Tesla Needs Lithium. Elon Musk Suggests It Could Get Into Mining Business.

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Tesla

CEO Elon Musk lamented the rising cost of lithium in a recent tweet. He even suggested that

Tesla

might get into the mining business to help solve shortages of the key raw material that goes into rechargeable lithium-ion electric vehicle batteries.

Tesla-as-miner has far reaching implications for the EV industry. Will locking up long-term lithium supply become a strategic imperative for the industry? Will other auto companies look to backward integrate into the EV battery supply chain? Those are longer term questions for investors to ponder. More immediately, lithium mining stocks—most likely the smaller ones—could react wildly in Monday trading.

The larger, more established, players include

Albemarle

(ticker: ALB),

Liven

t (LTHM) and

SQM

(SQM). (

Livent

still qualifies as a small capitalization stock.)

Three smaller players include

Piedmont Lithium

(PLL),

Lithium Americas

(LAC) and

Sigma Lithium

(SGML.Canada).

The three large players have a combined market capitalization of more than $50 billion. The three smaller players, which are in different stages of ramping up new projects, have a combined market cap of less than $10 billion.

“Price price of lithium has gone to insane levels!” tweeted Musk on April 8.

He has a point. Benchmark lithium prices are at about $78,000 a metric ton, up almost 80% year-to-date. The price for a basket of battery materials Barron’s tracks is up about 60% year-to-date, theoretically adding roughly $2,000 to the price of an EV.

Most battery materials, however, are bought on a contract basis. Most commodity prices quoted are spot prices. When spot is greater than contract, it is a sign that contract prices will move higher.

“Tesla might have to get into the mining [and ] refining directly at scale,” said Musk, adding in a later tweet “we have some cool ideas for sustainable lithium extraction [and] refinement.”

Scale doesn’t appear to be the big issue. There are large miners such as Albemarle that produce lithium for well less than $10,000 a metric ton, according to company documents and Barron’s calculations. What’s more, everyone in the lithium industry is investing for growth. Wall Street expects Albemarle’s capital spending to be about $1.4 billion in 2022, more than double levels from just a few years ago.

Current spot prices are good enough for miners to put capital into the ground. Instead, the issues appear to be EV demand growth, which is happening faster than people, and the time it takes for the mining industry to ramp up new capacity.

Lithium miners, it seems, are a little behind the growth curve.

Tesla (TSLA) has already taken steps into the industry, working with Piedmont. Tesla agreed to take production from the start-up back in 2020. That deal sent Piedmont stock up more than 230% the day it was announced.

Still, in that deal, Piedmont will be doing the mining. Musk is probably happy to take that company’s lithium. He just wants more.

The three smaller lithium miners are up about 33% year-to-date on average, propelled by higher commodity costs. All three stocks fell on Friday along with the

S&P 500.

Shares in the three more established miners are up about 20% year to date on average. All three of those shares dropped on Friday as well.

Write to Al Root at allen.root@dowjones.com