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Mining Executives Talk Tungsten

By: SeekingAlpha
Posted: 8/23/2012 2:31:00 PM
Referenced Stocks: DLA
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:

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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, 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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