EDITOR: | September 1st, 2015 | 11 Comments

Unravelling Tesla

| September 01, 2015 | 11 Comments
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I must confess I have been like a rock in the stream of the unending torrent of Tesla boosterism over recent years. I just sit and the flow of this material just washes over me and leaves me totally unmoved. What was a car company seems to have morphed into a battery manufacturer now. The appearance of a new marque in the car world is a rare thing and the only one I can recall, besides Tesla, during the part of my life when I had awareness of such matters, was DeLorean. The less said about that the better. So when the Tesla auto appeared, I was underwhelmed.

back_to_the_future_delorean

The battery business seems to have been spawned by the car business and appears to now be the tail that wags the dog (no irony intended). Why should Tesla not venture into tires? Or into car stereos? What special skill does it bring to the business of making Lithium-based batteries?

Mining investors have piled onto the Tesla phenomenon like it is the last lifeboat to get away from the Titanic. In particular it has been graphite companies and their followers who have searched Tesla’s tealeaves for signs favorable to their own stories. Therefore it is somewhat ironic that the first company to tangibly hitch its wagon to Tesla’s star is a little known Lithium hopeful, Bacanora Minerals (TSXV:BCN).

The Tesla Deal

The announcement that got the market in a kerfuffle was a new lithium project in northern Mexico that received the “first seal of approval” to supply the Tesla Motors Gigafactory in Nevada. A few days back Bacanora Minerals and Rare Earth Minerals (LSE:REM) received the go-ahead to supply lithium hydroxide to Tesla’s lithium-ion battery “megafactory” from its clay deposit in Mexico’s north-west should the new project reach production.

Tesla agreed a five-year lithium hydroxide contract (from the date of the first order by Tesla) to “purchase agreed minimum tonnages with estimated forecast maximum tonnages to be determined following delivery of future production orders”. The Supply Agreement has an option to extend for a further five years.

Some parts of the deal remain less than clear. For instance, over the next two years, the Sonora Lithium Project must reach certain (undisclosed) performance milestones and successfully pass product specification qualifications. If these are achieved then Tesla – or its authorized purchasers – will buy lithium hydroxide to feed the manufacturing of batteries at Tesla’s plant.

One of the key milestones will be the confirmation that the Sonora Lithium Project will be able to supply lithium hydroxide in accordance with volumes and timeframes to be established by Tesla. Tesla will purchase minimum quantities in accordance with an agreed upon pricing formula, below current market pricing, with actual prices and volumes that can only be finalized during the development phase in due course. The forecast tonnages and delivery dates are structured to coincide with Tesla’s forecasted Gigafactory production. Sounds like Bacanora is the one having to jump hurdles here. It begs the question as to what happens if Bacanora meets the timeline, and specifications, and Tesla does not!?

Some have speculated that Tesla will consume as much as 80% of Bacanora’s output and that the company will keep back the remnant to sell into spot markets. Frankly with Tesla not actually funding the mine-build, a commitment of 80% of one’s output to a non-committal offtaker, that also wants a discount to market, is exceedingly generous.

The Sonora Lithium Project
The project consists of ten mining concession areas covering approximately 100 thousand hectares in the northeast of Sonora State. It is managed by a Joint Venture between Bacanora Minerals and the AIM-listed Rare Earth Minerals. It should be noted that the latter company has been accumulating a larger shareholding position in Bacanora and at last reports held around 15.4%.

sonora_concession

The JV partners, through drilling and exploration work to date, established an NI43-101 Indicated Mineral Resource of 1.12mn tonnes LCE contained in 95mn tonnes of clay at a Li grade of 2,200 ppm and an Inferred Mineral Resource of 6.3mn tonnes LCE contained in 500mn tonnes of clay at a Li grade of 2,300 ppm.

Sonora_resource

The PEA

The Sonora Lithium Project Partners are working to develop a mineral-rich, lithium-bearing clay deposit into a planned low-cost, sustainable and environmentally conscious mining operation. It is estimated that the mine and processing facility will have an initial production capacity of approximately 35,000 tonnes of lithium compounds, with the scaling potential of up to 50,000 tonnes per annum.

It is currently anticipated that lithium hydroxide and lithium carbonate would be among the materials produced by the mine. Lithium hydroxide is a key feedstock material in the manufacture of certain kinds of lithium-ion battery cells.

The metrics from the PEA are below and the capex is truly impressive for being as low as it is and with a rather short payback.

