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Cobalt deal gives investors another way to bet on Tesla

A Tesla sign is pictured at the Tesla dealership on Lawrence Ave. East in Toronto on March 6, 2014.

Matthew Sherwood/The Globe and Mail

Investors looking for a way to profit from surging demand for cobalt used in batteries for Tesla Inc. electric cars have had a hard time until now.

While futures prices for the metal are up about 130 per cent since the end of 2015, a lack of buyers and sellers on the market, the high cost of more than $50,000 (U.S.) a contract, and a dearth of listed miners specializing in cobalt has kept many investors away.

Pala Investments Ltd. plans to change all that.

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The Swiss mining fund, which began buying cobalt about a year ago in a bet on demand, plans to sell the metal to Toronto-listed Cobalt 27 Capital Corp. The Canadian firm, headed by Pala investment team managing director Anthony Milewski, plans to raise $200-million (Canadian) on the TSX Venture exchange (ticker KBLT) to purchase cobalt, including from the Zug-based fund.

Mr. Milewski is being supported by advisers including Portal Capital LLC fund manager Robert Mitchell, who's also been buying up physical cobalt through his Green Energy Metals Fund.

"For equity investors, there's been a dearth of pure-play opportunities in the cobalt market," Portal's Mr. Mitchell said by phone from Tualatin, Ore.

Buyers of funds in less-traded commodities have faced risks from volatile markets in the past. The Uranium Participation Fund, set up in 2005 to offer exposure to physical stockpiles of the radioactive metal, is down about 80 per cent from a peak in 2007. Rare earth and molybdenum funds have also seen losses.

"There are probably half a dozen examples of these types of investments ending badly," Guy Darby, a cobalt trader at Darton Commodities, said by phone. "That being said, cobalt is perhaps a more enduring story."

Analysts including CRU Group expect more price gains as demand from electric-vehicle sales will outstrip increases in supply. The consultant sees cobalt demand growing at a rate of about 25 per cent a year through 2021 as annual electric-vehicle sales reach six million units, from less than two million last year. CRU sees average prices doubling this year, analyst Edward Spencer said by e-mail. LME cobalt traded at $32,750 (U.S.) a tonne at the end of 2016, up 36 per cent from a year before. Prices have rallied 68 per cent to $55,000 a tonne this year.

Auto-industry suppliers are adapting to the changes. Continental AG is boosting investments in electric and hybrid parts as it prepares for the eventual decline of internal combustion engines. Oil major Total SA expects electric vehicles to make up about a third of all new car sales by the end of the next decade.

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Cobalt 27 has signed 13 purchase agreements and set up six royalty deals with exploration-stage miners looking to bring cobalt deposits online. These include a $300,000 agreement with Asian Mineral Resources Ltd. covering supply from a project in Vietnam.

Suppliers will sell on commercial terms in return for cash, equity or both, Cobalt 27 said in a prospectus earlier this week. Pala will take a stake in the company during the offering. At spot prices of about $28 per pound for high-grade cobalt quoted by Metal Bulletin PL, $200-million would buy about 3,200 tonnes of cobalt, or about 3.5 per cent of global refined output.

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