If you're looking for a natural resource to be bullish on going forward, forget about gold, silver, or copper. The future is in cobalt.
Cobalt has many different uses. A radioactive form of the element is used to treat cancer. It is added to aircraft parts to help make them sturdier and less prone to failure.
It is also used in electroplating, which adds a layer of metal to specific parts to protect them, help them conduct electricity, or make them look better, depending on the circumstances.
Cobalt is also a primary input in lithium-ion batteries, an industry with long-term growth potential as we move into a greener world. Several high-profile companies are working on battery technology in North America, including Tesla and Apple.
And with the advancements in electronic devices, it will continue to be utilized in electronics for the foreseeable future.
Some day, bulls argue, we'll all live off the grid using nothing but the sun's rays and giant batteries to generate the electricity needed to sustain ourselves. And we'll drive our electric cars around, too.
Unfortunately, investing in Canadian cobalt stocks isn't an easy endeavour
Hundreds of gold and silver stocks and dozens of large-cap diversified miners exist. It can seem intimidating if you're new to buying stocks here in Canada. But don't fret.
Since so much cobalt production comes from unstable areas – including the world's largest producer, the Democratic Republic of the Congo, Russia, and the Philippines – it's difficult for Canadians looking to buy stocks to find pure plays on the metal. The Democratic Republic of Congo produces 70% of the world's cobalt.
The British mining giant Glencore is the world's largest cobalt producer. It produces about 30% of the world's supply. But cobalt production is almost an afterthought; the company primarily focuses on coal, copper, and nickel.
Let's take a closer look at the top three Canadian cobalt stocks, companies with huge potential to make it big in this exciting growth market.
What are the top Canadian cobalt stocks?
- Sherritt International (TSE:S)
- Canadian Silver Cobalt Works (TSEV:CCW)
- Wheaton Precious Metals (TSE:WPM)
Sherritt International (TSE:S)
Let's start with Sherritt International, a major cobalt producer with significant risks.
Sherritt is primarily a nickel producer, with mines in Canada, Cuba, and Madagascar. It also has oil and gas, and power operations in Cuba. And most importantly, the company is also a major cobalt producer. The company has guided to close out Fiscal 2023 with over 3,400 tones of finished cobalt produced.
Operating in Cuba is a challenge. It's tougher for the cobalt mining stock to bring cash back to headquarters. Due to trade restrictions, none of the products produced can be sold to the United States.
There are also political risks. Tightened policies and sanctions by the United States have impacted the company over the last few years. In late 2022, it finally settled on a repayment plan for money owed to the company by its Cuban partners.
Sherritt's shares have also cratered in the last half-decade. After reaching a high of more than $1.50 per share in early 2018, the stock has marched steadily lower as investors became concerned with Sherritt's liquidity situation and overall political risk.
The stock did soar in 2020; however, it caught the attention of many investors wanting exposure to the industry. It trades in the mid $0.50 CAD range now, but this stock was less than $0.08 a share in mid-2020. Talk about some short-term gains.
Although the company has approximately $126 million in cash today, that's offset by nearly $350 million in debt. The balance sheet is tight; there is no doubt about that.
However, this opportunity comes with excellent upside potential. If cobalt prices rally significantly from here, it'll go a long way toward helping Sherritt with its balance sheet woes.
Make no mistake about it; this is a high-risk/high-reward play.
Canada Silver Cobalt Works (TSXV:CCW)
Canada Cobalt Works is developing three high-grade former cobalt-producing mines in Northern Ontario.
It mainly focuses on the Castle Mine, a location boasting high-quality cobalt reserves and gold, silver, and nickel reserves in the area. The area previously hosted a silver mine, a viable location for a decade from 1979 to 1989. The company hopes new technologies will help it bring the mine back to its former glory.
I think they're onto something. After all, these assets are located near the town of Cobalt, Ontario.
Castle Mine also boasts good overall infrastructure, an agreement with nearby First Nations groups, three former mineshafts that will make restarting production much easier, and preliminary drilling results that suggest the mine is rich in both cobalt and silver.
The company has a skilled management team, with many of the key board members having decades of experience with other mining companies, including Kirkland Lake Gold, Agnico Eagle mines and more.
The only issue today is investors don't know when commercial operations will begin. Canada Silver Cobalt Works doesn't have immediate plans to begin serious production.
This likely means shareholders will see share dilution via offerings so the company can continue to raise capital to invest in its development-stage project. This is what I would call a "scratch-off ticket" stock. Sometimes you win big, sometimes you break even, but most times you lose.
This is the nature of investing in pre-revenue mining companies. The potential is explosive, but there is an extensive amount of risk here. If I were to buy Canada Silver Cobalt Works, it would be with money I'd be comfortable completely losing.
Wheaton Precious Metals (TSE:WPM)
Now that we've gone over two highly speculative Canadian cobalt stocks, it's time we talk about a blue-chip one. Make no mistake about it, Wheaton Precious Metals doesn't actually have that much exposure to cobalt.
In fact, only a low to mid single-digit portion of its revenue streams comes from the metal. However, it is a reliable streamer that is involved with a wide variety of metals to reduce overall risk and volatility for investors.
Wheaton Precious Metals is a streaming company. This means that it doesn't directly mine the minerals or metals itself. Instead, it loans these companies money in exchange for lower prices on the mined metal.
Not every cobalt stock needs to be an early exploration, high-risk play. Instead, you could grab a consistent dividend payer and a blue-chip streaming company and get lower exposure to cobalt but more consistent and a better chance of higher returns.
With a market cap of nearly $32B, Wheaton is one of the largest companies in Canada. It pays a low 1% dividend, one that is structured to pay out variably depending on the company's cash flow generation.
This is why when you look at a dividend chart of Wheaton, you'll notice that it's all over the map instead of a gradual rise. However, the company has been able to consistently increase the dividend year over year since 2016.
One of the company's bigger streaming agreements on the cobalt form is Voisey's Bay, operating by Vale and located in Canada. The company will collect 42.4% of the mine's production up until 31 million pounds of cobalt is produced. After that 31 million pounds is reached, they will continue to collect 21.2% up until the mine is exhausted.
The bottom line on Canada's top cobalt stocks
There's no doubt about it. Investing in Canada's top cobalt stocks is a risky endeavour. We can think of many other Canadian stocks to buy, but if you have an appetite for high-risk, you've come to the right place.
The first two cobalt stocks offer fantastic upside potential if demand for the metal really takes off. Each of these stocks could roar 500% or even 1,000% higher if we start using cobalt in a big way.
Alternatively, a royalty company like Wheaton is a stock that is a little more reliable, with strong cash flow streams and a wide variety of metal exposures.
If you're interested in the cobalt sector, perhaps the best way to play it is a small investment, something you can afford to lose.
You should still make a decent return if cobalt takes off, and you won't lose much if the thesis doesn't work out.