Why Elon Musk is betting big on lithium

If everyone’s going to be driving around in battery powered electric cars in five or ten years’ time, how can we profit?

On Wednesday I wrote about Elon Musk’s “secret” plan to take over the car business.

He wants nothing less than to turn the entire car industry over to electric power (and make billions in the process).

And when you boil it down, his plan is all about batteries.

To build a great electric car you need a cheap battery with a good range. But when Musk started Tesla in 2004, batteries were expensive. To make a good, cheap battery he’d need to manufacture them on a huge scale. The world’s biggest battery factory, in other words.

His first step was to build a super expensive, high performance battery-powered sports car.

His second step was to take the profits from the sports car, ramp up battery production (which cuts costs) and build a luxury saloon – the Model S. This is the Tesla you see around the streets these days.

His third step was to take all the money he’d made on the first two models and build an insanely big battery factory in the middle of the desert in Nevada. The gigafactory. This one is key. The gigafactory, as he calls it, is big enough to make a good battery, cheaply.

Musk announced his new mass market family car last week. It’s called the Model 3, and everyone’s very excited about it, and it’s booked a notional $10bn in pre-orders already. But that’s not what I want to talk about today.

I want to talk about the battery factory. Batteries are the key to this whole thing. Mass produced batteries are going to power the whole Tesla fleet. And powering the whole Tesla fleet is just the start of it.

Musk’s ambitions don’t just stop at Tesla. He wants Tesla Motors to be the first domino, the one which forces the every other major car company to invest seriously in battery powered electric cars. He wants every car on the road to be electric powered. To that end, he’s given away all of Tesla’s patents for free.

Conveniently enough, he happens to own the world’s biggest battery factory. And Teslas will do better in a world where there’s plenty of electric-car infrastructure around – stuff like charging stations.

So if everyone’s going to be driving around in battery powered electric cars in five or ten years’ time… how can we profit? Beside just buying Tesla stock, what’s the angle here?

The clue is in the batteries’ full name: lithium ion batteries.

Three players, three punts

You know lithium ion batteries – they’re the ones in your phone and laptop. They’re made from lithium. It’s a rare element found mostly in the Andes mountains around Chile, Bolivia and Argentina, though there are mines in the US and Canada also.

Elon Musk’s dream of a battery powered future all depends on the lithium supply. He built his factory near a mine in Nevada, and a special motorway to connect the two.
So if lithium is the key to all this, how do you invest in it?

A couple of big boys control most of the world’s production: Albermarle (NYSE:ALB), FMC corporation (NYSE: FMC) and Sociedad Quimica y Minera (NYSE: SQM). They make most of their money from lithium. So their stock is a good way to play the lithium battery boom.

The lithium industry has been consolidating – in other words, small companies have been merging to create bigger ones. And the big companies have been buying up junior miners with proven reserves.

At the smaller, riskier end of the spectrum you have juniors like Bacanora Minerals (AIM:BCN), Lithium Americas Corporation (TSE: LAC) and Rare Earth Minerals (AIM: REM). They’re a mix of explorers and mining technology companies. They’ll be hoping to supply lithium to the battery industry or perhaps get acquired by one of the big players. But they’re all pre-production yet – so beware!

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