A Lithium Gamble That Could Win Big for Tesla

March 29, 2016, 5:06 PM UTC

About half way between Reno and Las Vegas, in a barren, sun-scorched valley, sits a region that’s straddling the past and the future of humanity’s centuries-old hunt for valuable metals.

It’s a quest that recently caught the attention of a handful of high flying speculators, mining entrepreneurs, risk-embracing investors—and electric car maker Tesla Motors.

These upstarts are drawn to this desolate landscape called Clayton Valley looking for a new American source of lithium, a white metal that’s a key ingredient in batteries that power cell phones, laptops, and increasingly cars. The demand for lithium is increasing dramatically worldwide, as are lithium prices, and much of the global lithium supply comes from huge conglomerates in Chile, Argentina, and Australia.

Albemarle's lithium brine evaporation ponds in Clayton Valley, Nevada.
Albemarle’s lithium brine evaporation ponds in Clayton Valley, Nevada.Photo courtesy of Katie Fehrenbacher/Fortune
Photo courtesy of Katie Fehrenbacher/Fortune

But this bleak corner of the world in Nevada is home to the only operating lithium mine in the U.S. By some estimates, it also holds the promise of even greater untapped riches of the valuable metal buried beyond the mine.

That’s what has attracted a slew of lithium entrepreneurs hoping that they’ve bought the winning claims that will strike it rich in “white gold” that’s floating in salty water beneath the surface.

To Tesla, this valley that time forgot is only a three and a half hour drive from its massive battery factory, under construction outside of Reno, Nev. Tesla wants a supply of lithium to fill enough batteries to power 500,000 cars per year by 2020. The locale could also be an opportunity for Tesla to buy the resource from an alternative startup outside of the lithium oligopoly.

A mining community

On the edge of this desolate landscape is the tiny town of Silver Peak. Founded in 1863 as an outpost for silver and gold miners, it’s one of Nevada’s oldest mining communities. A century later the lithium mine, dubbed the Silver Peak mine, was built nearby. It uses thousands of acres of evaporation ponds to slowly uncover the metal.

The preserved post office of Silver Peak, Nevada, a tiny mining community established in 1864.Photo courtesy of Katie Fehrenbacher/Fortune
Photo courtesy of Katie Fehrenbacher/Fortune

Today the lithium mine is owned by chemical giant Albemarle (ALB), which also has much larger lithium operations in countries like Chile. Albemarle is one of four huge conglomerates that control much of the world’s lithium supply.

During the recession, the mine floundered as the owner concentrated on more profitable operations across the globe. Several years ago the U.S. government, through President Obama’s stimulus program, injected millions of dollars into the Nevada site in an effort to lift domestic lithium production.

From Google Earth, the mine’s sprawling evaporation ponds look like football fields of green-tinged and turquoise pools. They’re the only thing visible from the skies wedged into the desolate basin.

Currently the town—mostly trailers and abandoned shacks—has around 100 residents who still work mostly in mining. A bar called Old School is the only local business and also serves as the town hub. Residents drive ATVs on dusty unpaved roads.

On a sunny afternoon in March, a home proudly flies a Confederate flag; another a pirate-style skull and cross bones. During a brief stop by Old School, the bartender encourages us to help him bring what he says the town needs most: More people.

Anyone who successfully sucks out untapped lithium brine in Clayton Valley and turns it into a valuable product used in batteries could become incredibly wealthy. But such operations could also bring valuable local jobs to a fading town that desperately needs it.

Forty Million Years in the Making

Patrick Highsmith, the CEO of lithium mining startup Pure Energy Minerals, breaks off a tiny chunk of dirt from a box of cylindrical cores drilled from underground and puts it between his front teeth. “This is what geologists do,” apologizes Highsmith, as he confirms by nibbling that the sample is indeed from clay, and not silt or sand.

