Own Core Lithium shares? Here's why the miner backed off its Tesla deal

Core Lithium initially announced a potential offtake agreement with global EV giant Tesla in March 2022.

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Key points

  • Core Lithium shares were rattled when the miner backed off its supply deal with Tesla in October
  • CEO Gareth Manderson revealed the Tesla agreement was unlikely to generate the right level of cash and returns for investors and shareholders
  • Tesla is known to use its global branding power to secure bargains for its critical battery metal needs

Core Lithium Ltd (ASX: CXO) shares are charging higher on Friday, up 4.3%.

In early afternoon trading, shares in the S&P/ASX 200 Index (ASX: XJO) lithium stock are swapping hands for 98 cents apiece. The stock closed yesterday trading for 94 cents.

Core Lithium shares are joining a broader rally among ASX 200 lithium stocks today, which sees the majority of the miners well in the green.

That's today's price action for you.

Now, here's why Core Lithium backed off its deal with Tesla Inc (NASDAQ: TSLA) in October.

What happened with the Tesla contract?

If you own Core Lithium shares, you likely remember the big down day on 27 October.

That's when the company announced that its working agreement to supply Elon Musk's Tesla with up to 110,000 dry metric tonnes of lithium spodumene concentrate was not going ahead. That agreement was first announced on 2 March 2022.

Core Lithium's management reported on 27 October that the company has agreements in place with Ganfeng and Yahua.

The miner has some 80% of its total concentrate sales over the first four years of operations at its Finniss Lithium Project locked in under offtake contracts. Though that didn't stop Core Lithium's shares from sliding 5% on 27 October.

This week, Core Lithium's CEO Gareth Manderson addressed the reasoning behind his decision to back out of the deal with Tesla.

According to Manderson (courtesy of The Australian Financial Review):

In the early days of any business that is trying to get up, including a number of the lithium players like ourselves, having a large OEM [original equipment manufacturer] with a brand like that which is willing to endorse the project and the business actually adds a lot of value.

But at the end of the day, we are a business and we need to generate the right level of cash and returns for investors and shareholders, so at some point it becomes a little more about what is the commercial arrangement that is most appropriate.

It's unclear precisely what price Tesla was offering. But the company is known to use its global branding power to secure bargains for its critical battery metal needs.

"We had our position of what we thought was reasonable, Tesla had their position, and we were unable to find something that could work for both organisations," Manderson said.

This doesn't mean Core Lithium shares might not benefit from a deal with the electric vehicle giant down the road.

"We are still very comfortable having conversations with Tesla about offtake, that door is still open," Manderson said. "We need to be playing the long game here. At the end of the day, it is about being a mature business."

How have Core Lithium shares been tracking?

After doubling in value in 2022, Core Lithium shares have run into some headwinds amid falling lithium prices and some analyst concerns over the progress at its Finnis Lithium Project.

So far in 2023, the Core Lithium share prices is down 3%.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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