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Emerging lithium suppliers to Tesla

And other electric car companies.

WARREN DICK:  Good day. I’m Warren Dick, the editor of Mineweb.com. Joining me on this special podcast today is Peter Epstein, from epsteinresearch.com. Great to have you with us, Peter.

PETER EPSTEIN:  Thank you for having me. It’s my pleasure.

WARREN DICK:  We obviously want to get your insights. You’ve been doing a lot of work around what’s been happening with the electric cars and specifically the batteries that are powering these electric cars. One of the biggest producers is Tesla [Motors]. We wanted to just understand specifically how these batteries are developing and, in terms of commodities that they require, what specifically around lithium is going to be required in the coming years as they ramp up the production of electric vehicles. Perhaps you can just give us an introduction into the space and the kind of developments around the batteries that these electric vehicles are using.

PETER EPSTEIN:  Okay. That’s a pretty simple question to start out with. Tesla of course grabs all the headlines with their gigafactory in Nevada but, little known to many investors, there are already five or six other gigafactories around the world that are in the construction phase. Tesla is just the tip of the iceberg. There are going to be many more manufacturers putting out hybrid and full electric vehicles. I like to say that Tesla’s first car was so awesome that it immediately caused other manufacturers to develop their electric car offerings.

WARREN DICK:  There had obviously been some debate around it, and we know one of those other investors is Warren Buffet with BYD. But is it becoming abundantly clear to everyone in the industry that lithium iron is the type of battery that’s going to power these cars going forward?

PETER EPSTEIN:  That’s a good question and I always think about that myself because there are other kinds of batteries, some of which still use lithium and even some that don’t use lithium, that could in the future become of a greater use However, as it stands, no, they are at lab or benchmark testing stages in universities and battery makers’ R&D programmes. So these types certainly could make a difference in the future, but they are probably ten years away.

And finally I should say that the lead acid battery was in use for decades, even though it became pretty clear that better batteries were available ten and twenty years ago.

WARREN DICK:  Just turning our attention to Tesla, because that is the one that’s been grabbing the headlines, the construction of the gigafactory in Nevada is, as I understand it, going to be completed in the next couple of years, and they specifically have pegged the powering of their vehicles to the lithium iron battery. So at least from the Tesla side it’s clear that they are going to be building these batteries and they are going to be requiring quite large amounts, relatively speaking, of lithium. Is that right?

PETER EPSTEIN:  That is right, of course. And, as I mentioned, I think lithium iron batteries, which also are made with graphite and cobalt, are going to be absolutely the ones that manufacturers of batteries move towards because you need not only a good battery with good energy storage, but you need economies of scale. You need to produce hundreds of thousands of the batteries. That’s why, as I mentioned earlier, the batteries that are being studied in labs around the world are probably at least a decade away from reaching production scale.

WARREN DICK:  Outside of Tesla are there any others that are building factories to integrate lithium iron into their cars?

PETER EPSTEIN:  Yes, of course. In Nevada there is Pure Energy, which is top of the news because they recently received an agreement with Tesla, which is very interesting. Tesla has committed to using North American raw materials from lithium and other raw materials, but also Nevada seems to be a good place to start because of course the gigafactory is in Nevada.

So Pure Energy has had a nice move in their stock price based on a much-deserved lift by Tesla. But other companies I follow include Dajin Resources. Dajin has a market cap of maybe one-third or one-quarter that of Pure Energy, and they are probably one or two years behind Pure Energy. So it appears to me that Dajin could also actually land a deal with Tesla. Again, both companies are in Nevada. But even if Dajin does not get an active contract from Tesla, I think there are many, many more gigafactories being constructed now and on the drawing boards of companies around the world. To make it clear, Pure Energy and Dajin resources are both companies that sponsor my website.

WARREN DICK:  So just to get into this a little bit, there is obviously what seems to be a massive ramp-up in demand, but the current lithium industry in terms of the mining companies that mine the commodity appears to be very fragmented and the mining companies themselves are very small. So I think really why not many people have heard of these companies before is because of the very fragmented nature of this industry.

So, in terms of these companies, is there scope for consolidation in this industry now that we see that there is certainly going to be the demand for lithium going forward?

