EDITOR: | March 10th, 2016 | 12 Comments

Tesla’s Supply Chain – Triumph of Hope over Experience?

| March 10, 2016 | 12 Comments
image_pdfimage_print

They say that second marriages are the triumph of hope over experience but we can’t help thinking the same of Tesla’s “belief” that when miners said to it that they would be able to provide enough Lithium, Cobalt and Graphite for its Gigafactory it actually believed them. We can’t escape the feeling that the texting acronym ROFL (Rolling On the Floor Laughing) was made for exactly this situation.

However for a long time Tesla have painted themselves as being “the smartest guy in the room” and yet are we really supposed to swallow the line that Tesla actually believed that a whole swathe of projects in metals critical to their project would come to fruition when educated and informed people in the mining space knew that they would not? It would appear to be more of a case of didn’t want to know rather than didn’t know…

In this piece we shall follow on from the firestorm that John Peterson created in his piece last week with a specific look at how credible the chance of any of the many projects in the three metals of import actually becoming productive was over the last five years.

Lithium

We have been covering this metal since late last decade. Prior to that point (like Rare Earths) there had been so few players that they were well below any analyst’s radar. Moreover, with the pre-2008 focus on staples like precious metals and base metals, the specialty metals scarcely got a look-in. Our first exposure was the Rincon asset then embedded in an ASX-listed entity Admiralty Resources. Lingering effects of the 2008 crisis eventually forced Admiralty to divest this is to Cayman Island based resource fund, Sentient, who have held it ever since. At the time we thought this was the vanguard of the Lithium push that would break the Cartel and fill the demand gap in the middle of this decade. Instead the asset appears to be totally becalmed and it most definitely has not filled any gap, real or imagined.

Then came the Lithium boom. The great star performer was Talison Lithium which was cobbled together out of the old Greenbushes asset (ergo, a past-producer) and the assets of Salares Lithium in Chile. The high-point of the first flush was this company being bought for over $600mn by a Chinese group in league with Rockwood (one of the Cartel).

What was an initial field of around twenty lithium wannabes has shrunk by half over the last five years and is only now showing an uptick in interested new entrants. But as they say in the classics, “too little too late” to save Tesla’s bacon. It’s probably worth repeating here our Lithium Lifecycle chart, as a picture tells a thousand words:

lifecycle_lithium2016

An interesting microcosm of Tesla’s dilemma is that it signed a much vaunted deal with Bacanora Minerals. That fired up the stock price of BCN but did not bring in a single dime from Tesla in terms of investment. The attitude seemed to be “announce the deal, lift the price, go finance yourself”.  Easier said than done as we all know when the capex is north of $100mn. Understandably BCN has started to lose some of its rosy glow and the task of raising all the funds has now fallen upon the company. However even with the best will in the world (and easy money) this project would be years away from production.

If Tesla had really believed in this project or any other one, it should have taken a strategic stake and made funds available to move things along. Frankly, it did not.

Cobalt

This metal has until recently been one of the least talked about in the battery supply chain probably because it has an LME quoted price and thus this has given many the illusion that it is a “major trade metal”. Wrong! To put this in perspective the LME warehouses only have 614 tonnes of this metal in stock. Not exactly a base on which to build a major battery industry and still get a good night’s sleep.

But doesn’t it come as a by-product of major mines in other base metals? Oh, you mean the copper mines of the DRC with their on-again, off-again restrictions on exports and conflict mineral overtones? Or do you mean the big nickel mines, such as Ambartovy and Moa Bay that are scarcely fountains of cashflow for their owners (e.g. Sherritt et al.)? It is most correct to say that any manufacturer of size relying upon major base metals mines to continue providing them with cheap by-product Cobalt had better dust off their candles and light them to the Gods of Mining. The quantities produced from these mines is essentially driven by demand for the major metals and no major is going to ramp up copper or nickel production at a loss, or at breakeven, just to keep Tesla supplied with the Cobalt it needs.

As can be seen below has been on a long slide and has only just started to tick up. Frankly its price could double, but if the prices of nickel and copper have not moved commensurately, then it is unlikely majors will ramp up production.

Cobalt_price

This brings us then to the subject of primary Cobalt mines. These are rare unicorns indeed. Much air has been expended on this subject over the last fifteen years but little has been achieved in terms of bringing mines to production. The USGS produced a report on the Cobalt production outlook in 2013 and it included a frighteningly long table with the names of Cobalt projects that had been stopped in their tracks, mothballed or permanently decommissioned.

Cobalt_closed_mines

Below is our Lifecycle graph for the listed Cobalt developers, that we know of. This is the scantiest population of any of our “lifecycle graphs”.

lifecycle_cobalt

Formation Metals (FCO.to) is the obvious candidate for Tesla to “take out” if Tesla starts getting serious but even then, the project would probably not fully supply Tesla’s needs. Then it might need to move on to the NiCoCo project of Fortune Minerals (FT.to) to be fully self-sufficient. The others are all too early stage or too small to be realistic help in ameliorating Tesla’s looming Cobalt crunch.

