Elon Musk is driving speculation about a possible shortfall in high-quality lithium. That’s lifted the share price for Nemaska Lithium, but the producer still needs $549 million to get going.

NEMASKA LITHIUM (symbol NMX on the Toronto Venture exchange; www.nemaskalithium.com) aims to start up its Whabouchi lithium project, in Quebec.

Lithium is used in household batteries, glass and ceramics, lubricants, refrigeration, pharmaceuticals, polymers and aluminum production. But the metal mostly goes into lithium-ion and lithium-metal batteries for electric and hybrid-electric cars.

The Whabouchi mine site holds a deposit of spodumene, which is a hard rock that was once the most important lithium source. But most of today’s lithium comes from brine solutions drawn from salt lakes, such as the Chabyer in Tibet and the Salar de Atacama in Chile. This is cheaper than producing lithium from spodumene, and the recovered metal is suitable for most uses.

However, when manufacturers need the purest lithium, they prefer spodumene because the final product has fewer contaminants.

Nemaska plans to ship ore from the mine to a processing facility it aims to build in Shawinigan, Quebec. This plant will transform spodumene concentrate into high-purity lithium compounds using a method the company has licensed. That approach makes use of membrane electrolysis—a filtering process requiring a strong electrical current. The facility’s location would allow Nemaska to take advantage of Quebec’s lower-cost electricity. It also eliminates the need for the expensive soda ash that is traditionally used to extract lithium.

The company completed a positive feasibility study on the Whabouchi project in 2014. The plan calls for a $549 million mine with a 26-year lifespan. The study was updated in early April 2016.

Mining Stocks: Plant needed to test spodumene processing

Nemaska lithium must first build a pilot plant to test the effectiveness of its new method of processing spodumene concentrate. Whether the technology will work is uncertain, and that adds a lot of risk.

The company’s shares have jumped from around $0.40, in February 2016, on speculation that a lithium shortage is coming. The concern is based on plans by Elon Musk, the CEO of electric carmaker Tesla Motors, to increase the number of vehicles made at his facilities. Telsa recently started up phase 1 of its electric battery “gigafactory” in Nevada. Musk now plans to speed up the expansion of the factory at a cost of $5 billion. The goal is to eventually build 500,000 Tesla cars per year, up from the current production of 50,000. In March 2016, Musk said that in order to meet his target, “we would basically need to absorb the entire world’s lithium-ion production.”

Still, it’s unclear whether Tesla can achieve that level of production. Lithium could also suffer from the oversupply issues that have plagued other commodities when producers rushed to meet rising demand. Lithium deposits that previously were deemed uneconomic to mine could be put into production and that would bring prices back down.

As well, to build a mine, Nemaska will need to raise $549 million. But arranging that funding could be difficult. The company might be forced to make share issues that dilute the interest of current investors. It may also be forced to sell a big stake in the Whabouchi project. Moreover, as mentioned, Nemaska’s plan to use a new process to extract lithium adds further risk.

TSI Network recommendation: SELL

For our recent report on a heavy equipment giant that supplies the mining industry, read Cut your risk with this market leader.

For our view on how to make the most of mining stocks in all markets, read 20 tips for successful investing in mining stocks.