It’s easy to be cynical about Tesla. Tesla is somehow more valuable than Ford and GM – companies that each produce 100 times more cars than it.
Tesla is worth $56bn because investors expect its new Model 3 to be a smash hit. And the big question about the Model 3 is over production – can Tesla figure out how to manufacture 500,000 of them per year, from a standing start?
I laid my cards on the table on the Agora Financial podcast last summer: I said I didn’t think Tesla would make it. I didn’t think Tesla was going to figure out how to build millions of Model 3s before investors ran out of patience, and started selling the stock. Still don’t.
Now I’ve been completely wrong about Tesla, of course. A year and a half on, Tesla’s still working out its manufacturing problems… it’s only delivering about 20% of its production target… it’s even making bits of the cars by hand! But investors don’t care a bit. The share is up 51% since my big call last summer.
Whether or not Tesla stock craters, the company has achieved something important. Through pure gumption, Tesla has forced the rest of the auto industry to take electric cars seriously.
Tesla’s CEO Elon Musk has been saying this from the start. He’s said the whole point of Tesla Motors is to force established car makers to make more electric cars:
“The impact that Tesla will have is fairly small in and of itself. It will change people’s perception perhaps, but it will not in and of itself change the world.
But if large numbers of people are choosing to buy the Model 3, and the car companies see that there’s no excuse left anymore because the car’s long range and the car’s handling and acceleration is better in every way than a gasoline car, and it’s affordable—and people are pretty sure this is what they want to buy—then that’s what will prompt car companies to invest real money into electric vehicle programs of their own, and indirectly, by spurring competition, Tesla can be the catalyst for a multi-order of magnitude shift of the entire industry towards electric.”
Today it looks like Musk was too conservative, if anything. There are only a couple of thousand Model 3s on the road, but the auto industry is already going all-in on electric vehicles.
Last month we heard Volkswagen is investing £62bn to create 300 new electric vehicles by 2030. General Motors already has invested billions in its Model 3 killer, the Chevy Bolt. Daimler is planning to invest £9bn. And Renault-Nissan already ships 400,000 electric cars per year.
CB Insights, a market research company, says the number of electric vehicle funding deals has doubled in four years. And Bloomberg New Energy Finance thinks 40% of all new cars sold will be electric by 2040.
So far so good. Tesla’s stock is up, Musk is rich, and electric cars are going mainstream faster than anyone expected.
But there’s a catch: it’s all happening so suddenly that supply is struggling to keep up.
Electric cars depend on batteries, and electric batteries are constructed using a couple of rare and unusual metals. Without these metals, the batteries don’t work and the cars don’t run.
Before electric cars showed up, demand for these metals was fairly steady. But now batteries are going to be required for tens or hundreds of millions of cars. Demand for the metals is taking off.
You might have heard of one of them – lithium. Electric cars (and laptops, and phones) run on lithium-ion batteries. Lithium is relatively rare. Around 70% of world lithium supply is found in the Andes Mountains in South America, around Bolivia Chile and Argentina.
The other important metal is cobalt. You can’t make a battery without cobalt. And cobalt, it turns out, is pretty hard to get your hands on. 65% of the world’s supply comes from the Democratic Republic of the Congo, which is one of the world’s most dangerous and unstable countries.
A handful of miners control the supply. Earlier this week, the miners turned down Volkswagen’s offer to lock in a steady supply of cobalt at a fixed price for the next five years. Why would they? The spot price of cobalt is up 80% this year. Demand is forecast to grow by 300% by 2020, and 1000% by 2025.
So how can you make money from cobalt?
It’s not straightforward. The metal is a byproduct of copper and nickel mining. That’s why supply, for the most part, is controlled by some of the world’s biggest diversified mining companies.
But I think I’ve found a better way – a small cap which is a pure-play cobalt investment. I’ll be telling my subscribers about it in this month’s Penny Share Letter.