More than a mile below ground, sealed in by a mantle of rock, lie vast wells of boiling hot salt water trapped in porous sandstone formations. These subterranean springs stretching over an area of more than 4,600 square miles are believed to contain some of the richest concentrations of lithium anywhere on Earth. 

Germany’s Vulcan Energy believes this unusual geological formation, known as a graben, is the key to sustainably producing thousands of tons of the chemically reactive metal needed to power zero-emission cars. 

“We’re convinced it would be the most productive lithium deposit in the world,” Vulcan co-founder Horst Kreuter told Fortune.

His idea has convinced others as well: Volkswagen Group has just signed up as a buyer. On Wednesday, the carmaker vying with Elon Musk’s Tesla for leadership in the electric vehicle market agreed to an initial five-year supply contract starting in 2026. 

Courtesy of Vulcan Energy

Lithium—the lightest solid element on the periodic table—tends to be found in two main forms. Certain types of igneous rock, such as the crystalline mineral spodumene and jadarite, are rich in the metal. Lithium can also be extracted from pools of brackish waters called “salar brines” typically found in South American salt flats.

Unlike Australia or Chile, Europe produces lithium in neither of the two forms thus far, though that is changing. Companies like Keliber of Finland have been granted EU funding to mine spodumene, while separately plans are moving forward to extract lithium from zinnwaldite in the German region of Saxony. Crushing the ore and leaching the metal out of the surrounding silica and aluminum is a costly and complicated metallurgical process, however.

The Upper Rhine Valley would be the first geothermal brine to be commercially exploited on the continent.

“The largest reservoir of lithium is of course the ocean, but you would need to process vast amounts of water to filter enough out,” said Kreuter, who holds a doctorate in engineering geology. “The challenge is finding a source where the concentration is the highest and the extraction is the easiest and most economical, without producing a lot of CO2 in the process.” 

High upfront costs

To execute on the first two phases of his business plan, Kreuter reckons he needs over €1.7 billion in capital in total.

The funds are mainly earmarked for three types of facilities. First, multiple wells need to be drilled—often four kilometers (2.5 miles) deep—to pump out and inject back in the boiling hot salt water at a rate of 100 liters per second. 

Then extraction equipment must be procured to filter out the 180 milligrams of valuable metal per liter with the help of chemical sorbents. 

Finally, a refinery on the outskirts of Frankfurt has to be built to process the intermediate product, an aqueous solution of lithium chloride, via electrolysis into battery-grade material.

If all goes according to plan, his company should be able produce roughly 40,000 tons of lithium hydroxide (LiOH) per year by the end of 2025—enough by his estimate to power around 1 million EVs.

Vulcan Energy already raised roughly €200 million; it needs is another €350 million before the company has enough equity to fund the remainder via bank loans arranged by BNP Paribas.

“Building up the facilities that we need may be a capital-intensive process, but our running costs to operate them are minimal,” Kreuter said. “Once the upfront investments are paid off, we believe we will have the most competitive lithium prices on the market.”

The company’s co-founder believes he can exploit the resource at costs of $3,000 per tonne of LiOH, well below the $5,000 or $11,000 it costs to extract the metal from either salar brine deposits or spodumene ore. 

Soaring lithium price

Direct lithium extraction from geothermal brines is an untested business model, however. A company called Simbol once piloted the process in California’s Salton Sea. Tesla was even reportedly interested in acquiring Simbol for $325 million, but the business ultimately failed in 2015.

So what’s changed? EV penetration has increased substantially in the meantime—in China and in particular in Europe, where a tenth of all new cars sold are powered solely by battery as opposed to fewer than one in a 100 five years ago.

With Detroit’s Big Three now fully embracing electric vehicles in North America in a bid to ward off upstarts like the Jeff Bezos-backed Rivian, and close the gap with Tesla, the technology has finally gone mainstream. 

As a result, battery-grade LiOH has changed hands for about $14,000 per tonne on average over the past five years rather than the $6,000 at the time Simbol collapsed. Last month, spot prices even soared to roughly $29,000 per tonne. 

