On 31 March 2016, Tesla Motors Inc revealed its hotly anticipated new release – the Tesla Model 3. The Model 3 is a fully-electric car, capable of accelerating from 0 – 100 kilometres in under 6 seconds and expected to travel a minimum of 345 kilometres per single charge on Tesla's industry leading lithium ion batteries.
Pre-orders for Tesla's Model 3 opened on 30 March, with Australia being one of the first countries to have access to reservations of the US$35,000 vehicle. To date, an estimated 325,000 pre-orders have been received for the Model 3 globally, with analysts predicting this figure could reach over 450,000 by the time production commences in 2017.
The strong demand for Tesla's vehicles raises concerns over a global shortage of lithium, sending lithium miners' shares prices soaring due to an expected uptick in commodity prices.
This begs the question: is it time to buy lithium miners?
Lithium demand
Lithium ion is a commonly used metal in batteries, currently being the main material in most rechargeable devices including Apple Inc.'s iPhone. Demand for lithium has increased over time, driven by the uptake of smartphone usage. This has played well into the hands of lithium producers Altura Mining Limited (ASX: AJM) and Orocobre Ltd (ASX: ORE), whose share prices have benefitted from increased demand for its output.
According to the Australian Financial Review, global production of lithium in 2015 was 32,500 tonnes. Most of this was used to manufacture batteries for smartphones and other portable devices; however, production of Tesla's Model 3 is expected to change things dramatically.
Tesla powers all of its vehicles with lithium ion batteries, implying that huge amounts of lithium will be needed to supply pre-orders for its Model 3. Early estimates suggest Tesla will require an additional 25,000 tonnes of lithium hydroxide per year for production at its 'gigafactory', currently under construction in Nevada, U.S.A. If estimates are correct, this will place severe strain on current supply, causing lithium miners to increase production to meet demand.
Stocks to watch
If this is the case, lithium miners are set to go gangbusters, similar to those conditions experienced by big miners BHP Billiton Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) during Australia's decade long mining boom for iron ore.
Accordingly, here are two stocks which could benefit from Tesla's demand in the future:
Altura Mining Limited
Altura Mining is the hot new lithium miner whose share price has jumped from 5 cents at the start of 2016 to a recent intraday high of 26 cents. The company is one of the cheapest lithium producers in the world, with reserves in excess of 25 MT (yielding approximately 310,000 tonnes of lithium oxide) at its flagship mine in Western Australia. This means it has capacity to expand if required, thus it stands to benefit if lithium demand increases exponentially.
Orocobre Ltd
Orocobre is commissioning the world's biggest lithium mine in Argentina and appears set to reach production capacity in September this year. With a market capitalisation of $660 milllion and one of the lowest lithium processing costs in the world, Orocobre could become the Rio Tinto of lithium mining if things play out right for it.
Foolish takeaway
Investing in commodity producers is fraught with danger, given the highly cyclical and capital intensive nature of their businesses. Whilst lithium may indeed be the next booming commodity, most lithium miners' share prices have surged in anticipation of increased demand (remember, the share market is forward looking).
Accordingly, whilst I will be monitoring developments closely, I won't be rushing out to purchase any of the above stocks at current prices as the downside seems too great at present time.
