Tesla’s Investor Day – What’s In Store For Investors?

Summary:

• Tesla, Inc. will hold an Investor Day on Wednesday, March 1st, and Elon Musk will present his Master Plan part three.
• I make a guess at what might be in that master plan. I think it will lean towards energy storage rather than automotive.
• There will be significant investment needed and I believe Tesla will raise cash to carry out the plan.
• Comments are welcome. Feel free to make your own predictions and criticisms if I turn out to be wrong.

Tesla’s (NASDAQ:TSLA) “Investor Day” takes place next Wednesday, March 1^st.

Elon Musk will present part three of his master plan for the company. This article is somewhat speculative, but based on some moves that Tesla, Inc. has made recently, and a few leaks to the press I am putting forward a prediction of what I think Elon Musk might announce on Investor Day.

The $25,000 car

First announced in 2020, Tesla’s proposed $25,000 car earned the nickname “fluffy pillow” after Elon Musk showed a picture of an object covered by a blanket and resembling a large pillow. However, according to the Electrek website, the development of the car was on hold in early 2022 when Musk claimed that Tesla had too much on its plate and Tesla’s engineers had been diverted to work on a humanoid robot.

Tesla’s existing best sellers, the Model 3 and Model Y, are getting a bit long in the tooth, and in that price range, there is not a lot of scope for further expansion. So, if Tesla is to achieve significant growth (using units sold as the measurement), then it needs to revive the more affordable car.

News of this car has already been leaked to the media, and the specifications and preliminary pricing will probably be announced on March 1^st.

New factory (or factories)

Tesla’s current factory capacity is listed as 1.9 million vehicles per year versus an expected production of 1.8 million. There is room for expansion at both the Texas and German factories, and a Shanghai expansion was planned but has been put on hold. However, continued expansion at the 50% rate that Tesla has targeted implies a production rate of 6 million cars per year by 2026. In most locations (China excepted), a new factory takes three years to design, construct, and ramp up. I don’t think Musk is going to reduce his 50% growth forecast, so Investor Day will probably include some news of proposed new factories.

Indonesia has been suggested as a possible location, but that appears to be only in the early stages of discussions with the Indonesian government and could be a long way from finalization.

There have also been rumors about Mexico as the location of a new car assembly factory. Mexico would have the advantage of its free trade agreement with the U.S. and Canada, and cars built in Mexico would qualify for the $7,500 tax credit in the USA.

However, the smaller car, which is rumored to start at 180 miles range, is more suited to the European and Chinese markets, so maybe we will see the first production being allocated to new lines at the Shanghai or Berlin factories.

Irrespective of what is to be built in the factory, we should expect an announcement of at least one new assembly factory on March 1^st.

Nevada battery factory

News has already leaked of a proposed $3.6 billion Gigafactory to produce up to 100 Gwh of batteries in Nevada, and eventually, a factory to assemble the Tesla semi at the same location.

Musk has never shied away from taking subsidies, and a $45/KWh subsidy from the U.S. taxpayer (that’s $4.5 billion/year at the proposed production rate) and more than $1 billion in subsidies and concessions from the state of Nevada make this a no-brainer. I expect an official announcement on Investor Day.

Lithium Hydroxide factory

Lithium hydroxide is used in the manufacture of cathodes for Li-ion batteries that also contain nickel. Lithium hydroxide can be made from lithium brines but most hydroxide is made from spodumene concentrate, a product of hard rock lithium mining.

Tesla is proposing to build a processing facility to make lithium hydroxide from spodumene concentrate in Corpus Christie, Texas. It should be seen as a good move, the location is good for shipping concentrates, it is close to sources of sulfuric acid from the oil industry, and it will be the first such facility in the USA. It will help Tesla fulfill the raw material sourcing requirements of the IRA act to qualify its cars for the $7,500 federal tax credit.

This will probably be included in Investor Day

Lithium sourcing

Tesla signed a three-year supply deal with the Chinese lithium processor Ganfeng in 2021. That deal is for the supply of lithium hydroxide, which would be used directly to make battery cathode, it will not be the feed for the proposed hydroxide plant. By the time the hydroxide plant comes online, Tesla needs to have lined up suppliers for spodumene concentrate.

In mid-2022 Tesla announced supply deals with an Australian mining company to lock in supplies of spodumene concentrate. Liontown resources will provide Tesla with 100,000 tonnes of concentrate starting in 2024, increasing to 150,000 tonnes per year in 2025. A second deal with Australian miner, Core lithium has fallen through, but Tesla has an arrangement with Piedmont Lithium to supply 125,000 tonnes per year of concentrate on a three-year contract starting this year. Piedmont does not have an operating mine and is unlikely to be able to supply lithium from its own source within the term of the three-year contract, but it does have an arrangement with Sayona Mining, to purchase spodumene concentrate from its Quebec mine which is expected to resume production in 2023.

