Zambia Holds The Fate of Cobalt In Its Hands

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Some nations, it seems, have all the luck when it comes to controlling a major segment of the global economy.  You'll rarely read an article about oil without mention of Saudi Arabia, nor gold without Australia, nor corn without the United States.  Whenever you want information on cobalt -- which, most likely, isn't terribly often -- the first name on the list will usually be the Democratic Republic of the Congo, the war-torn region that exports almost as much cobalt as the rest of the world combined.  The last month, however, has bucked this particular trend not because of the DRC but because of major policy shifts in Zambia, a south African nation that has the milquetoast status of the 7th-largest cobalt producer on Earth.  Zambia cobalt can potentially rock the market due to a major dispute between the national government and the largest mining company in the country, Glencore.  After their stock has taken a beating on the market, Glencore wants to cut their losses and pull out of Zambia's cobalt mines.  That's put them squarely at odds with the heads of state, who want to preserve jobs above all else.  Whichever way the decision goes, odds suggest cobalt investors will likely win big.

Geology Games

Igneous sills occur when huge plums of magma within the Earth's core jettison up into the crust, producing mineral-rich circuits that miners love to excavate.  While South Africa enjoys more of these sills in their kimberlite formations than most other nations in the world, Zambia sits on the tail end of the continental plate and gets a good portion of such sills from the border of the rock formation.  This same plate drift will one day sever Africa in two (about fifty million years from now), pushing the northern section of the continent into a collision with Europe that will create mountains to rival the Himalayas.  For now, it trundles along at about a quarter of an inch per year, allowing ample time to collect its resources.  Zambia relies on these resources as a principle point of their economy, most notably copper, which accounts for two out of every three export dollars.  In theory, cobalt should fall far down the list of priorities for Zambia, as it generates less than 3% of their total export revenue, yet a 15% unemployment rate has convinced their politicians that every metal and every mine represents a priority.  That figure's not as bad as some historical precendents -- the nation had a staggering 50% unemployment in 2000 -- and the World Bank has named Zambia as one of the world's fastest economically reformed nations.  Even so, the country's economic planners want to keep the good times rolling.  To do so, they'll have to convince one of the largest mining entities on the planet to keep the lights on in the Mopani mines.

The Mopey Mopani

Cobalt hasn't fallen on hard times quite like sister metals iron or silver.  While its price peaked in the 2008 global financial crisis (like every other commodity under the sun), it quickly stabilized afterwards and has seen a small net growth in the past 52 weeks.  Even so, the companies that mine cobalt have felt the pinch of other assets.  Glencore, one of the world's largest mining conglomerates and a subsidiary of the tenth-largest corporation on Earth, decided that Zambia cobalt would face the wrath of the chopping block in an attempt to slash their debt by over twenty billion dollars.  The decision sent shock waves through the Zambian economy.  Zambian mining minister Christopher Yaluma told reporters that the government would seek negotiations with Glencore in order to keep the mines open, saying that they were "very concerned about retrenchments."  The move came at a harsh time since power shortages of half a billion megawatts (about a day's worth of electricity usage in the US) have crippled infrastructure and operations throughout Zambia, believed to come at a price tag of some $150 million in lost wages and productivity.  Zambia's largest mining union expressed a keen interest in the government negotiations, with spokesman Nkole Chishimba claiming that preventing the shutdowns would keep thousands of jobs in a country where the daily wage hovers at about $3.  Zambia will try to adjust their mining tax codes in order to keep the Glencore facilities operational, slashing the tax rate from 20% to 9% for above-ground mining and 6% for below-ground mining.  With both sides in desperate need of cash flow, the decision will put valuable pressure on cobalt at a time when the metal has done far too little for investors to take notice over the past four years.

  • The Takeaway: of the two scenarios to come out of the Zambia negotiations, both represent a positive outcome for investors with cobalt commodities in their portfolios.  Remember that the South African mining slowdown caused the price of platinum to spike when output fell to a mere trickle.  While Zambia is a secondary player on the global cobalt stage, the shutdown (or downsizing) of the Mopani mines would send shock waves through the market and drive the price upwards in a drastic fashion.  While the second scenario -- a continuation of mining operations at Mopani -- would not create quite so much growth for cobalt, the decision would come with cuts to workforce and budget that would likewise limit output.  While investors should hope for the former, they should buy cobalt in either case.
  • There appears to be no factors that would limit cobalt demand on the horizon.  Unlike the iron and copper that fueled the Chinese construction boom, cobalt has industrial, electrical, and biological applications, making it a vital part of the global economy.  Investors can effectively "invest and forget" about cobalt, since its value should rise steadily on the back of limited supply and steady demand.

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