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lift-off for the Gigafactory","lithium-lift-off-for-the-gigafactory","article/lithium-lift-off-for-the-gigafactory",{"_uid":557,"date":558,"tags":559,"editor":560,"content":570,"excerpt":907,"featured":50,"reporter":908,"_editable":912,"component":913,"seo_title":553,"categories":914,"visibility":926,"author_company":49,"featured_image":927,"seo_description":907,"author_full_name":49,"author_job_title":49,"formattedDate":932,"formattedArticleDate":933},"72d7c01a-a982-4e42-8a3b-046532dca389","2016-07-20 00:00",[],[561],{"slug":562,"name":563,"content":564},"didi-bostock","Didi Bostock",{"job_title":565,"image":566,"bio":568,"linkedin":569},"Editor - Energy Transition & Economics",{"filename":567},"https://a.storyblok.com/f/287943243085208/512x512/2c5ca5c1a3/didi-bostock.jpeg","Didi is the Energy Transition & Economics Editor at Benchmark, covering a broad range of markets across the energy transition. His remit spans from downstream sectors such as BESS and EVs, through to midstream such as new technologies and battery production, to upstream critical minerals mining. He also leads on financial analysis across these supply chains, alongside in-depth policy analysis.\n","https://www.linkedin.com/in/didi-bostock-656342198/",{"type":571,"content":572},"doc",[573,580,585,590,595,600,605,610,615,620,625,628,635,640,645,650,655,658,663,668,673,678,683,688,693,698,703,708,713,718,723,728,731,736,741,746,751,756,761,764,769,774,779,784,789,794,799,804,809,814,819,824,829,834,839,844,847,852,857,862,867,872,877,882,887,892,897,902],{"type":574,"attrs":575,"content":576},"paragraph",{"textAlign":49},[577],{"text":578,"type":579}," Tesla Motors starts its lithium sourcing for the Gigafactory amid an industry in shortage, but what do the deals actually mean? Simon Moores analyses both agreements Tesla has announced with early stage lithium developers and what options this leaves on the table for the electric vehicle manufacturer","text",{"type":574,"attrs":581,"content":582},{"textAlign":49},[583],{"text":584,"type":579},"After 18 months of speculation, Tesla Motors has got the wheels turning on its Gigafactory raw material deals to a wave of speculation and controversy.",{"type":574,"attrs":586,"content":587},{"textAlign":49},[588],{"text":589,"type":579},"In September 2015, agreements with two early stage lithium explorers were announced.",{"type":574,"attrs":591,"content":592},{"textAlign":49},[593],{"text":594,"type":579},"Bacanora Minerals and Pure Energy Minerals both received the green light from the electric vehicle producer to supply future production of lithium chemicals from their respective sources to the super lithium-ion battery plant that is under construction in Nevada.",{"type":574,"attrs":596,"content":597},{"textAlign":49},[598],{"text":599,"type":579},"Bacanora Minerals is seeking to develop a lithium clay resource in northern Mexico. The deposit has an indicated resource of 1.14m tonnes of lithium carbonate equivalent (LCE) at 2,200ppm, and an inferred resource of 6.3m tonnes at 2,300ppm.",{"type":574,"attrs":601,"content":602},{"textAlign":49},[603],{"text":604,"type":579},"Supply from the Sonora project is dependent on the company being able to raise the funding to bring what will be a new commercial source of lithium into production. Towards the end of September 2015, Bacanora increased its drilling programme to progress towards a prefeasibility stage.",{"type":574,"attrs":606,"content":607},{"textAlign":49},[608],{"text":609,"type":579},"Pure Energy Minerals is developing a more traditional source of lithium from its brine project in Nevada, strategically located next to the only active source of lithium in North America, Albemarle’s Silver Peak operation.",{"type":574,"attrs":611,"content":612},{"textAlign":49},[613],{"text":614,"type":579},"The Canada-based company has not yet established a proven or probable reserve estimate for its Clayton Valley brine project, but estimates an inferred resource of 816,000 tonnes. It expects to complete a preliminary economic assessment in Q2 2016.",{"type":574,"attrs":616,"content":617},{"textAlign":49},[618],{"text":619,"type":579},"The deal was the second to be announced by Tesla following political pressure over its selection of Mexico as a primary source over a state which is known for its lithium resources and has given the car manufacturer $1.25bn in tax breaks.",{"type":574,"attrs":621,"content":622},{"textAlign":49},[623],{"text":624,"type":579},"Until