Nightmare on Electric Vehicle Street

Halloween starts earlier and earlier every year. Cobwebs on restaurant doorways, skulls on bank counters, when it's still weeks away.  Evidently there are plenty of inner ghouls with lots of time on their hands in these establishments. Recessions are scary.

If you can't beat 'em, join 'em. How's this for a new horror movie concept?  Young, good-looking couple driving down a deserted country road in their brand new electric vehicle. It's a dark and stormy night. The car battery has just run out of juice.

They get out and push the vehicle up to the driveway of a broken down old house. The young good-looking couple trundle up to the door with their extension cord to ask if they could plug in and use just enough electricity to get them to the next town. They are willing to pay - more than they would for gas. Little do they know what the true cost will be.

They ring the doorbell. Someone creepy answers the door. . . . . 

It has not been a complete horror show yet in the electric car business, but there has been a bit of a letdown.  Chevy Volt sales through the end of September were 16,348 units. Chevy had originally hoped to sell 40,000 Volts this year. The Nissan Leaf, the other early big entry in the electric car market, has only sold 5,200 units in the US this year through September.

Car companies that have invested $billions in new electric models will have to wait longer to recoup those funds.

Why aren't more people forking over $39,995* for a new Chevy Volt or $35,660* for a Nissan Leaf? (*Manufacturer Suggested Retail Price).

The reasons are - Money, Convenience, and Fear of the Unknown. 

The cars are expensive. To address this problem, attractive leasing deals are now being offered by the car companies. These leases are starting to improve the number of cars leaving the lot.  Also, $5 + per gallon for gasoline in California lately is making the price equation look much better for electric vehicles.

The car companies realize they have to bring sticker prices down. Nissan is about to open a brand new $1.2 billion plant in Tennessee that will manufacture Leafs and batteries. A new lower cost Leaf model for next year is rumored to be in the works.

Convenience is a big issue, especially  if you don't want to be a character in a horror movie. The cars will need to charge more quickly and more chargers for electric vehicles will have to be deployed.  Those early adopters buying electric vehicles today know that they will have to put up with a certain amount of inconvenience on the charging front, but they are hoping that the situation improves fairly quickly.

Pike research estimates that 45,000 public charging stations will be installed worldwide this year. This number will certainly increase as more electric vehicles hit the road.

As to fear of the unknown - well when you see your neighbour driving an electric car to and from work every day, it's not an unknown any more. The foreign can become commonplace pretty quickly. And there is no better advertisement than a happy customer.

For now, the road to renewable energy is a bumpy one. Last week, A123, a company that owns the largest lithium ion battery factory in North America, filed for bankruptcy. The company provides batteries for electric vehicles made by GM and Fisker, as well as batteries for telecom, backup applications and other uses.

Despite the slower-than-hoped-for start to the electric vehicle revolution, the market for lithium, the element that makes electric cars go, has been strong. Lithium prices are high and lithium miners are looking to prosper.

I wrote about lithium exploration companies in December of last year. Some of these companies are making good headway to becoming new lithium producers.

Canada Lithium Corp.

Canada Lithium's stock was trading at 54 cents in December . It's moved up to 67 cents as of Friday's close. But it hasn't been a smooth ride.

Before I wrote about the company, Canada Lithium had problems with botched reserve estimates at its Quebec Lithium property near Val D'Or, Quebec. In February of 2011, the company discovered that its published estimates of the Lithium reserves on the property were higher than reality.

Canada Lithium hired a consulting firm to go through the numbers again. The conclusion was that the Lithium reserves at the Quebec Lithium property were almost 40% lower than the company, based on prior research, had estimated a few months earlier.

That's never good news and the stock was demolished. When I discussed it in December, Canada Lithium's stock was down 75% from its peak a year earlier.

Canada Lithium 2 Yr. Chart: Source - Bigcharts.com

But there was money in the kitty and the property has lots of pluses. There is paved road and electricity to the property and a community that is super mining friendly nearby. Even with the revised lower reserve numbers there are still millions of tonnes of ore to be mined. The management team and board of directors kept at it.

Financing was arranged for mill and mine equipment and work began. Unfortunately, as is often the case, construction costs went over projection and the company was forced to raise more capital by selling stock. Canada Lithium sold 88 million shares at 36 cents a share - a rock bottom price. But they needed the money to finish building the mine. There are currently 353 million shares out, fully diluted.

The work has advanced and production of lithium carbonate is scheduled to begin at the Quebec Lithium mine in March of 2013. The company is predicting EBITDA of $77 million once they go into full production. The estimated payback period for the mine is 4 years and the estimated mine life is 14 years.

This will be one of the first new lithium producers to come on stream. IF Canada Lithium delivers and there are no major setbacks, and the lithium price stays firm, the stock should appreciate.

Orocobre Ltd.

Orocobre's stock was $1.64 when I wrote about the company in December. Since then there have been positive developments for the company and the stock closed at $2.00 on Friday, actually up on that nasty day.

In June, Orocobre received approval to go ahead with its Olaroz Lithium brine project  from the Panel Of Experts appointed by the Province of Jujuy in Argentina, where the project is located. The approval was helped along by Orocobre ceding an 8.5% ownership of the project  to a corporation owned by the provincial government. (The Argentinian equivalent of a Georgia speed trap.)

There had been fears that the Olaroz project would suffer bigger setbacks. The Argentinian federal government has made nationalistic moves against foreign resource companies recently.  And the Jujuy Provincial government initiated the "Panel Of Experts" system to oversee lithium brine projects when they noticed that lithium was becoming a popular material. 

It's a tribute to Orocobre's management that they were able to make the deal. And they have made a couple of other deals recently.

In August, Orocobre purchased a company called Borax Argentina from Rio Tinto for $8.5 million US. This company has two producing mines and two plants that produce various products from vorax - boric acid among them and other products primarily used in glass manufacturing. Revenues were about $24 US million per year.  Borax Argentina was a tiny asset for a giant like Rio Tinto, but Orocobre will benefit in a few ways.

There will be a good geographical fit for the operations which are near Orocobre's properties. Orocobre will start receiving cash flow from Borax Argentina right off. Also, the company will eventually produce borax from the Olaroz project as well as lithium and potash. So having a marketing team already in place for borax will be leveraged.

Last week, Orocobre closed a financing deal for the Olaroz project. Toyota Tsusho, the trading arm of Toyota Motor, will take a 25% share of the project, for which it will put up $55 million. In all there will be $82 million of equity finance. The total cost of the mine is estimated to be $229 million. Another Japanese group, the Mizuho Bank, will provide debt financing for the project at a low fixed rate of 4%.

Mine construction is starting now and production is expected in Q2 of 2014. If Orocobre can deliver relatively on time and on budget and production targets are met, the company will be turning salt into lots of money.

There are gazillions of tablets and cell phones etc. sold around the world that are using Lithium batteries. Those products keep the demand for lithium strong, and prices firm.

New mines that begin producing now will benefit as a result. But the big kicker for lithium miners will be electric vehicles, because batteries for electric cars are huge. If sales of electric vehicles begin to ramp up, the demand for lithium will continue to rise and the miners will prosper.

It's not a slam dunk. For instance, the $7500 Federal tax credit that is available for buyers of electric cars in the US would be in jeopardy if the Republicans sweep the House, Senate and Presidency just after Halloween. The tax credit could even be sacrificed even if Democrats do well, due to the cuts that will be demanded in the pending fiscal cliff.

I can visualise Mitt Romney or Barak Obama in a vampire outfit.

By. Dave Zgodzinski