Tesla's (TSLA 6.30%) appetite for lithium is becoming increasingly ravenous as the electric-vehicle (EV) pioneer ramps up production of the Model 3, its first mass-market vehicle. Lithium is a silvery-white metal used to make the lithium-ion batteries that power EVs and other products, including the energy-storage products that Tesla and others produce.
Tesla and other companies that need lithium in their manufacturing processes have been eagerly inking longer-term supply agreements with producers to ensure they'll have adequate quantities. That's because lithium supply has been having a hard time keeping up with demand, thanks largely to the rising popularity of EVs.
This dynamic resulted in lithium prices soaring in 2016 and 2017, along with the stock prices of producers, such as diversified chemical giants Albemarle (ALB 4.05%) and SQM (SQM 3.98%). Lithium prices started falling off their peaks last year, which along with concerns about China's slowing growth and too much new production capacity coming online, contributed to stock prices plummeting. Supply, however, remains relatively tight.
So who are Tesla's lithium suppliers? And do any of them look like potentially good investments?
Tesla's lithium suppliers
According to company press releases and/or published reports, the following companies have or have had some type of agreement in place to supply Tesla with lithium hydroxide. (This list may not be all-inclusive.)
Tesla Agreement Date
|Pure Energy Minerals||Canada||Sept. 2015|
Joint venture partners Cadence Minerals and Bacanora Minerals
|U.K. and Canada, respectively||Aug. 2015|
Ganfeng is China's largest producer of lithium and the world's second- or third-largest producer (depending on source) behind the United States' Albemarle, and perhaps also behind Chile's SQM. In September, Ganfeng revealed that it has an agreement with Tesla to supply the EV maker with 20% of its annual lithium hydroxide production through 2020, which could be extended by three years. Shares of Ganfeng are not listed on a major U.S. stock exchange, nor do they trade over the counter (OTC) in the U.S. Thus most U.S. investors looking for exposure to the lithium realm should explore other options.
Kidman Resources has a 50/50 joint venture with SQM to develop its Mt. Holland lithium project in the Earl Grey hard-rock lithium deposit in Western Australia. In May 2018, Kidman entered into an offtake agreement with Tesla "for an initial term of three years on a fixed-price take-or-pay basis from the delivery of first product," according to Kidman's press release, adding that the agreement "contains two 3-year term options." The company said that the agreement "equates to less than 25% of Kidman's portion of initial nameplate production for the first three years from the refinery." Kidman's shares are listed on the Australian Securities Exchange (ASX) and also trade over the counter in the U.S, but the OTC shares are extremely thinly traded, which means volatility could be considerable. For this reason, along with the fact that Kidman is a developmental stage company that's not profitable, the stock is not a good fit for most U.S. investors.
Pure Energy Minerals is developing the Clayton Valley South Lithium Brine project in Nevada, which is located adjacent to the only producing lithium mine in the U.S., Albemarle's Silver Peak lithium brine operation. The project is roughly 200 miles away from Tesla's giant lithium-ion battery cell factory, the Gigafactory 1. Indeed, when Tesla chose Nevada for the location of its first Gigafactory, industry watchers speculated that the Silver State's plentiful lithium supply was one main reason. According to Pure Energy's Sept. 2015 press release, "provided that Pure Energy meets certain terms and conditions ... the Agreement establishes a commitment for an annual purchase volume of product over a period of 5 years by Tesla and/or its authorized purchasers."
Cadence Minerals (which was named Rare Earth Minerals until March 2017) and Bacanora Minerals are JV partners in the Sonora Lithium Project in Northern Mexico. In Aug. 2015, they signed a conditional long-term lithium hydroxide supply agreement with Tesla, according to published reports. Neither company's stock is listed on a major U.S. stock exchange, nor is either company profitable on an operating basis. For these reasons, their stocks are not good choices for most U.S. investors.
Are there better lithium stock investment options?
U.S. investors interested in the lithium space might consider further exploring the three largest lithium players traded on a major U.S. stock exchange: Albemarle, SQM, and Livent (LTHM 3.71%), the last of which is a Philadelphia-based company that was formerly FMC's lithium business and is now fully independent. Unlike many of the smaller lithium players, all three companies are profitable. Livent is the only one of the three that is a pure play on lithium, as Albemarle and SQM both have other businesses. That said, their lithium operations make up a considerable portion of their overall businesses. In the fourth quarter of 2018, Albemarle's lithium segment accounted for 37% of its total revenue and 55% of its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). SQM's lithium business comprised 41% of its total revenue and approximately 50% of its consolidated gross profit.
A volatile space
Only investors who have a higher-than-average risk tolerance and a long-term focus should consider investing in a lithium producer. The long-term demand picture remains bright because the EV revolution is still in the early innings. However, the key variable is how long it will take for enough new supply to be brought online to cause an oversupply situation, or at least to cause prices to drop considerably.