now, Tesla’s raw material negotiations, for lithium and graphite especially, have gone under the radar and not been publicly disclosed. But Tesla has allowed both developers to press release the supply agreements in a bid to raise funding for both sources. While the deals do not quite constitute an off-take agreement seen in commodity circles, Benchmark understands that Tesla is financially tied into the deals for the long term providing both companies can meet milestones that include raising funds and constructing a pilot plant with successful bulk sampling.",{"type":574,"attrs":626,"content":627},{"textAlign":49},[],{"type":629,"attrs":630,"content":632},"heading",{"level":631,"textAlign":49},3,[633],{"text":634,"type":579}," Why have the deals stirred the industry?",{"type":574,"attrs":636,"content":637},{"textAlign":49},[638],{"text":639,"type":579},"The two points that have caused most controversy are the price which Tesla has agreed to pay and the fact that both sources are early stage developments.",{"type":574,"attrs":641,"content":642},{"textAlign":49},[643],{"text":644,"type":579},"The electric vehicle company, for now, has avoided publicly announcing any discussions with the established lithium majors of SQM SA, Albemarle, FMC Lithium and Talison Lithium.",{"type":574,"attrs":646,"content":647},{"textAlign":49},[648],{"text":649,"type":579},"It has also not struck any deals with advanced stage lithium developers that have economic feasibility studies published.",{"type":574,"attrs":651,"content":652},{"textAlign":49},[653],{"text":654,"type":579},"In essence, the lithium deals that Tesla has agreed to so far are a huge leap of faith in both Bacanora and Pure Energy, with each junior yet to submit any form of studies for key factors such as economic reserve estimates and cost of production.",{"type":574,"attrs":656,"content":657},{"textAlign":49},[],{"type":574,"attrs":659,"content":660},{"textAlign":49},[661],{"text":662,"type":579},"This fact has surprised many in the mining industry, particularly considering the scale of the Gigafactory and the short timeframe in which lithium will be needed.",{"type":574,"attrs":664,"content":665},{"textAlign":49},[666],{"text":667,"type":579},"However, both Pure Energy and Bacanora are aligned with Tesla’s plan to drive the cost of batteries down and are willing to accept a reduced raw material price as a result. Both companies are also developing their own new processing methods which they believe will reduce the production cost of lithium.",{"type":574,"attrs":669,"content":670},{"textAlign":49},[671],{"text":672,"type":579},"Pure Energy, for example, is working with Tenova Bateman and POSCO to commercialise a new lithium extraction process from brine which involves fewer processing steps than presently employed in the industry.",{"type":574,"attrs":674,"content":675},{"textAlign":49},[676],{"text":677,"type":579},"But Benchmark estimates that the Gigafactory will need at least 10,000 tonnes of battery grade lithium hydroxide by the end of 2018, 20,000 tonnes by 2019 and 2530,000 tonnes by the end of 2020 should the ramp-up go to plan. These volumes mean the company will more than likely need shorter term supply in addition to the longer term prospects of Bacanora and Pure Energy.",{"type":574,"attrs":679,"content":680},{"textAlign":49},[681],{"text":682,"type":579},"Tesla will single-handedly increase lithium hydroxide demand by 50% on 2013 levels at a time when demand is also increasing from other battery producers that are expanding lithium-ion cell output on a significant scale.",{"type":574,"attrs":684,"content":685},{"textAlign":49},[686],{"text":687,"type":579},"Should the company be looking to purchase even 10,000 tonnes today, the industry would not be able to meet this demand.",{"type":574,"attrs":689,"content":690},{"textAlign":49},[691],{"text":692,"type":579},"The second most controversial aspect of the lithium deals is the price, or more accurately the assumed price.",{"type":574,"attrs":694,"content":695},{"textAlign":49},[696],{"text":697,"type":579},"While no price was cited in either Bacanora or Pure Energy’s press releases, Benchmark estimates it to be at a 30% discount to the present market price.",{"type":574,"attrs":699,"content":700},{"textAlign":49},[701],{"text":702,"type":579},"Pricing mechanisms in these contracts can vary, however. It is possible that a production cost plus a fixed cash price type of offer could be on the table, which would most likely still