Analysis
Summary
Major carmakers have made large-scale commitments to long-range battery-electric vehicles - moves requiring hugely increased battery production.
Experts say that high energy, cobalt containing batteries for these cars cannot be made in needed quantity because sufficient cobalt will not be available.
A new process for lithium-ion battery cathode material containing zero cobalt has demonstrated high density, high power, and good cycle life.
This new process, patented by a recent startup, avoids cobalt, lowers other material costs, and has advanced to pilot battery production by industry players.
With cost and cobalt supply issues solved, expect big changes to cars, trucks, grid storage, supply chain.
Batteries are the key driver in the electric vehicle space. Better batteries mean longer range, faster charging times, lower costs. Tesla (TSLA) has delivered cars with exceptional performance and range in large part because it uses really good batteries. General Motors (GM) is delivering its Bolt electric car with Tesla-competitive range because it too has good batteries. As more and better batteries become available, we can expect more long-range electric cars (and trucks) from more manufacturers. But there is a catch.
A constraint prevents large carmakers from converting wholesale from ICE vehicles to BEVs. While straightforward application of capital can build a big battery factory, batteries won't come out of the factory unless the necessary ingredients first go in. Today's 'good' (that is high energy density) batteries require three moderately expensive ingredients, two are supply constrained at levels that fundamentally prevent industry conversion to electric cars and trucks at scale.
The three critical battery ingredients are nickel, cobalt, and battery grade lithium hydroxide. The last two are bottlenecked. John Petersen has written extensively on Seeking Alpha about the limits to cobalt supply. Lithium hydroxide is more expensive than the more common lithium carbonate, and there is limited capacity for making battery grade lithium hydroxide, so it is also bottlenecked to some degree.
Mr. Peterson tells us "... global cobalt supplies cannot support total worldwide production of more than a few million short-range EVs (under 100 miles) or a couple million long-range EVs (over 200 miles) per year." At the same time, not only Tesla, but even the large legacy ICE carmakers are gearing up to make BEVs at much larger scale. Is there something going on here?
Tesla recently unveiled its semi-truck and second generation Roadster, both with larger batteries than anticipated by many experts. Tesla's pricing for its truck - $150,000 for the 300 mile, ~600kWh battery version and $180,000 for the 500 mile, ~1,000kWh battery truck raised eyebrows. Tesla is offering the battery upgrade at retail for ~$80/kWh. This is less than current industry raw cell cost! It implies that Tesla thinks its batteries will soon be (already are?) very cheap. And, Tesla seems to think it will have plenty of these cheap batteries.
Tesla second generation Roadster - credit TeslaAnd, it is not just Tesla. This past October, General Motors announced it will have 20 all-electric models available by 2023. Toyota's (TM) head of research says pure ICE cars will not be produced after 2040 and that by 2050, 90% of cars sold will not have engines. Long-time hydrogen fuel cell stalwart Honda (HMC) is moving to battery electric. And the list goes on. Most major carmakers have committed to making BEVs in quantity over the next several years.
Honda EV Concept
Honda EV Concept - credit Honda
Industry plans for all-electric cars and trucks - not just Tesla's enthusiastic claims - are totally at odds with conventional wisdom when it comes to cobalt supplies and the ability to make the necessarily huge quantities of high energy batteries. How can it be that executives of multiple, large carmakers - not just Tesla - have been taken in? And, if somehow the batteries happen and carmakers do switch to BEVs at scale, what happens to Tesla, to car and truck makers, to the battery supply chain, and to the energy sector?
Battery Chemistry
There is a lithium battery chemistry that has been around for a while that uses no nickel, no cobalt and requires only the more available form of lithium, lithium carbonate. This is the LFP (Lithium Iron Phosphate) battery chemistry. LFP batteries are rugged, safe, accept high charge and discharge rates, but they have low specific energy (~100Wh/kg). These batteries are used extensively (in China) for powering short range cars, city buses, and grid storage. But LFP batteries are too heavy for the long-range cars and trucks, Tesla and other carmakers say they will be building in large volume.
There is another chemistry that has also been around, in several variations, for years, that uses no cobalt. Manganese oxide spinel ("LMO") cathode material, LiMn2O4 can produce Li-ion cells, but these cells have relatively low specific energy and poor cycle life. However, when nickel is substituted for some of the manganese, cell operating voltage increases substantially (~4.8V) and specific energy improves to levels competitive with high energy cobalt containing cells. But capacity fading has limited cycle life, making LiMn1.5Ni0.5O4 ("LMN") unacceptable for long-range electric cars. Until now.