Graphite

For a mineral that is literally as common as dirt, the surprising thing is how little has been achieved by the “wannabes” which makes us think that they just “wannabe bought”. The most suspicious thing is that for a mineral that has minimal processing requirements and very simple mining requirements (quarrying, pretty much) the capexes being touted are truly eye-popping. This brings us to our usual suspicion (very prevalent in the glory days of REEs) that the companies pump up the capexes because if the capexes were smaller than their cash-pile or financing ability then cheeky investors (and offtakers) might say “well, why aren’t you building it?”. This impolite stating of the obvious is a sure conversation killer.

In any case this is all history now as most graphite companies that did not speed towards development now find themselves short of cash and staring the Grim Reaper in the face. Names like Elcora and Flinders are either in production or on the cusp, while some of those that most vigorously played the “Tesla card” in their promotional efforts are down to their last shilling with little hope of reviving their credibility.

Tesla should move on one of the more stricken players, take it over and then announce that it has satisfied all its foreseeable needs. The mind boggles as to what that will do to the valuations of the other “wannabe Tesla suppliers”.

Conclusion

There is an old adage of “put your money where your mouth is” and frankly Tesla has shown zero sign of expediting any of the projects that it has waved its magic wand over. That nothing has happened to move these projects forward thus makes us feel that Tesla’s magic wand is limp indeed.

If this failure to abide by the commandment “Secure Thy Supply Chain” has gone unheeded then whatever the market dishes up to the company once it starts to explain away sourcing difficulties will be well-deserved. Did Tesla seriously think it was going to get a free ride from beaten down miners who can scarcely afford to pay their light-bills let alone developing mines with capexes north of $100mn. With Tesla still having a market cap of over $26bn, it could acquire for stock the most likely player in each of the Lithium, Graphite and Cobalt spaces for less than 1% dilution. Think about it…


Christopher Ecclestone

Editor:

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>


Copyright © 2016 InvestorIntel Corp. All rights reserved. More & Disclaimer »


Comments

  • Craig

    And the only problem is, we don’t have a lithium shortage, you start up one graphite mine (syrah) and you’ve nearly doubled world production, and how do you have a cobalt shortage at record low prices?

    March 10, 2016 - 10:00 AM

  • T Williams

    Interesting article and comparisons. All this Gigafactory talk of being on time and the soon to be revealed Model 3 (March 31st) should shoot some reality into this area of understanding raw materials are going to be needed severely to meet demand, mainly of the M3 (along with MS & MX from Tesla).

    I have good hopes for Formation Metals and their Idaho project (ICP). The DMC is catching grief due to governments, child labor, etc. The ICP would also be a USA based more environmentally responsible local supply of Cobalt for Tesla – makes perfect sense for them to snatch them up.

    March 10, 2016 - 10:40 AM

  • Aat Oskam

    Quote from Lynas’ half year report published today: “Li High and Li Medium ore, both of which had previously been considered unsuitable for processing, were succesfully processed leading to greater use of ore in the current stockpiles.” Unquote.
    Your thoughts please Christopher?

    March 10, 2016 - 3:30 PM

  • Alan Levy

    Point taken about by-product cobalt from nickel and copper mines being subject to the price of the dominant mined material. But there is also cobaltiferous pyrite, which has been stockpiled in several areas and which can be reprocessed to recover the cobalt. Case in point was Kasese Cobalt Company Limited, in the Ruwenzori Mountain of western Uganda. They used to bio-leach the pyrite and the operation was pretty clean and efficient. Their problem was that they ran out of pyrite concentrates. However, there are significant dumps of mine tailings along the Nyamwamba River that could be repulped and froth floated to recover it. … nice hotels in the area too.

    Zambian and DRC mines get much (most, I am really not sure here) of their cobalt from the minerals Carrollite and Linnaeite. I would guess that there is also some cobaltiferous pyrite there, that could be processed, if and when the high price scenario comes into play.

    Of the trio, lithium, graphite, and cobalt, only the latter one is on a recognized, legitimately functioning exchange. Cobalt is traded on the LME, but the furthest one can go out is 15 months. The offering prices are in contango, but the bid prices… well graphically, they sort of look like a lopsided smile.

    And Chris, thank you for continuing to provide us with topical, well researched pieces.

    March 10, 2016 - 7:15 PM

  • Sam Amamoo

    Thank you Chris for your article that covers the three metals critical for volume production of EVs by Tesla or indeed any company that chooses to enter the market. Possible Tesla competitors include Faraday Futures, Daimler-Benz, BMW, Toyota etc and the list goes on.

    Your idea of Tesla acquiring mines to ensure its supplies of the three metals it needs is an interesting cutting of the Gordian knot approach but apart Toyota and its link up with one of the lithium producers in South America I know of no major vehicle manufacturer that owns or has sought to own mines that produce metals for its operations. But maybe that is the way of the future.

    Tesla has demonstrated that it is a highly innovative and performance oriented organisation intent on producing luxury EVs at prices people can afford. That is their focus and I suspect they might stick to that.

