Written by Tim McLaughlin and Karen Roche of The Energy Report
with Gordon Monk:
In this exclusive interview with The Energy Report, Gordon Monk of Performance Capital Advisers discusses the worldwide movement toward green sources for energy production. Gordon explains how cobalt and lithium are linked to solar and wind power. He also talks about why he prefers primary producers of cobalt to those that obtain cobalt as a byproduct of other operations.
The Energy Report: Gordon, your focus these days is on moving from conventional energy to green energy. What particular sectors of green energy are you focused on?
Gordon Monk: There are a number of sectors that I'm interested in. There's been a tremendous move of capital to wind in recent years. Certainly solar is another area that's also gaining a lot of attention. One of the areas that I'm focused on right now would be hybrid electric vehicles, specifically the batteries containing cobalt.
TER: There have been some failures with batteries containing cobalt. Some reports indicate there is a small possibility of those batteries catching fire. Do you have some information that you could share with us on this topic?
GM: As I understand it, the problems associated with those batteries had to do with overheating. The chemistry was such that the batteries would release a small amount of oxygen, which then creates the chance of possible combustion. There's been a lot of technology focused on the problem. Modern batteries now are equipped with microchips that control the discharge conditions of batteries. There have also been additives to the batteries which have more or less solved the problem. With the problems being solved, the benefits of using those batteries far outweigh the negatives of the past.
TER: Do you see cobalt continuing to be used in these types of batteries?
GM: Oh, absolutely. A report by J.P. Morgan suggests that the current output of around 740,000 units is going to increase to 12.9 million by 2020. So I think that in itself is a pretty strong indication that cobalt is here to stay.
TER: You mentioned that wind and solar are really starting to gain some momentum. Are there some public companies that you're following in these areas?
GM: There's NaiKun Wind Energy Group Inc. (TSX.V:NKW) and Western Wind Energy (TSX.V:WND). Western Wind is already operating. They have a large wind farm in California. NaiKun is sort of in the development stage. They're looking at building a massive wind farm in the Hecate Strait in the waters off the coast of British Columbia. They're going through their approval process at this point. So those are two interesting ones that I've been following.
TER: What do you find interesting about them? Their potential?
GM: Yes, it falls into the whole movement to green. In recent years there's just a tremendous focus on the environment and the environmental problems associated with conventional energy. I can speak to oil and gas and coal, the usual culprits. I find solar and wind fascinating because they solve a lot of the problems associated with greenhouse gas emissions. The capital flows that are going into these areas suggest to me that they are here to stay. I think there are tremendous opportunities in the space.
TER: How is cobalt connected to solar and wind technologies?
GM: Cobalt plays a role in renewable solar panel technology and wind generation. Cobalt is also used as a super alloy in wind turbines.
TER: So you see increased demand for cobalt because of wind and solar technologies, in addition to batteries?
GM: Yes, because of the batteries and because of the green movement in general. Cobalt is not just found in batteries and that's something that's key. I think a lot people misunderstand that. Batteries currently account for around 26% of the market for cobalt. Super alloys, which include turbine blades and heat-resistant steel, account for another 23% to 25% of the market. It's underappreciated about what it can do.
TER: Are there any cobalt companies that you find interesting?
GM: I can comment to two primary cobalt producers. One of them is Formation Metals Inc. (TSX:FCO). The other one is Puget Ventures Inc. (TSX.V:PVS). I like them both for similar reasons. They both are socio-politically-operated in friendly areas. Puget is in Canada. Formation Metals has large projects in the States. When you look at where cobalt comes from nowadays, the majority of it comes from the Congo. Only about 15% comes from primary cobalt producers. So I think there's tremendous opportunity and I think there's going to be, not pressure, but perhaps incentive for investment in primary cobalt producers such as Puget and Formation.
TER: Are you inferring with your comments on Congo-based producers that investments in more mining-friendly countries will increase the value of these two particular companies?
