I reported on Tesla (TSLA), Gigafactories, Lithium and Graphite about a year ago and much has evolved since. In particular was news out of Tesla in early October that announced a large short fall with their plan to build 1,500 Model 3s in the third quarter. The actual number came in at 260 or 83% less than promised. This announcement reveals a tough challenge that Tesla and perhaps all EV makers will face.
The feeble numbers can be traced back to the Nevada Gigafactory where Tesla builds batteries for their cars. An outside supplier responsible for part of the process of assembling batteries into modules "dropped the ball," Musk says, and Tesla was forced to take the work in-house. "We had to rewrite all of the software from scratch and redo many of the mechanical and electrical elements," he says. "This is what I’ve spent many a late night at the Gigafactory working on."
That's a vague explanation of the problem, but safe to say “the dropped ball” is lack of battery production for whatever reasons. If you calculate the enormous increase in LIB requirements to satisfy increased EV production this will continue to be a challenge for Tesla and other EV producers in the decade ahead. No different than building a cart without the horse. The Gigafactories are coming, but will they come quick enough and can they source the considerable raw materials they will need? I see this as the biggest challenges to Tesla and the whole electric vehicle market.
Tesla's Model 3 will use 50 kWh or 75 kWh LIBs so we can use a 60 kWh average and to meet their 1,500 Model 3 production rate/qtr. equates to 6,000 X 60 kWh = 0.36 Gigawatt hours (GWh) per year. Tesla released its delivery numbers for the first quarter 2017 that resulted in approximately 13,450 that were Model S and approximately 11,550 were Model X. Delivery numbers for Q3 2017 were a little higher at 25,915 for Model S and X. Using Q1 Model S production we can calculate 53,800 that use a 75 kWh or 100 kWh LIB, an average of 85 kWh equates to 4.573 GWh/year. The Model X uses a 100 kWh battery and again extrapolating to a year's production would require 4.62 GWh/year.
At current production rates, their cars are consuming almost 10 GWh per year. It's hard to get any solid figures from Tesla on Gigafactory production rates, but this article from August suggests the Nevada factory is only 30% of its planned finished size. The current run rate is 10 GWh for EV production and the factory has planned output of 35 - 50 GWh by 2018. Considering Model S and X source batteries elsewhere the Gigafactory has very low production or efficiency thus far.
Consider Powerwall 2 stores 13.5 kWh and the Powerpack 2 stores 200 kWh. In Q3, Tesla deployed 110 MWh of energy storage systems, growing 12% from the prior quarter and increasing 138% year-over-year, driven mainly by increased Powerwall deliveries. This equates to 0.44 GWh/year and it is no secret the constraint on this number is simply not enough LIB capacity highlighted by Greentech last week.
Considering Model 3 consumed very little in the quarter, there should have been a lot more capacity at the Gigafactory so the Powerpack backlog should have been drawn down? Model 3 is supposed to be a mass produced car, production should eventually out pace Model S and X. I estimate that by the time Tesla gets the Nevada Gigafactory to full production they will have to start building the next one.
I believe Tesla will eventually succeed and solve their LIB bottleneck and probably with some help from Jeff Dahn as Dr Beattie (CTO of Elcora) pointed out to me. It was very difficult before Dahn developed HPC for a cell manufacturer to do any development work or even qualify new materials because it would take years to get the longevity test results. This is largely how Panasonic and others got to the forefront of LIB technology, through a very long process of slow refinement. Now with what Jeff has developed, you can get results in weeks and rapid battery development is now possible. I think the better question to ponder. Would Tesla have contracted Prof. Jeff Dahn and his lab at Dalhousie University if they were not going to try to develop their own battery technology?
Another challenge is to manage the disruption LIBs will create and source raw materials at competitive prices for LIB manufacturing.
