Where will Tesla Motors (TSLA) get the tons of lithium it will need to make advanced batteries at its Nevada gigafactory? Is there an opportunity for profit in lithium mining as supply shrinks? For an answer, The Energy Report caught up with Thibaut Lepouttre at his home base in Belgium, where he edits Caesars Report, a newsletter that analyzes international mining projects. In addition to the lowdown on lithium, Lepouttre talks about several low-profile firms with phosphate and uranium mining projects. The Energy Report: The big news of last week was the announcement that Tesla Motors will manufacture lithium batteries in Nevada. What impact will the gigafactory have on lithium? Thibaut Lepouttre: By 2020, the gigafactory will be producing 500,000 (500K) lithium-ion batteries a year. That is more lithium-ion batteries than are currently produced in the entire world. If the other lithium battery producers keep production at the same level, the demand for lithium will double over the next six years. This will hugely impact its price. Right now, most lithium batteries are made in Asia. Because of Tesla's economies of scale, the gigafactory will be a low-cost producer of lithium batteries. From a management point of view, it would be wise for Tesla to vertically integrate and acquire a secure source of lithium to cushion supply shocks. TER: What other companies are major lithium producers? TL: We are looking at Orocobre Ltd. ($ORL:CA), which is in the final stages of construction for its Olaroz project in Argentina's Jujuy province. This a joint venture withToyota Tsusho Group (TYHOF) , which is partially owned by Toyota Motor Corp. (TM) . The mine is 8.5% owned by the province of Jujuy, which means that the local government has a vested interest in supporting it. Toyota Tsusho has provided the debt facility for Orocobre's plants, which covered the majority of the capital expenditures. We expect to see the first lithium production in October. Orocobre will steadily ramp up the production rate to 17,500 tons per year (17.5 Ktpa). That is quite large on a world scale. A big geological advantage of this project is that it's a salar [salt lake]: The lithium-containing brine is pumped out of the salar and allowed to evaporate in the sun. Producing by that method is a low-cash-cost operation. Orocobre expects the cash costs to be $2K per ton. Current lithium prices are trading at $5–7K per ton. That is a very good operating margin. The Orocobre project has a mine life of 40 years. If there is a huge supply shock on the lithium market, or a sudden boost in demand, Orocobre will easily be able to increase production to 25K, or even 35K tons of lithium per year. The mine has been approved by all the relevant provinces and communities. Only 20 kilometers (20 km) south of the Olarozsalar, there's another salar also owned by Orocobre, which can deliver additional brine to the processing plant at Olaroz. Orocobre is in an excellent position to benefit from an unexpected increase in demand for lithium, because its projects are low cost and scalable. TER: If Orocobre's cost of production is so low relative to the market price, will that pull the price down on a global level? TL: Even though Orocobre is a large producer, the demand for lithium is on a nice growth curve, so I do not expect the company to be price disruptive. However, as its product will fill in an existing gap in global supply, Orocobre could cause some hard-rock lithium projects in Canada to become less attractive. But I do not think that we will see a big move in the lithium price, overall. TER: Orocobre also focuses on potash and boron. Do these minerals occur alongside lithium? TL: In the salars, it is common to find a combination of lithium, potassium and boron, and even magnesium. The lithium is extracted from brine deposits, and the lithium and potash are separated from each other through an electrolyte process. Orocobre's project has some boron content, but the company is straightening out technical issues to make sure that the boron can easily be recovered and sold.
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