Emily Hersh, Managing Partner, DCDB Group
Simon Gardner-Bond, Senior Executive Vice President, Techmet
Chloe Holzinger, Senior Analyst, Batteries & Energy Storage, IHS Markit
Chris Berry, CEO & Founder, House Mountain Partners
Kimberly Berman, Analyst, Special Projects & Equity Research, BMO
It has been a very interesting year so far when it comes to battery metals, as the idea of a secure supply chain has started to gain more and more traction in different spheres. Let’s talk about the recent financing and going public of solid-state company, QuantumScape, via SPAC.
There are a couple of key trends to pick out there. First is the decision to go public via SPAC in the first place. There have been many cleantech companies, specifically in the batteries and electric vehicles space, that are choosing to go public via SPAC. The rationale being to raise more money and scale operations. This is an interesting trend in the US. Basically, these companies have chosen to go public and raise these funds rather than venture funds, because their timelines are very different from a lot of venture capital timelines, and typical startup timelines.
It really speaks to QuantumScape’s desire to scale operations and build a production facility quickly. But it begs the question if they are ready for that prospect? Have they completed the R&D steps and milestones that would make a battery startup ready to build a pilot production facility? I’m not really sure if we’ve seen that yet, from what they have disclosed publicly. Their electrolyte is an oxide ceramic, so it doesn’t wind in the same way that today’s electrolytes and batteries are made. Those systems will need to be stacked in a layered cell. And to my knowledge, they have not really done much of that yet.
They have a US$3.3 billion dollar valuation, which is a number I have not seen deployed to any new nickel projects. Simon, I believe TechMet announced a US$30-50 million-dollar investment for a nickel project in Brazil. Can you talk to me about how that scale of number feels from the mining finance side?
TechMet is investing in projects that are developing assets to feed the supply chain for critical metals, for technology metals, for things like lithium batteries. We recently announced an investment into TechMet from a US foreign investment bank, an organization called the DFC, for US$25 million, which we’re going to feed down into a nickel cobalt mine development project in Brazil, which will essentially turn it into a small mine.
The larger project will cost around US$500 million, which will get roughly 25,000 tons of nickel a year. That is a very capital efficient nickel project. A lot of the production that may come on stream will be HPALs, where you can double or triple or quadruple that CAPEX number to get a similar number of nickel tons. In general terms that might be enough nickel to feed one gigafactory. If you look at the buildout of battery manufacturing that’s slated for the next 5-10 years, we’re going to need a lot of capital input into things like nickel, cobalt and lithium to feed the supply chain for those factories.
But US$3.3 billion for parts of the battery that are not even proven yet really blows me away. We need to remember that the investors putting money into that SPAC have a different investment horizon in mind. It’s a very long-term bet.
I think what everybody should be watching for the battery space in the next five years is what’s going to be built in Europe. The Tesla and CATL factories are going to be in Germany, so all eyes should be there. Nickel is the star here. When you talk about solid-state, you’re looking at at least 5-10 years before we see it in a vehicle, because technology takes time. We have an entrenched technology, and incremental improvements don’t get the same media attention as these types of breakthroughs.
Solid-state has been a buzzword for 5-10 years and will continue to be, but the investment horizon is a bit further away for the type of capital that is being raised. There is a follow-the-money mindset in the battery space. OEMs are looking for the next technology and they have money to allocate to it. It’s a way for them to be ahead of the curve and to de-risk their research and development.
Chris, do you see a match between investor appetite versus the ability to finance a mining project for one of these battery metals?
They have historically been disconnected, and I think that a lot of that sentiment is news driven. One of the more interesting SPACs that I have seen this year is MP Materials trying to vertically integrate the Mountain Pass Mine for the third time. National security issues have heightened the interest for these critical metals and minerals, but the majority of investors that are looking at the critical metals space or the battery technology space, are more often than not generalist in nature.
They’re just as likely to invest in consumer retail as they are in batteries. There is a learning curve to this type of investment. Investors are asking: How much are we going to need? How much is it going to cost? Where is it going to come from? What are the challenges?
One thing to focus on, when looking at the metals from a macro perspective, is incentive pricing, which for greenfield nickel projects can run anywhere from $18-19,000 a ton. Today we’re in the $14-15,000 range. So there’s a window there but investors are weighing how much risk they’re willing to take, given that we’re pretty far from incentive pricing for new nickel projects.
