Three Considerations for Tantalum Investors

By Michelle Smith–Exclusive to Tantalum Investing News

Since tantalum is a smaller industry than the major metals, information that impacts investment decisions is often difficult to come by. Here are issues that investors and prospective investors of this metal should be considering.

Alarming indicators

Noventa (LON:NVTA) is the only pure play tantalum producer on a major stock exchange, but it is wise to do one’s homework on this company before investing.

Noventa, which operates the Marropino tantalum mine, has recently made some positive announcements. For example, it renegotiated its offtake agreement with H.C. Starck, one of the largest consumers of the raw metal. Under the new terms, H.C. Starck will to pay up to 36 percent more for tantalum through 2013 and it will increase its purchases by 29 percent.

The company also said that it exceeded its annualized 175,000 pound production target for June. Noventa plans to increase its capacity to 600,000 pounds per year by the end of 2011 if it can secure the necessary funding. A July 29^th statement said the company is now well advanced with its proposals to raise further equity capital through a combination of a placing and open offer.

However, Noventa’s chairman, Eric Kohn, recently described the company’s stock as undervalued and its performance as disappointing. This is likely due in large part to the fact that over the past few months Noventa has also had the type of news that tends to make investors jittery.

In April, the company announced the resignation of director Kean Chung with “immediate effect.” This was followed by the sudden resignation of CEO Pat Lawless. June brought the announcement that Timothy Griffiths was leaving his position as director and that Canaccord Genuity resigned as the company’s joint broker. Then, in July, the company disclosed that CFO Daniel Cassiano-Silva had tendered a resignation, though he is supposed to remain with the company until November.

In addition, to this whirlwind of changes, Noventa made headlines and caused self-inflicted wounds to its share prices in June when the company announced that it urgently needed to raise $25 million. According Kohn, the company was experiencing financial shortfalls for reasons including higher than expected exchange rates, the changing of civil engineering contractors, and an increase in capital expenditures and operating costs related a lack of rainfall that required pumping water from the river.

Forthcoming production

Demand for tantalum is expected to grow at a rate of six percent per year and may exceed seven percent in 2011. Yet, tantalum production dropped by over 50 percent in 2009. This was partly because producing the metal became uneconomic, causing major mines to close. Production has not yet returned to 2008 levels, but it is expected that pressure on supply will be alleviated by projects that are currently underway.

In addition to watching the developments at the Marropino mine, investors should also keep their eyes on Global Advanced Metals‘(GAM) Wodgina mine in Australia. This is the site of world’s largest tantalum reserves and it began processing ore again in April following a hiatus during the global financial crisis. GAM has now set a production target of 700,000 pounds per year.

TANCO, Tantalum Mining Corporation of Canada, is another formerly productive mine. It is owned by Cabot Corp (NYSE:CBT) and in May the company announced plans to restart production sometime later this year. Specifics regarding dates and production targets were unavailable.

Globe Metals and Mining‘s (ASX:GBE), Kanyika Niobium Project in Malawi is now in the final feasibility stage. Production is scheduled to begin in 2014 and although niobium is the primary focus, the company says tantalum will be produced as a by-product.

Tantalum prices are negotiated on a per contract basis. Contracts are generally long term and the rates are influenced by supply-demand fundamentals. It is estimated that if new production is indeed forthcoming, it could bring tantalum prices down from current levels by up to 40 percent and stabilize them in a range that will make production of the metal economic for major producers over the long term.

Talk of recession

Though there has been positive outlook for tantalum growth, many of those reports were released before economists started using the “r” word. Over the past week concerns about another global recession have been growing. The red flags that are prompting these concerns include the US Federal Reserves announcement to keep interest rates low for two years, drastically declining gas prices, and economic troubles in the Eurozone. Tantalum investors should be honed in on developments and further indications of a recession.

Demand for this metal is largely driven by consumer purchases of electronics. The recession of 2008 proved how sensitive the industry is to economic conditions. Consumer spending for items such as cell phones and laptops took a dive and with it went the profitability of tantalum production. It was during those rough economic times that mines such as Wodgina and TANCO shut down.