January 18, 2017

Short Tesla Motors Inc.? Robert Fridland and the Coming Cobalt Cliff

Short Tesla Motors Inc? Ivanhoe Mines Ltd CEO Robert Friedland And The Coming Cobalt Cliff

Written By: James West

January 18, 2017

Tesla Motors Inc. (NASDAQ:TSLA) and Robert Friedland’s Ivanhoe Mines Ltd. (TSE:IVN) (OTCMKTS:IVPAF) may have more reasons to talk than Elon Musk will be readily willing to admit. Tesla began production of lithium-ion battery cells at it gigafactory in the Nevada desert earlier this month, and is now reporting that it will also produce electric motors and gearbox components for the model 3 there too.

But Tesla isn’t the only one launching gigafactory scale production of lithium ion battery products. Renault, Nissan, BMW, GM, Volkswagen, Daimler,, Fiat Chrysler, Hyundai, Honda, Ford, and Toyota have all made commitments at some level to expand Electric Vehicle production implying exploding demand for lithium ion fuel cells.

“You’re not going to be able to build any batteries in your own gigafactory and your whole company is going out of business, and we’re going to make money shorting your stock.” – Robert Friedland

Currently the biggest lithium ion battery manufacturers are LG chem in the number one position followed by Samsung and Panasonic a close third. This is according to data provided by Navigant Research. There are also major manufacturing capacity initiatives coming from the likes of A123, BYD, AESC, and Johnson Controls.

The implications for demand in raw materials lithium and increasingly cobalt, however, suggest that there may be supply chain bottlenecks in the near future that could have the damping effect on the possible productivity and by extension the price of Lithium-ion batteries in the future.

Investors are beginning to wonder if Musk will be able to deliver Tesla’s vision if it can’t solve some supply-chain problems.

No Cobalt, No Tesla?

Recently, I had the opportunity to speak with Robert Friedland CEO of Ivanhoe mines who is developing projects in the Democratic Republic of Congo, current supply source of 65% of the World’s supply of cobalt.

“Cobalt went from $8/lb to $50/lb in the last cycle. In 2008, cobalt was at $50,” he said. “This year it’s gone from $12 to $14.50. Cobalt is just starting its move. Most of it is mined artisanally in the Democratic Republic of the Congo, but the auto makers need cobalt that is not mined artisanally because the supply chain gets audited. So the hot commodity is to find non-Congolese cobalt sulphate and nickel sulphate.”

He’s referring to the prevalence of child labour in Congolese mining operations, Which major manufacturers have committed to reducing, in accordance with rights organizations expectations.

Last year China Molybdenum acquired Freeport McMoRan’s 56% controlling interest in the Tenke Fungurume Mine, one of the world’s largest known Cobalt resources, located in Katanga province in the southeast of the DRC. Then Lundin Mining announced that it was going to sell its 24 per cent stake in the mine. DRC national mining company Gecamines opposed the sale, but that was recently rescinded for certain considerations.

That puts China firmly in the cobalt drivers seat. China Moly also owns controlling interest in the Kokkola refinery in Finland, where 10 per cent of the world’s 2016 cobalt production was refined.

Friedland summed it up.

“Elon came to me because we have a nickel sulphate and cobalt sulphate operation in Australia, not the Congo,” he said. “And Elon said ‘I’ve got the world’s biggest battery factory, so I want to buy your nickel and your cobalt at the current metal price for 10 years, because I’m the biggest buyer.’ “

So we told Elon Musk, you know, Elon, that’s interesting. We’ll think about it. And then two months later we went back to him and said “Elon, you’re totally screwed. The Germans are building a gigafactory twice as big as yours, the Chinese are building four of them bigger than yours, the Japanese are building two and the Koreans are building one. So unless you’re willing to pay to buy our cobalt and our nickel at whatever the price may be in the future, you’re not going to be able to build any batteries in your own gigafactory and your whole company is going out of business, and we’re going to make money shorting your stock.”

Increasingly, media and investor speculation on the potential for supply chain constraints to materially restrict Tesla and other EV manufacturer’s ambitions is rising in terms of frequency.

Remember, Elon Musk’s vision and promotional language states unequivocally that the affordability of Tesla automobiles hinges on the ability of the company to lower the cost of lithium ioin batteries. With new battery manufacturing capacity coming onstream faster than new supplies of lithium cobalt, that future might be more distant than either Tesla or any other lithium-ion battery consumer can credibly predict.