How Elon Musk's lithium search ended badly for startup

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How Elon Musk's lithium search ended badly for startup

Sammy Roth, The (Palm Springs, Calif.) Desert Sun

6:43 p.m. EDT June 8, 2016

The letter from Elon Musk left no doubt about his intentions: He wanted Simbol Materials, and he was willing to
pay handsomely for it.
Simbol claimed it had developed extraordinary technology for extracting lithium a key ingredient in the
batteries that power Tesla's electric cars from the mineral-rich brine by the southern shore of the Salton Sea,
southeast of Palm Springs, Calif. Tesla's rock-star co-founder and chief executive was on the hunt for lithium,
and Simbol planned to produce huge quantities of the valuable metal.
(Photo: Maxine Park, USA TODAY)

Musk's preliminary offer for the startup: $325 million, paid in Tesla stock.
"This is a compelling opportunity to combine two innovative companies on a mission to advance clean and sustainable energy technologies worldwide,"
Musk wrote in a June 21, 2014 letter to Simbol CEO John Burba, a copy of which was obtained by The Desert Sun and verified by a person with
knowledge of the negotiations. "We're very impressed with what you and your management team have created at Simbol."
"Tesla is prepared to move quickly to negotiate a potential transaction," Musk added.
Simbol desperately needed new funding to stay afloat, and Tesla's $325 million purchase offer the size of which has never previously been reported
may have represented the company's last, best hope. The money also would have been a boon for Imperial County, an impoverished, largely agricultural
corner of California where the unemployment rate regularly tops 20 percent.
But this story doesn't end well for Simbol, or for Imperial County -- the expansive inland region of desert and mountains north of the Mexican border.
For reasons that are still unclear, the deal with Tesla fell apart. By January, 2015, Simbol was so strapped for cash that it fired the vast majority of its
employees. Since then, the company has been sued twice by one of its co-founders, who alleges that financial wrongdoing by the startup's Silicon Valley
investors caused its demise. Simbol's once-humming demonstration plant, just southeast of the Salton Sea, sits dormant.
For all intents and purposes, Simbol is dead.
A new company, Alger Alternative Energy, has risen from the startup's ashes. Founded by Simbol's former vice president of businesses development,
Tracy Sizemore, the firm expects to finalize a purchase of Simbol's assets and technology through a court proceeding this week. Sizemore thinks he can
do what Simbol never could: Find investors willing to plunk down $400 million or more to build a large-scale lithium plant. Even if Tesla had bought
Simbol for $325 million, the automaker would then have had to spend at least that much money to build the plant.
"We have a very different business strategy, and a different management team," Sizemore said. "I don't want to discount or discredit (Simbol's) decisions,
but we have a very different focus than what they had."
Some industry observers are skeptical, pointing to Simbol's longtime insistence it was on the verge of landing the funding it needed right until it fired
most of its employees. Moreover, Sizemore and the co-founder of his new company are already facing scrutiny: They're being sued by an early investor,
who says they promised to return his $100,000 plus interest nearly nine months ago.
Tesla's near-purchase, meanwhile, will loom large over any effort to pick up the pieces of Simbol Materials.
Everyone who worked for or invested in Simbol says the company's technology worked as advertised, producing battery-grade lithium at a demonstration
plant. But there's little agreement on why the company failed to secure financing, and why the $325 million Tesla deal fell through.
According to some parties, Musk balked after Simbol's top investors who took an active role in running the company asked for much more than
Tesla offered. Simbol had commissioned a valuation by Jefferies, a New York-based global investment bank, which estimated the startup to be worth
$2.5 billion. A copy of that valuation was obtained by The Desert Sun, and verified by the person with knowledge of the negotiations.
Joe Lowry, a veteran lithium consultant, was Simbol's vice president of sales and marketing during negotiations with Tesla. He said Simbol's board of
directors hoped to strike a deal with Tesla for $1.6 billion.
"I told them it was a ridiculous number," Lowry said.

