Tesla Signs First Lithium Supply Agreement

Late Thursday night, Bacanora Minerals (TSXV:BCN,LSE:BCN) and joint venture partner Rare Earth Minerals (LSE:REM) announced a conditional lithium hydroxide supply agreement with Tesla Motors (NASDAQ:TSLA).
The deal marks the first much-anticipated raw materials supply agreement for the electric vehicle manufacturer. Tesla’s lithium-ion battery gigafactory in Nevada is expected to require large quantities of lithium, graphite and cobalt once it reaches capacity.
Bacanora’s share price shot up 48 percent, to $1.90, on the TSXV on Friday, and was up 26 percent, at GBP88.50, in London. Rare Earth Minerals’ share price was up 20 percent in London, at GBP1.08, as of 3:22 p.m. BST.
Bacanora and Rare Earth Minerals hold the Sonora lithium project in Mexico, a mineral-rich, lithium-bearing clay deposit that is still being developed. The partners estimate that Sonora will have an initial production capacity of 35,000 tonnes of lithium compounds per year, ramping up to 50,000 tonnes. (Editor’s note: Bacanora has clarified that those estimates are “internal, Company estimates that have not yet been determined through a PEA, Pre-Feasibility or Feasibility study.”)

Under the terms of the deal — which is conditional upon development of Sonora, as well as product quality, pricing and timing of delivery — Tesla will purchase agreed-upon minimum tonnages, with estimated maximum purchases based on future production orders.
Furthermore, Tesla will purchase lithium hydroxide from Bacanora and Rare Earth Minerals at below-market prices, based on an agreed-upon formula.
No specific volumes are disclosed in the press release, but Benchmark Mineral Intelligence estimates that Tesla could take up to 80 percent of Sonora’s total output. The firm also estimates that Tesla’s gigafactory could consume 25,000 tonnes per year of lithium hydroxide once at capacity.
“This Supply Agreement with Tesla represents a vital and monumental step forwards in the commercialization of the large lithium resources that the Company holds, together with its partner REM, in Northern Mexico,” said Bacanora Chairman Colin Orr-Ewing in a statement.
Bacanora and Rare Earth Minerals are currently carrying out development work in support of a prefeasibility study for Sonora.

Thursday’s announcement stresses that the agreement “will form a portion of Tesla’s anticipated lithium-based feedstock needs; the remainder of which is expected to come from other lithium peers.”
Other lithium juniors advancing projects in North America include Western Lithium (TSX:WLC), Nemaska Lithium (TSXV:NMX), Pure Energy Minerals (TSXV:PE) and Dajin Resources (TSXV:DJI). Albemarle’s (NYSE:ALB) Silver Peak mine in Nevada is the only producing lithium operation in the United States.
Certainly, it’s interesting that Tesla signed a supply deal with a lithium junior. However, it’s worth noting that some are skeptical, such as Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal:

Honestly very very surprised that $TSLA did a deal with a lithium junior. Assuming it’s a hedge as they pursue additional supply.

— Chris Berry (@cberry1) August 28, 2015

Why would $TSLA sign a deal with a lithium play with no production history? — Chris Berry (@cberry1) August 28, 2015

Others commented on what the deal may mean for lithium supply overall:

#Tesla‘s #lithium supply announcement helps ensure hydroxide shortage! #lawofunintendedconsequences
— Joe Lowry (@globallithium) August 28, 2015

In any case, it will be interesting to continue watching the story unfold.

> @mramsey37 picks up the Tesla Lithium story. I feel this is just the start, more to come / unravel … https://t.co/G6EwgnbBjN
— Simon Moores (@sdmoores) August 28, 2015

 
Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned.