Summary
In this article, we have a closer look at the lithium supply chain.
A lot of car manufacturers are jumping on the EV bandwagon, but where will the supply come from?
Quite a lot of press releases last week, and some production and cost guidances really stood out from the crowd.
The twentieth edition of Resource Sector Digest (vol. 20 - January 25, 2016), an offering that is brought to you by Itinerant and The Investment Doctor.
As always, this edition of our newsletter will:
- Set the scene;
- highlight actionable ideas;
- comment on news releases; and
- link to relevant articles.
As always, here is a cordial invitation to join Itinerant Musings for exclusive access to actionable research on mining and energy stocks. Some examples are sprinkled throughout this newsletter for good measure. And before we forget, you can read the three most recent editions here, here, and here in case you missed them.
Setting The Scene
As the market for electric cars seems to be continuously expanding, we think it's about time to have a little chat about how the EV constructors (and more importantly, the battery suppliers) will secure the necessary commodities to effectively build the vehicles.
Of course, a company like Tesla Motors (NASDAQ:TSLA) likes to think two steps ahead and has signed two "deals" with early-stage lithium companies in Nevada and in Mexico, Pure Energy (OTCQB:HMGLF) and Bacanora Minerals (OTC:BCRMF). The first few hours after the news was announced, the markets reacted very excited, almost ecstatic, but then the reality set in.
The deals Tesla closed with the two lithium juniors were actually quite loose, and the Bacanora press release summarizes it pretty well"
"Tesla will purchase minimum quantities in accordance with an agreed upon pricing formula, below current market pricing".
So, in return for uncertain technical and financial support, Bacanora and Pure Energy will allow Tesla to purchase the lithium at a discount to the prevailing market prices. So, basically there's no (disclosed) advantage for the two smaller players because even being associated with Tesla didn't do a lot with the share price.
Source: Thecarconnection.com
But maybe there's a reason why Tesla wants to deal with these early-stage companies, as it might (once again) have a longer-term vision and a desire to secure lithium for decades to come. In that case it's indeed better to get some supply agreements locked in, especially if it isn't costing you an arm and a leg to do so.
And maybe other vehicle constructors will follow this example. Toyota Motor Corp. (NYSE:TM) is already involved with Orocobre (OTCPK:OROCF) which owns a low-cost lithium project in Argentina and as BMW (OTCPK:BAMXF) (OTCPK:BAMXY), General Motors (NYSE:GM), Honda (NYSE:HMC), Volkswagen (OTCPK:VLKAY) and Ford (NYSE:F) also seem to be trying hard to not miss the EV train, it will be interesting to see how all these car manufacturers will manage their supply chain.