A major problem in making any of the mixed-metal cathode materials (NMC, NCA, LFP, LMN) is achieving uniform distribution of the two or more metals, and hence stable, consistent crystal structure at nano scale in the cathode material. Non-uniform distribution of metals within the cathode material reduces both energy storage capability and cycle life of the battery. A process that produces uniform distribution and hence good crystal structure at nano-scale can enhance the performance of these cathode materials.
A small, public startup company in Canada has developed (and patented) just such a process, and that process works well with a variety of lithium-ion cathode materials. The company, Nano One (OTCPK:NNOMF) has built a pilot scale plant and is producing several cathode materials in tens of kilograms quantities for evaluation by multiple industry players.
Disclosure: I have been invested in Nano One for some time. Be sure to consult your financial advisor and/or do appropriate due diligence before investing in this or any other very small cap, thinly traded company. Financial and other information about Nano One is available on the Nano One website, here.
I recently talked with Dan Blondal, Nano One's founder and CEO. Dan has extensive precision chemistry experience at Kodak among other companies. The reason I wanted to talk with Dan was Nano One's recent announcement of successful pilot production of manganese - nickel spinel cathode material that exhibits high specific energy, high power capability, and good cycle life. I wanted to know if Nano One's high voltage spinel cathode material was 'real', and if so, who might be considering this material for volume battery production. I learned some of that, and some other interesting things, within the limits of what Dan was free to publicly disclose.
First, Nano One has data showing that its process makes LiMn1.5Ni0.5O4 cathode material, that when used in lithium-ion cells delivers higher energy capacity and much longer cycle life than previously possible with this material.
The Nano One process evenly distributes nickel and manganese throughout the cathode material to produce a uniform, high-energy crystal configuration. Conventional processing produces a mixture of high energy and lower energy crystal structures and results in batteries with non-uniform discharge voltage.
HV Spinel cathode material - credit Nano OneThe uniform metals distribution achieved with Nano One's process not only results in greater energy storage but also yields a more stable crystal structure that holds up under repeated cycling - even at high battery temperatures.
HV Spinel cathode material - stable at higher temperatures. Credit Nano OneAnd, interestingly, Nano One's high voltage spinel cathode retains high storage capacity even when operated at very high discharge rates. Performance is significantly better than NMC cathode material used by many electric car makers and is similar in power capability to the NCA material Tesla uses in its high performance electric vehicles.
High rate discharge performance - credit Nano One
Nano One's process can make cathode materials other than LMN. Since the process can utilize lithium carbonate or lithium hydroxide and is simpler, there is interest in making a variety of cathode materials. Dan tells me the company has successfully made LFP, NMC622, NMC811 as well as high voltage LMN using cheaper, more available lithium carbonate. Not only can the cheaper lithium feedstock be utilized by Nano One's simpler process, superior cathode material is produced due to the homogeneity achieved at nano scale.
Performance of NMC622 material - credit Nano OneNano One has been working with a number of industry players. The company has had discussions with Tesla and Nano One is now in the process of making NCA cathode material with lithium carbonate feedstock.
Interest in the process has progressed to the point that battery production is being done at pilot scale by multiple organizations using cathode materials from Nano One's pilot plant. Dan told me users are now validating materials made with lithium carbonate from different, specific lithium carbonate suppliers in pilot battery production.
Interest in the high voltage LMN spinel material has been primarily from organizations working on solid state batteries, where the use of a solid electrolyte allows use of a very high energy density lithium metal cathode. Though Dan would not talk about specific end users of their cathode materials, I can't help but note that Toyota's battery efforts are focused on solid state (i.e. solid electrolyte) lithium cells, and Toyota is such a large carmaker that it must have a way around the cobalt and lithium bottlenecks before it can transition to BEVs.
Nano One - the Company
Nano One is an interesting research and development company in that a lot of its development work has been financed through non-repayable grants from the Canadian government. This Canadian government support has helped Nano One both to accomplish its research goals and to raise additional private investment on favorable terms.
The company started in 2011 and since that time has received about CDN$4.5 million in non-repayable government grants. Over the same period, the company raised roughly CDN$14 million through private placements, its IPO and warrant redemptions. According to the company fact sheet, there are currently has 57.6 million shares outstanding (64.4 million shares fully diluted). At the end of September, Nano One had CDN$5 million in cash on hand, with operating expenses around CDN$2 million a year exclusive of capital expenditures. For more detail, take a look at Nano One's latest financials, here.