At those production costs, Vulcan Energy has been able to ink supply deals with Belgian automotive materials group Umicore, EV cell producer LG Chem, as well as French carmakers Renault and Stellantis.

Courtesy of Vulcan Energy

The list is impressive given the company is small—at just 80 employees it it still small enough to throw an office party whenever a new employee is hired.

Apart from a pilot plant and some drill rigs it has secured, perhaps the main asset it owns are two licenses to prospect for lithium over a combined area of 500 square kilometers (193 square miles) in the Upper Rhine. Vulcan Energy estimates this land sits on top of reserves totaling 15.85 million tonnes worth. 

The company would qualify as a unicorn had it not already listed shares on the Australian stock exchange, a bourse known for attracting investors looking for exposure to key raw materials. 

A torrid 12-month period saw its shares soar elevenfold, and currently Vulcan Energy closed on Friday at a market cap of AUD1.43 billion ($1 billion).

That has however attracted attention from short sellers. The stock entered bear territory after Tim Murray of Australia’s J Capital Research accused the company at the end of October that its assumptions were far too rosy.

“Frankly I don’t think this project is commercially viable in the current way they are framing it, so I don’t think there’s a great deal of value in this stock at all,” he said on CNBC at the time. Despite categorically refuting the claims in a regulatory statement filed at the time, Kreuter’s company shed over third of its market cap.

NIMBY

One of the reasons why the company is popular with both customers and investors is its ecological footprint. 

Instead of the roughly 5-15 tonnes of carbon dioxide emitted per ton of lithium that is produced in other parts of the world, Kreuter believes he can extract the precious resource without adding any net new CO2 into the atmosphere. 

All the energy he needs can be harnessed from geothermal sources, with plenty enough left over to go around. 

With sensitivities over the long-term price of natural gas increasing, for example, Kreuter hopes communities will jump at the chance to buy affordable heat piped in directly from a nearby Vulcan site. This could abate greenhouse gases produced elsewhere, such as from Germany’s heavily polluting brown coal plants.

Courtesy of Vulcan Energy

This could help him overcome one of his chief concerns: local opposition. Residents clamoring “Not in my back yard”—NIMBY for short—could delay or even stop the permitting process entirely. 

Citing damages to municipal property from a geothermal well in the nearby Black Forest, Germany’s Der Spiegel quoted local CDU party official Richard Schüler as saying he was “would do everything to prevent” Vulcan Energy from drilling for lithium in his small town on the border neighboring Strasbourg.

There are many precedents for this in the materials and energy industry. Demonstrators this weekend came out in force to protest Rio Tinto’s planned mining of lithium-rich ores in Serbia, which they say could poison the environment. Even clean on-shore wind parks in Germany are a trigger point for affected residents who often complain the giant turbines are an eyesore.

New hope

First, however, Vulcan Energy still has to decide where best to drill. Expensive three-dimensional seismic tests at about €1 million each are required for detecting deposits four kilometers below the earth. 

Fortunately, the Upper Rhine is among the most geologically explored regions of Europe thanks to the discovery of petroleum at the turn of the last century. About an hour’s drive from Karlsruhe, where the small offices of Vulcan Energy are headquartered, lies the Alsatian town where France’s Schlumberger brothers first prospected for oil.

But there are hurdles. Due to ever fewer resources being mined in Germany, Kreuter fears there are not enough personnel in local government offices with the necessary expertise to efficiently process permits. Even with some former oil and gas engineers leaving a shrinking fossil fuel industry in exchange for safe civil servant jobs, Kreuter believes the shortage could endanger his 2024 ramp-up plans.

There could be relief in sight, however.

Firstly, the freshly installed federal government aims to slash the average waiting time for permits in half. Just as important, however, is Vulcan Energy’s own administrative region. The region’s popular governor, a high-profile member of the Greens, is keen to support the transition to clean mobility for local carmakers Mercedes-Benz and Porsche. 

“Clues give us hope,” Kreuter said. “There’s a sentence included in our state’s coalition agreement that the two governing parties explicitly support the sustainable exploitation of lithium in the Upper Rhine graben.”

If the deposits are there in the volumes he expects, Europe could very well end up then as the lithium supplier to the world.