Early Wednesday morning Tesla held its annual general meeting and its much awaited “Battery Day” with Elon Musk presenting to an audience sitting in Tesla vehicles arranged in an old style drive-in configuration.

The one thing you don’t want to do when you have a market capitalisation of US$360 billion and don’t make much profit is to overpromise and under-deliver. But that’s what happened.

No “million mile battery” was unveiled and generally the presentation focused on what they need to do over the next few years to make the electric vehicle cost competitive in the mass market, rather than unveiling an end product.

Tesla detailed a plan to increase vehicle range by 54%, reduce the cost per kilowatt hour by 56% and cut the investment per gigawatt hour by 69%. This would be achieved by:

  1. Reconfiguring the battery cell design to be bigger with no “tab”, resulting in dramatic increases in energy and power;
  2. Reducing the cost of manufacture of battery cells by doing it themselves, introducing manufacturing efficiencies and benefiting from economies of scale as they move from a planned 100 GWh in 2022 to a massive 3 TWh by 2030.
  3. Reducing raw material costs and supply risk via the use of silicon in the anode and removing the use of cobalt in the cathode. Further, they will seek to develop their own lithium supply source and take an active role in supply chain management.
  4. Integrate the battery pack into the structure of the vehicle to save space and add strength.
If they deliver, then they change the world.
The 5 key takeaways from this announcement are:
Economics wins

The market will switch to electric vehicles when it makes economic sense to do so. Tesla recognises that the key to achieving mass market acceptance of electric vehicles is to make them irresistible. At present, the features and capability are enticing but the cost is prohibitive.

While battery costs have fallen significantly, the rate of decline has slowed. In response Tesla has devised a series of enhancements and improvements that will drive costs down and enable a US$25,000 Tesla within three years. If achieved, the price will lead to mass adoption and most likely signal the extinction of the internal combustion engine motor vehicle.

A battery business

Tesla is seeking to evolve into a vertically integrated battery manufacturing business. At the backend, it will seek to control and integrate the supply chain to squeeze out unnecessary cost, whist at the front end it will develop a portfolio of products that utilise the batteries – electric vehicles being the first large scale market opportunity.

This aligns with their vision of driving the transition away from fossil fuels in the transport and power generation sectors in order to reduce green house emissions and dramatically slow global warming.

Serious firepower

Tesla’s market capitalisation currently sits at approximately US$360 billion. To put this in context, this is larger than the combined market capitalisation of BHP, RIO Tinto and Fortescue. Put simply, they have the financial strength to ensure that the raw material supply chain keeps pace with their product pipeline objectives.

Product differentiation

Tesla will develop a portfolio of battery products targeting various market segments.

A lithium iron battery will be utilised in the lower cost vehicles that don’t require as much power or range; the lithium/nickel/manganese battery pack will support the mid range vehicles that require more range and power and the lithium / high nickel batteries will support the high range, high power vehicles, including the Cybertruck and Semi.

Recycling will emerge as an important supply source

Recycling will emerge as an important raw material supply source. Tesla indicated that they would build recycling facilities alongside their battery factories to ensure that they close the loop and capture this growing supply source.

So what does this mean for commodities?

The electrification of the transport sector and the transition from fossil fuels in power generation to renewables supported by battery storage are two  long term trends impacting commodity demand and supply characteristics. The immediate implications from the Tesla battery day are as follows;

  • The big loser was cobalt. It is being designed out of the battery configuration due to its high cost and uncertain supply sources.
  • Tesla continues to experiment with silicon to reduce the use of graphite in the battery anode, but too early to suggest an end to the use of graphite.
  • The presentation identified lithium as an abundant commodity and detailed they had acquired a lithium clay resource in Nevada that would be developed utilising a new salt extraction method. Further, there was enough lithium resource in Nevada to supply the entire US market. This sent the traditional brine and hard rock lithium stocks into freefall. Lithium experts have queried the validity of this claim and we suspect that it’s too early to mourn the demise of the industry. We will wait with interest to learn more on this development.
  • The need for nickel in the battery cathode was made abundantly clear in the presentation. It is fundamental to range and power with no current substitute. The pressure for nickel producers will be the need to deal with a demanding customer seeking to control the supply chain.
  • Copper remains one step removed but an attractive exposure to the electrification thematic.
The Argonaut Approach

Argonaut are resource sector specialists. We have recently launched The Argonaut Natural Resources Fund, a high conviction investor in the Australian resources sector.

We invest across the resource sector, from micro caps with a market capitalisation of less than $50 million to the very largest companies with a market capitalisation exceeding $100 billion. This enables us to adjust the portfolio to reflect our assessment of market risk at any point in time whilst also seeking out pure commodity exposures in lesser known companies.

Our investment process can be described as “top down meets bottom up” in that we seek to identify favoured commodities and then select the best quality and best value companies exposed to that commodity.

The portfolio will often consist of a mix of those commodities and companies that are currently in favour, and those that are out of favour and represent counter-cyclical investment opportunities. We adopt a three year investment horizon and recognise that being a patient investor is an important discipline in resource sector investing.

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