Sonora_PEA

The attractions of this project are various but the main advantage it has is the clay nature of the mineralisation and the fact that it is relatively near surface (though with a basalt cap over much, but not all, of the deposit). A cross-section of the deposit is one of those pictures that “tell a thousand words”:

sonora_crosssection

Bagging the Tesla deal is obviously a good first step. Now we need to see if financiers are as impressed with Tesla as a counterparty as retail investors seem to be. Whatever happens Tesla has shown no sign of digging into its own pocket so the Sonora Lithium Project Partners will need to raise finances to design and construct a mine and processing facility under their own steam.

Conclusion

It would be somewhat ironic if, ten years from now, the Sonora Lithium project was up and running and Tesla and its modestly named Gigafactory have gone the way of the DeLorean.

bacanora_price

The chart above shows that Tesla certainly was good for a mighty pop in Bacanora’s stock price with the announcement pushing the stock from around $1.30 per share to over $2, before easing back.

The Sonora project is interesting for its clay component, its good grade, its proximity to the US markets and its low capex. Whether the Tesla deal plays out or not is probably neither here nor there. If Tesla were really serious they would have snapped up the company (in an all-stock bid) or taken a sizeable strategic stake in Bacanora so they could have their cake and eat it too. They did neither.

Bacanora should get a financing done while the going is good and if Tesla ultimately doesn’t turn out to have any relevance to Bacanora’s future then it will have been a case of “nice knowing you, Tesla, and goodbye”.


Christopher Ecclestone

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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Comments

  • Jack Lifton

    Chris,
    I am puzzled by Tesla’s action’s with regard to Bacanora. I thought that Tesla had announced it would source lithium in the USA in part payment for all of those tax break and subsidy dollars that have allowed Tesla to stay open and continue losing money on each car. Perhaps if more Mexican miners find work in Sonora then there will be fewer jobless ones to emigrate to Fresno so that the burden on the local economy to which Tesla obviously contributes little will lessen.
    Tesla by the way offers to pay a huge discount to market for lithium products, so even if Bacanora wins it might be, as they say, “for losing.”
    I love commenters who say that Tesla could sell any lithium it does not use into the market. I note that at the purchase price offered by Tesla might well be more profitable as a lithium trader-reseller than as a car maker.
    Let me know if you find any new players in the lithium market that can sell at today’s prices and make a profit. I’d like to know more about them. Please hurry. You know I’m not getting younger.

    Jack

    September 1, 2015 - 2:04 PM

  • hackenzac

    Jack: You’ve been bashing Tesla since they traded for 20 bucks a share. John Petersen is wrong about them and so are you. They are no Solyndra or a Chrysler, bailed out twice now. They’re Solar City and a car so good, it broke the template at Consumer Reports. You might be on to something concerning new Mexican industry. It’s better than Chinese so far as North America is concerned especially if it raises the standard of living enough to keep migrants home.

    September 2, 2015 - 12:17 PM

  • Alvarita

    Jack is correct for a change. Tesla will be belly up before they ever make a dime profit, creative accounting notwithstanding.

    September 2, 2015 - 1:00 PM

  • Christopher Ecclestone

    Jack has an inbuilt corporate zombie detector and he hasn’t been wrong yet.. If it smells like a corpse its a zombie!

    September 2, 2015 - 2:08 PM

  • Alvarita

    Chris,
    You’re graciously giving him a pass on GWM. If he smelled a corpse it was a well kept secret until too late, and well after he dumped his stock. Just sayin’…..

    September 2, 2015 - 3:19 PM

  • lazpitts

    Jack makes valid point about the company’s statement regarding the sourcing of materials !!
    While Tesla has been a momentum stock (so was Molycorp) with no profits, and enormous tax breaks (the new GAAP principles), just how many people can afford a US $80 – 125K car, that only goes 200 miles?

    As for beating any “Consumer Reports” scale, … for what exactly? Certainly not for; lifetime durability, serviceability, maintenance, fuel efficiency, or even cost effectiveness of transport miles/ $ spent!!

