Tesla
Battery Day: Out With
The
Cobalt, In With The Manganese
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.
Data 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.
Disclosure:
I am/we
are long HNCKF, MNXXF. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it
(other than from Seeking Alpha). I have no business relationship
with any company whose stock is mentioned in this
article.
Edward Vranic, CFA
Editor's
Note: This article covers one or more microcap stocks. Please be
aware of the risks associated with these stocks.