This morning Bacanora Minerals (BCRMF) and joint venture partner Rare Earth Minerals announced a conditional lithium hydroxide supply agreement with Tesla Motors (TSLA). The deal marks the first much-anticipated raw materials supply agreement for the electric vehicle manufacturer. However, some analysts remain skeptical about the agreement.

Tesla is currently building a $5 billion battery factory in Nevada that aims to reduce battery costs by 30% or more, partly by bringing in in-house materials suppliers. The lithium supply agreement with Bacanora and Rare Earth Minerals (REM) gives Tesla access to below-market-rate lithium in exchange for minimum purchase amounts over a five-year period.

Production capacity

The two companies have rights to land in northern Mexico, where lithium can be obtained from mineral-rich clay. The partners estimate that their mine will have an initial production capacity of 35,000 tonnes of lithium compounds per year, ramping up to 50,000 tonnes.

However, theses numbers have not yet been determined through a pre-feasibility or feasibility study. Bacanora and REM are currently carrying out development work in support of a pre-feasibility study.

Terms and conditions

The deal is subject to various terms and conditions. One of the biggest is that Bacanora and Rare Earth Metals will need to raise funding and then build out the mine and a lithium processing facility.

Nevertheless, Bacanora Chairman Colin Orr-Ewing sounded optimistic in a press statement:

“This Supply Agreement with Tesla represents a vital and monumental step forwards in the commercialization of the large lithium resources that the Company holds, together with its partner REM, in Northern Mexico.”

Good timing

The timing appears good for Bacanora with lithium prices at 5-year highs intensifying the need for new supply. According to Benchmark Minerals, a lithium intelligence provider, hydroxide prices has risen as much as 25% this year while carbonate is up as much as 15% on 2014 levels.

A lack of new supply in the face of steadily increasing battery demand has seen the lithium industry fall into a supply shortage.

Skepticism

Certainly, it’s interesting that Tesla signed a supply deal with a lithium junior. However, it’s worth noting that some analysts are skeptical, such as Chris Berry, publisher of the Disruptive Discoveries Journal:

“Honestly I’m very, very surprised that Tesla did a deal with a lithium junior. I assume it’s a hedge as they pursue additional supply. Why would Tesla sign a deal with a lithium play with no production history?”

According to Joe Lowry, a renowned lithium-expert and president of Global Lithium LCC, Tesla’s lithium supply announcement does nothing to eliminate the current lithium hydroxide shortage.

“To reduce the lithium shortage, the industry needs massive investment commitments. But there is no hard money involved. It’s a no-risk deal for Tesla.”