Tesla's HQ in Palo Alto California. Gigafactory could be built in Reno, Nevada

A new lithium project in northern Mexico has received the first seal of approval to supply the Tesla Motors Gigafactory.London-based Bacanora Minerals and Rare Earth Minerals have received the go-ahead to supply lithium hydroxide to Tesla’s lithium-ion battery megafactory from its clay deposit in Mexico’s north-west.

Tesla have agreed a 5-year lithium hydroxide contract to “purchase agreed minimum tonnages with estimate forecasted maximum tonnages to be determined following delivery of future production orders”.While no volumes were revealed, Bacanora explained that its planned processing plant capacity will have a minimum lithium hydroxide output of 35,000 tpa and a maximum of 50,000 tpa.

Tesla expected to consume up to 80%

In Benchmark’s estimates, should the product pass Tesla’s specification and quality control tests, the company could consume as much as 80% of the project’s total output. It is an expectation that Bacanora would want to keep some tonnages for the spot market.

It is also expected that Tesla’s deal would be at a significant discount to market prices such is the scale of the order. Should Tesla regularly purchase over 10,000 tpa of lithium hydroxide, it will be the largest battery consumer in the world. Benchmark expects the Gigafactory to need up to 25,000 tpa of lithium hydroxide at capacity.

An analysis on this can be downloaded here in Benchmark’s Q1 2015 magazine.The timing appears good for Bacanora with lithium prices at 5-year highs intensifying the need for new supply. Lithium hydroxide 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.

The biggest hurdle to the agreement is Bacanora’s need to secure “significant financing through debt and/or equity” which Tesla may itself be involved in. Full details of the deal can be seen here.

Snapshot: Bacanora’s Sonora Lithium Project

1. Location: North-West Mexico
2. 1.12m t indicated contained lithium carbonate equivalent (LCE)/ Li grade: 2,200ppm
3. 6.3m t LCE inferred / Li grade 2,300ppm
4. Ore is a lithium-boron clay, unique and not yet in widescale commercial production globally
5. Project held over ten mining concessions

Original Article: http://benchmarkminerals.com/blog/tesla-begins-gigafactory-sourcing-with-lithium-supply-deal/