Tesla: Mining for the Future of Electric Vehicles
By: Michael Lee & Alexander Yang
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Drilling Home a Vision
Almost 20 years since its inception, Tesla has become the largest electric vehicle (EV) manufacturer globally. Through its vision of "accelerating the world's transition to sustainable energy", its product objective has been to produce lower-cost and higher-range EVs than competing alternatives. The in-house production of batteries for their vehicles is key to achieving these objectives. Since 2014, Tesla has begun construction and brought into production five "Gigafactories", expected to be the most extensive production facilities in the western world.
To date, Tesla has produced 3.2 million vehicles and holds an ambitious production target of 20 million EVs per year by 2030. Such a ramp-up will require a significant increase in battery production infrastructure to an estimated 10-12 Gigafactories and increased acquisition of critical battery minerals.
During the COVID-19 pandemic, Tesla experienced rapid free cash flow expansion and grew Tesla's strong cash position to over $18 billion, with the company's market value eclipsing $1 trillion in 2021. Combining Elon Musk's appetite for diversified ventures, from SpaceX to The Boring Company, with Tesla’s ability to vertically integrate, this would allow the company to explore unique opportunities to reach its sustainability mission.
Hot Earth, Hot Policy
In 2015, the Paris agreement was signed as an international treaty to prevent the increase of global temperatures to well under 2°C, preferably 1.5°C. A green energy transition, specifically electrification, is pivotal in decreasing reliance on greenhouse gas emissions. Electrification of processes, from driving to manufacturing, would transition consumption away from high-emitting energy sources (i.e., coal, oil) to decarbonized energy (i.e., solar, hydro). Tesla strives to have a significant role in electrification in the vehicle industry, with their EV production reducing carbon emissions by 800 million tonnes (Mt) per year.
Certain mined and recycled metals are expected to play a significant role in the world’s green energy transition. So-called battery metals and several base metals, such as copper, own favourable chemical and physical properties which make them efficient materials for electric motors, batteries, conductors, and other applications needed to enable electrified technology.
Red Rocks
Copper is essential in nearly all energy-related technologies. Utilized for its unique combination of conductivity and efficiency, significant amounts of copper are required from solar to EVs. In pursuit of the Paris agreement and net zero emissions, analysts expect that the world will require 9.7 Mt of refined copper within the next decade, which is not currently sanctioned. Electric vehicles require ~117 pounds of copper each, over 2x what internal combustion vehicles require. To supply them with their need for copper and other critical minerals, Tesla has historically signed offtake agreements with mining companies, frequently signing contracts with numerous suppliers—forming global and complex supply chains.
However, the discovery and supply of copper have reached an inflection point, presenting a long-term supply risk and tensions with Tesla's sustainability goals. The requisition of critical minerals remains the most significant barrier to a successful energy transition. According to S&P Global, global demand for copper is expected to outgrow supply as soon as 2024. To meet the Paris target, the EV end market will require 1.7 Mt of copper yearly by 2030 and 3.3 Mt by 2040. To meet their vehicle production alone, Tesla will require approximately 1.06 Mt, representing a massive need for a material mission critical to their vision.
Historically, markets have responded to supply constraints by either a combination of providing a substitute product, increasing supply, lowering demand, price volatility, and time lags. However, unlike other transition minerals, there are no viable substitutes for copper. Furthermore, due to the long development tenure of copper mines (average 17 years) and decreasing mineral grades, it would be difficult to increase supply significantly more than expected. Copper reserves in Chile have seen a 30 percent decrease in mineral quality over the last 15 years. Lastly, the necessity and urgency to decrease carbon emissions and global policy will mean demand is unlikely to decrease. Thus, price volatility followed by time lags for consumers is the most likely outcome.
Tesla has already faced disruption in its mineral acquisition from its processed graphite agreement with Syrah Resources. The mining company’s Balama mine has struggled in its five-year "ramp up", achieving only an 80 percent recovery rate against the 93 percent projected in its feasibility study. This has contributed to the mine producing less than 50 percent of its throughput capacity as of Q3 2022. In addition to affecting their ability to supply off-takers with their required critical minerals, lower recoveries generate more emissions and environmental waste per tonne produced, decreasing the net benefits of their green end-use.
