Katanga Mining [stock_market_widget type="inline" template="generic" color="default" assets="KAT.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has fallen off a cliff this year as cobalt prices have lost steam on account of oversupply. Katanga shares have lost a third of their value this year, and that’s not surprising as weak cobalt prices have knocked the wind out of its financial performance.
Let’s take a look at what challenges Katanga is facing and whether the company is worth buying given that it has lost so much value.
Second-quarter Results Have Been Poor Despite Operational Improvements
Katanga Mining delivered second-quarter cobalt production of 4,763 ounces. That was a nice jump from the year-ago period’s cobalt production of 2,607 ounces. The increase in production can be attributed to Katanga resuming the export and sale of cobalt from the Democratic Republic of Congo. The company had to suspend exports from Africa after uranium was detected in cobalt in the fourth quarter of 2018.
But now that the uranium level is under control, Katanga has been able to resume shipments. What’s more, Katanga is busy debottlenecking its projects at the KCC mine. The company has already commissioned two filter presses and the third one was commissioned recently.
In all, Katanga plans to upgrade the current cobalt plant design so that it has to face less bottlenecks going forward. The company believes that the debottlenecking will allow it to attain the life-of-mine cobalt production of 30,000 tonnes a year, which would be in line with the planned average life of a mine.
However, despite their progress on the operational front, its revenue was down nearly 13% year over year. What’s more, Katanga reported a second-quarter loss of $0.10 per share.
That’s not surprising as cobalt prices have been crashing on account of an oversupply.
Difficult Times Ahead
Demand for cobalt was expected to remain strong on account of increasing demand for electric vehicles since cobalt is used in the manufacture of lithium-ion batteries. Thanks to this catalyst, cobalt prices shot through the roof for nearly two years from 2016 to 2018, hitting $95,000 per tonne at one time last year.
But the crash has been spectacular and cobalt has dropped to around 36,000 per tonne now. This crash can be attributed to the hype surrounding EV-related demand, which didn’t translate into reality. Tesla, for instance, reduced cobalt content in their electric vehicles. On the other hand, the Chinese kept hoarding cobalt because of the rising prices.
However, it is expected that cobalt will stabilize and make a comeback in the coming years. According to a report from FocusEconomics, the price of the commodity is expected to increase to $40,000 per tonne by next year, and then rise to $50,000 per tonne in 2021.
That opens up a ray of hope for Katanga to make a comeback. But investors should be cautious before taking a call and putting their money in this miner, and ensure that a turnaround is in progress.
