In July, we updated Supply Chain Matters readers concerning Tesla Motors construction of its $5 billion massive gigafactory, which when completed, will provide the capacity to be the single largest battery manufacturing volume plant in the world. Once more, the plant is located in the United States, an area that many thought impossible for sourcing such a plant.   Tesla Model X SUV

Tesla’s strategy is bold, involving supply vertical integration. Given that a considerable portion of the cost-of-goods sold (COGS) for an electric powered automobile involves its batteries, the strategy is to control the bulk of the value-chain. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent.

Since the state of Nevada site selection announcement in 2014, a far broader strategy has been unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California. While the highest concentrations of lithium are mined in Bolivia and Chile, there are supply sources in the western U.S. and Mexico.

Last week, there was a significant joint announcement regarding one source of raw material supply for this new battery production plant, that being lithium hydroxide. Tesla announced that it had secured a five-year strategic long-term supply agreement through a partnership with mining firm’s Bacanora Minerals Ltd and Rare Earth Minerals PLC. The two suppliers have formed an entity termed the “Sonora Lithium Project Partners.”

According to a published announcement from Alberta Canada based Bacanora: “The Sonora Lithium Project Partners are working to develop a mineral-rich, lithium-bearing clay deposit into a planned low-cost, sustainable and environmentally conscious mining operation.” The announcement further estimates that the mine and processing facility will have an additional capacity of 35,000 tonnes of lithium compounds, with a scaling potential of up to 50,000 tonnes annually. That is a considerable supply, somewhat equating to global supply needs. The Sonora Lithium Project itself consists of ten mining areas in the northeast of Sonora State.

The supplier is further required to reach certain performance milestones and pass product specification milestones. A key milestone is noted as the ability to supply lithium hydroxide in accordance with the volumes and timeframes that will be established by Tesla. To do so, Sonora Lithium Project Partners will be tapping lithium supply from Bacanora, along with additional supplies located in Northern Mexico, owned by partner REM. The Mexico site will mine lithium from mineral-rich clay.

The electric automaker will additionally purchase specified minimum tonnages in accordance with an agreed-upon pricing formula which is described as below market pricing.

Noted is that this new agreement will form only a portion of Tesla’s lithium-based feedstock needs. The remainder will likely come from other mining suppliers which imply that Tesla has an active supply risk mitigation strategy for lithium feedstock.

The agreement requires that Sonora Lithium Project Partners raise additional financing to design and construct this mine and processing facility. That implies additional time required for fund-raising, permitting, construction and volume production. Thus, we strongly suspect that initial gigafactory lithium supply will come from other sources. However, the Bacanora announcement indicates that the Sonora Lithium Project will rapidly accelerate mining and development efforts.

In the spirit if its founder and CEO, Elon Musk, Tesla consistently makes bold moves in its product designs, detailed manufacturing, and now with its supply vertical integration strategies. It is going to be quite interesting to observe how all of this unfolds.

Bob Ferrari