Tesla's Lithium Problem

| About: Tesla Motors (TSLA)

Summary

A failed 2014 lithium buyout has come back to haunt Tesla.

The price of lithium continues to soar as demand escalates.

Nevada's lithium reserves are not the United States' largest — yet that curiously seems to be Tesla's choice.

Much has been written about Tesla (NASDAQ:TSLA) needing a steady, consistent and affordable Lithium supply for their future car production. But has Tesla really solved that dilemma with their Gigafactory plans? Tesla's most recent SEC filing for their Q2 2016 quarterly report mentioned the word "lithium" 16 times. The following quote was the closest thing found relating to the company's current status on their lithium battery needs:

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Not exactly a ringing endorsement that would give investors comfort in Tesla's ability to achieve profitability anytime soon (or even a long way out).

Nor is this excerpt:

Our production plan for Model 3 is based on many key assumptions, including:

—that we will be able to develop, build and equip a new dedicated final assembly line for high volume production of Model 3 at the Tesla Factory without exceeding our projected costs and on our projected timeline;

—that we will be able to build and bring online the Gigafactory in a timely manner to produce high volumes of quality lithium-ion cells and integrate such cells into finished battery packs for Model 3, all at costs that allow us to sell Model 3 at our target gross margins.

Now some here may argue that those quotes are standard safe harbor cautionary statements used to protect Tesla from lawsuits. I think that those statements are actually factual and show the true obstacles Tesla faces. Also, assuming that Tesla finds adequate supplies, at what price will they either produce or buy the lithium?

Here is the price history of lithium as extracted from this Economist.com chart provided by Citigroup:

The usage of lithium for car batteries is still in it's infancy stage yet just that modest demand has sent prices skyrocketing in the past year. It would be logical to think that the most optimistic price scenario going forward would be for steady prices. A more realistic expectation however would be for a continuing spike in prices as demand continues at the current break neck pace. Tesla has seen their future car demand continue to be strong. That strength confirms their need for a Gigafactory. There is no disputing that fact. First and foremost however is the ability of Tesla to secure an adequate source of lithium for the batteries they need for their cars. Absent an adequate and guaranteed source of lithium no cars can be delivered.

In 2014 Tesla tried buying Simbol Materials for $325 million. This is the buyout offer letter from Elon Musk. Of note is that no one really knows why the deal fell thru. There is much speculation but no one has ever confirmed what transpired. What is known is that the Salton Sea in California has one of the largest lithium reserves in the United States; even larger than those found in Nevada. What I find interesting is that Tesla walked away from the reserves of the Salton Sea so quickly and easily and chose Nevada instead. For Tesla to use their own lithium they face a dangerous future. The company has no history of mining minerals, and if they hire outsiders to do it or if they secure their lithium from other sources they lose part of the cost savings they are trying to capture.

If there was ever a doubt about the abundant supply of lithium in the Salton Sea region of California one only needs to read this article detailing how Imperial County California is capitalizing on the lithium in the area.

Here are just a few quotes from the article:

The 30 megawatt battery complex will use lithium ion battery technology.
...

The lithium ion batteries will be able to store 30 megawatts of power and deliver about 20 megawatts to the grid. That's enough power for 20,000 homes.
...

The battery system is expected to be built and operating by the end of next year.

To understand lithium and the science behind how it is needed for batteries, I suggest you read fellow SA author Robert Castellano's article for a better understanding of the topic. He delves into the topic in much more detail than I, but I will go on to discuss the availability of a proven supply being secured.

Also, here is some basic information on Lithium supply on both a world wide and United States level:

Below is a snap shot of world wide Lithium reserves as reported by Australian-Lithium.com

Next is a Lithium demand forecast thru 2025:

Conclusion

Clearly Tesla is becoming a victim of their own growth and success. The failure to secure their lithium supply in 2014 is coming back to haunt them. So what does this mean for Tesla? It is too early to say with certainty. The Gigafactory is already facing cost over runs and delays. These issues will only become worse if the company is unable to secure the lithium it needs. Given the uncertainty surrounding the future of Tesla's Gigafactory and lithium supply concerns it is likely that shares of Tesla will underperform the market for the remainder of 2016.

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