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Tesla's wild plans hold significance for UK investors

Investors reacted with a shrug to another set of major goals and growth plans from Elon Musk, but there are implications for UK-based miners and funds with exposure to the carmaker
September 25, 2020 and Mary McDougall

Elon Musk’s entrance to the much-awaited ‘Battery Day’ event was met with honking from the crowd. Indeed, onlookers were seated in Tesla (US:TSLA) cars parked in front of the stage. 

But such enthusiasm did not extend to shareholders more broadly. Tesla’s valuation has skyrocketed this year as investors backed chief executive Elon Musk’s vision of the company as a tech player that happens to sell cars. But in the days after the much-anticipated event on 23 September, its share price dropped by almost 20 per cent. High expectations were ostensibly dampened by a longer-than-expected timeline for the carmaker’s ambitions.

Mr Musk said that his company had worked out a new, cheaper way of extracting lithium from ore that could be done in the US. He also flagged massive increases in production, which - if realised - would lift demand for nickel and other materials. Moreover, he pointed to a shift towards in-house battery production and lithium mining, huge increases in battery capacity and a $25,000 (£20,000) car in three years. The capacity ambition would see battery production triple over the next three years from the current level of 35 gigawatt hours (GWh). 

The market was, perhaps, searching for more detail and quicker wins. But in any case, the battery event – and the impact on Tesla’s stock – have knock-on implications for UK companies and funds.

New demand for battery components 

For one thing, mining players in London could see fresh demand for battery-related materials based on Tesla’s new technology, while plans for a cheap car could ramp up electric vehicle (EV) take-up.

As things stand, the company has already begun producing its new battery-cell design. “We expect this new development to be implemented in line with guidance, as the change in form factor alone gives the new cell five times more energy capacity and six times more power than previous cells,” said energy consultancy Wood Mackenzie. 

Nickel - the biggest winner?

In commodity terms, on the face of it, the biggest winner from the battery-day presentation was nickel. Demand for nickel is already increasing because of its ease of sourcing, compared to cobalt, and energy density properties. BMO analysts said “High nickel...batteries offer better energy density, and hence range, but notoriously come with additional safety concerns”. The Canadian bank has kept a ‘favourable’ demand outlook for both nickel and cobalt, although forecast a reduction in cobalt demand down the line. 

Pure-play nickel exposure is available through Aim-listed Horizonte Minerals (HZM), while BHP (BHP) and Glencore (GLEN) are major producers - although their earnings are dominated by other metals. Mr Musk said that Tesla was working on processing techniques which removed the need for 'class 1' nickel in batteries, opening up supply from deposits not previously seen as able to contribute to the EV supply chain. 

Lithium developers

While it is extremely unlikely that Tesla will be able to ramp up its own lithium production and processing within a few years, lithium developers in London who had been hoping to supply battery-makers will now be looking at the claims with interest. 

Mr Musk said that Tesla had bought the rights to a clay lithium deposit in Nevada, which had a terawatt-hour worth of supply - enough to replace every single US vehicle with an EV.  This claim can arguably be taken with a grain of salt, as the company said that it had found a new way to extract lithium from the ground. “We found that we can actually use table salt, sodium chloride, to basically extract the lithium from the ore,” Mr Musk said. “Nobody has done this before to the best of my knowledge.”

Wood Mackenzie agreed on the novelty of a salt-based extraction technique. “It is very difficult to believe that all the world’s mineralogy and processing experts would not have realised it was so simple to extract lithium in this way,” the consultancy said. 

That said, lithium producers are largely listed in North America and Australia, but there are a few developers left over from the 2016 boom on the London boards. Bacanora Lithium (BCN) actually has a clay deposit of its own in Mexico but has strong links to Chinese and Japanese companies, with the Sonora project part-owned by Ganfeng Lithium.

Its exposure to possible US battery production capacity is limited, in that case. Other Aim companies like Savannah Resources (SAV) are looking to sell their products to the European market, so will have little to fear if Tesla’s wild claims are true.