GM: Well, yes, if you take a look at the relative size. These two companies, if you put them side by side, are very small as compared to some of the other operations out there. Having these operations in friendly territories is a bonus. Both of these operations are very small as compared to the companies operating in, let's call them, less-friendly geopolitical areas. What that presents to me is an opportunity in each of these companies for growth. Again, referencing that J.P. Morgan article, there's going to be just a tremendous demand that's going to be more and more important. What we need to see is more cobalt being produced in friendly areas. So that's why when I speak of those two companies I think there's tremendous potential.
You don't want to be operating or producing in an area that's prone to political unrest. You have a situation where such a large percentage of production occurs in one area that historically has had political problems. So if all of a sudden there's a problem, you have a worst-case scenario where 30% of production goes away. You've got yourself an issue.
TER: So it's diversification, in essence.
GM: That's exactly right.
TER: Cobalt is generally thought of as a byproduct of other operations. Is that correct?
GM: Yes, that's right. Cobalt comes as a byproduct from copper, as well as nickel, historically. As I said, only 15% of world production comes from pure cobalt. I'd like to see more, just because it won't be a slave to other metals in terms of output. So if we can have more primary cobalt producers, things are going to be a lot better from a stability standpoint.
TER: So Formation and Puget, in addition to being in friendly jurisdictions, also could be the low-cost provider.
GM: That's right.
TER: If the demand for cobalt continues to go up, do you see companies starting to produce cobalt exclusively?
GM: Yes and no. I think that's why the opportunity really lies with the primary cobalt producers. That could happen, but when you start taking a look at the percentages of cobalt that are coming out as a byproduct, I don't really see any scenario where they'd necessarily switch to extracting just to get the cobalt. I think the opportunities again lay with the primaries, the Formations and Pugets.
TER: Looking at green technology, what sort of timeframe do you see before things really start to get active?
GM: I think the argument can be made that things are already starting to get active in the area. You're starting to see orders in the billions of dollars for units for these hybrid electric vehicles, HEVs. So I think we're just getting started in terms of the space right now. It's a movement. This green movement is unstoppable at this point with all of the focus on the environmental issues.
I should also like to point out that I'm one of those who believe that cobalt has a relationship to the price of oil. We've seen oil moving up in recent times. That's an influence on cobalt and on these hybrid electric vehicles. That influence is from a substitution standpoint. That's only going to increase awareness and I think increase demand for substitutes.
TER: With the increasing amount of focus on the green technologies, what's the long-term impact going to be on conventional energy sources?
GM: That's a good question. I think conventional is here for a while. It's just so ingrained in the economies of the world. These movements to green, while they are tiny as compared to consumption, the movements themselves are significant enough where these kinds of metals-cobalt, lithium-they can't be ignored. Because when you start putting these on a chart, when you look at the demand perspective, it looks like a hockey stick. The demand is just going to be tremendous. It's going to take a long time to replace conventional, if ever. As long as this green movement is going on, and people start caring about the environment, there's going to be tremendous up pressure.
TER: Is that going to increase as governments start instituting more restrictions on conventional sources?
GM: I think so. It's not necessarily restrictions on conventional, but rather requirements on hybrid. There have been a number of initiatives in recent times where carbon emissions have to be cut by "x," or total energy production needs to come from green sources. So it's not like they're saying you have to stop. What they're saying is more that it is going to have to come from these other areas. So, yes, to a certain extent legislative action will play a role.
TER: Where does the investment opportunity lie for green technologies? Are these companies actually doing a lot of development, or is it that they're purchased by larger companies?
GM: You know that's a very interesting question. If I was a large multinational producer, if I was a Chevron, I'd be looking at replacing my traditional revenue models. If you've got the opportunity to do that by acquiring profitable companies in the green tech space I'd absolutely do that. You're going to see a lot of these companies start off as fledging green producers of energy and then be acquired by the larger companies as a way of those bigger companies augmenting traditional revenue models. So absolutely there's going to be lots of pick-ups.
