Survey: Will Tesla’s Gigafactory be Good for Lithium?

In the wake of Tesla’s announcement, an analyst at Goldman Sachs (NYSE:GS) estimated that Tesla’s ambitious Gigafactory could potentially consume 17 percent of current lithium supply, which could be a boon for lithium companies.

According to Goldman Sachs’ Robert Koort, the proposed factory will need somewhere in the area of 15,000 to 25,000 tons of lithium carbonate per year when it reaches full capacity. In order to fill this need, the company will need to partner with a producer.

Junior speculation

In a March 12 edition of Morning Notes, Chris Berry, founder of House Mountain Partners, looks at the impact Tesla’s Gigafactory could have on junior miners.

Berry warns investors that although both lithium and graphite juniors have seen share price increases since Tesla’s announcement, it is dangerous to assume that a major manufacturer will rely on a junior not yet in production.

“This is not to say that a select junior couldn’t integrate into TSLA’s eventual supply chain,” Berry writes, “but given the risks associated with junior mining today and the fact that the lithium market is an oligopoly with excess capacity, making a bet on a junior partnering with TSLA seems like a speculation.”

Major options

If juniors are too speculative a risk for Tesla, then what options remain?

With big names like Rockwood Holdings (NYSE:ROC), Sociedad Quimica y Minera (NYSE:SQM) and FMC (NYSE:FMC), the electric vehicle manufacturer doesn’t have too many options to choose from. Add to that Tesla’s plant location choices of either Nevada, Arizona, New Mexico or Texas, and it seems that the choice is pretty clear. Given Nevada’s proximity to the electric vehicle manufacturer’s production facility in Fremont, California, that state is the most logical choice. Further, Nevada is home to Rockwood Holdings, a producing lithium company as well as the world’s top producer of lithium compounds.

But what about those juniors?

One of the overarching themes in the lithium space is the oligopoly that a select few companies have over lithium production. With three major players holding the lithium market in a stranglehold, it will be difficult for smaller companies to make significant strides in selling their product.

But, as mentioned, it is not impossible to see lithium juniors succeed in light of the Tesla proposal.

Kirill Klip, president of International Lithium (TSXV:ILC), views the announcement of Tesla’s Gigafactory as a “groundbreaking development.”

Tesla “brought attention to what Elon Musk has accomplished,” Klip told Lithium Investing News. “He showed to everyone that electric cars are not toys anymore — they are for real.”

Through its intention to reduce electric vehicle costs, Tesla could succeed in dramatically dropping the cost of lithium-ion batteries.

“For our industry it will be a very big boost because right now, the cost of lithium material in the battery is not more than 2 to 3 percent,” Klip said.

Kilp also pointed to a similar announcement from LG Chem, whose CEO, Park Jin-soo, is said to be mulling over building an electric vehicle battery plant in China. That would add to the company’s existing battery plant in China, where it produces smaller-scale batteries for smartphones and tablets.

Given that Tesla alone will require 17 percent of current lithium supply and also that not all lithium produced is battery grade, Klip said that the addition of more battery plants will create a greater need for lithium producers to feed the market.

But that’s not all.

Klip also pointed to China’s dramatic shift in its own emissions initiatives, whose aim is to encourage the use of electric vehicles. That being said, Klip used International Lithium as an example of what investors could expect to see transpiring in a market rushing to secure battery grade lithium: strategic partners.

Despite being an early stage exploration company, International Lithium has a strategic partnership with Ganfeng Lithium. Ganfeng is a specialty metals producer with an interest in a secure a stable supply of lithium as demand increases.

Klip also looks beyond the realm of electric vehicles and into the growing markets for secondary energy storage and solar power. All of which he explains will need their own infusion of lithium as technologies become more refined and mainstream.

So really, while Tesla might not necessarily pair up with a junior, the company’s proposal acts as a rather large catalyst for the lithium market moving forward.

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.