Where Will The Gigafactory’s Lithium Come From?
Lithium is in focus as the ambitions of the world’s most high profile tech billionaire continue to captivate and infuriate the business pages. Elon Musk has built a cult of screaming followers and an equally vocal cult of screaming detractors while building the first 14% of the Gigafactory meant to be at the heart of his master plan. Musk’s grand dream of carbon-free cars for the masses is a modern initiative built on a throwback concept.
Not since the days of Henry Ford has there been a plant that took raw material in one side and rolled cars out the other. For Tesla to pull this off, it can’t go any other way. Electric cars are 0.1% of the market right now, and the Tesla products are the first ones with any consumer appeal.
That means that the sector of independent factories who make a business out of manufacturing components to be used in traditional gas and diesel cars just don’t exist for plug-ins, at least not yet. Those secondary manufacturers are a vital part of the traditional auto supply chain that Tesla doesn’t have. Yet.
Naturally, if a car built on an all new powertrain, running on an unconventional fuel source could be built out of off-the-shelf parts economically… it would probably already exist, and the company wouldn’t have nearly as much upside potential. For now, at least, Tesla is on their own.
So off they go in search of raw materials.
The Spice Must Flow
Frame and body materials are made from things like steel, aluminum and copper. Those are all available commodities traded readily on global markets. They’re used in all manners of things and don’t figure to be in shortage. The materials weakness for the Tesla cars is in the component that gives it its biggest strength: the 7,000 cell, 85 kW, 400 volt battery pack that makes it go.
The battery is a feat of modern engineering, showing more range and capacity than anything that came before it. Gigafactory 1 (Musk plans on replicating it once it’s done) is tasked with developing the battery’s manufacturing process of least resistance, then making enough of them to satisfy a strong demand for affordable cars, and a few more for solar installations. That’s going to take a lot of lithium.
Tesla has made no attempt to hide its appetite for lithium. They signed a forward purchase agreement with Pure Energy Minerals, operators of a Nevada lithium brine close to the Gigafactory this past September. This agreement followed an aborted attempt to purchase California Lithium startup Simbol Materials for $325 M, who are no longer operating and probably wish they took the deal.
The Pure Energy deal will likely come in handy eventually but the project is still in the development stage. Besides, they’re going to need a lot more than that when they scale this thing, and Musk knows it. As giga-hype ramps up, the lithium producers have been rising with the tide.
Lithium in the US and Abroad
Albemarle Corporation operates a brine operation in Silver Peak, Nevada, and will likely be the
first source for Tesla’s cathodes. Should the factory scale to meet demand, though, the reported ~6,000 tonnes of carbonate a year that they’re producing won’t be nearly enough. Albemarle doesn’t produce traditional feasibility studies for its mining operations, so how much is there is anyone’s guess. The USGS lists total US Lithium reserves at 38,000 tonnes.
The involvement of the world’s largest mining co in Lithium exploration is a good indication that
the light metal has graduated from a secondary curiosity to an industrial staple material.
Rio Tinto is developing a hard rock deposit in Serbia, the kind of thing that only a major like them could reasonably move forward. Hard rock lithium is costly, and requires capital outlay that pushes juniors out. The Jadar project is still in the prefeasibility stage, so it won’t figure into the global picture immediately.
If Rio wanted to be serious bout lithium in the short and medium term, they may consider the acquisition of one of the more successful brine producers.
Lithium brines aren’t new to Chile. The world’s three major producers, Albemarle, SQM and FMC all have operations in Chile, where the quick development curve and low cost of productions make the Salars attractive to companies who value quick ramp-up times.
The way lithium salars are formed makes them especially easy to prospect. Salt flats are visible from satellites and helicopter, so it’s easy to know where to test. The trick to success appears to be owning it at the right time.
Henk Van Alphen’s Wealth Minerals (a Liviakis Client) has spent the past 6 moths consolidating
Chilean lithium salars. The company now controls 5,700 hectares in the Atacama Salar, home of Almemarle, SQM and FMC operations. They got it piece by piece through patience and relationships and the end result is a package that looks better and better with the rise of the electric car. Accumulated land positions in key mining districts have been known to become valuable parcels when acquired and de-risked in timely manners.
Lithium Salars as Lego Pieces
Mining companies are forever a collection of depreciating assets. If they can’t grow their reserves through exploration, then value of their balance sheet declines as quickly as they’re able to produce. Hard rock deposits have their reserves extended at depth. Nobody ever knows the sum total of hard rock reserves when they start to produce, not so with lithium salar brine operations. They’re deposited by evaporation, so their footprint is known in advance. Flat terrain is easy to drill, so a rough estimate of the total available reserves is easy to make once the feasibility study is done. Salars of consistent grade are relatively easy to value for acquisition purposes, if not for purposes of bankable feasibility.
In its most recent annual report (2015) SQM reported 6.89 million tonnes of lithium reserves in its Atacama Salar operations, up from 6 million tonnes the year before. That rate of expansion figures to level off as they run out of ground to explore.
The key to ongoing success for aspiring global players may be the ability to control enough near and long term production to have effect on price. In an environment where EVs are being sold as quickly as they can be produced, Availability matters. Locked-in delivery contracts figure to be valuable parts of an ongoing vertically integrated battery production plant. They would give cost certainty and begin a supply process that could become so ingrained that it’s vital to ongoing production. Such a supplier would likely maintain a relationship for as long as their reserves last.