The two supply deals, if all goes to plan, will provide Tesla with about 275,000 tonnes per year of spodumene concentrate per year after 2024, enough to make about 42,000 tonnes of lithium hydroxide monohydrate (equivalent to 12,180 tonnes of lithium metal). Enough to produce about 76 GWh of batteries.

Those deals are at market prices, Tesla would reap the profits from processing the spodumene concentrate into hydroxide, but the bulk of the profit from the material supply accrues to the mining company. Tesla has hinted previously of plans to enter the lithium mining business.

However, I don’t expect Tesla to make any further mention of mining their own lithium in Nevada. I was unable to verify the statement made on Battery Day that Tesla had a 10,000-acre claim in Nevada (no such claims had been registered at the time), and I don’t think Elon Musk has the patience to go through the 10-year-plus process of developing a mine of his own in the U.S. I think if Tesla intends to bring their entire Lithium supply chain in-house, it will buy into a producer or a mine that is nearing production. That is why I think there may be some truth behind the recent Bloomberg article claiming that Tesla will make a bid to buy Sigma Lithium (SGML).

Sigma’s market cap is $3.6 billion, but it may take a higher bid to finalize a deal ($54.20 a share perhaps?). I would not gamble on Sigma shares at this time, the news is already built into the share price and there are other potential targets, so the deal is by no means certain.

Unless the deal is close to fruition, I don’t expect Tesla to announce a takeover of Sigma or any other mining company at Investor Day, but I do think they could announce their intent to move into the lithium mining business. Musk has always favored doing things in-house rather than relying on suppliers.

Third master plan

Master plan part two, which was issued shortly before the acquisition of Solar City contained the following targets:

• Create stunning solar roofs with seamlessly integrated battery storage.
• Expand the electric vehicle product line to address all major segments.
• Develop a self-driving capability that is 10X safer than manual via massive fleet learning.
• Enable your car to make money for you when you aren’t using it.

None of those targets has been achieved. The solar roof seems to have been abandoned, the electric vehicle product line is woefully thin, and the self-driving car and Robotaxi seem to be as far away as they have ever been.

However, master plan part three must include self-driving, as Tesla has too much invested in the technology. Whether they ever get it to work satisfactorily or not is questionable, but Musk will keep pushing the concept along with his visions of artificial intelligence and robotics.

He will not back off the 50% growth rate, so expanding the product line is essential. However, I think he will steer some of that expectation of growth away from the automotive sector and towards energy storage.

I think it was Mark Spiegel of Stanphyl Capital who coined the phrase “subsidy truffle hound” to describe Elon Musk and his uncanny ability to unearth taxpayer dollars for his projects and products. The timing is right for an expansion of the energy storage business. At the household level, net metering is not a sustainable approach for rooftop solar and we will see more battery packs installed for small-scale solar applications. At the utility level, more batteries will be needed for load balancing as more renewables are added to power grids.

The $45/kWh battery subsidy in the misnamed “Inflation Reduction Act” works out to $630 for a 14 kWh Tesla battery pack, $2,700 for a 60 kWh car battery, and a whopping $72 million for a giant 1.6 GWh utility storage battery. Our “subsidy truffle hound” will want his share of that loot.

However, material shortages, especially lithium could easily de-rail the energy transition, it would be seen as a positive move for Tesla to lock in sources of supply for battery materials, especially lithium. Master-plan part three could include a move into the upstream part of the battery supply chain, including the lithium mining and processing opportunities that are outlined above, plus other possible moves, maybe some deals in nickel or graphite.

As usual, the Tesla Investor Day will generate a lot of interest. The event will be covered extensively in the financial media, and Tesla shares will very likely get a temporary boost from the attendant publicity.

A capital raise is possible

However, there is one prospect that could dampen enthusiasm for Tesla shares, and that is the prospect of a capital raise that may be announced at the Investor Day or shortly after.

Master-plan part three, if it is anything like the plan I have outlined above, will require investments of billions of dollars. Recent deep cuts to Tesla’s car prices will probably result in negative free cash flow for Tesla for a few quarters, even without new Capex. Construction is still ongoing at both the Texas and German factories, and capital expenditures are eating into the cash provided by car sales.

Tesla’s cash position, as presented at the end of each quarter is highly misleading. The balance sheet is a snapshot of the company’s financial position at the end of the quarter, and Tesla manages its affairs to present the best possible picture at that time. The $22 billion in cash that sits on the balance sheet is offset by $15 billion in trade payables and another $7 billion in accrued payables, much of which is due early in the new quarter. Tesla’s cash position mid-quarter is much less healthy.

I believe Tesla will need to go to the market to raise cash to carry out part three of the proposed Master Plan. That is the real purpose of Investor Day.

I could have waited till after Investor Day to write this article, but then I would have only been regurgitating what is bound to be in every other financial newspaper and Internet web page on Thursday. Instead, I stuck my neck out and made a prediction. It may turn out to be wrong, but to some degree, it reflects what I would do if I were in charge of Tesla. Elon Musk may think differently, but for now, I am sitting on the sidelines and waiting to see what he comes up with before investing in Tesla, Inc. stock either long or short.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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