Let’s talk about the relationship between quality, cost of production, and ESG. From a quality or purity standpoint, what do you see happening to battery technology, and how is that going to impact what types of chemicals are demanded across this material spectrum?
A lot of trends in the battery space, in terms of next generation materials, are trends that we have seen for the past five years. Increased demand for high nickel content batteries will continue to grow, but there’s a limited supply.
Simon, how do you see a nickel project in Brazil stacking up in terms of cost and how are changing requirements for ESG impacting the decision to do this project versus another nickel project?
ESG credentials are only going to become more important moving forward. We’re developing a lithium mine battery recycling company, so we talk to OEMs about the battery manufacturing facilities they’re looking for. One of the things that surprised me is how much weight they are putting on in the future, whether it’s a cell, a battery or a vehicle, the units they will have to put onto that, in terms of C02 emissions for manufacturing, miles traveled, water used.
All these ESG metrics are important, but I think consumers don’t really care that much about them. In the UK you’re legally obliged to put stickers on every white goods appliance, so if you buy a washing machine or a fridge, it has an energy performance certificate. But I think it’s become background noise. People want a certain machine and don’t care if it’s an A or an A+ or a B-.
Nevertheless, this is something the industry has had to adopt but it is an extra cost. The battery manufacturers, the OEMs and the auto-manufacturers are saying that this is going to become the norm, and so it behooves us to make it an important part of our investment decision now. Everything TechMet does, all the projects we look to invest in or develop, will have the highest standards of ESG.
How much do ESG considerations raise the cost? How is that weighed from a banking standpoint?
At this point we don’t know how much that is going to weigh and how it is going to contribute. There is no standard metric of what to look for going forward. C02 is the norm because there’s a lot of it, it’s easy to measure, and when you go after C02, you’re going after all the other toxic pollutants like particulate matter and methane which are also very problematic.
On the banking side, we’re hiring ESG experts to come in and normalize what those measurements are going to be. On the investment side, there are different metrics they they’re looking for – there is no consensus. One project may pass a certain standard in one investor’s mind, but it doesn’t for another investor. Mining companies are starting to look at this a lot more seriously, because they don’t want to be caught down the road doing something that hinders their business potential.
Battery metals companies are not operating like traditional miners. They have to go through testing and deals and qualifications. They don’t want to be caught off guard and they lose clients because they’ve decided that they don’t meet key investors’ ESG qualifications.
When you talk about ESG principles behind the materials that go into batteries and EVs, you are looking at the supply chain for something that people are adopting and paying quite a lot of money for at the moment. Not just for economic reasons. They’re doing it to feel good about themselves.
So, the drive for ESG standards is going to come from both consumers and investors. Which do you see as a more important driver? Or, do you see them coming together in the future?
At least initially, you must incentivize mining companies to achieve these goals. Banks and other financiers can certainly lay out ESG criteria, but low-cost financing through green bonds is a great way to do that. SocGen has initiated this project financing boom.
As EV costs comes down, investors are going to be more ubiquitous. It is not just going to be about virtue signaling, like has been done to date. People are going to care more about C02 and particular matter in the air, and it’s going to be incumbent on everybody in the supply chain to help out.
I don’t think anyone can agree on what the value or the price of a ton of C02 actually is. Costs are going to go up if supply chains are going to become more regionalized and less efficient. Which is one of the reasons I’m so interested in leveraging technology to lower overall costs, whether or not it’s with cathode technology or recycling or anything else. It looks like a less efficient supply chain is a costlier one, and the question will ultimately come down to who’s going to pay the costs. If it’s consumers, then so be it, but people are only going to be willing to spend so much on these technologies.
What do you see happening when it comes to subsidies and programs in China to incentivize EV shifts? You talked about the adoption of LFP cathodes in Chinese battery vehicles. Can you walk us through that more generally?
When COVID-19 initially hit, a lot of concern in the market was around EV sales and general vehicle sales. Over the past 6-8 months, we have seen EV sales recover much more quickly than ICE sales.
I think all LFP battery production today takes place in China. What’s really interesting is watching non-Chinese firms starting to use LFP, where previously we had seen LFP make up less than 5% of the light duty vehicle market outside of China. It looks like LFP will start to be used outside of China in the near term, and that there is a strong future for LFP and light duty vehicles.