PETER EPSTEIN:  I think that there will be mergers and acquisitions among the juniors that are in the lithium space. However, there are dozens and dozens of juniors, the vast majority of which will probably go out of business for lack of capital, and the in-betweens that are stretched will perhaps even look at other projects besides their own. So yes, M&A will occur, just like Western Lithium and Lithium Americas, but I think only a select few are worthy of combining and moving forward.

WARREN DICK:  Can you give us, I guess, a better idea of who those companies are and why you think they will be the ones that survive in the end?

PETER EPSTEIN:  Well, I mentioned Pure Energy and Dajin Resources. I think both of them are prime candidates to move forward alone or possibly together, but that’s not me making any forward-looking statement. I have no idea what their plans are vis-à-vis each other, but Dijon I think particularly has an opportunity to partner with other much larger companies, perhaps a company like Tesla, but other battery manufacturers as well. Dajin I think is also looking at making its own merger or takeover strategies, which I think would do well for the company. But also, quickly, in Chile and Argentina, from which the vast majority of supply of lithium comes, there have been for years now political and even problems with severe rains impacting that region. So the supply side is uncertain. The demand side – I could go on and on about the demand side. It’s going to be much higher than most people even realise.

WARREN DICK:   Okay. I think one of the other ones that certainly caught my eye was Bacanora Minerals, and that stock obviously started to rise on the announcement that they’d signed a lithium-supply deal with Tesla. So can you tell me who has already signed agreements with Tesla, and how those agreements are structured? Obviously many of these mines are still projects as I understand it, and they require capital to put them into production themselves. So can you tell me how Tesla is managing things on that side?

PETER EPSTEIN:  Yes, that’s a great question. Importantly, Tesla has only announced two. The one you mentioned plus Pure Energy – those are the only two that have been specifically mentioned, and both of those are lithium. I have not seen any agreements signed with cobalt or graphite companies, for example. So I think this is a statement that Tesla is in great need of lithium. And also both of the companies that Tesla has signed on with are still several years away from being in production and being able to feed the bigger factories. So I think that’s a sign that the gigafactory will actually grow well beyond what Elon Musk is talking about. Both of those are positive signs in my view.

WARREN DICK:  Just to get that right, you are saying that Tesla doesn’t have the demand for lithium right now? Obviously that demand will come on stream as the gigafactory comes on stream. So they are already signing agreements for offtake with these companies to take lithium in the future?

PETER EPSTEIN:  That’s correct. And, again, the fact that both Pure Energy and the company you mentioned in northern Mexico [Bacanora] are both not in production yet, and in fact are years away from production, is telling Tesla’s strategy moving forward.

WARREN DICK:  Okay. Just to wrap up the interview, are there any other companies that investors should be looking at aside from the ones we’ve mentioned so far?

PETER EPSTEIN:  Well, I’m a proponent of not just investing in one, but investing in several companies to diversify risk. Pure Energy and Dajin, which again are sponsors on my website, are great small-cap companies. In terms of larger companies, though, it’s really hard to get pure-play exposure to lithium. That’s a big problem. So if you look at SMC or SQM, both in the lithium triangle in South America, Chile and Argentina, in SMC’s case less than 10% of their revenues come from lithium. That’s sort of forces people to look at the lithium juniors but it’s hard to get exposure in lithium juniors if the trading volume is low and the market caps are low, which is very frequently the case.

So that brings you back of course to mergers and acquisitions like Western Lithium and Lithium Americas. That particular merger I think is a pretty good one in the sense that the combined companies hold a market cap of US$100 million, and the trading liquidity should go up, enabling institutional buyers to take a position in a pure-play lithium company.

WARREN DICK:  And that’s a lithium company that’s actually producing lithium already, is it?

PETER EPSTEIN:  Actually no. Both companies aren’t under production yet. Lithium Americas is certainly close to production and Lithium Americas has a working relationship with Posco from South Korea. But Lithium Americas and Western Lithium have a diversified set of assets, though. Western Lithium has Nevada assets and Lithium Americas has Argentinian assets. So that’s why the merger seemed to make sense.

WARREN DICK:   Okay, great. Peter, we are going to have to leave it there. Thanks very much for joining us. That was Peter Epstein from Epsteinresearch.com.

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