Spain is home to Almonty Industries‘ (TSXV:AII) Los Santos project, one of the only producing tungsten mines in the western world. Spain is also now center stage in the Eurozone crisis. The world is waiting to see whether its government will request a bailout, which some insist is necessary to help the country lower its borrowing costs to sustainable rates. Inquiring minds may wonder what impact conditions in Europe are having on the business of producing and selling a rare metal like tungsten. Almonty’s CEO, Lewis Black, provided Tungsten Investing News with some insight.
While it operates in Europe, Almonty is not directly exposed to market conditions there. The company exports all of its tungsten to North America, a market that Black says has held up well. Still, the company does not exist in a bubble and therefore has not been able to completely insulate itself against the region’s crisis.
“No one wants to carry [tungsten] inventory given the uncertainty in Europe,” Black said, outlining the first effect the company has noted. “Consumers only buy what they need and they are working down the inventories that they have. Understand that this is not based on fundamentals, but purely on uncertainty.”
Some may find that surprising as many consumers have been pushing to secure access to supply outside of China.
“I will probably get shot for saying this, but there is very little partnership between consumers and producers in the tungsten business,” said Black.
“Consumers’ primary concern is to keep their costs low, and they operate with no real regard for what will happen to the producers. Consumers feel that they can always get a bit [of tungsten] here and bit there and for years they have been. Now, I really don’t understand it because the quantity and quality of that supply is dwindling, but this is how they operate. So the producers have a tough time, no doubt about it.”
Another effect, according to Black, is that everything costs more.
“Costs are up 20 to 25 percent over five years ago, but the lead times are double. You have to be more creative in obtaining heavy equipment because it seems manufacturers would rather work for more money over longer periods.”
Black explained that manufacturers have reduced staff on their assembly lines and have outsourced those jobs. The companies that they have outsourced to are generally smaller. In Europe, small and mid-sized businesses have no access to credit; that slows down production times because many can’t keep large supplies of simple components, such as rubber seals. And given the broader sense of uncertainty, companies with the cash, like everyone else, aren’t prone to risk tying it up in inventory.
One solution to this problem that Almonty has found is to turn to the “thriving second-hand market” for equipment.
“We have always been creative in getting things done. We built Los Santos on a shoestring. We had less than a quarter million dollars and no credit,” Black said.
During the Eurozone crisis, much emphasis has been placed on the strength of the region’s banks and the possibility that the euro may not be able to survive. Black does not believe in risking the farm, so Almonty has taken precautions to protect against worst-case scenarios.
The company has moved all its accounts out of Spanish banks. It was able to do so with no obstacles because it made moves at the end of 2011.
“There were already rumblings about Spanish banks back then. We left the party before the parents got home, so to speak,” said Black.
He said hedging does not make sense for the company. It invoices in dollars and converts into euros only the sums needed to cover accounts payable.
“Honestly, we don’t understand how the euro has held up as well as it has. They say the market is never wrong, but it makes absolutely no sense for the euro to be as high as it is.”
On Wednesday the euro got stronger, reaching a one-month high against the dollar. Equity markets also moved higher, partly because Moody’s decided not to downgrade Spain’s credit rating to junk status, but largely on speculation that the country’s officials are moving closer to finalizing the request for a bailout.
Whether or not the country actually makes this request may be important in some circles, but not for Almonty and not for tungsten.
“I truly do not believe Spain is a risk country,” Black said. “The Spanish are creative and resilient people. They are very smart people. I have absolute confidence they will get it together. It’s not going to be easy or pretty. But they are proud people and they will not allow themselves to fail and certainly not to fail in the eyes of the world.”
“Even if something were to happen with the euro or somebody leaves the union, Europe is still going to be there. Tungsten is still a global material,” said Black.
“We are likely to see this hand-to-mouth policy among consumers for the rest of the year. Then we expect that they will start to rebuild inventories in the first quarter of 2013.”
He also insisted that the conditions in Spain and the Eurozone crisis overall will not have any impact on the company’s decisions for future investment in the region as long as the company has access to the right people for any project that it might consider.
“Europe has some of the best skilled technical people in the world. Spain and Portugal have always been supportive of mining. And we would always be interested in pursuing projects in any place that supports mining,” Black said.
That then leads to the question of investors’ confidence. Do investors continue to value Almonty as one of the few tungsten plays outside of China, or are they heaping the company into the larger EU risk basket?
“Our investors appreciate that we are not exposed to Europe, as far as where our material goes,” Black said. “I don’t think they view us through the risk of Europe. And I don’t think they look at the country we operate in. They just want to see us do what we told them we would do. If we can’t deliver on our promises, then we have problems.”
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any company mentioned in this article
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