Tesla Motors Inc (NASDAQ:TSLA) is planning on being one of the biggest power cell makers in the world in the coming years, but the firm doesn’t have the metals needed in order to make that a reality. Lithium is a vital material in the building of Model S power packs, but Tesla Motors, being a car-maker, doesn’t have a whole lot of it in Fremont. The firm just solved that problem.
On Friday morning Rare Earth Minerals PLC and Bacanora Minerals Ltd announced that they had come to terms with Tesla Motors in a deal to supply the Nevada Gigafactory with lithium hydroxide. The deal will see Elon Musk’s firm draw the metal from a project in Sonora, Mexico.
Tesla Motors builds a supply chain
Cost is a major issue as Tesla Motors (NASDAQ:TSLA) scales up power cell production. The scale at which it plans to make batteries in the Gigafactory is something that Elon Musk and his team have never approached before. The deal revealed this morning shows that the firm is building the links it will need to make the battery plant work.
To see a list of high yielding CDs go here.
It calls for the supply of lithium to the Gigafactory at terms that Tesla Motors will set. As the plant is not yet up and running it seems that the concrete numbers have not yet been put together. Tesla, and Rare Earth, may also have chosen not to disclose the figures in full.
Rare Earth chairman David Lenigas said “The selection of the Sonora lithium project as one of the lithium suppliers to the Tesla Gigafactory is a landmark transaction.”
Tesla Motors risks the Gigafactory on Lithium
Last year, Cosmin Laslau, an energy storage expert from Lux Research said that lithium supply wouldn’t be a major hurdle for Tesla Motors. He says for “these raw materials, we don’t really have a concern for the supply of them.” What could be a problem, however, is the putting together of a supply chain that drives costs down rather than up.
It’s not clear if the Sonoro Project will be enough to satisfy all of the firm’s demand going forward. Joe Lowry, a Lithium Industry analyst, reckons that the firm may have to fall back on Chinese producers that get the metal from ore rather than seawater.
Lowry says that the exports from China “has not met the battery quality standard on a consistent basis.” Improving that quality is likely to increase “costs and impact the overall quality of the lithium ion cells produced at least in the short term,” he adds. This is what Mr. Lowry call Tesla Motors’ “Real China Problem.”
Sam Jaffe, who works with Navigant Research, reckons that the Gigafactory is an “incredible risky business move” on the part of Tesla Motors. But that, he added, is what makes Tesla “such an exciting company to watch.”
Hedging costs at Tesla Motors
In order to get around those risks, Tesla Motors will have to try its hand at hedging bets on the supply chain. Laslau of Lux says the firm will “have to lock up the supply and secure yourself against any strong variances in the price of these raw materials, because that could throw off your entire business.”
Sam Jaffe says that Tesla Motors will likely have to use a complex mix of buying futures in the metals market and form direct deals with those pulling the metal out of the ground (and out of the ocean.)
Part of keeping those risks low means not relying on one single supplier for any resource. The press release says “This 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.”
Hedging with complex financial deals will open Tesla Motors up to a lot of risk that was not there before, and it will make its balance sheet, and its earnings numbers, more complex and opaque.
Driving costs down at Tesla Motors Inc (NASDAQ:TSLA)
The whole point of the Tesla Motors power cell plant is to drive down the price of the Model S and the cars it will release in future. In order to get there the firm will need to make deals in the metals market, and in other areas, to assure that it can get what it needs at a cost that’s worthwhile.
The deal that the firm signed this morning may help it to do that, but it’s likely that there’s a lot more to come in terms of supply agreements. That’s the nitty-gritty of business that most fans of the firm will never see, nor care about, but it’s something that those with shares will want to watch closely.
Tesla Motors is turning itself into much more than just a start-up car maker with some cool tech. In a few years the firm plans to be an industrial powerhouse, making power cells for both the auto market and home solar storage.
That’s a huge change in the way the firm will operate. Even if it doesn’t make any sales in the power cell market, outside of those in the Model S, Model X and Model 3, the Gigafactory is going to be a huge risk for the firm, and have a huge impact on its balance sheet and spending.
Elon Musk and Deepak Ahuja are aware of those problems, but they know that in order to get the price of the Model 3 to $35,000 the power cells that make Tesla Motors cars go need to get a lot cheaper.
The firm has already made great strides in reaching key levels, and the cost of the cells appear to be below $200 per kWh. Going beyond that requires the Gigafactory, and a level of production that Tesla Motors simply isn’t used to. That’s risky but, as Sam Jaffe says, shooing for the stars is what makes the firm worth watching, and worth investing in at such a high valuation.