constitute a heavy discount on today’s prices but protect the margins of exploration stage lithium companies.",{"type":574,"attrs":704,"content":705},{"textAlign":49},[706],{"text":707,"type":579},"It is also expected that Tesla will not be committing to 100% of the material, leaving quantities available for the spot market.",{"type":574,"attrs":709,"content":710},{"textAlign":49},[711],{"text":712,"type":579},"Such deals do not take into account price volatility in the lithium market and could see companies fail to benefit from rising prices or fall into a loss should production costs run higher than expected, which is common for the first three years of a new operation.",{"type":574,"attrs":714,"content":715},{"textAlign":49},[716],{"text":717,"type":579},"At times of peak prices such as this year, which has seen hydroxide rise over 20% and carbonate over 10%, this type of deal would understandably shelter Tesla from unforeseen increases.",{"type":574,"attrs":719,"content":720},{"textAlign":49},[721],{"text":722,"type":579},"Bacanora explained: “Tesla will purchase minimum quantities in accordance with an agreed upon pricing formula, below current market prices, with actual prices and volumes that can only be finalised during the development phase in due course.” An excerpt from Pure Energy’s release also sheds light on this. “The agreement sets a predetermined price that is below current market rates and is aligned with Tesla’s goal to continuously reduce the cost of its lithium ion batteries,” the company explained.",{"type":574,"attrs":724,"content":725},{"textAlign":49},[726],{"text":727,"type":579},"It is a low price that neither the advanced exploration companies nor the established lithium producers were willing to accept.",{"type":574,"attrs":729,"content":730},{"textAlign":49},[],{"type":629,"attrs":732,"content":733},{"level":631,"textAlign":49},[734],{"text":735,"type":579}," Tesla’s hedge",{"type":574,"attrs":737,"content":738},{"textAlign":49},[739],{"text":740,"type":579},"Benchmark believes Tesla has announced both lithium deals as a hedge against the major lithium producers. On the surface it seems like a significant risk for the company to partner with early stage lithium juniors for all of its supply; however, it is more likely Tesla was left with no choice but to attempt to lock up lithium resources in case it does not reach an agreement with any major suppliers. It also allays shareholder fears and political pressure that was building.",{"type":574,"attrs":742,"content":743},{"textAlign":49},[744],{"text":745,"type":579},"It can also be seen as a tactic to add pressure onto the major supplier and advanced juniors, with economic and processing test work completed to meet the company’s price demands.",{"type":574,"attrs":747,"content":748},{"textAlign":49},[749],{"text":750,"type":579},"It is a strategy that has been seen before with Tesla during its battery cell negotiations with Panasonic – flirting with LG Chem in the process – and with the Gigafactory locations, announcing a short list that included California and Texas before choosing Nevada, a state which offered the biggest tax incentives totaling $1.25bn.",{"type":574,"attrs":752,"content":753},{"textAlign":49},[754],{"text":755,"type":579},"Tesla is a company that is willing to exert its brand power to get the best deal; however, with lithium, Tesla does not hold the cards. The suppliers do.",{"type":574,"attrs":757,"content":758},{"textAlign":49},[759],{"text":760,"type":579},"If Tesla cannot get its specific grade of lithium hydroxide in the volumes required, the Gigafactory will not be in operation at the scale need to produce the lowest cost batteries in the world. Lithium has no substitutes and it is the bedrock raw material for lithium-ion battery technology. Demand is also at a high at the moment due to increasing battery demand in Asia, so lithium producers are not short of customers.",{"type":574,"attrs":762,"content":763},{"textAlign":49},[],{"type":574,"attrs":765,"content":766},{"textAlign":49},[767],{"text":768,"type":579},"Tesla’s focus on driving down cost on the raw material side has also surprised many, considering that the lithium in a Model S, for example, constitutes under 1% of the total price. It should be a supply security issue, not an economic one, for Tesla.",{"type":574,"attrs":770,"content":771},{"textAlign":49},[772],{"text":773,"type":579},"This brings up a further question: why is Tesla not interested in buying a stake in a lithium