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How Elon Musk's lithium search ended badly for startup

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The person with knowledge of the negotiations told a slightly different story, saying Musk shut down all discussions after seeing the $2.5 billion valuation
from Jefferies. According to that source, Musk abruptly ended all negotiations after reviewing the valuation, never giving Simbol the chance to present a
counteroffer to his proposed $325 million purchase price.
A Tesla spokesperson acknowledged the discussions with Simbol, saying the automaker "considers many potential partnerships in an effort to stabilize
supply chain, drive down costs, and minimize our footprint."
"Lots of these potential partnerships, like the Simbol one from years ago, ultimately dont work out after due diligence is done into the economics, the
companys business plan, or its value," the spokesperson said in an email.
Former Simbol CEO Burba declined to comment on the negotiations with Tesla, although he agreed to discuss other events involving Simbol. Former
Tesla chief financial officer Deepak Ahuja, who sent Burba the purchase offer from Musk, didn't respond to phone calls seeking comment.
California's Imperial Valley is home to 19 geothermal power plants, which take heat emanating from the Earth and convert it into electricity. The plants
pump mineral-rich brine from a naturally heated underground reservoir, running the superheated fluid through a series of tubes before depositing it back
underground, replenishing the reservoir. Along the way, pressure on the brine is gradually reduced so as to create steam, which is used to turn turbines
and generate electricity. It's a renewable process that doesn't emit planet-warming greenhouse gases.
Most geothermal plants take advantage of underground water, but the reservoir by the southern shore of the Salton Sea actually contains brine, a salty
mixture that's about 75% water and 25% solids. Those solids include chloride, sodium, calcium and potassium and, in small quantities, lithium.
That's where Simbol Materials saw an opening. In 2010, the startup reached an agreement with EnergySource which runs one of the Salton Sea
geothermal plants to extract lithium and other valuable minerals from the company's brine.
To the venture capitalists backing Simbol, the startup's business plan made sense: Electric vehicles and other battery-based technologies were on the
rise, and industry analysts predicted soaring demand for lithium. Most of the world's lithium is currently produced by a handful of companies in a handful
of countries, including Argentina, Australia and Chile, using extraction processes that are often environmentally damaging.
For Salton Sea geothermal companies which have struggled to open new plants due to the high up-front costs of development mineral extraction
has long represented an attractive potential revenue stream. Imperial Valley officials also hope mineral extraction will generate hundreds of millions of
dollars to help fund the restoration of the Salton Sea, which has been shrinking as farm runoff declines. As the lake has dried up, gusting winds have
kicked up dust from the exposed lakebed, further dirtying the region's air, which is already highly polluted.
"The Imperial Valley should have a large lithium company down there. It should for so many reasons," said Burba, Simbol's former CEO, who's worked in
mining and chemicals for nearly 40 years. "The resource is stunning. And the area needs industry. And the process we put together is absolutely green
we had essentially no pollution."
People wanted to believe Simbol would succeed, and for a while it looked like it would. The company built a demonstration plant to show that its
technology worked, and by all accounts the plant was a success. By mid-2014 around the time of Tesla's purchase offer Simbol officials said they
were finalizing designs for a large-scale extraction plant, and closing in on the $400 million they needed to build it.
Tesla, meanwhile, was deciding where to build its "gigafactory," a planned $5-billion battery factory the automaker said would employ 6,500 people. Musk
ultimately chose Nevada, which offered $1.25 billion in tax incentives, but not before an Imperial Valley official made headlines when he told The Desert
Sun a Tesla representative had visited Simbol's demonstration plant.
But Simbol was never able to raise the money it needed. The big question is why.
Burba said investors were nervous about coughing up hundreds of million of dollars when it would take several years to build and scale up the extraction
plant, especially because they didn't know what the price of lithium would be by the time the plant was finished. He added the lithium industry has long
been dominated by two or three major companies, and those companies cast doubt on new players using new technologies, sometimes scaring away
investors. It doesn't help that many new lithium companies have failed to pan out, Burba added.
"The history's not good," he said.
Scott Conley, one of Simbol's co-founders, tells a different story.
Conley sued Simbol last year, claiming several of its investors took control of the company's board of directors and blocked all attempts to bring in new
funding, so as to make sure their own investments wouldn't be diluted. Those investors, Conley said, abused their positions on the board to prevent new
funding from coming in, breaching their fiduciary duties and ultimately causing the company's collapse.