Core samples from the floor of Clayton Valley in Nevada, taken by Pure Energy Minerals.
Photo courtesy of Katie Fehrenbacher/Fortune

Highsmith, a geochemist and 26-year veteran of the mining industry, shows me samples of earth that his company has drilled from various spots across the Clayton Valley floor. The samples are housed in dusty cardboard boxes, perched on metal piping, and temporarily laid out in the middle of the sandy valley floor for me to see.

The company is testing these core samples, taken from depths of hundreds of feet below the surface, for porosity, or how much liquid they can hold, among other things. That will help the company more accurately calculate just how much lithium brine is suspended beneath our feet.

Samples of the earth's core in Clayton Valley, Nevada lie in boxes, temporarily propped up on metal piping.
Samples of the earth’s core in Clayton Valley, Nev. lie in boxes temporarily laid out on metal piping. Pure Energy Mineral’s CEO Patrick Highsmith stands nearby. Photo courtesy of Katie Fehrenbacher/Fortune
Photo courtesy of Katie Fehrenbacher/Fortune

To the untrained eye, the cores look like dried out tubes of sand with little variation. But to Highsmith they’re a treasure trove of evidence of tens of millions of years of unusual geology that has made the valley rich in valuable metals. Shifting earthquake faults, volcanic activity, and a closed basin that was once covered over by a vast prehistoric lake have, over eons, turned the region into one of the rare places in the U.S. that could produce lithium brine riches.

“Here’s a layer of volcanic ash,” Highsmith says as he points to a light-colored spot on one of the cores. “These are pumice fragments.” More evidence of volcanoes are all around us. A few miles up the highway from the spot where we’re standing is a soaring black volcanic cinder cone that’s 390,000 years old and close to 300 feet high.

In addition to the core samples, Pure Energy Minerals has drilled five wells across the valley, which it uses to extract samples of the lithium brine to test the contents, conductivity, and the pH, among other things.

At well C-1, Highsmith and two colleagues collect clear salty lithium brine samples from hundreds of feet below the surface and place them in a bright blue cooler, the kind you’d use to keep a ham sandwich and a Coke cool. The samples will help the company determine the quality of the lithium brine.

A lithium brine well that Pure Energy Minerals is testing in Clayton Valley, Nev. Photo courtesy of Katie Fehrenbacher/Fortune
Photo courtesy of Katie Fehrenbacher/Fortune

The work isn’t without its hardships. At one point the pump stops working. The gear was originally made to pump water not salty brine. They end up fixing it later in the day.

Pure Energy Minerals is trying to determine, and prove with its samples and testing, that the lithium brine in Clayton Valley is as high quality and in abundance as the small four-person team thinks it is. The company estimates that there are 816,000 metric tons of lithium carbonate equivalent underneath their land claims that stretch over 9,000 acres, or 14 square miles, of the basin. Lithium carbonate is a lithium compound and it’s a standard way that lithium supplies are measured.

In comparison, the global reserves of lithium carbonate equivalent—which is the amount that can be economically mined right now—is estimated to be about 75 million metric tons, according to the United States Geological Survey. The U.S. can only claim about 203,000 metric tons of those reserves right now.

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The global supply of lithium, which is actually being produced, is even smaller. Analysts at Cormark Securities estimate there were about 175,000 metric tons of lithium carbonate equivalent produced in 2015. Albemarle’s Silver Peak mine in Nevada currently accounts for about 6,000 metric tons of lithium carbonate equivalent per year.

But U.S. lithium resources—which includes reserves as well as lithium that can’t yet be economically mined—is estimated to be about 36 million tons of lithium carbonate equivalent, according to the USGS. Worldwide lithium resources are estimated to be 217 million lithium carbonate equivalent. In other words, the U.S. has a lot more untapped lithium resources than economically mined reserves at this point, explains Brian Jaskula, a lithium specialist for the USGS.

Over the coming decade no doubt some of the U.S. resources will turn into reserves, which will then turn into lithium production. But it’ll take awhile.

The growth in lithium demand is predicted to soar over the coming years, partly because of the increased adoption of electric cars, which can use thousands of lithium-ion batteries each. By 2020 the global market for lithium-ion batteries will jump to about $40 billion from $24 billion last year, according to Citi Research. World lithium consumption is expected to double by 2020, according to Cormark Securities.