    September 2, 2015 - 11:57 PM

  • Jack Lifton

    This is just the tip of an iceberg of bad publicity that Tesla will get from a decision driven entirely by raw economics. Tesla has given a valueless commitment to an exploration phase (i.e. junior, at best) lithium producer, which commitment has been capitalized in the short term stock appreciation of both companies. Later when Tesla is buying at market price like everyone else they will say that the fumbling with Bancora was just the best practice at the time. General Motors was receptive to this all of the time before the bankruptcy, although GM was far too large and unwieldy for stock appreciation to make much difference and the actual discounts were kept quiet because if they were actualized they were embarrassing (for example to Johnson Matthey) and unethical (not reported to the markets, so as to “distort” price discovery).
    Keep in mind that Tesla has basically taken no risk at all just as Siemens didn’t with Molycorp. When benchmarks are not achieved the terms of the agreement default to “normal terms,” i.e. that the company will ONLY buy from the vendor if the product is delivered regularly on-time, to spec, in the quantities ordered, and at market price. Any manufacturer will gladly give that kind of “guaranty” to any production material supplier. This “guaranty” is printed somewhere on each purchase order.
    I’m surprised that Tesla allowed this kind of publicity, but I can give you my guaranty that Tesla has not stopped looking for regular supplies from existing producers. All companies play this game hoping to get low cost alternate suppliers to supplement market priced producers.
    The naïve way these traditional sourcing practices are viewed by small investors is a sad commentary on the practical knowledge of manufacturing operations by “analysts” and “advisors.”

    September 3, 2015 - 9:42 AM

  • DoctorFouad

    Personally I would be far more worried for Bacanora shareholders than for Tesla. for several reasons :

    1- to the best of my knowledge, please correct me if i am wrong, clay lithium deposits have never been commercially exploited on a large scale in the past.

    Does Bacanora engineers have the expertise/knowledge/technology and know how to produce 50.000 tonnes per year of lithium in two years timeframe from this new type of lithium deposits ? hats off if they can, but I am very skeptical to say the least, history shows that even traditional lithium rock deposits are complex endeavours (e.g RB energy bankruptcy, albait a very low grade less than 1% lithium content), actually even the easy/low cost brine deposits are complex and unpredictable (e.g orocobre delays/technical difficulties).

    2- For the same number1 reasons, I am very skeptical the Bacanora PEA numbers would turn out to be even remotely correct. A meager 114million$ initial capex ? seriously ? when RB energy spent 300million$ and went bankrupt, and Orocobre spent 300M$ and didnt finish yet solving all the technical problems. Unless Bacanora Managers/engineers know something others do not know. (add to that, for the same clay type deposit, WLC numbers/estimates are far higher).
    And average operating costs of 2000$ per tonne ? no comment, suffice to say that the lowest cost per tonne for major lithium producers is higher than that.

    3- Does Bacanora has a capable management team with proven track record able of achieving the desired Tesla Milestones (full production of lithium in 2/3 years ?) given that Mr Peter Secker, CEO of Bacanora, was the CEO of the bankrupted canada lithium which became RB energy ?

    4- As mentioned by the author Christopher Ecclestone, the Bacanora deal with Tesla is “generous”. I would dare to say is : “irrelevant” and “dosent make business sense”, it looks more like a publicity for Bacanora / trying too hard to get it cheap for tesla, than anything else. If Tesla refuse to finance the mine plan construction, and expects to get the lithium at cheaper than market prices, how come Bacanora did accept such a deal ? it reminds me of the infamous off-take deals of graphite junior miners, and everyone knows where we are now with those.

    IMO, either Tesla needs to put its hands in the pocket to secure a cheaper lithium supply, or accept paying the spot market price. there is no free lunch in business.

    I will make now a bold claim, IMO Orocobre would ramp up production and start producing Hydroxide and WLC/LAC/Posco would start producing lithium carbonate/hydrowide way before we see a tonne of lithium from bacanora clay deposit. Unless I got it all wrong and Bacanora managers/engineers would surprise us with a miraculous feat ; getting a new type off deposit from PEA into full production without any major technical/financial hurdles in a 2/3 years record timee. But I am not holding my breathe for it.

    September 3, 2015 - 12:40 PM

  • Clausi on the lithium market and why Nemaska shares heating up | InvestorIntel

    […] they are more mature industries, I strongly agree with Chris Ecclestone that lithium or graphite can’t count on Tesla Motors for a jumpstart. It will be up to each company in those spaces to develop its own brands, […]

    September 10, 2015 - 9:44 AM

  • Clausi on the lithium market and why Nemaska shares are heating up | InvestorIntel

    […] they are more mature industries, I strongly agree with Chris Ecclestone that lithium or graphite can’t count on Tesla Motors for a jumpstart. It will be up to each company in those spaces to develop its own brands, […]

    September 10, 2015 - 9:46 AM

  • Lithium boom moves to Mexico | InvestorIntel

    […] the countries mentioned in dispatches. Mexico has only bubbled to the surface in recent times with Bacanora Minerals (with its Sonora project) getting airtime due to its “offtake” with Tesla, which we wrote about […]

    November 11, 2015 - 9:42 AM

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