The new energy model and its unstable supply chains

The transition to renewable energies seems to no longer be a pipe dream in the US and is rapidly accelerating. With the Paris Agreement goals within reach we need to push collectively to make sure we can achieve them and sustain human life on this planet. Since the beginning of the Industrial Revolution, large-scale centralized energy production has driven civilization's fast progress, but this has been taken to unhealthy limits for the biosphere and must be fixed quickly. This energy transition will mostly stand out for its decentralized nature and a reliance on battery storage. Aside from increased sustainability, this new energy model can also bring about a new mentality on energy ownership and management. However, to enable this transition the US must ensure trade routes of raw materials go through America.

The type of batteries used in EVs are mostly NMC811 or NMC622. These batteries contain high concentrations of nickel, coupled with lower concentrations of manganese and cobalt. A lithium salt is also added to get the ions to create the necessary electric current. This salt used to be lithium carbonate, but lithium hydroxide is growing to be the preference as of late. NCA (nickel, cobalt and aluminium) and LFP (lithium iron phosphate) batteries are also growing in absolute numbers and are going to have a role in EV markets, especially LFP in lower cost models in China. The fabrication of these batteries will place a lot of reliance on suppliers and opens up a host of geopolitical issues that must be analysed before deciding what investments to make and where.

Raw Materials Supply

Concerning lithium availability, it is a very common element all over the planet. Currently though, most of the mines are either brine mines in South America or hard rock spodumene mines in Australia. The market has lately shown a preference for spodumene which has a more predictable supply and is cheaper to obtain. From spodumene, lithium hydroxide can be obtained at a chemical plant, whereas brine needs to be changed into lithium carbonate and then can become lithium hydroxide. The price paid for the latter is higher in money and pollution. Among an ecosystem of mainly Australian, Chinese and Chilean mining corporations, Albemarle and Livent are the American representatives. In the US there are spodumene mines in Thacker Pass, Nevada (waiting for permit) and North Carolina. Lithium Americas wants to mine at Thacker Pass, while soon-to-be American Piedmont Lithium will have the license for the North Carolina mine, where Albemarle also has a small operation.

As for cobalt, it is mainly found in the DRC. The use of slave labour makes this area highly problematic on an ethical level and also has the potential to become a geopolitical battleground. On top of that, China is stockpiling 10% of the global availability of cobalt for military reasons and will probably cause swings in market prices. Thus, battery makers like Tesla are trying to reduce their reliance on cobalt given all the preconditions it imposes. Nickel on the other hand will be really necessary and battery manufacturers are demanding miners to get some. Most current nickel mining efforts are Indonesia-based and surrounded by Chinese influence that controls 60% of the supply. Indonesian mining is also highly polluting because its acid leaches hurt the oceans and are not sustainable in the long term. Solutions to HPAL (High Pressure Acid Leach) are being researched but so far none that can scale has come up.

Instability and geopolitics

The incentives for miners to extract lithium now is low. Albemarle have stopped their operations in certain spots and up and coming junior Altura Mining has gone into receivership. Currently, the demand is lower than the supply and prices are low but expected to rise, so senior miners are waiting for that to happen. The problem is that when the price rises, demand will likely spike quickly as well, given the number of battery mega factories is expected to grow hyperbolically. There is a real danger that if that occurs there might be a shortage of lithium supply causing its price to spike as well, damaging the EV and battery businesses in the way, and lowering lithium demand again. In response to this, Juniors Piedmont Lithium have taken a chance and have decided to supply one-third of the Austin Terafactory's lithium demand at a fixed-cost on the current price for five years. This way they expect to become a more senior player and gain Tesla's trust as a customer.

