- Carmakers are securing input supplies mainly though ‘offtake’ deals
- Security of supply a major concern for battery manufacturers
Earlier this month a fraudster made use of the rush for carmakers to lock up supply of key electric vehicle raw materials by faking a stock exchange announcement showing Tesla (US:TSLA) buying a junior lithium miner.
Lithium Corp’s (US:LTUM) shares shot up before it issued a confused denial, saying there was no deal but it would be “happy to chat with Elon [Musk] if he was inclined”.
It’s no scam that carmakers are keen to go to the very beginning of the supply chain, although this is largely done through ‘offtake’ deals (rather than buyouts), where a miner commits to selling the carmaker a proportion of production. This can happen years before a mine is financed, let alone built, and is seen as a vote of confidence in future demand. Future lithium supply represents such a big question mark over future electric vehicle production that even speculative deals are worth making. A sector expert called offtake deals “win-win” for prospective miners and carmakers.
But investors can lose out, given the opaque nature of the deals and the extremely high marketing clout of corporations such as Volkswagen (DE:VW) or Ford (US:F) when inking deals with pre-revenue companies.
“Security of supply is likely to be a key concern for battery producers over the coming years,” said BMO Capital Markets analyst Colin Hamilton. This extends to carmakers, with Tesla also noting lithium supply as a constraint to growth in its most recent results. Musk's firm has already signed two deals this year with Australian hard-rock lithium mining hopefuls.
A long-term punt
“What we've seen with Ford [with Lake Resources], and what we've seen with Stellantis and Renault, who signed offtake deals with Vulcan Energy Resources (AU:VUL), is they're relying much more heavily on emerging lithium technologies rather than traditional lithium supply,” said Benchmark Mineral Intelligence senior analyst Daisy Jennings-Gray.
Recent examples include Lake Resources (AU:LKE) signing up with Ford – sending its share price up a tenth – while UK-based Britishvolt has signed a swathe of deals with miners and midstream companies to try and lock in supply.
“As the demand for battery cells rapidly grows, so too will raw material demand, having supply deals means you are protected and can continuously meet customer requirements [and] demands,” said Britishvolt spokesperson Ben Kilbey.
He added that locking in supply means companies like Britishvolt can “more easily secure investment”.
The question for investors is whether these deals result in actual de-risking of projects or just good marketing. In the short term it doesn’t matter (what investor would argue with share price gains?), but on a medium- and long-term view it’s possible these deals could overstate the commercial viability of mining projects.
“It's an opportunity for the junior producer to perhaps open up access to funding, if they've got offtake agreements with well-known household names,” Jennings-Gray said.
Recent history
Studying offtake deals signed in the initial battery metals rush between 2016 and 2018, most of the companies that had lithium projects were keen to promote seemingly concrete supply agreements in the lead-up to financing.
Bacanora Lithium had a deal with investor Hanwa – which also bought a significant stake in the company – before its funding arrangement collapsed in 2018. Former industry heavyweight Nemaska Lithium (which went bust in 2019) had “investment grade” US and London offtake partners, according to its broker.
Beyond the failures like Nemaska, there are plenty of companies that still have years to go before reaching production despite signing supply deals much earlier in the cycle.
The sting in the tail can also come from details not made public. One mining executive told Investors’ Chronicle he had been offered an offtake arrangement where the buyer could pick a price for each delivery either five days before or after the delivery date. A quick crunch of the numbers showed this could have cost the company millions in lost sales over the life of the planned mine, compared with a simple spot price arrangement.
As Nemaska’s broker pointed out in 2017, a key variable is “creditworthiness” of offtake partners on either side of the deal.
More established miners can offer credibility to the carmakers and battery makers, rather than the other way around, as well. Britishvolt signing up Glencore (GLEN) as both supplier and investor, has given it a powerful ally in supply chain terms. Stellantis and Mercedes have also just signed up Belgian chemical giant Umicore (BE:UMI) to provide 500,000 cars' worth of battery parts by 2030. These are significant deals that are very likely to come to fruition.
This is the key point for investors: an explorer’s deal with a carmaker – who might not understand the actual mining details – could certainly help supply worries down the line, but take every announcement with a grain of lithium, or perhaps salt, if you haven’t locked in your supply.