A lithium brine drilling site of Pure Energy Minerals in Clayton Valley, Nev. Photo courtesy of Katie Fehrenbacher/Fortune
Photo courtesy of Katie Fehrenbacher/Fortune

Already lithium prices are jumping because of the growing demand. Last year, they rose 10% to 15% in many regions. In China, they soared even more.

If Pure Energy Minerals can tap into this potentially abundant new resource in Clayton Valley and use technology to lower the costs of lithium mining, it might have a chance to sell its production to Tesla, or others, at a low cost.

Last year, Pure Energy Minerals and Tesla announced an early stage supply agreement whereby Tesla would buy an undisclosed amount of lithium from the company within an certain time frame. Tesla (TSLA) would pay a “predetermined price that is below current market rates,” according to the release at the time.

Lithium generally makes up only a single digit percentage of the cost of a lithium-ion battery, but cheaper prices could still lower overall battery costs, to a point. Tesla wants to lower its battery costs at its nearby battery factory by 30%, in order to sell a low cost, mainstream electric car in the coming years (on Thursday Tesla will unveil the car, called the Model 3, for the first time).

Tesla Model S
The Tesla Model S in the Globe parking lot. Photograph by Aram Boghosian/The Boston Globe — Getty Images
Photograph by Aram Boghosian/The Boston Globe — Getty Images

Additionally, because the lithium mining industry is dominated by just a few huge companies, supplies can be difficult to procure and can be subject to supplier whims. Tesla appears to be willing to take a low risk chance on an early stage, high risk company that could offer access to an alternative supply.

Tesla has inked this type of early stage supply agreement with other companies, too. It has said it may buy lithium from a yet-to-be-built mine in Mexico, and has reportedly considered getting supplies from Chile’s lithium mines as well.

Albemarle’s own lithium mines in Nevada could also be a source for Tesla. Albemarle already sells lithium from its global sites to battery makers like Panasonic, which is a Tesla supplier. Tesla’s Gigafactory will likely have a handful of lithium supply deals from large established lithium providers and small early stage risky suppliers alike.

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Albemarle’s president of lithium & advanced solutions, John Mitchell, emphasizes that the lithium industry and the world’s battery supply is a global business. “The location of the mine in Nevada near Tesla makes for a good story,” says Mitchell, but the location is less important than whether or not the lithium materials in the area are of the “right quantity and quality.”

Albemarle has no plans to expand the modest mine in Clayton Valley at this point. Its current production of 6,000 metric tons of lithium carbonate equivalent per year is about a tenth of the size of what the company intends to produce in Chile. “We think we understand the Clayton Valley better than anyone else. We also feel that we’ve invested appropriately to extract the lithium in an efficient and sustainable way,” says Mitchell.

Albemarle also has another advantage in the region: Water rights. Because the valley is a closed basin the water rights are closely monitored and tightly controlled.

The Tesla Gigafactory is shown under construction outside Reno, Nevada
Construction of the Tesla Gigafactory outside Reno in February 2015. Photograph by James Glover — Reuters
Photograph by James Glover — Reuters

The path to white petroleum

Of course Pure Energy Minerals’ agreement with Tesla is contingent on whether it can start extracting lithium and producing the lithium compound in a low cost and timely manner. USGS’s Jaskula notes that building lithium projects can take many years to develop, and usually only slowly come online.

This summer, Pure Energy Minerals plans to publish a preliminary economic assessment report based on its research that will detail the costs involved and how much money the company will need to raise to drill lithium extraction wells and build its first lithium production plant. After the lithium brine is extracted, it must go through processing to remove excess materials like magnesium so it can be turned into a product that can be used in lithium-ion batteries.

Instead of building large evaporation ponds like the kind that dominate the lithium industry in South America—and can be seen across the valley on Albermarle’s land—Pure Energy Minerals plans to use a production technology from Italian company called Tenova Bateman. The technology, untested at a commercial scale, uses a solvent to extract the lithium instead of through evaporation.

