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Edward Vranic

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Summary

  • Tesla battery day is coming up on September 22. Big announcements are widely expected with respect to its battery technology.
  • I believe that the company will eliminate expensive cobalt in its battery, with increases to the nickel content and introduction of manganese.
  • There will be a challenge to securing North American supply of battery input metals that will be cost effective and environmentally friendly.
  • Tesla appears to be working to secure a North American supply of raw materials which may provide speculative investment opportunities on these raw material producers as well as a bullish thesis on Tesla itself.

It’s no secret that Tesla (TSLA) is aggressively valued. It has ballooned to more than a $300 billion market cap and neared half a trillion at its highs. It’s forward P/E is over 100, more than 10 times higher than mature vehicle manufacturers like Ford (F) or General Motors (GM). In order to maintain that kind of valuation, Tesla has to meet sky-high expectations of a society-changing electric vehicle technology that can be produced profitably while being affordable for consumers. It has been on this path so far, but there are still more challenges to overcome.

One major roadblock for Tesla and electric vehicles in general is their high cost relative to gas-powered combustion engine vehicles. In order to truly dominate the vehicle market, the company has to find a way to reduce the sticker price of its cars. One of the most obvious ways to do so is to reduce the cost of the battery. I believe that Tesla is on this path and will be announcing a cobalt-free battery at its much anticipated Battery Day coming up on September 22. My guess is that the cobalt will be replaced by less costly materials such as an increase in nickel content to at least 90% and introduction of manganese.

A successful deployment of a cheaper battery would bring Tesla closer than ever before to pricing its cars more in line with mid-size sedans. There is also an opportunity to speculate on companies that mine the needed raw materials. Especially those located in North America for Tesla’s gigafactory in Nevada.

ChartData by YCharts

Out with the cobalt…

My suggestion of Tesla eliminating cobalt is not exactly a new one nor is it a controversial statement. Not only is cobalt 2-3 times more expensive than nickel, it’s also politically toxic as a majority of the world’s cobalt comes out of Congo. That being said, there is a limit to how much cost savings can be driven purely by converting cobalt content into nickel. As outlined in a recent CNBC article, the prices of the two metals has converged over the years, and an increase in nickel content in batteries will only further spur demand to drive prices up. There will have to be a constant push for cheaper and cheaper materials that still result in a long-lasting, reliable and safe battery.

In 2016, Tesla partnered with a battery researcher working out of Dalhousie University in Nova Scotia, Canada by the name of Jeff Dahn. Dahn is one of the pioneering developers of the lithium-ion battery and has since been named Tesla’s Head of Battery Research. Whatever Tesla has developed, Dahn will most certainly have been central to it. For anyone who has done a bit of research, there is no shortage of signals to try to figure out where this research is headed.

A paper in Journal of The Electrochemical Society titled “Is Cobalt Needed in Ni-Rich Positive Electrode Materials for Lithium Ion Batteries?” gets to the heart of the matter. It’s co-authored by Jeff Dahn with the research taking place at universities in Canada and China:

The research concluded that cobalt brings little or no value to NCA-type batteries where nickel is at least 90% of the transition metal layer. The paper hoped that it would spur more interest in cobalt-free materials and specifically named aluminum, manganese and magnesium as three elements with more use than cobalt.

…and in with the manganese

Of the three cheaper and more useful metals than cobalt, I believe that manganese makes for the best pairing in a nickel-dominant battery. While I’m not an engineer, Battery University explains in layman’s terms why manganese makes such a useful pairing with nickel:

The secret of NMC lies in combining nickel and manganese. An analogy of this is table salt in which the main ingredients, sodium and chloride, are toxic on their own but mixing them serves as seasoning salt and food preserver. Nickel is known for its high specific energy but poor stability; manganese has the benefit of forming a spinel structure to achieve low internal resistance but offers a low specific energy. Combining the metals enhances each other strengths.

Nickel-manganese-cobalt, or NMC batteries are already popular with other EV manufacturers along with power tools and e-bikes, but Tesla might have avoided using them until now due to capacity fade issues that would wreak havoc on the life of the battery. A recently published research paper titled: “Operating EC-based Electrolytes with Li- and Mn-Rich NCMs: The Role of O2-Release on the Choice of the Cyclic Carbonate” leveraged Dahn’s research to get to the heart of the capacity fade problem associated with manganese. If one of the breakthroughs that have not yet been made public through open access research articles includes having solved this issue, then nickel-manganese batteries should become the preferred choice for Tesla.

Securing the supply of nickel and manganese

If Tesla has indeed created a better and cheaper battery in a lab, the next challenge would be securing the raw materials so that mass production can take place. The strong preference would be to secure supply in North America for Tesla’s Nevada Gigafactory while minimizing the carbon and environmental footprint. That might be easier said than done. A blog from americanresources.org titled “New Chart Unveils Supply Chain Weaknesses for Manganese, a Critical Input for EV Technology” showed that the United States and Europe are trailing China in a global battery arms race, particularly in the supply chain for lithium, cobalt, graphite and nickel.

Despite the challenges, Tesla appears to be making some aggressive moves to combat the issue. The Globe and Mail reported last Friday that Tesla is in talks with Giga Metals Corporation (OTCQB:HNCKF) (GIGA.V) to secure a supply of low carbon nickel in its Turnagain mine in British Columbia. The result was Giga flying up 185% on the OTC on over 10 million shares, an outstanding amount of volume for a 5-letter symbol OTC stock. The Turnagain mine has measured and indicated resources of 2.36 million tonnes of nickel.

However, as the title of the previously linked americanresources.org blog post implies, manganese might be the trickiest metal in which to secure supply:

China, while only producing 6% of global total output, has a “significant advantage” in the manganese chemical refining step in the supply chain accounting for 93% of production in 2019.

While global prices are cheap, North American production of manganese is non-existent. An added challenge is that while most manganese is appropriate for the steel industry or as fertilizer, not all manganese is suitable for battery production.

Tesla does have an inside connection to one potential source of useful manganese through Jeff Dahn. Manganese X Energy Corp. (OTCPK:MNXXF) (MN.V) owns the Battery Hill Project in New Brunswick, an early-stage manganese exploration project that is one province over from Dahn’s Dalhousie University in Nova Scotia. Manganese X has demonstrated an ability to produce high grade battery material out of its property with it yielding manganese sulphate with a purity exceeding 99.95%. The company has a Board Member and Director named Roger Dahn, who is the brother of Jeff Dahn. That family connection is likely something that both Tesla and Manganese X would be willing to exploit.

Conclusion

There is a lot of hype around Tesla’s Battery Day. I expect the company to come through with technology breakthroughs that will lead to a cheaper, more environmentally-friendly and more politically popular battery that is made on North American soil. The stock should react positively, but investors should also be on the lookout for North American properties that can produce needed raw materials at battery grades. The price performance of Giga Metals shows the potential returns waiting for investors who are willing to dig deep to find the right properties. Manganese X looks like another one with a definitive connection through the Dahn name and the Manganese supply potential.

Author: Edward Vranic

Source: Seeking Alpha: Tesla Battery Day: Out With The Cobalt, In With The Manganese

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