resource?",{"type":574,"attrs":775,"content":776},{"textAlign":49},[777],{"text":778,"type":579},"Benchmark believes that developing a new source of lithium is the only real way to secure the supply the Gigafactory will require. But it seems the company is not willing to fully commit to this strategy yet.",{"type":574,"attrs":780,"content":781},{"textAlign":49},[782],{"text":783,"type":579},"Vertical integration is ingrained in Tesla’s ethos firstly with constructing its own auto battery packs, then seeking to make the battery cells with the Gigafactory, but it seems to be stopping short of investing in the entire supply chain all the way upstream to the mine.",{"type":574,"attrs":785,"content":786},{"textAlign":49},[787],{"text":788,"type":579},"It has led many to question whether Tesla has underestimated the difficulties in bringing new sources of lithium to market.",{"type":574,"attrs":790,"content":791},{"textAlign":49},[792],{"text":793,"type":579},"It is important to note that lithium is not a commodity but a speciality chemical.",{"type":574,"attrs":795,"content":796},{"textAlign":49},[797],{"text":798,"type":579},"It is not a uniform product that is easily mined and transported to a wide ranging end market such as iron ore, but a product of both mining and chemical processing practices that is tailored to precise specifications.",{"type":574,"attrs":800,"content":801},{"textAlign":49},[802],{"text":803,"type":579},"The problems Orocobre has had this year in ramping up its new brine operation and lithium’s first since the 1990s – should serve as an example of the difficulties in bringing a new project into production. The Australian company was the most successful lithium junior graduating from early stage explorer to producer in seven years, a short time frame considering the mining industry average of 10 years.",{"type":574,"attrs":805,"content":806},{"textAlign":49},[807],{"text":808,"type":579},"But building the mine is just the start.",{"type":574,"attrs":810,"content":811},{"textAlign":49},[812],{"text":813,"type":579},"The next significant hurdle is optimising the processing plant to produce a consistent product that end users will accept. Lithium plants can take years to reach their nameplate capacity, which means they cannot be relied upon to produce 100% of what is expected.",{"type":574,"attrs":815,"content":816},{"textAlign":49},[817],{"text":818,"type":579},"Even if Tesla invested its own money into either early stage or advanced stage lithium developers, it still would not get the product it needs by the Benchmark estimated timeframe of 2018/2019.",{"type":574,"attrs":820,"content":821},{"textAlign":49},[822],{"text":823,"type":579},"This brings us full circle back to the original question: where will Tesla get its lithium from?",{"type":574,"attrs":825,"content":826},{"textAlign":49},[827],{"text":828,"type":579},"It is likely that it will have to pay market price from the existing producers for the short term with new sources making up the long term supply shortfall. And this would still allow the company to produce low cost batteries as the cost of graphite and lithium are not major contributors to the overall price of a lithium-ion cell. But the volumes required in three years’ time means the producers will need notice before committing to significant expansions.",{"type":574,"attrs":830,"content":831},{"textAlign":49},[832],{"text":833,"type":579},"Would any of the incumbent producers want to invest their own capital to expansions for the Gigafactory without long term contracts in place? It would require Tesla to accept a price close to market levels, something that today appears unlikely.",{"type":574,"attrs":835,"content":836},{"textAlign":49},[837],{"text":838,"type":579},"Since 2012, no new lithium supply has come from the lower cost brine resources in Chile and Argentina with 100% of expansions coming from the more expensive hard rock, spodumene source operated by Talison Lithium in Australia – lithium feedstock that is almost exclusively sold into China.",{"type":574,"attrs":840,"content":841},{"textAlign":49},[842],{"text":843,"type":579},"The brine producers have not been able to increase their supply for a number of reasons, the most serious being political issues in the lithium heartland of the Atacama in Chile. The Chilean government has put under review its largest producer, SQM, and the circumstances surrounding the lithium extraction contracts it was awarded in the early 