To see the disruption ahead in the battery market this chart from Avicenne is an eye opener. The LIB market is seeing strong growth but lead acid is currently 90% of the market. Considering EVs will require much more battery power, the required LIB production will be very disruptive. The Tesla model S uses 60 kWh or 100 kWh LIBs. A typical lead acid car battery may be rated for 100 amps or a 1.2 kWh rating. It's obvious that an EV will require 60 times more battery and probably more. If EVs displace just 10% of the gasoline engine market it will turn this chart upside down and be the exact opposite with LIB at 90% of the market. I'm not factoring in LIBs for grid storage. And also consider Volkswagen (OTCPK:VLKAY) is targeting 25% sales volume of EVs by 2025. A UBS report expects 30% penetration in Europe by 2025.
This next graphic from Avicenne shows costs of $250/kWh on average for LIB production in 2012 to 2014 and a considerable reduction to just $150/kWh from 2014 to 2017. Tesla is investing heavily but this is somewhat dated and BYD (OTCPK:BYDDY) out of China is blowing right by Tesla. Panasonic and Tesla announced in 2014 their plans to build a “Gigafactory” capable of producing 35 gWh of LIBs every year and that was big news for most of us here in North America. Battery technology originated in Japan, was then further developed by companies in Korea, and is now shifting strongly toward China. A lot has changed since and led by China, LIB manufacturing capacity has more than doubled to 125 GWh and is projected to double again to over 250 GWh by 2020.
This Forbes article claims that total cell production capacity will need to increase tenfold from 2020 to 2037, the equivalent of adding 60 new Gigafactories, during that period. Volkswagen is well aware of the problem. In Europe Auto news this July VW says they see a huge shortage of batteries by 2025 and the industry needs 40 Gigafactories. This will only be a stepping stone as Britain is to ban all new petrol and diesel cars and vans from 2040 amid fears that rising levels of nitrogen oxide pose a major risk to public health. This follows a similar pledge in France.
I mentioned the UBS report above and I believe it is a must read. UBS tore down a Chevy Bolt and analyzed all the new and more or less used materials, who will benefit and who might be disrupted.
LIB supply chain would be most disrupted, in particular lithium, cobalt and graphite.
The Bolt is almost maintenance free so fewer parts to replace and no fluid changes, such as engine oil. The after-sales revenue pool could drop by ~60% or >$400 per vehicle per year.
The Bolt has six to 10 times more semiconductor content than an ICE car so current OEMs could be negatively affected and semiconductor companies positively.
This graphic in the UBS report is a great summary.
I would like to address the issue of next generation batteries or new technology could undermine the current LIB market. Few realize how long it takes to bring a technology to commercial stage and be reliable for long-term use for something so big and important as automotive. Engineers have been working for many decades improving ICEs and already over two decades refining LIBs.
A year ago I asked several questions with LIB expert Dr Buiel. At the time he was running Coulometrics that offered an array of testing and development services for LIBs, supercapacitors and NiMH batteries. He was a colleague and worked with Jeff Dahn who is now at Tesla. In fact Dr. Buiel was a PhD student under Prof. Jeff Dahn where he completed his thesis on Hard Carbon Materials for LIBs. I asked him if he seen any other technology on the horizon that could displace LIBs - the answer was a flat out 'No'. Volkswagen echoes the same thing. Urich Elichhor, head of R&D for the world's largest car maker, was talking (noted article above) about advancements using lithium sulphur and lithium air chemistry but predicted it could be 15 years for that technology to become available. He is convinced the time for electric drive has arrived regardless of the comparatively low amount of cell supply
This next graphic from UBS focuses on the commodity demand that will be asserted by LIBs.
I want to point out a flaw or misleading factor in the chart above. It appears there will be much more demand on Lithium and Cobalt compared to Graphite, but the opposite is the reality. Graphite already has a large market outside of battery storage so the percentage increase in the overall market is smaller when compared to Lithium where the No. 1 demand usage is already from LIBs. The Graphite market is just staring to be influenced by LIBs and that is why Lithium prices have responded ahead of Graphite. Graphite also is important because of the sheer number of LIBs required and they will need a commodity with enough abundance for this massive amount of electrical storage.