The main story in the battery battles has been about nickel and we have typically seen LFP as something like a stalwart, that would never go away. It’s a boring technology and has been around for a while. BYD has been a champion of LFP for a long time, and Tesla is using this technology in their Chinese-made vehicles.
Now we are looking at battery recycling and second use. LFP have only really been used outside of China for buses and stationary storage, but now that Tesla is using it, everybody else is looking at it again. I think that’s a positive thing for the industry, though maybe not for nickel markets.
When looking at recycling, what is the difference between mined feed stock (i.e. mined and processed nickel products) versus accessing feed stock from used batteries. What are some differences between what is developing in China versus North America?
If you look at metals and mining markets, recycled metal has been driven purely as an economic gain. If you can get copper out of an appliance and get it back to market, it tends to be quite clean. It’s quite easy to recover and it’s a lot cheaper, so about a third of the global copper supply is from recycled copper.
But with lithium ion batteries, and the metals and materials within them, the pressure to recycle is growing before the volume is there to do so. We have a market leading technology and we’re expanding as fast as we can, but the volumes still need to come and these vehicles are going to have around a 10 year life on the road.
There is pressure from the downstream, with people asking how much we will actually use recycled material. And the fact is that recycling is easy to talk about, but not easy to do. There needs to be enough volume to contribute recycled material into the front-end to make new batteries. With my modeling looking at the supply of recyclable material over time, the most I get to for lithium ion batteries by 2030 is 10% of nickel, lithium, cobalt.
We are going to need a lot of investment into recycling facilities around the world to get to the volumes we need. But it’s not going to be a panacea. You’re still going to have to mine metal out of the ground.
In relation to maturity, recycling a high nickel battery is still very low in the technology scale versus an LFP. A battery pack has to be fully used before it even goes into the recycling plant. So, when you’re looking at decarbonizing the whole supply chain, the second use battery is very important.
It’s a two-pronged approach. We have to be able to have the second use, we have to get these batteries down to zero, and then we have to figure out the recycling end of it. The bottom line is all these battery packs look different, so that’s going to be another added caveat to the process.
Let’s look at second use versus recycling.
I’m not quite as bullish on second life as I used to be because we can now see that light at the end of the tunnel around cost parity for an EV relative to a traditional internal combustion car. If we get to that point within the next couple of years, where cost per kilowatt hour is $100 or below, you start to ask yourself if it makes sense to consume new or to take on the cost of reconfiguring. Let’s say you have an old EV battery with around 50-60% of its capacity left. There is a cost associated with reconfiguring that for energy storage. People talk about a million mile battery or even a two million mile battery, which is great, but it’s going to come down to cost.
One of the more interesting parts about recycling we’ve seen this year is really what Musk said – the idea that you could potentially get higher quality materials from a recycling line than from a raw minerals production facility. Because we know exactly what the inputs are into that process.
For lithium, I think that the issue of quality and whether or not it’s coming from a natural resource or recycled resource is quite interesting. These recycling efforts are really being directed to the high nickel cathode batteries that would potentially have larger amounts of lithium in them.
You could recycle an LFP battery and maybe we’ll see that once we see more LFP being used in EV markets. But a lot of the recycling technologies that I’ve personally seen have been focused on NMC.
At Tesla’s Battery Day, everybody was asking how this is going to change the industry, but people don’t fully comprehend that what Tesla is doing is very different than everybody else. They’re using a different technology, they use NCA versus NMC, and they really set the tone. What they have always done is keep everything within their own brand and they have their own battery management system and their own charging infrastructure. Whereas others need to rely on third party charging infrastructure and possibly third party battery management systems.
Tesla has deep control over what they do and what inputs they put in. They’re not going to be recycling others’ batteries. They’re going to be recycling their own batteries. You’re going to see these individual circular economies that are happening.
Chris noted that the performance of new batteries is so superior that it makes more economic sense to recover the metals from them. Where are the economics of that? Can you give me some cost examples of the repurpose versus recycle?
At the moment, the volumes are so small for end of life automotive batteries, that there is competition. In the UK, where we have one of the most advanced markets for EVs, researchers are bidding for batteries. They can’t buy a battery to test. I wouldn’t take the current state of affairs as what’s going to happen in the future.