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A Delaware judge rejected Conley's lawsuit earlier this year, referring to his complaint as "factually sparse" and saying it "omits many pertinent facts,
which presumably were available to stockholders." Still, the judge dismissed the lawsuit without prejudice, leaving the door open for Conley to file suit
again if he can find more evidence for his claims.
That's what Conley's trying to do. He sued Simbol again in May, demanding financial information he says should be available to him as a shareholder,
including documents concerning Tesla's $325 million offer. Those documents, he believes, will help prove his case that several investors including two
Silicon Valley venture capital firms, Mohr Davidow Ventures and Firelake Capital Management blocked new investments, and maybe even torpedoed
Tesla's purchase offer by asking for an unreasonable amount of money.
"In 2014, when there's the expression of intent from Tesla to buy the company for $325 million, what happened with that?" asked Conley's attorney,
Sidney Liebesman. "We suspect that there were some breaches of fiduciary duties that prevented that deal from consummating."
Joshua Green, a general partner at Mohr Davidow, declined to comment. So did Martin Lagod, a managing director at Firelake Capital, and John
Ashburn, Simbol's former chief legal counsel. All three served on Simbol's board and were named as defendants in Conley's first lawsuit.
Burba, who was also a defendant, called Conley's lawsuit "frustrating." Just because Simbol wasn't able to secure financing, Burba said, doesn't mean
anyone was trying to block new investments.
"We had several deals that came really, really close, but we just couldn't close...we were all trying to accomplish the same thing," he said. "I think there's
a certain amount of effort to get back at people that they view as the problems."
On Jan. 5, 2015 six months after Tesla's preliminary offer Sizemore said at a public meeting that Simbol planned to hire 400 people for the
construction of its large-scale extraction plant, which would take 18 months to build and reach full-scale production by 2018. But by the end of the month,
the company had fired 38 people the vast majority of its staff.
Simbol never filed for bankruptcy, but it ceased operations.
In September, two companies that Simbol owed money sued the startup in Alameda County in Northern California, where Simbol is headquartered. A
judge responded by placing Simbol into receivership, a process by which an independent third party sells the company's assets in order to pay off its
debts. In a March report, the court-appointed "receiver" outlined a host of obstacles to selling Simbol's assets, including lapsed insurance policies, unpaid
property taxes and hazardous materials requiring expensive cleanup at the company's sites in Calipatria and Brawley.
The court-appointed receiver Andrew De Camara, a senior managing director at Sherwood Partners, a business consulting firm in Mountain View,
Calif. declined to comment on the court proceedings. Sizemore said his new company, Alger Alternative Energy, was selected as the buyer of Simbol's
assets and technology, and was on the verge of finalizing its acquisition Wednesday. Sizemore said he didn't know if there were other bidders, and he
declined to say how much his company had agreed to pay.
Sizemore's goal is to have a full-scale plant producing lithium in two years if he can secure the roughly half-billion dollars he needs to start building,
which he's confident he can. In the meantime, he's planning to fire up Simbol's old lithium purification plant in Brawley, which will convert low-quality
lithium carbonate, purchased on the market, to battery-grade lithium carbonate. That operation would generate revenue in the short term.
"Not only do I believe in the technology and the process and this resource, I also believe in the concept of using renewable power in a variety of means
as a resource to manage our environment," Sizemore said. "I believe in electric vehicles. I believe in smart grids and smart controls in your house."
Sizemore said he's invested close to $800,000 in the company himself. Most of the rest of the early funding has come from Sizemore's co-founder,
Harold Alger, a commercial lender and insurance broker who runs an Indiana-based firm called Seneca Mortgage and Financial Services. Alger said he
and several of his friends have invested, as has an Imperial Valley resident named Diane Williams.
"I don't expect people to invest in things I'm not invested in personally," Alger said.
But Lowry, who's considered a leading expert on the lithium industry, said he's skeptical Alger Alternative Energy will be able to raise the money it needs.
He criticized Sizemore's work at Simbol, saying Sizemore and John Burba "went traipsing around the world trying to get funding" when they should have
been tending to more immediate concerns, like signing a long-term brine contract with a geothermal company. He also said Sizemore "doesn't have the
technical background or chops" to run a lithium company.
"Tracy's told me at least 10 times he's got the money set up to get this plant built, and it never happened," Lowry said, referring to Sizemore's time at
Simbol. "When it came to writing a $400 million check this has never been done before, and there were a lot of i's that weren't dotted and t's that
weren't crossed at Simbol."
Alger Alternative Energy also has a more immediate problem: It's being sued in Oregon by a man named J. North Cheatham, who loaned Sizemore and

