Rare Earth Minerals (LSE: REM) and BACANORA MINERALS (LSE: BCN) are surging this morning after the two partners announced that they have signed a lithium supply deal with Tesla Motors.
On the condition that Rare Earth and Bacanora’s Sonora lithium project in Northern Mexico reaches certain performance milestones during the next two years, Tesla will buy lithium hydroxide to feed the manufacturing of batteries at its Gigafactory in Nevada.
One of the conditions attached to the deal will be that the Sonora project has to be able to produce lithium hydroxide in accordance with the parameters determined by Tesla.
The deal between Rare Earth, Bacanora and Tesla will last for five years, starting from when Tesla places its first order. There’s an option to extend the contract for a further five years.
Commenting on the deal, Rare Earth Chairman David Lenigas said:
“The selection of the Sonora lithium project as one of the lithium suppliers to the Tesla Gigafactory is a landmark transaction that will support the development and commercialisation of the Sonora lithium project. This key supply agreement with Tesla will hopefully be the first of a number of potential lithium off-take partners for the Sonora lithium project…”
A big deal
There’s no doubt that this deal between Rare Earth, the company’s partners, and Tesla is a big deal.
Tesla Motors designs and manufactures premium electric vehicles, which have gained a reputation for being the best electric cars in the world. Tesla’s newest model, the P85D, an all-wheel-drive version of the battery-powered of the company’s Model S car, has recently earned a 103 out of a possible 100 in an evaluation by Consumer Reports magazine, setting a new standard for comfort, quality, reliability and overall perfection.
And to meet the rising demand for its vehicles Tesla is building a $5bn Gigafactory in Nevada, which will be able to supply enough batteries to meet the projected demand for Tesla’s vehicles. Along with strategic partners such as Panasonic, the Gigafactory will help reduce the cost of manufacturing batteries by around 30%.
Tesla’s Model S uses around 7,000 lithium-ion batteries, and Tesla is planning to produce 500,000 cars per year in the latter half of this decade. So, the company needs a reliable lithium supplier to feed production at its Gigafactory. The factory is set to commence production during 2017 and reach full capacity by 2020.
A long way to go
A deal with Tesla is a game-changing development for Rare Earth, but the company still has a lot to do before the contract translates into revenue. For example, today’s press release warned that:
“…the Sonora Lithium Project Partners will need to design and construct a suitable mining and processing operation. This will require the Sonora Lithium Project Partners to secure significant financing through debt and/or equity.”
What’s more:
“Bacanora and REM will be pursuing next steps to raise finances in order to achieve this goal. There can be no assurance that the conditions to supply product under the Supply Agreement will be met or that the agreement will prove to be economic.”
In other words, while Rare Earth and Bacanora may have a provisional agreement with Tesla, there’s no guarantee that the partnership will register any economic benefit from the deal.