In 1848, gold was first discovered in California. In 1859, the U.S. oil industry began when the first well was drilled in Pennsylvania. Back then, oil from animals (think whale blubber) was typically used, until a patent for creating kerosene from coal oil was patented in 1854.
Once Pennsylvania shale oil was analyzed and determined to be a great source of kerosene, others began looking for “rock oil.” Petroleum soon replaced whale oil and a new term was coined: “black gold.” This is not to be confused with the alloy black gold, which is created by mixing gold with cobalt.
Fast forward into the 21st century and I believe we are about to enter into another gold rush of a sorts. Batteries. In a recent article by Yahoo! Finance, the author pointed out that the real money may not lie in Tesla’s cars, but in its battery business. The article analyzed Canaccord analyst Jed Dorsheimer’s note that upgraded Tesla stock (NASDAQ: TSLA) from “hold” to “buy.” Dorsheimer also tripled his price target to $1,071 per share.
He pointed out that Tesla holds a “several-year lead” over its rival EV makers around the world. However, this wasn’t why he upgraded the stock. That reason has everything to do with batteries. Batteries have evolved over the years. You may look at a pack of Duracell batteries at the store and perhaps be confused as to how batteries will be the next gold rush. But we’re in a whole new era.
Dorsheimer emphasized that Tesla’s focus on “first-principles engineering” includes getting the battery science right, and Tesla is planning to scale it up once it does. Its battery focus also allows it to “expand into the solar and home energy markets with its Powerwall products.”
Once this gold rush of the 21st century is in full swing, Tesla will be leagues ahead of its competitors. In 2022, Dorsheimer predicts that Tesla will have worked through its challenges in its supply chain to make sure it has sufficient battery production to cover its automotive needs and then some. Once Tesla achieves this, “ample battery supply will allow TSLA to meet its new aggressive Powerwall campaign” (selling batteries with all new home solar installations), and Tesla will also be able to increase sales of Powerpacks and Megapacks to utilities and large companies.
As of now, Tesla’s business is mostly from its automotive market. However, Dorsheimer predicts that Tesla’s energy storage business will soon take off and start to represent an increasingly large share of Tesla’s revenue. It could grow to around $8 billion by 2025, while producing gross profit margins on par with what the automotive business produces in that same year — 25%.
What will help both of Tesla’s divisions improve their gross profit margins according to Dorsheimer will be falling battery costs. He predicts that the costs of batteries will decline as much as 30% in terms of dollar per kWh. Batteries with a lower cost will make Tesla’s businesses more profitable by reducing input costs.
Lithium Is The New Gold
What sets EV batteries and Tesla’s Powerwall apart from your average batteries are the materials that they are made from. Back in 2010, Jean-Marie Tarascon published a paper in Nature Chemistry titled, “Is Lithium The New Gold?” Tarascon noted that lithium as an element has been known for around 200 years but that it is now critical for an electric vehicle era. As a result it, “could become as precious as gold in this century.”
In June of last year — well before Tesla’s Battery Day event late summer — RK Equity’s Howard Klein gave an interview on the EV Stock Channel, and one thing he said that really stayed with me was this:
“If Tesla had its own lithium ore, it could design its own batteries. It wouldn’t have to buy them already made or partially designed. Tesla could use its own ore to make its own unique design.”
After Tesla held its Battery Day event, the company announced that it was planning to build its own cathode factory in North America. Also, in essence, Tesla officially entered the mining business. Klein also predicted that the lithium markets would be impacted — and indeed they were. I now hold a few lithium stocks which have performed decently since Tesla has forayed into this world.
Bloomberg reported in September of last year that Tesla’s talks with Cypress Development Corp have fallen through, but that Tesla had the rights to mine lithium on its own in the state of Nevada.
Tesla has 10,000 acres of lithium-rich clay deposits. In more recent mining news, Tesla partnered up with New Caledonia for nickel, which is another critical metal needed to make EVs.
If you take a step back and look at Tesla through only the lens of it being an automaker, this should amaze you. As an automaker, Tesla taking on the problem of sourcing materials to makes its batteries instead of only leaving this problem to other companies to solve is what will put Tesla in the lead once this new gold rush is in full swing. When you look at Tesla through the many lenses of the industries its impacting — ranging from automobiles to insurance to batteries to energy, which is comprised of both solar and batteries — you start to see why it’s important for Tesla to take the lead in this industry.
Add in Tesla’s sense of urgency, which is fueled by Elon Musk, who understands that we have to take action quickly to preserve our species (as the human race), one can begin to understand why Tesla is making these power moves in the mining industry.