Since I last talked with Dan Blondel, Nano One CEO last spring the direction of the company has changed. In the spring, Dan saw the company licensing its patented process to players in the lithium battery supply chain, most likely to one or more cathode materials suppliers. In our latest conversation, he said thinking has changed and the company now looks to joint venture opportunities which would give Nano One a larger stake and larger value return on its process and expertise.
Dan also told me that a number of investment banks have approached the company with interest in financing expansion of the company beyond research, process development and licensing. My takeaway was that Nano One and its innovative cathode material process is becoming of serious interest to the industry and to large, knowledgeable investors.
Valuation
Valuing Nano One is tricky. This is a startup company and the eventual value to Nano One's shareholders depends on what might be the exit strategy.
Will the company be acquired? By whom? For how much?
Will the company attract licensees then sit back and 'clip the royalties'?
Will the company turn out to be a "unicorn" - a multi*billion dollar lithium-to-battery-to-electric car vertical enterprise?
The first of these possibilities presents the most interesting case for near to medium term investors 1) because it could happen soon - within 1 to 2 years - and 2) because buying of Nano One could advantage the acquirer (say a large auto manufacturer, battery maker...) relative to rivals and thus enable the company (and shareholders) to extract the strategic as well as the purely economic value of Nano One's process. A large carmaker (Volkswagen(OTCPK:VLKAF), Toyota, General Motors...) planning to invest tens of billions to create battery factories could easily justify spending several hundred million to perhaps a billion dollars to escape the cobalt bottleneck while denying that ability to competitors. A large battery maker, or even a cathode materials supplier could find similar advantage in acquiring Nano One. However, the further removed the acquirer is from the end electric car business, the smaller may be its willingness to pay for strategic advantage.
Acquisition of Nano One within the next year for a mid-range 'strategic' price of say, $500 million would value shares at ~$7.75 or more than 8 times the current price. That Nano One will be acquired is of course less than a certainty. I would estimate a 25% chance within 12 months and perhaps a 50% chance within five years.
The second possibility - that Nano One licenses others and collects royalties - isn't as exciting, but is perhaps easier to value. If Nano One licensees make cathode material for batteries going into say 10 million cars a year, each having a 50kWh battery, batteries costing at the OEM level $50/kWh, cathode powder representing ~25% of battery value at OEM level and the royalty on cathode powder value for Nano One's process being 2%, then Royalty income would be $125 million per year. Since this royalty income would be "pure profit", the company might be valued at say, 20X royalty income, or $2.5 billion. Reaching this point - that is signing up licensees, seeing the BEV market expand... - will take time and one should look to a ten-year or so time horizon. Over such a time period, there will likely be significant shareholder dilution. So, assuming double the current 64.4 million shares, the estimated share price, ten years out looks like $19.40, or ~21 times the current share price. The chance Nano One ends up a simple licensor of technology ten years out, without being acquired I estimate to be no more than 20%.
The third possibility - that Nano One turns into a multi-billion dollar "unicorn" startup - is both quite unlikely and all but impossible to value. The chance of this happening in my opinion is small, less than 5%. On the other hand, depending on how things might play out, Nano One shareholders could get ever so rich riding this tiger.
This leaves a 30% or so chance that we don't know what will happen to Nano One. Maybe the company will fail. Maybe the company will be taken over by a secret government agency and the Nano One process used to produce food for space aliens. Maybe something else will happen.
Now, Let's Take A Deep Breath
I think the Nano One process is elegant, clever, and so on. I like the company, its management, its strategic direction so much that I have made a modest investment in Nano One. That doesn't mean that you should, too. Nano One is a very small company with less than 70 million shares outstanding, and it has historically been very thinly traded. An investment in Nano One is risky. And because the stock tends to be thinly traded it could prove difficult to liquidate any investment in the company. Potential illiquidity of Nano One shares could result in the inability to get out of the stock should the price decline, or to sell shares quickly should the price go up. Beware of the risks. Consult your financial advisor. Do your due diligence before considering any investment in Nano One.
There is another risk facing Nano One - there might be a cobalt avoiding battery solution out there that is better, that is further along in scale up that we, or at least I don't know about. If this is the case, Nano One could see its future greatly curtailed.
This last Nano One risk - the chance that there is something even better - is perhaps the really important point of this article. Even should Nano One lose out because somebody else has a better solution to the cobalt bottleneck, that would still mean the path is cleared to lots of good, cheap batteries.