1990s.",{"type":574,"attrs":845,"content":846},{"textAlign":49},[],{"type":574,"attrs":848,"content":849},{"textAlign":49},[850],{"text":851,"type":579},"This has resulted in a new CEO being installed and a continuing legal battle to not only expand production in line with lithium quotas set by the government, but also to maintain its status as a leading lithium producer.",{"type":574,"attrs":853,"content":854},{"textAlign":49},[855],{"text":856,"type":579},"It is a situation that could not have been foreseen even a few years ago, with Chile seen as a strong and stable present and future lithium supplier, with the lowest costs in the world.",{"type":574,"attrs":858,"content":859},{"textAlign":49},[860],{"text":861,"type":579},"This leaves Talison Lithium, the higher cost hard rock lithium miner, as a strong shortterm potential supplier to the Gigafactory via Chinese chemical processors. But Talison is 51% owned by Chinese producer Sichuan Tianqi Lithium Industries Inc, which ships the majority of spodumene concentrate in Australia. The remaining 49% is held by Albemarle Corp, the US chemicals manufacturer that recently purchased Rockwood Lithium.",{"type":574,"attrs":863,"content":864},{"textAlign":49},[865],{"text":866,"type":579},"At present, Albemarle seems the most logical option for Tesla.",{"type":574,"attrs":868,"content":869},{"textAlign":49},[870],{"text":871,"type":579},"While the company owns the significant lithium brine operation in Chile’s Atacama, it recently announced a plan to build a 50,000 tpa spodumene-based lithium chemicals plant in, most probably, North America to supply the auto battery industry.",{"type":574,"attrs":873,"content":874},{"textAlign":49},[875],{"text":876,"type":579},"The plant will take Albemarle’s share of concentrate from Talison’s Greenbushes spodumene mine and is expected to re-route the supply to the US instead of China. However, it is not new supply rather a processing capacity expansion.",{"type":574,"attrs":878,"content":879},{"textAlign":49},[880],{"text":881,"type":579},"The significant investment is set to cost Albemarle in excess of $500m and will be at the higher end of the lithium cost curve.",{"type":574,"attrs":883,"content":884},{"textAlign":49},[885],{"text":886,"type":579},"It was clear from Albemarle’s timing of its announcement, just a day after Tesla announced its second deal with Pure Energy, that the lithium producer was putting its stake in the ground.",{"type":574,"attrs":888,"content":889},{"textAlign":49},[890],{"text":891,"type":579},"Coincidentally, the timing of the new plant is at the pinch point when Tesla will need its lithium supply.",{"type":574,"attrs":893,"content":894},{"textAlign":49},[895],{"text":896,"type":579},"But with volumes needed not only by Tesla but also other battery producers that are enacting huge supply expansions an order of magnitude bigger than today’s lithium-ion battery industry, it is likely every sector of the upstream lithium supply chain, early stage and advanced explorers alike, will have to play their part.",{"type":574,"attrs":898,"content":899},{"textAlign":49},[900],{"text":901,"type":579},"The deals with Pure Energy and Bacanora also reflect Tesla’s desire for sourcing from North America.",{"type":574,"attrs":903,"content":904},{"textAlign":49},[905],{"text":906,"type":579},"Lithium’s evolution is well underway but, for now, the posturing has just begun.","Tesla Motors starts its lithium sourcing for the Gigafactory amid an industry in shortage, but what do the deals actually mean? Simon Moores analyses both agreements Tesla has announced with early stage lithium developers and what options this leaves on the table for the electric vehicle manufacturer",[909],{"slug":562,"name":563,"content":910},{"job_title":565,"image":911,"bio":568,"linkedin":569},{"filename":567},"\u003C!--#storyblok#{\"name\": \"article\", \"space\": \"\", \"uid\": \"72d7c01a-a982-4e42-8a3b-046532dca389\", \"id\": \"\"}-->","article",[915,918,921,924],{"slug":916,"name":917},"batteries","Batteries",{"slug":919,"name":920},"critical-minerals","Critical Minerals",{"slug":922,"name":923},"gigafactories","Battery & Gigafactory",{"slug":925,"name":8},"lithium","private",{"id":49,"alt":928,"name":928,"focus":928,"title":928,"source":928,"filename":929,"copyright":928,"fieldtype":930,"meta_data":931,"is_external_url":51},"","https://a.storyblok.com/f/287943243085208/24ce4ec529/bm-screen-shot-2016-07-20-at-181003.png","asset",{"alt":928,"title":928,"source":928,"copyright":928},"Jul 20, 2016","20th July 2016",[],[],1792773948954]