The Karakul project represents a rare combination of an advanced-stage strategic metal deposit located in a pro-mining region that is also proximate to major markets. On top of which, the company behind it – the newly minted Global Cobalt Corporation (CVE:GCO), formerly known as Puget Ventures -- has secured regional and federal political support to provide the project with a firm footing, and most importantly, the commodity being mined, cobalt, enjoys both robust demand and stressed sources of supply. All of which makes it all the more significant that the current size and scale of the deposit -- which is open at depth and along strike -- qualify it as one of the largest known potential sources of primary cobalt outside of Africa.
The Karakul Cobalt Deposit, Global Cobalt’s flagship, is located in the Republic of Altai, part of the Russian Federation, sandwiched between China to the south and the edge of Siberia to the north. It is an area that Global Cobalt president and CEO Erin Chutter deems “a fascinating geological corner of the world,” one that has been shown to be highly prospective without, due to various quirks of history and geography, ever being fully capitalized upon.
Nonetheless, Karakul has the benefit of significant exploration work, which was carried out during the Soviet era, which, among other things, left in place 3 kilometres of workings tracing the mineralization along strike. Global Cobalt is also set to benefit from a treasure trove of data from some 24,000 metres of historical drilling.
Thus, Global Cobalt can step in and reap the benefits of what for practical purposes Chutter says is “under any definition an advanced project.”
The company will acquire up to 100 per cent of the large historic project, already known to boast in excess of 30,000 tonnes of cobalt and 66,000 tonnes of copper, on an earn-in basis linked to cumulative exploration and development expenditures.
The company’s near term focus will be to compile and interpret existing Russian data with an eye to planning a significant surface and underground core-drilling program to verify historical results, and from there to delineate the extent of mineralization in order to prepare an initial mineral resource statement, with an eye toward production.
Global Cobalt is also set to concurrently acquire a 100 per cent interest in four additional mineral resource projects collectively termed the Altai Sisters. These four properties - Kuruozek, Yantau, Toshtuozek and Olendzhular - are near the Karakul project, at a distance of about half a kilometre at one point, and according to Chutter have the potential to house deposits that are of related geology.
In common with the Karakul property, the Sisters are earn-in projects, with Global Cobalt acquiring up to 100 per cent of the interest in the resources on an accretive basis with ownership thresholds based on work programs and mineral resource tonnage.
Global Cobalt has arranged for a $4.67 million convertible loan with Imperial Mining Holding Limited, a privately held company with shareholders that include the European Bank for Reconstruction and Development (EBRD). This funding will help the company move toward a scoping/feasibility study for the mine, which would more than satisfy its commitment to a $7 million work program at the properties by October 2014 in order to accrue a 51 per cent interest.
Of even greater comfort to shareholders is the measure included in the partnership contract jokingly referred to as ‘the money back guarantee’, by the CEO, according to which, as part of its agreement with IMHL, should Global Cobalt decide not to continue with the earn-in programs, the company’s funds spent on exploration will be returned to it.
“It’s not something we focus on,” clarifies Chutter, “because we have every intention of moving forward with the 100 per cent earn-in.”
“It’s risk mitigation,” says Chutter of the earn-in terms. “It’s a risky world, and the more strategic you can be with your funding and deal structure, the better it is for your shareholders and your partners.”
And these partners include some big names – among them beyond those already mentioned are CITIC Merchant Bank, which provides relationships into CITIC Capital and other Chinese state-owned-enterprises (SOEs).
Particularly important for Global Cobalt is the CITIC group mining arm CITIC-Anhua. An MOU with CITIC-Anhua will, post definitive agreement, give it the exclusive right to nominate an EPC contractor for development of the project. CITIC-Anhua will arrange for full financing for the EPC contract, and, crucially, will also arrange for an off-take agreement for the product from the Karakul project with a major Chinese processor.
Another aspect of risk mitigation is the matter of the placement of the project -- a resource is only as good as the jurisdiction in which it is located. Of this factor, Chutter says, “We feel a glowing confidence. The Altai region is aggressively welcoming for investment. They recognize that without significant funds they wouldn’t be able to develop a mining industry.”
Citing the fact that last year Russia joined the World Trade Organization, Chutter says, “We’ve seen a real warming to foreign investment. We’re in the right region.”
Indeed, Global Cobalt seems to be spearheading the establishment of a new mining district in the area. The Russian Federation has not only approved the foreign bid for a strategic asset and granted an open pit permit but committed, along with the Altai Republic, to the investment of an amount equivalent to CDN$440 million for the improvement of transportation, power capacity and other elements of local infrastructure with Karakul as the pilot project for the program.
The resource is also well placed to access existing infrastructure – at 5 kilometres from the Mongolian border, the resource is 40 kilometres from the main road connecting Russian and Mongolia, which, critically is “the entry point into China as well,” Chutter says. The project is accessible by a four seasons road and is also nearby “a gas pipeline between Russia and China that goes through a very narrow section of the border. Though the area has not seen a lot of development, the basic infrastructure is in place.”
“To go into a region that’s already been well explored by geologists of the era, it’s like walking into a mining candy store. Being the first on the ground is a huge opportunity for us.”
The timing is fortuitous too, as Chutter points out cobalt has achieved new prominence as an element essential to the production of rechargeable batteries for uses ranging from mobile phones, laptops and tablets to hybrid vehicles, all high demand items.
It is a “material that straddles old economies and new,” she says, being used in such traditional applications as a hardener in the production of steel – thus military applications for high tensile steel accounts for 30 per cent of the market – while seeing immense growth in demand for use in the batteries that power modern technology - a “demand side [that] has grown from almost nothing to 34 per cent.”
Electric vehicles are another area of technology that requires cobalt, and as Chutter says, while a mobile phone uses 4 grams of cobalt, an electric car requires 6 kilograms of the metal, so should that technology ever take serious hold, “it would be a game changer.”
“But the big demand has been for batteries and the biggest demand is from consumer electronics.”
Perhaps even more important than the many uses of the ever more in-demand commodity is the matter of security of supply, and in this respect, the timing for Global Cobalt could hardly be better.
More than two thirds of the world’s supply of cobalt originates from the Democratic Republic of Congo, and recently that jurisdiction has taken the step of banning exports of cobalt concentrates.
The announcement of this policy change, dated April 5, gave companies 90 days to clear their stocks before the ban comes into force, meaning it will start to bite in July.
There is currently no reliable supply chain back-up.
All indications are that the new ban could have significant upward pressure on cobalt prices, Chutter says, as “a secure supply is a necessity,” and the move to curtail what had previously flowed out of the Democratic Republic of Congo has chilled the end user. And that end user?
“China has taken off as a pivotal market for cobalt. In particular, China accounts for more than 50 per cent of cobalt refining and it sources 90 per cent of that from the Congo, so there’s a strong appetite among refiners and end users for a new source of cobalt and they would like to get their hands on it before prices go through the roof.”
Once again, Global Cobalt comes up trumps in that the location of the company’s projects is cheek-by-jowl with China; that is, the source of the commodity is right next to its principal market.
It is, as Chutter says, a uniquely fortunate combination of circumstances, or as she describes it “a bit of a perfect storm”.
“We’ve got a commodity with a supply that is fundamentally stressed and demand that is fundamentally strong.
“The project is strong; it’s near roads; it’s next door to the [main] market for that commodity; and the partners we’re supported by are top drawer. The fundamentals of the project make so much sense. I feel sure there are significant opportunities for value growth.”