A New Hope
Rising prices of copper and other battery metals are increasing the viability of traditionally higher-cost recycling. Hence, secondary copper is expected to become an increasing source of supply. Tesla has now begun recycling their batteries, providing them stable access to less CO2-intensive battery minerals. It plans to build recycling facilities targeting 92 percent recovery at each Gigafactory, with the first installed at the Nevada factory in 2020. The plant currently runs at a production rate of 50 tonnes of recycled material per week. At this scale, recycling will represent a small percentage of their material supply. While recycling will partially close the supply deficit, it would not be the solution for two reasons. First, there is a significant lag time with automobiles and other appliances from when they are produced to when they can be recycled. Additionally, the short-to-medium-term global supply of secondary copper is currently stifled by regulations in China, Association of Southeast Asain nations (ASEAN), and EU countries, which have enacted restrictions on imports of recyclable critical minerals by classifying them as waste. Complete bans and the end of issuances to import battery materials will limit the amount of recycled copper Tesla could acquire.
Clean Energy, Dirty Minerals
Due to its fungibility in the market, there is little incentive to produce "greener" copper. Sustainability throughout the supply chain is a crucial consideration for integrated producers and their customers. However, significant capital investments must be made to promote sustainability across the supply chain.
If You Build It, They Will Come [Clean]
To achieve copper supply security and align its supply chain and sustainability mission, Tesla should acquire a copper project or mine. As of September 30, 2022, Tesla has ~$21.1 billion cash on hand. Furthermore, Tesla brings numerous capabilities and resources that would enable improved results from the acquisition. To achieve these outcomes, the acquisition target should fit several criteria.
First, the mine should be in a strong mining region with active refineries to minimize shipping costs and emissions. An ideal region would be Nevada's copper triangle due to the aforementioned characteristic and proximity to the Nevada Gigafactory. Next, given the long time horizon required to meet net-zero targets and to scale global recycling, the mine should exceed a ten-year remaining lifespan. The resource base and mine production plan should allow for about 100 to 150 thousand tonnes (kt) per year. Given Tesla's current operations, taking on exploration risk does not make sense. Thus, the project must have sufficient mineral reserves base achievable at the earliest during the feasibility study stage.
Additionally, the mine should have costs no higher than the third quartile of the industry. In mining, the cost curve is critical as it determines the ability of a mine to weather pricing volatility throughout the commodity cycle. Low-cost mines will continue to be economical through copper price downturns compared to high-cost mines. Given current demand growth expectations, a mine with costs as high as the third quartile should sufficiently provide a pricing margin of safety.
Lastly, the project must not operate in a jurisdiction with a reasonable likelihood of pushback from indigenous parties, non-governmental organizations, and other third parties. Constructing or operating a mine in such a region has a reputational risk associated with the broader Tesla company and brand.
Based on our selection criteria, acquiring a mine similar to Morenci would best meet Tesla’s requirements. Located in Arizona with numerous refineries, transportation costs would be minimized with the nearby Nevada Gigafactory. With a production plan of 125 kt per year and operational costs of $1.59 per pound of copper, Tesla would have sufficient copper supply and be able to further decrease cost structures through electrification investments.
Through these parameters, control of a mine would allow Tesla to solve its two key copper requisition issues while minimizing the risks of this additional operation. First, this would enable them to micro-manage the mine's operations and achieve absolute priority on the produced metal. Such management would allow them to prioritize the security of supply over total returns and make capital investments, such as desalination capacity and pilot plants, to guarantee resources when needed. Second, control should allow them to make significant environmental considerations that are not feasible for other parties. These considerations could be both the primary use of renewable energy and considerable electrification of operations. Such measures would enable Tesla to build its products with the "greenest" copper available, further allowing them to achieve its sustainability mission.
By acquiring a mine similar to Morenci, Tesla could utilize their current resources and capabilities to improve the mine's productivity and sustainability. With Tesla's development of real-time location and radar technologies, Tesla would be able to integrate these technologies into mining equipment to decrease incidence rates and increase worker safety drastically. Moreover, with Tesla's investments in autonomous capabilities, introducing self-driving vehicles could help diminish safety concerns entirely while realizing cost savings. For example, Internet of Things (IoT) sensors were used to help mining operators at Copper Mountain assess mineral content and redirect mining resources. This IoT data achieved cost savings of C$4 million and decreased metallurgy energy consumption by ~20 percent. With Tesla's extensive IoT investment in their vehicles, they have developed capabilities to help the IoT transition in their operating mines. Further, Tesla's goals of maximum supply chain security and sustainability allow it to consider projects with already defined but lackluster environmental considerations. Tesla's time horizon enables it to delay its permitting and production timeline to add and evaluate these environmental considerations to produce the greenest end product.