With good, cheap batteries, carmakers will get to make lots of long-range BEVs and to kick the ICE into the dustbin of history. An unrestricted source of good, cheap batteries will also enable cost-effective energy storage at scale - a boon to wind and solar renewable energy and a threat to the current public utility electricity business.
There are also implications for the lithium battery supply chain, some of these are general with respect to any cobalt bottleneck solution and others are more specific to the Nano One process.
Obviously, any solution that eliminates the requirement for cobalt in high energy lithium batteries will reduce cobalt demand. Since it will take time and because some applications are likely to continue using cobalt containing batteries, because batteries are not the only application for cobalt, because cobalt is largely produced as a byproduct, there will still be a market for cobalt. But, if batteries don't need cobalt, don't look for the price of cobalt to be sky-high over the long term.
Any battery solution that makes more, cheaper, better lithium batteries will increase demand for lithium. The solid electrolyte batteries likely to use Nano One's LMN cathode material operate at higher voltage than current NMC and NCA cells. Higher cell voltage means more energy is stored in each lithium ion, so less lithium (about 20% less) is needed for a given amount of energy storage. This effect will be totally swamped by very much higher demand for high energy, cobalt free batteries. In the case of the Nano One process, should it prove the 'solution' to abundant, high energy batteries, lithium demand will shift from lithium hydroxide to lithium carbonate which is a cheaper feedstock. This has implications for lithium mining where spodumene (lithium ore) which is competitive for lithium hydroxide production, will be less competitive with brine based lithium mines that are cheaper sources for lithium carbonate.
All high energy cathode materials (NMC, NCA, LMN) contain nickel. But the Nano One produced LMN (LiMn1.5Ni0.5O4) uses less nickel than NCA or NMC (about half the nickel/kWh of battery capacity). This means that should the industry use Nano One's process - or any other process - and switch to LMN HV Spinel cathode material - nickel will face a situation similar to lithium. Increased battery demand will again swamp the effect of lower nickel use per kWh however, and nickel demand for batteries will continue to be robust.
Implications for Cars and Trucks
The Nano One cathode material process effectively breaks through the cobalt supply barrier, opening a path to very large quantities of high energy lithium batteries. Further, because the LMN cathode material uses more of cheap manganese and less of expensive nickel, this advancement will mean further, significant reduction in battery costs.
Availability of lots of cheap, high energy density batteries will release the brakes on electric vehicle disruption because lower cost will make BEVs cheaper to make than ICE cars, and because adequate quantities of these batteries will be available, enabling legacy ICE car and truck makers to convert to BEVs at scale.
The entire landscape for electric vehicles is about to change. With the barrier to production of good, cheap batteries removed, the brakes are about to be released on full-scale BEV disruption of cars and trucks. As legacy carmakers scramble to enter the electric car and truck business, unencumbered by fundamental battery supply constraints, the competitive landscape will be dramatically altered. Big carmakers that have been dabbing in electric cars in isolated market segments will begin offering cars across the market, just as quickly as battery plants can be brought online. Tesla's world in particular is about to change.
Tesla
Tesla is currently a couple of years - perhaps a bit more - ahead of the legacy carmaker competition. Tesla and its battery partner Panasonic (OTCPK:PCRFF) are astute, aggressive players in batteries, and they do have very good batteries, in volume, in their cars today. But better batteries (that is cheaper batteries with similar or better performance) are on the way. Tesla is likely to get such batteries from Panasonic pretty much as soon as other carmakers, but that isn't Tesla's immediate problem.
Tesla has a window of roughly two years in which to grow production and establish market share before serious competition will arrive. To justify the current, substantial premium on Tesla shares, the company must seize a lot of market share and build up to very high production and sales within this window. Tesla has plans to do exactly that, ramping Model 3 to 500k annual units and beyond, bringing on the Model Y SUV, and so on.
The Tesla's risk lies in execution. Model 3 is behind schedule, something which is not altogether unexpected based on Tesla's experience with both Model S and Model X. But this time was supposed to be different. This time, Tesla was supposed to get real and make hundreds of thousands of cars. So far, that looks to be an issue. An issue investors need to pay close attention to, because this is Tesla's window in which to win the disruption of cars and trucks. If the company fails to gain the high ground and establish a substantial market share now, its ability to do so will be curtailed once the legacy carmakers arrive, armed with a large, sure supply of batteries.