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Alger $100,000 last summer to help them buy Simbol's assets.

According to the lawsuit, Cheatham was promised his money back, with interest, by September. But that payment never came. Sizemore later told
Cheatham to expect his money in early December, as soon as Sizemore secured additional financing in Hong Kong, according to the lawsuit. But still the
money never came. Cheatham sued in April, at which point he said he was owed more than $173,000.
Asked about the lawsuit, Harold Alger described Cheatham as a "disgruntled early investor." Still, he acknowledged he should have paid Cheatham back
already, and said he planned to get him his money this week.
"He was hoping for things to get out a little bit quicker than what they did," Alger said. "I feel sorry for his potential loss. I would have let him in further if
he'd chosen to stay with it."
Cheatham's lawyer, Nicholas Henderson, said Wednesday he'd still heard nothing from Sizemore or Alger.
"We have not gotten a single response from anybody, which seems to be par for the course with these people," Henderson told The Desert Sun in a
earlier conversation last week.
Tesla has made steady progress on its Nevada "gigafactory," which is still under construction but started producing lithium-ion batteries for home energy
storage earlier this year. Once the factory reaches full production, Tesla expects it will drive down the cost of batteries by more than 30%. The automaker
is counting on those savings: It's already taking pre-orders for its $35,000 Model 3, which will be the cheapest electric vehicle it's ever sold.
There's little question demand for lithium will rise: Musk said last month he hopes to deliver 500,000 electric cars per year by 2018, and California Gov.
Jerry Brown has set a goal of putting 1.5 million zero-emission vehicles on the road by 2025. More broadly, the climate agreement struck by 195 nations
in Paris last year will necessitate a massive shift over the next few decades from gas-guzzling cars to vehicles powered by clean electricity. Lithium-ion
batteries are also used for energy storage, which will increasingly be needed to store electricity generated by solar panels during the day for later use at
night.
Tesla currently buys lithium-ion battery cells from Panasonic, which in turn buys lithium from established producers. But it's possible Tesla will eventually
look for major new lithium supplies. The automaker has already entered into limited supply agreements with companies that plan to build mines in
Nevada and northern Mexico, although it's unclear whether those projects will come to fruition.
Karl Brauer, a senior analyst at Kelley Blue Book, an automotive research company, said it would have been "out of character" for Tesla to buy Simbol.
At the time of the automaker's $325 million preliminary offer, it had never purchased another company. Last year Tesla made its first acquisition, buying a
Michigan tool and die manufacturer for an undisclosed price.
Still, Brauer said he wasn't surprised Musk was interested in a lithium company.
"He's producing cars, that's what hes known for," Brauer said. "But what he really wants, I think, is to be one of the global suppliers for battery
technologies and batteries themselves, because he knows that's where there's a lot of money to be made.
Experts say the Salton Sea's mineral-rich brine is one of the world's best lithium resources. But so far, no company has successfully converted
geothermal brine to lithium on a large scale, at the Salton Sea or elsewhere. Lowry is skeptical Alger Alternative Energy will be that company that finally
makes it happen, but he hopes Sizemore proves him wrong.
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