I also asked Dr. Buiel about the amounts of Lithium and Graphite in LIBs and it boils down to a scientific formula as follows. The graphite used in LIBs has a capacity of about 350-360 mAh/g. A LIB has a nominal voltage of about 3.8V and so the capacity of the Graphite is 355 mAh/g X 3.8V = 1.35 Wh/g of Graphite. So a 60 kWh Tesla battery will contain 60,000 / 1.35 = 44,444 g of Graphite or 44.4 kg of Graphite. The stoichiometry of Li in Graphite is LiC6. So this will give you the ratio of Li to Graphite in a cell. Li is introduced into the LIB through the cathode and electrolyte.
In simple terms this mean six times more Graphite in a LIB compared to Lithium.
The importance of Graphite to China is because they are the manufacturing basket of the world and as such have the biggest pollution issues so are at the forefront of EVs and LIB manufacturing. China is the largest auto market and in September joined the ranks to ban vehicles powered by fossil fuels. This map gives a clear picture how important China and Asia are with EVs and LIBs.
What China has commissioned or partly commissioned, plus under construction is 39,010 MWh which is almost eight times more than the US at 4,970 MWh. Korea and Japan are well ahead of the US as well. In North America we hear lots of noise because of Tesla and they represent most of the circles in the US but they are not very big in the overall scheme of things.
The bigger issue is the supply of Graphite, Lithium and Cobalt/Nickel and is what I call the environmental catch 22. Many of these countries pushing EVs to improve the environment also have a very restrictive and a time consuming process to get environmental approval for new mines. In many countries it can take 5 to 10 years to get environmental mining approvals. China has been producing their own raw materials in particular graphite but they no longer have enough and are not exporting much. Tesla has stated they prefer to source their materials in North America but this is probably not realistic.
It will be a long ways off for any big lithium mines in North America but maybe some smaller ones. Over half the world's littium resources are in South America and is probably the best hope for more quantities of the white metal. Newest significant production looks to be Lithium Americas (OTCQX:LACDD) which are moving ahead with Stage 1 on their Cauchari-Olaroz project in Argentina with initial production in H2 2019. Also some new supply in Australia. A good summary on this slide in the Lithium Americas presentation.
To date investors have been more focused on Lithium than Graphite. It is easy to see with this chart of the Lithium etf (LIT). Note the price rise and more so the surge in trading volume. My last pick in the Lithium market, Quantum Minerals (OTCPK:QMCQF), surged from 10 cents to $1.50 so is another sign of this bubbly market. LIT's holdings include two of the top Lithium producers, Albemarle Corp. and FMC Corp. but the main revenue driver in these companies is actually other metals/materials. The ETF also includes Samsung, LG Chem, Panasonic and even Tesla so it is really more a battery tech ETF than Lithium.
The best way to invest directly in Lithium is some of the juniors with a total focus on the metal. However, these small stocks are risky and we already have a 300% or so move up in Lithium prices that has been providing lots of alcohol in the punch bowl.
Graphite seen an initial move up in 2010/11 until China supply pushed the market down. The market started changing in 2016 as China has run into its own graphite supply problems for it's domestic market, let alone exporting any. In October Benchmark Mineral reported that three graphite anode plants with an annual capacity of 100,000 tpa are being built by LuiMao Graphite in conjunction with BAIC Automotive Group Co., Ltd, ShanShan Technology and BTR New Energy Materials, with Hitachi Chem building a new facility in Japan. This will bring the total new capacity from the four anode megafactories to 360,000 tpa by 2020 – a tripling of capacity on today’s levels and enough to produce 300 GWh of LIBs or 6 million pure EVs the size of Tesla’s Model 3. Just these factories alone will require over 800,000 tpa of mined graphite.
Northern Graphite (OTCQX:NGPHF) has a graphite deposit with environmental permits in place and Mason Graphite (OTCQX:MGPHF) is getting close. Both are in Canada and if these obtain financing and construction started today, it could take two to three years to see production. Northern Graphite's bankable feasibility is for 15,900 tons per year. Masons Preliminary Feasibility on their Lac Gueret Graphite project in Quebec in visions producing 51,900 tons/year.
Graphite companies appear to be on two different strategies. Some trying to compete with China with their projects far outside of Asia so diversifying out of Asia while others planning to complement China's plan and develop new resources for that market.