The second life argument comes down to the cost of new batteries. What we’re actually talking about is movable batteries and static batteries. At the moment, some people are using automotive batteries for another automotive use. But the majority are for putting it in one place and keeping it static. That is very well suited to LFP, not for NMC. So, the batteries that we’re engineering and designing and building are being engineered and built and designed specifically to be as light as possible and to have dynamics that are suitable for an automotive use. These include power on demand and fast charge.
As the market matures, and LFP gets a bigger market share, those are the batteries that will probably be suitable for second life. I think anything that’s a high performance battery such as NMC or NCA, the new option is going to be better and more reliable, and so it won’t need to be replaced as soon.
I’ve heard stories in the UK already of some second life batteries that have had to have been replaced, because they’ve failed much sooner than their projected life. As soon as you start to get a few installations where that happens, you’re going to change the economic outlook on a secondhand second life battery.
All of these gigafactories are lithium ion for a reason. But there are competing energy storage technologies, like vanadium redox flow which did not win on cost, but are arguably better for grid scale energy storage. Chloe, do you have an opinion on vanadium redox relative to more traditional energy storage technologies?
I’m a big fan of a lot of these alternative technologies. Zinc batteries are also pretty fascinating. They are able to use a lot of low cost raw materials, so their bill for materials compared to lithium ion batteries is smaller. But this ultimately comes down to the fragmented nature of the grid storage market. In the automotive market, there is a handful of big players pursuing EVs, and if you can contract with one of those players, then you’re set.
There are so many different users and customers globally in the grid storage market, and a wide variety of applications and use cases that the sales timelines for these alternative technology developers are pretty long. They also need to explain what the technology is, how you use it, how its better and how its worse than a lithium ion battery. It takes a long time to actually get deployment.
Similarly, they need to build up manufacturing lines so they can achieve some kind of economies of scale that might be competitive with a lithium ion battery for grid storage. But ultimately it’s really hard to compete with lithium ion batteries from the economies of scale perspective, from the education perspective, and from the sales perspective. And falling lithium ion battery costs are making it easier and easier for customers on the grid side to purchase these systems.
Now I want to hear which metal you’re bullish on in the battery supply chain, and which one you’re bearish on.
Nickel is definitely the star and it’s going to be the star for the next decade. Cobalt is a very necessary metal, but there are lot of people trying to get it out of the system just so that we don’t have any supply chain risks down the road.
Chris, bull and bear case.
I’m trying to think of something different, because I agree with Kim. Over the next five years it’s hard not to be bullish on nickel. Copper also comes to mind, and that goes beyond just specific EV usage. Copper is an infrastructure play, so those would be my top two.
For bearish, I think natural graphite. Graphite concerns me a little bit, in light of what’s happening on the anode side of the battery and with the Chinese dominance, I think it’s just going to be really hard for anybody new to break in, given the shifts we’re seeing from a technology perspective on the battery.
As an investor, this comes down to making money, and ultimately it comes down to price. I’m going to pass on nickel because I’m obviously bullish on nickel. It’s worthwhile highlighting that lithium is at a ridiculously unsustainable low price. It cannot stay this low if the world is going to start charging batteries powered by it.
At the end of the day, commodity prices, immediate spot prices, are always driven by the availability of the next unit. Right now there is lithium available, so the price is not very high. But it’s not going to last long. We’re just starting to see it coming out of its lowest point now. When you look at supply/demand outlook, I see a deficit for the next 5-6 years, and then I don’t see anything on the mining and supply side to change that. Somebody has to put serious capital to work to be able to go and develop new lithium projects. Otherwise, you’re just not going to be able to buy your vehicle.
I’m not going to say which metal I’m bearish on. I’m just going to labour a point that we’ve already made, but that people still seem to get wrong. Lithium ion is successful because it’s been around for a long time. That’s just why it’s working. For all of Lithium ion’s negatives, it has lots of positives.
One material that hasn’t been named that I am more bullish on is silicone. I think silicone graphite composite anodes are going to become more common. Right now silicone is being used in something like 5% of most batteries and I think those percentages are going to increase. I’m not quite sure yet about a full silicone anode. There’s a lot of other technical issues, but I see a higher percentage silicone in EV batteries.
The issue that I’m bearish on is the industry trending away from cobalt. Whether it’s high nickel batteries or LFP batteries. There just isn’t much support or momentum behind continuing to use large quantities of cobalt.