The Likely Provider of Lithium for Tesla’s Gigafactory
We recently wrote an article titled “Don’t Invest in Lithium Mining Companies” and a number of our lovely readers commented that some lithium junior mining companies are of interest because “Tesla (NASDAQ:TSLA) needs lots of lithium for their gigafactory”. This is a fair conclusion to arrive at, but not too probable given what we know. Are we to believe that TSLA has not already secured the raw materials needed for this $5 billion lithium battery factory to operate? That’s not likely and would show poor planning on the part of Elon Musk, a businessman who has achieved an almost cult-like status for being a visionary. Let’s take a closer look at TSLA’s needs for lithium.
According to Goldman Sachs, the TSLA “gigafactory” could require the equivalent of 15,000 tons to 25,000 tons of lithium carbonate annually at full capacity which would consume 17% of global lithium output. That’s massive, make no mistake. In an article published by Bloomberg last year, Goldman goes on to say that this demand will serve to “ease a forecast oversupply and benefit producers like Rockwood Holdings Inc”. Rockwood was one of the three biggest producers of lithium before being acquired earlier this year by Albermarle (NYSE:ALB), a $5.7 billion specialty chemicals company. According to Goldman Sachs materials analyst Robert Koort:
“We continue to see a near-term oversupply scenario for lithium as likely,” Koort, who rates Rockwood neutral, said in the note. “An inflection in pure battery electric vehicles may help ease oversupply of lithium around 2020.”
So why does Goldman mention Rockwood? As we stated in our previous article, Rockwood is one of the three major suppliers of lithium who are responsible for 90% of global lithium production. When Albemarle Corporation (ALB) bought Rockwood earlier this year, they inherited the Chemetall-Foote lithium “mine” which is the largest lithium mine in the U.S. located in Silver Peak Nevada, and just a 3.5 hour drive from the Tesla “gigafactory”. Using the word “mine” is a bit misleading though since the mine, Chemtall-Foote, is actually an operation which extracts lithium salts from an old lake bed through brine evaporation. The concentrated brine is then pumped to a production plant at Silver Peak where it is converted into lithium carbonate, the basic raw material for lithium compounds.
Now one piece of information shows us that there was some advance knowledge of TSLA’s decision to pick Nevada last year as the site to develop their gigafactory. In July 2010, Rockwood (now ALB) announced that they would double the capacity of their Chemetall-Foote mine in Silver Peak Nevada. 50% of the project funding or $28.4 million was provided by a grant from the U.S. Department of Energy to quote “expand and upgrade the production of lithium materials for advanced transportation batteries“. That’s a pretty compelling statement. 4 years later, TSLA announces that their gigafactory will be built in Nevada. Here’s where the Chemtall-Foote lithium production facility is located in relation to the gigafactory:
So based on the analysis of leading investment bank Goldman Sachs, ALB stands to benefit from TSLA’s demand for lithium and the oversupply of lithium in the market should resolve itself by 2020, even with Tesla consuming 17% of global lithium output. This leads us to believe that it is highly likely that TSLA will be procuring their lithium from ALB for their gigafactory, and the Chemetall-Foote mine seems well positioned to fill some or all of that demand. ALB states that sales of lithium for electric vehicle batteries are up 30% year to date. The Company expects this to the largest driver of lithium growth over time and currently sells lithium to Panasonic, a partner in the TSLA gigafactory. ALB’s latest corporate presentation even makes mention of how much lithium a TSLA electric vehicle needs:
Being a $33 billion company, TSLA is not likely to depend on junior miners to supply their lithium. They will likely stick with one of the three biggest lithium producers in the world, ALB. In their latest corporate presentation, ALB claims to be the #1 global provider of lithium now ahead of FMC and SQM. Maybe 5 years from now, ALB will have a supply problem and look to acquire lithium junior mining companies. The more likely scenario is that they’ll ramp up production at Silver Peak in anticipation of the increase in demand using a mine they own which is already producing and which is just a 3.5 hour drive from the Tesla “gigafactory”. Maybe they’ll start bringing in lithium from their Chilean operation. One thing we do know for certain is that Tesla won’t be committing any of their capital to lithium junior mining companies, no matter what those flashy PowerPoint presentations say.
UPDATE – August 29, 2015: Bacanora Minerals and Rare Earth Minerals signed a long-term lithium hydroxide supply agreement with Tesla on condition that over the next 2 years the Sonora Lithium Project reaches certain milestones. This will require Bacanora/Rare Earth to secure significant financing through debt and/or equity of which Tesla has the right to participate. This represents one of the lithium suppliers for Tesla, but not the only one.