House Mountain Partners

Lithium ion

Lithium Strategy: Re-positioning in a Bull Market

Chris Berry8 Comments

By Chris Berry (@cberry1)

 For a PDF version of this note, please click here.

 

This isn’t a bubble…yet, but there are reasons to be cautious and a strategy reassessment is in order.

In the wake of Tesla Motors (TSLA:NASDAQ) introduction of the Model 3 “mass market” EV, lithium development and exploration company share prices have absolutely exploded higher. This is despite the fact that TSLA hasn’t actually sold (or even built) a single Model 3 yet, won’t have it on the road for years, and continues to hemorrhage money. The $1,000 refundable reservation fee is simply a free option for a potential car buyer and gives TSLA an opportunity to defray dilution.

In the wake of this news, lithium developers are “making hay while the sun shines” through some truly impressive capital raising efforts.

My estimates year-to-date show that the lithium mining industry has raised a collective $198,000,000 USD with multiple offerings oversubscribed. For an industry that only generated $1 billion USD in revenues last year, this is impressive. Especially when you consider the overall funk in the commodity sector and that no major lithium producer is included in this total.

What Tesla's Gigafactory Means for the Juniors

Chris Berry
  • Tesla Motors (TSLA:NYSE) recent announcement to build its own vertically integrated lithium ion battery factory (dubbed the Gigafactory) sent the share prices of many junior mining companies into the stratosphere

  • There are a number of questions to consider behind TSLA’s strategy, but with respect to the junior mining sector, one wonders if this is a lifeline or a false dawn

  • Though lithium and graphite plays have benefited the most from the TSLA announcement, there are a host of metals which will be required to manufacture the specific battery chemistry

  •  It was interesting to note that cobalt or nickel plays didn’t react in the same way lithium plays did after the announcement

  •  It is dangerous for a junior mining company (or an investor) to assume that a major manufacturer like TSLA will rely on a junior not yet in production to feed the eventual Gigafactory supply chain

  • The success or failure of the Gigafactory rests less with a secure supply of raw materials and more with the long term price of a gallon of gas