“The physical purchase expands our balance sheet in preparation for a stream. This is actually a key point of the transaction. We have reduced our cost of capital for streaming transactions,” chairman Anthony Milewski told Metal Bulletin at the time.
The purchase that equity vehicle Cobalt 27 made has had a tightening effect on the market and pushed cobalt prices higher.
Metal Bulletin assessed low-grade free market in-warehouse cobalt prices in a range of $32.85-36 on December 13, a nine-year high from the $48.25-49 per lb assessed in March 2008.
But any streaming deal would be new to the cobalt market, which is changing rapidly as a result of the boom in growth expectations for battery technology.
At the point that Cobalt 27 announces such a deal, or stream, it will demonstrate that it offers more than a speculative opportunity — and is not a vehicle of capital that actually serves no capitalist purpose.
Such a promise was there at the start.
From the outset the company said that the physical market was seeking ways to use it – to hedge against rising prices and tightening availability, for example.
A streaming deal could be structured in any number of ways.
Physical streaming deals are not unheard of in cobalt, but the kind of synthetic deal that Cobalt 27 might have in mind is more commonly associated with precious metals markets — and would mark a first in cobalt.
(It is worth noting that Justin Cochrane, the chief operating officer of Cobalt 27, has experience of structuring stream financing deals in the precious metals markets from his time at Sandstorm Gold.)
It is easy to imagine a scenario in which indebted nickel producers, making cobalt as a byproduct, would contract to sell some or all of their forward production to Cobalt 27 at a fixed or variable price in return for a cash advance that was sufficiently large enough to cut their debts or spend on delayed capital initiatives.
Cobalt 27 might then take on the downside risk, and share any upside in a staggered fashion with the producer, in a way that no bank would be willing to consider at an acceptable cost. A trader might take the risk, but would require the physical units.
By contrast, no material would necessarily change hands, which would suit producers that are protective of their agency.
Instead the producer and the investment firm could settle the difference between the floating and fixed price by invoice.
This would give the producer the capacity to fund large capex projects or pay down its borrowings while maintaining control of its units.
In facilitating this development Cobalt 27 would be adding another dimension to the market.
Those producers would be marginally strengthened since they would have a greater capacity and flexibility to monetize their planned future production, without actually giving up control of units — and this might be of significant value in and of itself to producers with an extensive network of customers.
At the same time it would keep the market open to traders since those producers would not have to lock up units in offtakes, such as the deal Vale did with Traxys.
Given the sophistication of the battery and energy storage technology that is underpinning the boom in the cobalt market, such usage of the capital markets would be apposite.
When Cobalt 27 increased the size of its balance sheet earlier this month, and the volume of cobalt metal it held, it did so with a specific aim: to enable it to carry out deals with physical producers.