Elon Musk made headlines with his recent “Master Plan, Part Deux,” a strategy to build solar power systems with integrated energy storage, plus an aggressive move to expand electric vehicle offerings across all major segments. In order to realize his dreams, Musk wants Tesla (TSLA) to purchase SolarCity (SCTY), the biggest player in the rooftop solar business.
Tesla has received a lot of hype and excitement, as well as a healthy dose of criticism, but if there is one thing that Musk is not guilty of it is moving too cautiously.
If Tesla and Musk are to be successful, they will need to dramatically ramp up the production of lithium-ion batteries to power both Tesla’s line of EVs and to provide energy storage for solar systems. And there is one key ingredient that will make all of this work: lithium.
Lithium is only mined commercially in a few countries, most notably Chile and Argentina. But the U.S. state of Nevada also happens to have large deposits of lithium brine and it is not a coincidence that Musk chose Nevada as the site of his gigafactory, which will churn out batteries for Tesla vehicles.
It is hard to overstate the scale and significance of the gigafactory for the lithium industry. Musk’s gigafactory will require all the lithium production capacity that exists in the entire world. That gargantuan demand has led a whole range of lithium mining companies moving in to scoop up attractive acreage in Nevada. The coming tidal wave of batteries has also led lithium prices to skyrocket over the past year, sending the share prices of lithium miners soaring along with it.
One company that is particularly well-positioned Oroplata Resources (ORRP), which just floated earlier this month. It is sitting on 10,000 acres that have 500 mining claims in Nevada, with the option of acquiring another 12,000 acres. Oroplata is also focusing on lithium brine, a cheaper and easier-to-produce resource relative to rock mining.
Just ahead of its float, Oroplata Resources reported exciting results at its Western Nevada Basin project, a 100 percent company-owned project where it found high concentrations of lithium. Oroplata is confident that the results prove the potential profitability of its play, which is located not too far from Tesla’s gigafactory. Oroplata has a management team with extensive mining experience in different parts of the world, which should help it carry out the next phase of its operations.
The interesting thing about companies like Oroplata are their small market caps – Oroplata’s is less than $70 million – which present a lot of potential upside to investors. In fact, with a large portion of lithium production coming from massive integrated companies that are diversified across multiple sectors, such as Albermarle (NYSE:ALB) and SQM (NYSE: SQM) the only way for investors to gain exposure to lithium is from a handful of pure-play lithium producers.
Lithium has been dubbed the “new gasoline” by Goldman Sachs, and there are few other commodities that are showing such a tightness in supply looking forward. The EV market is growing explosively, but it is still early days. With new EV models set to hit the market, growth rates will only accelerate.
And Tesla’s announcement that it will take over SolarCity and build backup storage devices for solar PV panels highlighted the fact that the energy storage market, which is even less mature than the market for EVs, is also set to take off.
That means that little companies like Oroplata Resources will see extraordinary demand for their lithium volumes for the foreseeable future.
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