Albemarle's lithium mine in Silver Peak, Nevada.
Albemarle’s lithium mine in Silver Peak, Nev.
Photo courtesy of Fortune/Katie Fehrenbacher

In that way, Pure Energy Minerals would be able to produce lithium much more quickly and have less impact on the land. Highsmith says he doesn’t think any new lithium evaporation ponds will ever be approved in North America because of the environmental impact on such large areas.

But the early untested nature of the Tenova Bateman technology also adds to the risk of the Pure Energy Minerals project. Pure Energy Minerals lithium gamble is just that.

The company is part of a speculative industry called “junior mining companies,” which are essentially startups that search for new valuable metals and materials the world over. Many of these companies are based in Vancouver and publicly-traded on the Toronto Venture Stock Exchange, which is known for its low cost listings compared to the NASDAQ and New York Stock Exchange.

Today, hundreds of lithium junior mining companies are trying to find the motherload by scouring deposits in South America, Australia, and Nevada, too. By Highsmith’s estimates, there are at least a dozen lithium juniors looking at Clayton Valley including Lithium X, Nevada Sunrise Gold, Matica Enterprises, and Dajin Resources. A company called Ashburton Ventures calls its claims in Clayton Valley the “Elon Project,” after Tesla CEO Elon Musk.

Another company called Lithium America (formerly called Western Lithium) has been working on a lithium mine in northern Nevada that would extract lithium from clay instead of brine. That extraction process is more expensive than sucking out lithium brine, and Lithium America has been trying to get the project up and running for years.

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But the time to try out newer, and potentially more expensive, mining and production processes is when lithium prices are rising. The higher the price a company can get for the lithium, the more economical, or even profitable, the lithium projects can be.

Pure Energy Minerals’s shares are currently trading around 69 cents, Canadian dollars, but that’s up from a low of 23 cents a year ago. Last year it was the top performing mining stock on the Toronto Venture Stock Exchange. The company was founded in late 2011, and acquired in 2012 by a public company and completely restructured.

Founder Robert Mintak kept the company alive during the lithium bust of a few years ago, when speculators buzzed about a coming lithium supply before electric cars were really on the market. At one point, he was basically its only employee.

In 2013, Mintak bought the current Clayton Valley claims from a company that had faltered on its property payments. Soon after that, Mintak managed to score a supply partnership with Korean steel giant Posco, and last month Mintak, a longtime entrepreneur, handed over the CEO reins to Highsmith, who was on the board.

The small team has been adding engineers and executives, but won’t really ramp up until, and if, it can prove that it has enough lithium reserves on its claims and enough investment to build the project. If all goes well, and Pure Energy Minerals achieves what it set out to with Tesla, the lithium majors might come calling, particularly Albemarle, which owns the production site just next door.

If Pure Energy Minerals’ project flounders, it wouldn’t be the first early-stage lithium plan to do so. Two years ago I visited a lithium pilot project built by venture capital-backed startup Simbol Materials next to the Salton Sea, in the California desert a hour outside of Palm Springs.

Today the company appears to have shuttered its doors, or at least gone into hibernation, after much hype and millions of dollars lost. The firm likely couldn’t get enough investment to prove out its pilot project and move on to a commercial level. When it was operating, the company had touted that Tesla had checked out its project as a lithium source.

If Pure Energy Minerals is able to build its plant and start churning out lithium, it wouldn’t just be a boon for the company or Tesla. Any local development would be a godsend for the struggling town of Silver Peak and surrounding Esmeralda County. The town is consistently mentioned on the list of Nevada’s ghost towns, despite its strong hold of die hard residents.

As we drive back through Silver Peak after several hours of touring the desolate basin, a couple of local children are playing on a jungle gym in the town’s sole and aging playground. If the lithium development in this area does take off, the next generation of residents could have a much brighter and vibrant future than the last.

Updated at 12:03 PST on March 29 to clarify that while Bolivia has large lithium resources the country isn’t a current supplier.

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