Battery metals miner, Sigma Lithium, experienced a sharp increase in share price of 25.5% this week. This was due to Bloomberg’s report of a possible Tesla acquisition of the Canadian based company. Sigma Lithium mines many of the necessary metals needed by Tesla to manufacture electric car batteries. After 15 years of operations and a volatile week on the stock market, it has a market capitalisation of $3.69 billion whereas Tesla’s currently sits at $652.47 billion. This news comes the same week the Chinese battery metals miner, CATL, were found to be offering discounts to Tesla’s competitors in China.
Battery metal mining is a rapidly growing market, as car manufacturers move away from combustion engines towards electric batteries. Analysts predict a six-fold increase in demand for lithium-ion batteries in the next decade. Industry forecaster, Benchmark Minerals, claimed this would require 384 additional graphite, nickel, lithium and cobalt mines by 2035 to supply. However, as Reuters reported this week, CATL discounts are being offered to Chinese EV manufacturers. This caused the markets to interpret this as a decrease in the price of lithium, causing all lithium mining companies’ shares to plummet. Although, this has now been corrected for Sigma Lithium, after Bloomberg reported that Tesla were considering the takeover, causing the shares to immediately shoot back up.
Tesla CEO, Elon Musk, had announced Tesla’s intention to vertically integrate with battery metal mining companies last year. Sigma Lithium is likely just one of many companies being considered, however what sets them apart is their huge growth potential. Sigma’s mine by the coast of Brazil is supposedly located by one of the world’s biggest hard lithium deposits. It plans to increase annual output from 270,000 to 766,000 metric tonnes in the coming years. Tesla already manufactures its own battery cells and has recently acquired a lithium refining facility. So, by acquiring a mining company, it would obtain an almost fully vertically integrated lithium supply chain. The resulting cost synergies could widen Tesla’s profit margins which are already far beyond most car manufacturers at 15.16%.
Sigma Lithium are yet to make any revenue. As a result, their last reported income statement for month end September 30 reporting losses of just over $13 million. This is to be expected for a mining company still setting up their operations in Brazil. After their mine in Grota do Cirilo is complete and supply chains are established, we can expect earnings to increase significantly.
At the point of market close on 21 February, Sigma Lithium has a market capitalisation of just over $3 billion and an EBITDA of just under $500 million. It’s EV/EBITDA sits at 6.20. After the possible Tesla acquisition was leaked, shares shot up 25.5%. Consequently, it’s possible Sigma is currently overvalued. As the market settles and mining operations in Brazil become better established, we can expect EBITDA to rise and equity value to fall for a more attractive multiple. Until then, Bloomberg’s estimate of a $3 billion bid seems infeasible.
It is still unknown as to when the acquisition could be made, therefore no timeline can be predicted. One challenge that Musk and Tesla may face is acquiring a company that is in a very different industry to EV. However, they have been highly successful in similar takeovers in the past such as Maxwell Technologies.
It is unlikely that there will be any regulatory issues with this takeover. This is because the Lithium industry is not monopolised and is not risk from this post acquisition. There are numerous companies currently competing with each other such as Ganfeng Lithium, Albemarle, SQM and more.
Ultimately, it is still too early to forecast whether Tesla will go through with this estimated $3 billion takeover bid. Elon Musk and Tesla will surely be looking into lithium mining companies as they reach for that fully integrated supply chain. Other car manufacturers are likely to be pursuing a similar strategy; General Motors having recently invested $650 million into a Lithium mine in Nevada. As electric cars takeover and manufacturers become more focused on lithium-ion batteries, we can expect many deals of this nature in the future.