    Even more important, what if their aim, like other major car manufacturers before them, is to begin from a position on the cost curve for their resource inputs that is as low as possible and then for the cost to continue to fall as they ramp up production units over time? Now that is the stuff of profits and happy shareholders!

    Let us consider how disconcerting it would be for them if the mines they owned ended up supplying inputs for operations at prices that for a variety of reasons were above those on the open market. Grinding and gnashing of teeth in the executive chambers of Tesla? Ownership guarantees supply but not the highest operational efficiency necessarily

    To be fair I think the issue is a trade-off between security of supply on the one hand that you have outlined so well in your article and getting the best quality, lowest cost input metal for scale operations.

    My hunch is that Tesla will go for the latter because it fits better with the declining long-range average cost curve of production.

    However, if I’m right the security of supply problem remains.
    Good luck Mr Musk.

    And thanks for your article, Chris.

    March 11, 2016 - 7:17 AM

  • Ann Bridges

    Thank you Chris, for pointing out the obvious. Very few people in Silicon Valley want to face these hard truths. After all, they live off of the hope of unicorns and high valuations. Musk is their new Emperor–what child dares point out he has no clothes? There’s a reason for storytelling, to share wisdom and insights when the details get lost in the narrative. Your concluding paragraphs say it all.

    March 11, 2016 - 9:59 AM

  • Cobalt: the backstory of a technology metal | InvestorIntel

    […] week. John Petersen has authored two imposing posts (PT 1, PT 2). Now Christopher Ecclestone has underlined the worries that should be concerning Tesla and other end-users about the possibility that the supplies of […]

    March 11, 2016 - 10:02 AM

  • Robert Richardson

    I’m a bit surprised that you didn’t mention NMT (WA) that should be producing Li very soon Chris… And – so unusually for a miner starting up – it’s very cashed up too!

    March 18, 2016 - 8:06 AM

  • Christopher Ecclestone

    Robert, I am an unreconstructed fan of Neometals (actually having lunch with them on Monday here in London). I would note though that due to the Ganfeng nexus the production will be going to China most likely NOT to Tesla (reinforcing the point that Tesla is just not in the race for most of the upcoming material due to its failure to tie up serious companies like Orocobre and Neometals) and secondly I would note that Mt Marion is not imminent. Construction has not even begun. Due to the Ganfeng deals it is inevitable but by no means is it in any way something that Tesla can count on…

    Gotta love the cash at NMT.. they are distributing some now by the way in a special dividend. Not something you would EVER see from a Canadian Lithium player.

    March 18, 2016 - 8:17 AM

  • Jack Lifton

    Christopher,

    In all od this I note that this morning’s WSJ has a lead story that basically says that even though ALL of the world’s central bankers are holding down interest rates in order among other things to make their home currencies cheaper in term of the reserve currency (guess whose?) nonetheless major currencies are strengthening. The point being made is that even though central bankers are following the economics’ rule book the rules aren’t working! For lithium and cobalt prices to go up it seems obvious that only demand has to increase, right? The “shortage” will then squeeze prices and result in increased and new production, right?
    I think that the law od supply and demand is working just fine. I think the problem with lithium and cobalt prices is that there is no REAL additional demand. It is battery makers, not car makers who would buy lithium and cobalt CHEMICALS, and lithium and cobalt chemical producers who would buy crude lithium and cobalt mined concentrates. Neither group it seems has decided to use scarce working capital to stock up. I think the explanation is to be sought in the political arena. Our “leaders” or at least the ones in the rich countries (the ONLY markets for EVs!) have not given the signal yet that they are willing to socialize the costs of EVs that make them unattractive to ordinary investors who, unlike governments, seek a RETURN on capital not just an uptick (for a pump and dump opportunity) in share prices.
    Obama and Xi are alike in their promises that EV production will soar, but for this to happen they both (should) know that a permanent large subsidy will be necessary as they both at the same time push policies that drive up the cost of electricity. The best hope for Tesla is that after Bernie Sanders taxes Elon Muck (misspelling intended) into penury he will announce that the US government will give as a birthright (and also for illegal aliens) not only a free college education but a Tesla People’s Car (literally, a Volkswagen).
    The trouble, Dear Christopher, lies not in our stars, but in our environmental politics. I propose for a new national anthem (for the world) a song entitled “Let’s kick the can down the road.”
    Have a nice (poor but righteous) life, youngsters

    Jack

    March 18, 2016 - 10:05 AM

  • Christopher Ecclestone

    Jack is indeed right… The enemy of those who would advocate stockpiling now is the “Just in Time” school of thought in manufacturing that has reigned for thirty years now. (Ironically invented by the Japanese at Toyota). The key differentiator is that IF the Japanese thought that JIT would not work because there was a logjam up the production pipeline then they would either not use it or stockpile the material. Instead the US has adopted the “good bits” of the practice (i.e. low inventories) and forgotten to consider what happens if no-one is producing enough raw materials to keep the pipeline topped up..

    With be funny to find Elon cutting a ribbon at a big empty plant…

    March 18, 2016 - 10:39 AM

Leave a Reply

Your email address will not be published. Required fields are marked *