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Tesla's Gigafactory And Bond Sales: The Investment Numbers Don't Seem To Add Up

Aug. 07, 2015 8:57 AM ETTSLA20 Comments
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As most readers following Tesla already know and as I discussed in earlier Instablogs, Tesla's giant battery factory - the so-called Gigafactory [GF] - will require about $5 billion in investments until 2020.

I recently ran the numbers again, comparing the total expenses/investments so far versus these future/projected expenses:

1) From the last available Tesla 10-Q form (after calendar Q1 2015, next one will be released in a few days):

"We acquired land for the site of our Gigafactory and have incurred $146.2 million of construction costs as of March 31, 2015."

2) New article with GF numbers up to and including Q2 2015:

"Total investment by Tesla on the project that Tesla CEO Elon Musk calls Gigafactory 1 during the second quarter grew by 28 percent from the previous quarter to $183 million, GOED confirmed. Investment by Tesla partner Panasonic Electronics North America, which is expected to send hundreds of employees to help prepare for production, grew nearly fourfold on a quarterly basis to $2.8 million."

Source: http://bit.ly/1DtwRUX

It amazes me Tesla spent so little on the GF until today (partner Panasonic even less, see quote above).

For example, Tesla spent only $35-40 million on the GF in the last quarter by simply subtracting the numbers listed in 1) and 2) above.

Not only was very little spent on the GF this past quarter, but also in total (comparing total expenses to the full $5 billion until 2020).

At the same time, the cash raised from the big convertible bond issue (from 2014) is melting rapidly:

The Palo Alto, Calif., company raised $2 billion in a sale of convertible debt-bonds that can be exchanged for stock-late last week, garnering an audience of big investors such as mutual funds and hedge funds. The deal ranked as the second-biggest sale of convertible bonds in the U.S. in the past two years, according to data provider Ipreo.

Tesla was able to raise 25% more than originally planned. The company intends to use that money in part for construction of a $5 billion plant to build batteries crucial to expanding its business, it said.

Source: www.wsj.com/articles/SB10001424052702304...

Details from the FT on the 2014 convertible bond sale:

Tesla sold $800m in five-year notes and $1.2bn in seven-year notes as part of the deal on Thursday, according to a person familiar with the matter. The five-year notes will carry a coupon payment of 25 basis points and the seven-year notes will pay 125 basis points. Both bonds have an equity conversion premium of 42.5 per cent.

The company had originally sought to raise $1.6bn, but the deal was increased due to heavy demand from investors, according to a person familiar with the matter.

Source: www.ft.com/intl/cms/s/0/2f2387a0-a00a-11... (Registration required)

The bond buyers were told that most of their money (the $2 billion) would be used for the GF project.

However, the GF numbers (money already spent, money required versus cash on hand as of August 2015) simply don't seem to add up as I outlined above.

The exact number definitions are also hard to come by:

Sometimes Tesla refers to "construction costs", sometimes "total investments". Maybe some GF machinery was pre-paid and expenses booked under other (non-GF) cap-ex?

This PDF from the GOED (Nevada), on page 5, (page 7 within the document) seems to match rough predictions submitted by Tesla:

http://www.diversifynevada.com/documents/Full_Tesla_Summary_Report_Analysis_Letters.pdf

See Figure 1 on that page for details:

The $335 million in projected construction costs for CY 2015 seem to roughly match their projections ("up to $300 million" until 2016 for GF), but are the $600 million in equipment for 2015 really booked or ear-marked somewhere else in Tesla's cap-ex (i.e. unrelated to GF investment)?

If not, the $600 (or $592 million to be exact, quoting from the PDF source linked above) million figure for 2015 is either

  1. too high, i.e. the investment will be postponed until 2016-2020
  2. paid for by third parties, i.e. Panasonic saves the day (so far, they spent very little on the GF). However their total full-year investment in the auto sector tops out at below $500 million and includes other projects, see here for details: www.reuters.com/article/2015/06/08/panas...
  3. or Tesla is in need of a major capital raise very soon - especially because other expenses keep rising in Q3 2015 before cooling a little in Q4 2015 according to their own projections.

Taking a step back, Tesla's overall liquidity situation (as of August 2015) was discussed in a good SA article recently:

$1.15 billion (cash on hand [at the end of Q2 2015]) + $0.7 billion (highest possible credit [*]) - $1 billion ([expected] cash burn next two quarters) = $0.85 billion in cash after the next 6 months (2 quarters).

Source: seekingalpha.com/article/3407616-tesla-t...

That's below Tesla's confortable margin of safety of around $1 billion and would involve drawing down the entire line of credit!

[*] This is an additional line of credit from 2015, details can for example be found here: fortune.com/2015/06/12/tesla-secured-500.../

Summary: Any delay, slower sales, a downturn in the economy in important car markets - or simply a safety cushion - will require Tesla to raise billions of USD once more. Even an optimal outcome will require them to probably raise at least $1-2 billion in the coming weeks or months.

To make matters more interesting, Tesla's current CFO is leaving the company this year:

"Tesla Motors CFO to Retire This Year"

http://on.wsj.com/1gfpmWF

Maybe the new CFO will have to deliver the bad news?

I doubt Tesla will get as favorable terms as in 2014, simply because their debt level is quite staggering and the latest line of credit (from June 2015) is already secured by their assets in the EU and North America and has small print attached.

I therefore think Tesla will apply for a massive capital raise (dilutive equity) soon.

Analyst's Disclosure: I am/we are short TSLA.

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