E Tesla’s Cobalt Blues; Growth Fallacies And Supply Chain Risque Majeure

Conclusion

Most of us grew up in extraordinary times when the word “shortage” meant “it will cost more but you can still get all you want if your wallet is deep enough.” With each passing day, I’m increasingly convinced that the cobalt cliff will teach all of us that the word “shortage” means “not available in sufficient quantities at any price.”

While Tesla’s executives are spinning fake news headlines and trying to convince the market that cobalt is a non-issue, Japan's Ministry of Economy, Trade and Industry is following China’s lead and pulling out all the stops to ensure that Japanese automakers have adequate cobalt supply chains.

Without rock-solid battery material supply chains, Tesla’s gigafactory is a $5 billion boondoggle with no alternative utility. Pretending that precarious cobalt supply chains are a non-issue because they detract from an exponential step-change growth story-line is irresponsible.

I continue to believe Tesla’s “continued rapid growth” story is an impossibility, a farce majeure. I also believe the unrecognized risks inherent in its battery supply chains are enormous. Under the circumstances, I believe Tesla’s stock is worthless and bankruptcy is inevitable.

I am aware of reports that Mr. Musk wants to take Tesla private at $420 per share and that his planned structure would give existing shareholders a choice to either accept a cash payment or stay with Tesla through a special purpose fund that would offer semi-annual liquidity windows. At this point, I can’t assess the merits or risks of the proposal because no details are available. That being said, most of Tesla’s institutional shareholders operate under charters that preclude investments in illiquid securities. Likewise, many retail shareholders use their Tesla shares as collateral for margin accounts that can’t hold illiquid securities as collateral. Since my problems with Tesla’s broken business model have nothing to do with the legal structure that allows investors to participate in the business, I don’t think the potential buyout is relevant to the issues discussed in this article.

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Disclosure: I am short Tesla’s stock through long-dated out-of-the-money put options.

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Comments

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Danielle Rogers 2 months ago Member's comment

Excellent read.

Vasilii Pollock 3 months ago Member's comment

Somebody must have done a good research before investing billions in the factories. Am I wrong?

Danielle Rogers 2 months ago Member's comment

Vasilii Pollock, some times people see what they want to see. It's called "confirmation bias" and can be an investor's worst enemy.

John Petersen 3 months ago Author's comment

In a March 2016 article I referred to the cobalt cliff as the biggest Oops in the history of supply chain management.

miningpundits.com/.../ev-batteries-and-the-cobalt-cliff-the-biggest-oops-in-the-history-of-supply-chain-management/

Bill Myers 3 months ago Member's comment

These articles on Tesla have been very eye-opening. The drama yesterday was intense. Baffled by $TSLA.

John Petersen 3 months ago Author's comment

If its any comfort I'm baffled too.

Jack Lifton 3 months ago Member's comment

My theory is that Musk is designing an exit strategy. He can sell his shares into the privatization for "the good of the company."

Nicky Paterson 5 days ago Member's comment

I think #Musk is a little on the nutty side. Maybe the pressure got to be too much for him.

Barry Hochhauser 2 months ago Member's comment

Could be Jack Lifton. There's an interesting read about the benefits of an Apple/Tesla merger worth reading that you might like: www.talkmarkets.com/.../the-time-has-come-for-apple-to-buy-tesla Perhaps Musk will jump at the opportunity (should one manifest).

Howie Sandberg 3 months ago Member's comment

Interesting theory, could be. But I think he's just trying to pump up the stock. I get the feeling that he believes Tesla would be successful, if people would just ignore some of the inconvenient truths.

John Petersen 3 months ago Author's comment

I think the most likely explanation is pressure from institutions that want out but can’t sell into the market without crushing the price because they own so much stock.

In a going private scenario XYZ and Musk could each say “we loved the company but our policies don’t let us own illiquid securities. So we’re reluctantly taking the cash.

Alpha Stockman 3 months ago Member's comment

You are probably right, John. This scenario makes the most sense to me. Musk is too intelligent to have simply screwed up by accident. I think the tweet was a carefully thought out decision.