I’m going to start this post by making it quite clear that this short article is definitely not saying that Bacanora Minerals have done a deal with Elon Musk. I am however going to discuss the growing rumours (and what I think is a real possibility) that they could be candidates to deliver lithium to the joint Gigafactory venture between Elon Musk’s Tesla and Panasonic.
This post is really a broad analysis of the other articles that have begun to float around the internet linking Tesla and Bacanora Minerals, and in writing this I hope to allow you to draw your own conclusion on the rumours that are beginning to circulate about the two companies.
Lithium Transport Links:
Let us begin by having a look at where Tesla said that the Gigafactory would be built:
The general public were initially given five locations including sites in Nevada, Arizona, Texas, New Mexico or California, but with Reno Nevada appearing to have been chosen as the final resting place for the site (although there has been talk of more than one site across the five states mentioned above).
On Thursday 31st July Elon Musk was quoted saying in a conference call that Tesla had “essentially completed the creating of the construction pad of the Gigafactory in Nevada”. While a finite decision on the site has not been made yet, as to further quote Musk “we want to make sure things sorted out at the state level, (and that) incentives are there.”, this still seems to be a pretty conclusive piece of evidence as to the final location of the Gigafactory.
How this links to Bacanora Minerals:
Well, first we have to take a step back and analyse where the Sonora Lithium Project is (North-West Mexico) and then we have to further analyse where the location sites for Musk’s Gigafactory were to be placed relative to the Sonora Project.
In the event of multiple sites being created by Musk, any of the five states that were initial candidates are easily accessible for Bacanora Minerals to export lithium to.
The easily accessible freight train lines allow fast and relatively cheap transport of the minerals (raw or processed) needed direct to the proposed Gigafactory.
Having scavenged this already very useful map of main U.S. train lines from the realms of the internet, I added the Sonora Lithium Project site on to it and connected it by the green line (which conveniently follows an existing train line) as seen. The fastest and most economic route takes the export line across the Mexico Border connecting up to Tucson where the mineral product would then follow the freight line via the west coast cities, up until the point of San Francisco where it would change line and continue up to Reno.
This allows for a reliable and continuous supply of lithium to the plant where it can be used in manufacturing.
Battery Grade Lithium Supply Links:
From the Rare Earth Minerals RNS 2986G we learnt that analysis of the Sonora Lithium project reserve showed 99.5% battery grade lithium (a quality almost unheard of in resource estimates), as such it really would make logical sense for a deal to be done, because Tesla would be able to get hold of high grade lithium at good prices utilising a derivative purchase strategy that will be discussed later.
The fact that this supply is already at such a high grade shows why they wouldn’t have chosen to pick a deal with a Supplier already in the U.S., or via a Canadian Reserve, which could also incur higher transportation costs.
The already relatively low cost of freighting lithium in from Mexico is counteracted by the relatively minimal onsite processing necessary due to the already almost pure ionic lithium. This could well make using Bacanora Minerals as a supplier the cheapest option as well as the easiest in terms of efficiency and ease of supply chains.
The Potential For a Long Dated Derivative:
This will be a somewhat difficult concept to understand for many who aren’t privy with derivative contracts, but I’ll try and explain it as best as I can.
I’m going to use the term “long dated derivative” in this case to describe what is in reality a glorified futures contract. For those who don’t know what a futures contract is I thoroughly recommend this video (made by another of my investing heroes) entitled “What are futures?”: https://www.youtube.com/watch?v=nwR5b6E0Xo4
A “long dated derivative” contract in this case is effectively a way in which both parties (Bacanora Minerals and Tesla) could hedge against changing commodity prices. Now, the point here in a nutshell is that with a smaller sized resource company like Bacanora Minerals, Elon Musk has much more power to negotiate on longer term pricing of the commodity he’s purchasing from them (in this case battery grade lithium).
To use a practical example, Elon Musk could negotiate to initially pay them above market price for battery grade lithium while locking them in at that price for set number of years to hedge against the growing demand for lithium globally.
Larger resource companies would be much more reluctant to take out these longer contracts because they don’t need to, because their global asset control is larger and therefore they’re already hedged against supply induced price rises (because they primarily have a larger control on global output) and further to this they have much more technology available in the medium to long term to decrease their cost per tonne than the smaller resource companies have and thus can protect and or increase their profit margins without becoming locked into a contract.
In short, the main advantage with Tesla doing a deal with Bacanora Minerals would certainly be that they would have a lot of pricing power in the medium to long term.
To round up this information, there are certainly a lot of potential reasons why Tesla could chose to do a deal with Bacanora Minerals for the supply of battery grade lithium, with some reasons seeming pretty unique to Bacanora Minerals itself. Tesla would certainly have a low cost option in picking Bacanora Minerals as a partner in terms of both transport, supply price and availability. I personally wouldn’t be building a long position in Bacanora Minerals based on these rumours that have begun to circulate, but instead be building a long position becuase I think that with or without a Tesla link up the company will likely reward shareholders very well over the medium and long term with the potnetial for more short term volatility in both directions.
For more information see my write up on the company:
http://themaskedstocktrader.blogspot.co.uk/2014/08/bacanora-minerals-bcn-resource-mining.html
Enjoy,
The Masked AIM Trader
Enjoy,
The Masked AIM Trader
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