TER: Are you seeing any opportunities in natural gas? Some people are saying that there simply isn't enough supply, while others insist there's really going to be an opportunity going forward.
GM: I'm one of those at this point that agree with the supply issues that you've mentioned. There's been technology, like horizontal fracking, which basically makes available a tremendous amount of natural gas from historical traditional sources. So it's going to take a while for the supply to clear out. That's sort of the short-term view. I think the long-term view is it's a cleaner source. We're going to continue to need power. I look at China as essentially going through the industrial revolution right now, and just barely scraping the surface of what total consumption ultimately will be there. So I don't think you can really discount any source certainly in the long run.
TER: Do you consider natural gas a green technology, or more of a conventional energy source?
GM: I look at it more as conventional. Just by virtue of it still being a fossil fuel.
TER: The LME recently issued its first warrants for cobalt. How do you think it's going to impact cobalt in general?
GM: I'm glad they did that to cobalt and to moly as well. It's going to be great for the companies to basically price hedge. You're able to lock in the price that you sell cobalt for. It smoothes the peaks and valleys of price fluctuations. It adds a level of transparency as well to the metal. Certainly from a tracking standpoint it's a whole lot easier to find it. It's a leveler. It's a hedger. I think it's a great development for cobalt.
TER: Lithium and cobalt are linked, of course, because of lithium-cobalt batteries. Lithium has been the hot story in the energy markets. Do you see cobalt creating the same kind of buzz?
GM: Yes. I think it's a matter of awareness. Absolutely lithium has had just a tremendous amount of buzz. There was a while there, when I was a broker, that you'd be seeing little lithium companies spreading up all over the place. The second they had a press release that there was lithium you'd see the price spike. I think that the same potential exists for cobalt, but you know, again, it's just about awareness. I don't think people understand how important cobalt is in HEVs, as well as the other uses, such as the super alloys that I mentioned. I think the awareness is going to catch up, and therein lays the opportunity.
TER: Are there any other energy sectors that you're keeping an eye on?
GM: Oil and gas is certainly an area that I've had some experience in. I think it's interesting that we're creeping up again in the price. We'll see if that backs off.
TER: Do you see oil at some point going much higher than it is right now, or getting to the $100 per barrel point again?
GM: It's funny how you start hearing those comments as it starts creeping up to $100. I don't know. I think it's due for probably a correction to the downside. I have trouble seeing why it is where it is right now.
TER: China is growing massively in their industrial revolution and requesting a lot of solar investments. What are some interesting plays for investors?
GM: The China question is interesting to me from an investor standpoint. A lot of the investments you see going on in China involve a lot of private companies being formed, private companies raising money in the solar space. Obviously investors can't participate in that. Again, it's almost a cobalt story because these technologies also require large amounts of batteries, and by extension, cobalt. So it's difficult perhaps to play it directly, but again it comes back to cobalt.
TER: Critics complain that a lot of these green technologies, such as solar and wind energy, are only surviving because of government subsidies. Do you agree with that? What happens if those government subsidies are removed?
GM: Well, it's a technology question, isn't it? It's taken government subsidies to get them to where they are right now, and subsidies are also driving technologies to make them more efficient, which then brings the cost down. It's a profitability paradigm. We've already seen tremendous developments in alternative energies, which are now almost as cost effective when you compare them against the price of, let's say, oil. We're going to get to a point where these things are profitable on their own, if they aren't already. Aside from that there's this global movement towards green. People want to stop killing the planet, to put it bluntly. So I think all of these technologies that I referenced are here to stay.
TER: Gordon, we appreciate your input.
1) Tim McLaughlin of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None
2) The following company mentioned in the interview is a sponsor of The Energy Report or The Gold Report: Puget Ventures.
3) Gordon Monk: I own shares in all the companies mentioned in this interview. I haven't been paid by any of the companies mentioned.