With the later, one such company is Elcora Resources (OTCQB:ECORF) which has small production from their Ragedara mine in Sri Lanka. It is fully permitting and producing with an objective to ramp up production to 10,000 tpa. Elcora also is securing other mines in the country as well as neighboring countries that can provide close access to Asia markets.
Elcora is not really a miner but a vertically integrated company to supply anode material to the LIB market. To provide the best quality control and a superior product, Elcora believes it is an advantage to control the graphite from production to finished anode product for LIBs and their graphene for the current scientific research. To that end they have built a state-of-the-art lithium ion battery research and development laboratory in Halifax, Nova Scotia to serve a growing market.
Elcora produces the world's best graphene
Led by Dr. Ian Flint, Elcora already has proven they can produce the best graphene in the world.
Dr. Flint has over 25 years experience in graphite metallurgy, engineering and processing. He also has a strong background in equipment and circuit designs, the development of materials, physical processing, hydrometallurgy and pyrometallurgy. Prior to joining Elcora, Dr. Flint has worked at Bissett Creek, Victoria Graphite, Quinto, Crystal Graphite Corp., Integrated Carbonics, and Worldwide Graphite. Dr. Flint also has over 10 years of teaching experience at Dalhousie University on mining engineering and graphite processing. Dr. Flint’s knowledge formed the funding block of Elcora’s proven technologies for graphite processing and graphene production. Here is an excellent YouTube video with Dr. Flint and graphene.
The Centre for Advanced 2D Materials (CA2DM) at the National University of Singapore (NUS) tested Elcora’s graphene. CA2DM has been dedicated to graphene R&D since 2010 and has received more than $200 million in funding. It is reported that the director of CA2DM, Dr. Antonio Castro Neto, played an important role in informing the Nobel committee regarding whether the Nobel Physics Prize should be awarded to Russians Andre Geim and Konstantin Novoselov of Manchester University in 2010. In recognition of Dr. Castro Neto’s contribution to the graphene industry, Science For Brazil named him the “Graphene Godfather.” CA2DM tested a large number of graphene samples from suppliers worldwide including well-known commercial producers from North America and Europe. It was concluded that Elcora’s graphene is the best quality in all areas tested, including the percentage of graphene content, average number of layers, and consistency in size.
Dr. Castro Neto on graphene: “It's one atom thick, it conducts electricity extremely well at room temperature, and it’s completely transparent. That means the number of applications for graphene is only limited by your imagination.”
Now, can Elcora produce the best battery anodes?
Elcora's lab is focused on quality control and developing their EL-I-C6 graphite anode powder for LIBs. Graphite powder is routinely tested using industry-standard cells to ensure the coulombic efficiency, reversible capacity, first-cycle loss and rate capabilities of the product are within Elcora's specifications. These traceable results will give customers confidence in Elcora's materials and their reliable performance.
The research and development laboratory is testing graphite from multiple sources within the supply chain; directly from the mine, processed or refined graphite, and convert it into fully functional lithium ion batteries. The company's capabilities include: mineral processing, refining, graphite particle size reduction and sizing, spheronization, purification, electrode slurry mixing, electrode slurry coating, drying, slitting, cell fabrication, cell testing, and advanced electrochemical analysis.
Another of the Jeff Dahn/Tesla alumni is Dr. Shane Beattie as the chief technology officer for Elcora. Dr. Beattie has more than 15 years of experience in energy storage and anode development. He earned his PhD working with Jeff Dahn at Dalhousie University. His post doctoral fellowship was with Dr. JeanMarie Tarascon at the LRCS, UPJV, Amiens, France. More recently, he was the technical director at Warwick University's battery pilot scale-up line.
Dr. Beattie will be responsible for expanding the company's existing capabilities to include testing of pouch cells, evaluating different graphite sources, supervision of the anode facility construction and related personnel, and interfacing with clients. He brings valuable experience working with several automotive companies using lithium-ion technology and with cell manufacturers.