It may be useful to keep in mind what are Tesla's manufacturing and sales objectives for Model 3. Tesla says they will achieve a rate of several hundred thousand units a year in 2018. This doesn't mean they are promising to make half a million cars next year, only that the will achieve a truly high production rate at some point (probably toward the end) of the year. Well, allowing for holidays, there are about 50 'working weeks' in a year, and five working days in a week (yes, I know factories can run weekends, but bear with me) which is 250 working days a year, making a thousand cars a day is a "rate" of a quarter million cars a year. That is one car per minute, 16.7 hours per day. Put another way, if everything works pretty well, Tesla will need two shifts and a 60 second take time to reach 250k cars per year production rate.
Tesla has recently been stockpiling Model 3 cars at "delivery centers" and we should expect a flurry of deliveries at the beginning of the year. Investors would do well to carefully look at how many Model 3 cars are being delivered. Tesla "success" means a sustained manufacturing and delivery rate reaching 1,000 cars per day or so by the end of the year. There is a big, big difference between "Oh my, look at all those cars Tesla delivered the other day - just see these pictures on the Internet..." and "Tesla is now routinely delivering a thousand Model 3 cars every business day." Remember, Tesla has a couple of years more or less to grab enough market share to start justifying the premium stock price. After that, competition will likely emerge and the going will get tougher.
I am no longer invested in Tesla. This isn't because I think the company will fail or collapse. I just think that right now, the company is "fully priced". Should the price fall a bit or should I see the company getting their act together and making Model 3 in "big boy" volume, I might get in again.
Legacy Carmakers
As the car industry disrupts to BEVs, some carmakers will do better than others and it is, or soon will be time for longer term investors to start picking winners (and losers). There are many aspects of this for investors to scrutinize, and there isn't space to go into a lot of detail here. This caution might be kept in mind, however, there is a difference between announcing lots of new electric models and delivering lots of electric cars, and the one does not inevitably lead to the other.
Trucks
Electric trucks are coming. With batteries good enough and cheap enough, the electric truck is an economic "no brainer". As soon as electric trucks can demonstrate lower costs in real-world operations, there will be a mad scramble by truck operators to switch. The dynamic here is different than it is for cars because truck operators are driven by hard cost numbers more than by fashion. This transition is likely to be sharper than that of electric cars and when it comes, truck makers that are onboard will likely take market share from those with few, poor, or no electric offerings. There will also be some opportunity for niche ICE truck makers addressing specialty, off-road and developing world users. Oshkosh (NYSE:OSK) comes to mind.
Grid Storage, Renewable Energy, Electric Utilities
Good, cheap batteries, available at scale will disrupt electric utilities, makers of peaking generators, suppliers of coal and natural gas for electric generation. Cheap batteries mean cheap grid storage. Cheap grid storage means solar and wind power, which are already very cheap in comparison to fossil generation, will become practical for a larger and larger share of electricity because grid storage will smooth out intermittent production. Residential electricity economics for many communities will be threatened by cord-cutters who can make their own electricity with solar panels and storage for less than the utility's cost of maintaining the distribution infrastructure. A lot of turbulence lies ahead for generators and utilities. And, astute investors can profit from turbulence...
Final Thought - The Supply Chain
With the advent of good, cheap batteries that can be manufactured at scale, I believe the interesting (for investors) playing field becomes the lithium battery supply chain. There are likely to be several key technologies/processes that turn out to be enablers for greater battery production. Nano One may have one of these. Undoubtedly there are or will be others.
Situations where a key or keys to enable scale-up of battery production are going to have value as this unfolds. If investors can identify points of leverage there may be substantial profits to be made. Nano One is an example of a potentially key battery enabling technology, held by a small company, that could be widely utilized by the industry bringing out-size gains to the company and its stockholders. But there is substantial risk, too. Even if an interesting process like Nano One's is technically successful, even if it delivers great economic gains to battery manufacturing, someone else may come up with an even better approach, leaving Nano One and their shareholders high and dry.
I continue to search for this kind of opportunity elsewhere in the battery supply chain. So far, Nano One is the best such opportunity I have found, but there almost certainly are others out there. If you find one, please let everyone know in the comments.
Best wishes for a happy and prosperous 2018!
Disclosure: I am/we are long NNOMF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: These writings about the technical aspects of Tesla, electric cars,components, supply chain and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other competent technical advice on the subject issues before making investment decisions. My investment in Nano One is a modest one and I would urge investors to limit any investment in Nano One (or any very small cap, thinly traded company) to only such amounts as they are prepared to put fully at risk. I may be taking a position at any time in Tesla. I have no plans to buy or sell Nano One shares in the next 72 hours.
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