$100M per day." There appeared to be no positive near-term scenario, and Crocker expected a massive "dislocation" of the supply chain across 2020, with many people not expecting it.

Is the outlook still the same? Some EV market commentators have previously argued that this reduction in demand is temporary, and is driven by short-term consumer cash flow issues rather than insidious changes to market fundamentals. With +$300M being spent on EV infrastructure around the world by automotive manufacturers, and with major subsidisation packages being actively discussed by various national governments, it seems to be a case of when, rather than if. 

With Statista forecasting that a 62% share of the global demand for cobalt will be attributable to the production of lithium-ion batteries in 2020, and with global demand for cobalt in batteries is expected to reach some 117Kt by 2025, the macro story remains intriguing. Moreover, recent articles in some major publications have argued that 5G technologies will also significantly bolster cobalt demand over the next decade, with George Heppel, an analyst at CRU, expecting cobalt demand for portable devices to rise to 73,000t by 2025 from 45,000t this year. With 75% of cobalt coming from the unstable and ethically-questionable Democratic Republic of Congo, cobalt developers and producers will look to benefit. 

So, having taken a brief look at the health of the battery metals space in general, let's hone in on the investment proposition that is Jervois Mining. The company's share price has been improving throughout much of 2020. Starting the year at A$0.22, it has travelled down to lows of A$0.13 in March, highs of A$0.36 in mid-August, and currently stands at A$0.30. It seems like the company has ridden out COVID-19 demand suppression and Crocker seemed encouraged by recent developments. 

Jervois Mining's primary focus is the development stage Idaho Cobalt Operations (ICO) and the acquisition of a mill in Brazil. Adding a degree of jurisdictional diversification, the Nico Young nickel deposit in Australia and a large package of prospective exploration tenements in Uganda - including the Kilembe Cobalt Project - reinforce the company's project portfolio. 

Crocker has a track record of working for major mining companies, and having come to Jervois via Glencore, this appears to have been an intriguing journey for him. One thing he does appear to have brought from Glencore is his sense of ambition: Jervois Mining sees itself as an integral part of the US critical minerals ecosystem. Juniors can often bite off more than they can chew, and by imitating a large company, there can be problematic consequences. However, Crocker believes things are different at Jervois. He has an aura of pragmatism to complement the company's ambition. Nico Young is a large nickel play, and the Kilembe Cobalt Project is solid, but he clearly recognises that they are better suited for a large company. As such, they have both been parked until ICO becomes a cash-generative asset. 

At the end of September, Jervois acquired the SMP Refinery in Brazil. This is a nickel and cobalt electrolytic refinery designed and constructed by Outotec that commenced operations in 1981. It has a production capacity of 25,000t of nickel and 2,000t of cobalt. Jervois will initially lease SMP from Companhia Brasileira de Alumínio (CBA), providing Jervois access to undertake a Feasibility Study for a restart. Subject to Jervois’ Early Termination Right up to September 2021, the lease shall continue until closing of Jervois’ acquisition of the SMP Refinery, which is subject to the satisfaction of usual condition precedents and is expected to occur by December 2021. The cost of $22.5M will be paid in tranches.

It is now clear exactly what Jervois Mining is shaping up to be. The company will use SMP to transform itself into a vertically integrated producer when ICO commences commercial production. Jervois will use SMP to refine concentrate from ICO, and return cobalt metal to the United States. The company intends to supply refined nickel and cobalt products to a wide range of industries including Li-ion EV batteries, cathode precursors, nickel and cobalt superalloys, and specialty stainless steels. 

The company also appears to have something of a USP, and Crocker is currently in Washington knocking on doors and spreading the word. He believes the company is uniquely primed to slot into the US critical minerals ecosystem that is currently being strategically created. Cobalt has been listed by the United States Department of the Interior as one of the 35 critical minerals. Crocker claims that his take on the list is mirrored by the United States Department of Defense: cobalt and rare earths are "right up there." 

Jervois Mining is aiming to get ICO into production by 2022, and if it achieves this, ICO will become the only producing cobalt asset in the entire United States. He states the level of political attention the company is receiving is "disproportionate" compared to if this was just a gold mining story. Does this mean that Jervois could provide more value for investors in the long run? It remains to be seen, but things appear to be shaping up nicely. Let's take a quick look at the BFS for ICO, which was released on the 29th of September:

• Jervois Mining announces BFS from its 100%-owned Idaho Cobalt Operations in the United States, based on processing 1,200tpd of mined cobalt-copper-gold ore.
• NPV(8%): $113.4M on pre-tax cash flows and $95.7 million on post-tax cash flows.
• Nominal IRR: 45.2% pre-tax and 40.6% post tax based on annual inflation of 2.5%.
• Updated Ore Reserve: 2.5Mt grading 0.55% Co, 0.80% Cu and 0.64g/t Au. This results in an approximate average annual contained production of 1,915Mt cobalt, 2,900Mt copper and 6,700oz gold, with operations commencing in Q2/22.
• At a cobalt price of $25.00/lbs, the average annual EBITDA in real terms is projected to be $54.8M over life of mine (LOM) at an operating EBITDA margin in excess of 50%.
• Forecast life of mine cash costs: $7.45/lbs payable cobalt on a post by-product basis (assuming copper and gold prices of $3.00/lbs and $1,750/oz respectively).
• Total project capital cost: $78.4M to produce a bulk concentrate.
• Post-tax payback of all capital: 2.8 years from technical completion.
• According to Jervois, 'ICO represents a low capital, high return investment and will be the only cobalt mine in the United States upon forecast commissioning in mid-2022. Operations are permitted and all infrastructure required for final construction of the mine and processing facilities is in place.'
• Moreover, Jervois states that 'Negotiations with potential lenders and off-take partners continue to advance; today’s announcement of Jervois’ agreement to acquire the Sao Miguel Paulista nickel and cobalt refinery in Brazil provides additional marketing flexibility and allows Jervois to further beneficiate ICO concentrate internally and deliver customers refined cobalt. This optionality enhances its current negotiations with customers on concentrate sales.'

If you would like to read more about Jervois Mining, check out the company's website.