Last week, Tesla Motors announced that it had agreed in principle to an off-take agreement with Bacanora Minerals Ltd. (located in Sonora Mexico) and to a lesser extent, its joint venture partner, on a portion of their properties, Rare Earth Min. Since then, Bacanora’s stock is up approximately 40%. At first, I was surprised Bacanora’s stock didn’t soar even higher. It turns out that the off-take agreement has a number of contingencies and no financial commitment from Tesla. In fact, Tesla’s Elon Musk was quoted as saying, “this lithium deal is not exclusive (and) has many contingencies. The press on this matter is unwarranted.”
The point of the opening paragraph is not to marginalize the good fortune of Mexico’s Bacanora, they have certainly staked a coveted spot! Instead, I believe it has significant and important ramifications for lithium juniors in Nevada. There’s Dajin Resources [(DJI.V) & (DJIFF)] Pure Energy Minerals [(PE.V) & (HMGLF)] the proposed [Western Lithium / Lithium Americas] merger and of course the currently producing Rockwood Lithium
Clearly, more than one of the above will get the green light. In fact, I’m laying out a thesis that, over time, all existing Nevada lithium companies will be keenly sought after. I find it noteworthy that Tesla’s first move to secure lithium supply was choosing a company that remains years from production. To be fair, Bacanora is more advanced than Western Lithium, Dajin Resources and Pure Energy. However, the fact that Tesla is looking so far in advance and might soon announce deals in Nevada, is telling of Musk’s longer-term strategy. Remember, Musk believes, “the need for lower-cost batteries for autos and power storage means there will need to be hundreds of, “giga-factories…”
Can Long-Term End Users Avoid Tapping Every Viable Lithium Source?
If Tesla is largely confined to North America for his its raw materials, as is reported to be the case, Nevada is surely a great place to be. The State offers security of supply not just for Tesla, but for giga-factories sure to follow. There are not that many lithium juniors, except a dozen or two with little more than a potential deposit, in places like Serbia, with no cash or the ability to raise capital. Hope is not a strategy.
Tesla and others will need ALL of the lithium supply from any economic deposit in a known, safe jurisdiction like Nevada. It’s a question of when, not if, investors wake up to Nevada’s small cap lithium opportunities. Even companies in Nevada that might be 5 + years from production are still years ahead of green field prospects. Dajin Resources is an early-stage play, but it has invested capital, drilled holes, and staked some of the most prospective property in Nevada as well as in Argentina. Dajin has a committed shareholder base and the demonstrated ability to raise capital, including from the ongoing exercising of in-the-money warrants.
Yes, Dajin is an earlier stage play than Western Lithium and Pure Energy. However, there will be room for more than just one winner. Dajin controls almost 7,000 acres in Nevada and an enormous land position (roughly 250,000 acres) in Argentina. Investors in Dajin get a long-dated call option in Argentina for free. How large a holding is 250,000 acres? Lithium Americas controls about 200,000 acres, which was no doubt an attractive attribute to Western Lithium’s stakeholders. Although at early stage, in the long run will that matter if lithium demand explodes higher like Musk and others seem to believe? I think not.
The bottom line is that there are probably 10 or fewer pure-play, lithium juniors with a shot of reaching production, (there will be more joint ventures, farm-outs and takeovers). Therefore, green field explorers and higher-cost projects in Australia (and elsewhere) will never see the light of day. In my opinion, Musk tying up a portion of Bacanora’s output would not be a meaningful part of his aggressive long-term demand expectations. Bacanora might end up supplying just 10% (my guess) of its lithium output to Tesla’s first giga-factory. Security of supply means multiple sources for multiple end users.
Tesla and others to follow will demand consistent, high quality, on-time delivery from a wide range of sources. If Musk keeps to his pledge of obtaining raw materials solely from North America, he will likely be all over Nevada’s emerging production, timing unknown. Not to be lost in the analysis is that Musk not only wants to secure his own growing needs, but is likely to be searching for opportunities to thwart competition.
As soon as the likes of Buffet’s BYD, LG Chem, Panasonic, NEC, Samsung, Sanyo, etc. begin announcing off-take agreements, the world will see how critically important the 10 or fewer lithium hopefuls are. Dajin Resources is a favorite of mine, but not my only. There’s ample room for any and all lithium supply, especially secure supply, to meet demand for the next few decades. Yes, I’m bullish on lithium. Yes, I’m bullish on Dajin Resources.
Several of the companies mentioned herein have small market caps, including Dajin Resources, Pure Energy, Western Lithium and Lithium Americas. Small cap stocks are speculative, not suitable for all investors. I, Peter Epstein, own shares of DJIFF and PE.V. Mr. Epstein, CFA, MBA is not a licensed financial advisor. Readers should take that fact into consideration before buying or selling any stock mentioned. Readers are encouraged to consult with their own investment advisors before buying or selling any stock, especially speculative ones such as Dajin Resources, Pure Energy, Western Lithium and Lithium Americas. Peter Epstein conducts a lot of articles and written interviews that are popular among readers. At the time that this article was posted, Dajin Resources and Pure Energy were sponsors of: http://EpsteinResearch.com. Please consider visiting: http://EpsteinResearch.com