Given the situation and the lack of incentives in mining at the moment, the Biden would do well to use their stimulus package to try to unlock lithium mining in the US. At a global level, China currently mines 23% of the raw materials, processes chemically 83% of raw materials, controls 66% of the cathode/anode production and 73% of the manufacturing of lithium ion cells. Chipping away at this leverage as much as possible would save the US an ever more likely dependence on their main rivals for world dominance. In addition, marked price swings in the raw materials' markets would hurt mainly Tesla and other EV American automakers, so it makes sense to invest in a domestic supply chain. The retooling of NAFTA in 2018 by Trump forces US carmakers to make at least 75% in the country, which should also help intensify the commitment to strengthening the supply chain. Currently, it is Tesla driving the accelerating the EV transition but hopefully it can get some help from the new administration. The US could also profit from fracturing Sino Australian relationships to get some spodumene at a competitive price, but the remaining infrastructure would remain to be built.

Regarding Tesla, tired of the indecision in the market endangering their business viability and needing more raw materials has decided to move upstream. Apart from showcasing their progress, Elon used the Battery Day to try to scare miners into getting resources for him. At one point he mentioned Tesla would consider starting to mine lithium using clay and salt. Later, he announced Tesla is going to start buying spodumene for the Austin Terafactory from Piedmont Lithium and will build an eco-friendlier sustainable chemical plant right next to their factory. This will allow them to get one step closer to the mining of the lithium and will reduce the uncertainty in the supply chain. It will also boost their margins and reduce the distance the material has to travel. It is likely Tesla now sends spodumene to be chemically processed in China, then send it to Japan or South Korea for the cathode/anode assembly and then back to the Terafactory for the construction of the cell. This causes an increase the dollar cost per kWh and makes vehicles significantly expensive. This upstream move also gives power to America in this race to catch up with China and gain relevance in the lithium market. Elon also threatened to revolutionize the graphite anode chemistry with silicon, but a scalable option does not seem to be in the works soon.

Where to allocate your capital?

Mining companies are majorly out of the question for me. Seniors have an already established market cap and will not change much, while juniors are trying to put money together and get licenses. Sometimes they get them and sometimes they do not. Sometimes they find resources and sometimes they do not. It is a very risky business and if their projects are approved, they normally bring about a lot of dilution in order to finance mining operations. Also, what I do not like about them is they pay dividends on the benefit instead of reinvesting in making mining more efficient. Investment in cleaner solutions, aerial drones that study resource probability or better tools are obvious choices, but instead they pay high dividends. One of the few worth considering is Piedmont Lithium given that they can potentially become a big Tesla supplier if they gain their trust over the years. They will be moving into the NASDAQ in March 2021 and they have an upper junior valuation of around $500m. However, in general, miners seem to be stuck in a rut until someone with a better business model will eliminate them.

My bets on the investments to make are two. First, the people that made the most money in the gold rush were the ones selling pickaxes, so analogising to modern standards one would go for companies supplying calcinators, rotary kilns, etc. The US will inevitably have to strengthen its domestic production and when they do these people will generate value. There are several private companies in the US in the mining manufacturing sector that if proven to have strong financials, could benefit from the public markets and generate outsized returns. However, there is some uncertainty surrounding the evolution of machinery towards more sustainable ways, and old private companies might not be willing to go down that road.

The other choice for my investment would be Tesla. At a valuation currently hovering around $600bn, the P/E ratio would tell you it is an overvalued company, but it is quite the contrary. Everyone keeps comparing Tesla to GM, BMW or Toyota, but they still have not realized Tesla is not about that. Tesla is about energy generation through decentralized private solar, battery packs at home to store energy and EVs, with a high likelihood of fully autonomous driving. Competing automakers will have to build brand new battery mega factories and at the same time develop a responsive autopilot to even be able to be in the same category. On top of the existing profitable business lines Tesla is primed to take advantage of the creation of new markets such as insurances for autonomous driving cars, robotaxis with huge margins, ways to interact with one's own private energy supply, and more. With the renewable energy business reaching a size of $1.5tn by 2025, I suspect Tesla can become not only America's company, but a political bet for the country's future.

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