On June 6 Elcora announcedthey are working closely with several lithium-ion battery manufacturers. Elcora has provided multiple kilograms of its purified, spheronized graphite anode powder to prospective customers. At that time Elcora had generated quality data from 18,650 cells using both nickel manganese cobalt (NMC) and lithium-iron-phosphate (LFP) cathodes. The data show that Elcora's graphite anode power is suitable in both high-power and high-energy density applications.
Given China's large LIB manufacturing base, Elcora plans to source graphite material near Asia markets. They have operations in Sri Lanka, inroads through Singapore and they have now opened an office in China to facilitate ongoing discussions with battery customers. Elcora is essentially negotiating with battery manufacturers who are looking to secure long-term contracts for graphite resources. Elcora’s graphite anode powder has been tested by numerous high-profile battery manufacturers with positive results and supply contracts are being negotiated.
In addition to graphite processing capabilities, Elcora also has internal expertise in LIBs. Elcora’s Battery Technology lab is currently undertaking research and development projects for next-generation Li-ion battery technology. A key project involves using Elcora’s graphene in Li-ion battery electrodes to increase capacity and power. This successful project will result in batteries that can be fully charged in minutes rather than hours. The BT lab also is used for quality control and analysis of Elcora’s graphite anode powder to ensure customers receive consistent and state-of-the-art graphite anode powder.
Interest has been picking up in the stock and it recently tested its high near $0.40. The pullback from that provides a good entry point. Any progress towards supply agreements for their LIB anode material could impact the valuation very positively.
A new graphite mine in Mozambique
I also covered Syrah Resources (OTCPK:SYAAF) in last year's article. Syrah was in the final stages of bringing their Balama Project in Mozambique into production. The feasibility projects 313,000 tons per year at an average head grade of 16.25% carbon. This will be a very large operation and I believe the market is skeptical that Syrah can mine this much and sell it. The mine has been under construction for most of 2016 and this year. The rubber is about to hit the road so to speak as last Friday Syrah announced their first production of saleable flake graphite with a finished grade in excess of 95% carbon.
CEO, Shaun Verner commented: “Following the intermediate concentrate produced in late October, Syrah has now successfully commissioned the final stages of the flake circuit including polishing, filtration, drying, screening and bagging. Flake graphite produced is within our expected grade range, in excess of 95% fixed carbon. Remaining commissioning activities will focus on the fines circuit and further optimization works. We expect our first shipment of flake product from Nacala Port in the coming weeks. First cash receipts are expected in early 2018 with production of 160,000 to 180,000 tonnes1 in 2018, following customer qualification processes.”
Commissioning sequence was prioritized for initial production of coarse flake.
Full ore commissioning of the combined crusher, primary mill, scrubber, classification, thickener and tails disposal to the tailings storage facility is complete and optimization work is underway.
Ore commissioning of the flake circuit including flotation, polishing, drying, screening and bagging completed with first production of saleable bagged graphite achieved.
Chipembe Dam pipeline is fully commissioned.
During the commissioning phase, costs of Balama production offset by any revenue received will be capitalized on the balance sheet until commercial production is declared. Further details will be provided as commissioning draws to completion and production ramps up.
Syrah intends to ramp up toward full production in 2019 and producing an anode material supply outside of China with a focus on the U. S. Their next plan of development is an Anode production factory in Louisiana US with initial production of 10,000 tons per year. Construction costs are expected to be US$40 million with initial production in Q2 2018 to be used for product qualification and hopefully commercial sales agreements by end of 2018.
This graphic from their presentation shows how they would fit in on the world stage with China.
Syrah announced a binding sales agreement with BTR, the world's largest battery anode producer, on September 8, 2017 for 30,000 tonnes of graphite from Balama in first year of production. This is a significant endorsement of Balama’s quality and suitability for the battery market. Further negotiations are underway with other Chinese spherical and battery anode producers.
As I mentioned, the market has been skeptical if Syrah can pull off a new and such a big project but they are starting to get some respect and stock appreciation in the past couple months. The current valuation is just over Australian $1.2 billion and I believe there is plenty of room on the upside as they increase production and make inroads in the U.S. battery anode market.
Disclosure: I am/we are long "QMCQF" "ECORF" "NGPHF" "SYAAF".
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.