Daniel Fridson
submits:
Tungsten has confounded generations of chemistry students with
its seemingly nonsensical "W" symbol below the number 74 on the
periodic table of elements. However, to industry professionals, the
uses and importance of tungsten are very clear. As far back as
1913, renowned physicist and General Electric Laboratory director
William D. Coolidge successfully filed a patent for the industrial
use of tungsten. However, the patent was overturned by the Supreme
Court in 1928. To date, it is the only element that anyone has
tried to license exclusively in the U.S.
Today, half of tungsten produced is in the form of tungsten
carbide, a material with three times the stiffness of steel and a
greater density than titanium. Tungsten carbide is virtually
indispensable in the production of cutting tools, and has numerous
other applications in hard materials. Steel alloys strengthened by
tungsten have proved a huge advantage in military equipment, both
in aiding the production process and producing higher quality
projectiles. There is also a growing number of niche uses,
including LCD screens, fluorescent lighting, and as a substitute
for gold, lead and depleted uranium. With a relatively small
supply, and so many applications, it is unsurprising that tungsten
prices have gone up dramatically in the last five years. Though a
sharp drop in 2009 caused some to exit the business entirely,
prices have rallied significantly since then:
(click image to enlarge)
As with many strategic minerals, the spotlight issue is
expanding tungsten production outside of China, which currently
accounts for approximately 80% of the world's output. Today, there
are only three primary, publicly traded tungsten producers outside
of China. Two are based in North America, and their CEOs both have
much to say about the importance of expanding output ex-China and
the role their companies play in the current state of the
industry.
Citing a "definite need for Western Sources," North Amern
Tungsten (NATUF.PK) CEO Stephen Leahy (who is also president of the
International Tungsten Association) laments that "no one outside of
China has an aggressive exploration program." With recycled
tungsten having increased to 30% of the world's supply, and the
United States' Defense Logistics Agency ((
DLA
)) auctioning off its stockpile to account for another 3-4% (at
which rate it will run out entirely within a few years) -- not to
mention falling Chinese exports -- it will be increasingly
difficult to accommodate growing demand and high consumption. "Once
you turn off those taps," Leahy commented in a phone interview last
week, "supply goes down drastically." He looks back fondly on the
days when Union Carbide, with government assistance, engaged in
extensive early development work in a wide array of potential
mines.
Though governments in the West have shown little interest in
such development, Malaga Inc. (MLGAF.PK) CEO Pierre Monet has found
some help from his business partners. Since the industry sputtered
briefly but significantly in 2009, he says, "The end user has been
willing to lend money and invest in order to help the mine to
develop and extract more tungsten." Last week, Malaga released its
Q2 earnings report, which noted that an off-take agreement granted
an advance on $1.4 million worth of sales to help the company
increase output from its Pasto Bueno mine in Northern Peru. This is
hardly a new trend, as Malaga received a $5 million dollar loan in
2009 in return for a five year supply contract.
It is largely due to the low cost of Pasto Bueno, thanks to an
innovative gravimetric ore concentration process, access to roads
and water and a proprietary power plant that supplies 70% of needed
energy, that Malaga was able to survive the market downturn in
2009. Now with prices exceeding $454/ton, Malaga's estimated costs
of $163/ton make for good profit margins. Although some were
disappointed that the Q2 results showed no increase in production
and decreased net income, Monet maintained that the new numbers
were "in line with our estimates" and that the influx of cash would
further the company's goal of expanding current production to
between 90,000 and 100,000 MTU.
That the head grade of tungsten sold from Pasto Bueno has
decreased in the past six months is somewhat offset by the
potential of a new project that is adjacent to Pasto Bueno. Malaga
has discovered over 75 new veins on the previously privately owned
property, 25 of which are major structures. As Monet explained, his
company offers the stability of a producer and the potential of an
exploration company. Indeed, it is rare for a company of this size
to offer both, but the low-cost process and the increased demand
for Tungsten allows such conditions.
The same is true for North American Tungsten. "There are three
things to you need to know about us or any other mining company,"
CEO Leahy says. "Grade, grade and grade." Seeing an opportunity to
re-exploit past mines with a patented process developed back in
1993, the former venture capitalist and StarTech Energy director
now oversees the West's largest producer of tungsten concentrate,
all from its Cantung property in Canada's Northwest Territories.
With total probable reserves of around 1.7 million tons as of the
most recent NI 43-101 filing, and an average grade of 1.17 WO
3
%, there has been steady production. In its most recent quarterly
report, North American Tungsten reported $57.8 million in sales
over the six month period ending March 31, 2012, up from the six
month period ending a year earlier, in which it recorded sales of
$18.8 million.
Most metrics would indicate that the true upside of the company
lies in its Mactung exploration project in Canada's Yukon
Territory. It is clear, however, that the revenue from current
production will not cover exploration costs sufficiently to bring
Mactung to production, which is reflected in the current share
price. I see a major issue with this current market valuation,
aside from the justifiably tough environment currently faced by
mining juniors. First of all, according to miningalmanac.com, North
American Tungsten lies in just the 12th percentile of all producers
in terms of relative cash flow over stock value. This means that
the highly promising Mactung property is being treated as a
liability. There is evidence, based on past events with both North
American Tungsten and its peers, which indicates that there are any
number of methods of financing that will ensure Mactung makes it to
production.
First of all, according to management, a Chinese company tried
to acquire North American Tungsten in 2009 shortly after
encouraging drill results were released from Mactung, showing a
clear market imperative to get all that tungsten out of the ground
and into the hands of producers. In July of this year,
Australian-based tungsten explorer Woulfe Mining (WFEMF.PK) saw
Berkshire-Hathaway sink $70 million dollars in equity (split evenly
between the mineral property and the on-site refinery) into its
Sangdong project in South Korea. Monet speculated that this was
designed in part to secure tungsten supplies for the massive
holding company's other subsidiaries, although a straight
investment prospect would bode equally well for the industry.
Both Monet and Leahy predicted prospects of M&A activity
within the tungsten sector, based on the dual trends of increased
need for Western sourcing and China's continued to desire to
maintain a dominant position in global reserves and production.
Whether through an advance from off-take agreement partners,
institutional investors who have shown increased interest in
applied minerals over the last few years or a conglomerate seeking
synergistic interests with existing operations, I strongly believe
the Mactung mine will be financed one way or another. Certainly,
less promising juniors have been able to find financing partners
over the last few years.
The project, which is 100% owned by North American Tungsten, has
shown 10.79 tons of proven and probable reserves with a highly
impressive 1.19% grade, almost twice the industry average of .65%.
Leahy told me there were discussions underway to help the company
gain additional financing to move forward on Mactung, which
requires an additional year of licensing and a two-year
construction window, putting the estimated start of production in
2015. There is a clear economic incentive for any number of
partners to help North American Tungsten bring Mactung online. It
will be a year before any significant cash costs begin to accrue,
an interval in which there is plenty of time for discussions to
bear fruit.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I
have no business relationship with any company whose stock is
mentioned in this article.
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