Tungsten Outside of China

By Michelle Smith — Exclusive to Tungsten Investing News

China’s grip on the tungsten market makes many people uneasy and there is a healthy appetite for supply from other sources. Given the positive demand and pricing for the metal in recent years, a number of companies have stepped up to answer the call for supply diversity. As investors increasingly catch wind of interest there are some things they should remember when adding these equities to their portfolios.

Before the new millennium, tungsten prices were depressed for a long period of time. Many place blame largely on China’s flooding of the market with metal that was so cheap it stamped out competition. However, after decades of a gloomy market environment, conditions began to look up. As prices have risen so has interest in the tungsten business.

Converting undeveloped tungsten projects into production sites is still a major challenge for reasons such as low grades and financing difficulties. Many miners have instead focused on redeveloping or expanding previous tungsten projects.

For example, EMC Metals (TSX:EMC) plans to restart operations at the Springer mine in the US. The company has said it spent over $20 million partially reconditioning the property between 2006 and 2008 and plans to do more work in Q2 2012, including developing detailed multi-year mining plans.

In Q1 2012, King Island Scheelite (ASX:KIS) completed the feasibility study and the purchase of key mine-related land for its Dolphin project in Australia.

Malaga (TSX:MLG,OTCQX:MLGAF), which successfully restarted the Pasto Bueno mine in Peru in 2006, has long said that demand substantially exceeds its ability to supply tungsten. As a source of additional production, the company recently announced plans to construct a pilot plant to process its tailings.

Where should investors focus their investments?

Wolf Minerals (ASX:WLF,LSE:WLFE) has a high-grade tungsten project, Hemerdon, in the UK that was mined and explored during the 20th century. The company has an offtake agreement with Traxys for the tin produced from the project and has signed offtake agreements with Global Tungsten & Powders (GTP) and Wolfram Bergbau und Hutten (WBH) for 80 percent of its tungsten. GTP and WBH are also set to provide the company with a £20 million loan facility.

Offtake agreements and other significant investments in tungsten projects outside of China are expected to continue. As tungsten creeps further toward mainstream awareness and miners continue to display optimism about the prospects in this space, investors may also consider scaling up their positions in the metal.

But just as the WBH and GTP loan deal is subject to due diligence, equity investments in miners engaged in tungsten projects outside of China are moves that should be thoughtfully made.

Below $250 investment dries up and some miners become uneconomic, according to Christopher Ecclestone, Principal and mining strategist at Hallgarten & Company.

Though international projects are set to increase the shares of tungsten produced outside of China, that nation will still be by far the predominant producer for quite some time. And therein lies the risk that the Chinese could manipulate prices to make projects or production elsewhere uneconomic.

Given that threat, investors should focus on costs, perhaps more closely than is necessary in other industries. At current prices some miners may appear far out of harm’s way. Still, investors should consider which companies could tough it out the longest if there was a sharp decline in prices.

Investors would also be wise to give preference to companies that have offtake agreements securing the sale of some or all of their production. Such agreements help to insulate miners and their investors against the risks of price declines.

Another reason to give special consideration to companies with offtake agreements is that these contracts may help them to overcome an important hurdle: obtaining financing. Advance sales can make miners appear more creditworthy.

Woulfe Mining (TSXV:WOF,OTCQX:WFEMF,FWB:OZ4) is in the the process of advancing its Sangdong tungsten-molybdenum project in South Korea, a mine with a production history of over 40 years prior to its closure in 1992. The company has entered into an attractive partnership with IMC, which is 80 percent owned by Berkshire Hathaway, and the deal includes an offtake agreement.

Woulfe believes this helps make it a more attractive candidate not only for investors, but also for financing.

“You reach a point in the project and you have to fund the big cash piece, which is providing the money to build the mine,” said Nick Smith, Manager of Investor Relations. “When you go to a bank and you say, ‘okay, this is how much it’s going to cost us to build’ and they say, ‘what is your projected income,’ there’s obviously a concern that you will not sell your product.”

A company with an offtake agreement has a much brighter outlook because as Smith points out, it can say its product is already sold.

Other companies outside of China

There are several other companies with projects outside of China including: Largo Resources (TSXV:LGO) with the Currias Novos tungsten project in Brazil; Happy Creek Minerals (TSXV:HPY) with the Fox tungsten-molybdenum property in British Columbia; Almonty Industries (TSXV:AII) with a focus on mining, processing and shipping tungsten concentrate from its Los Santos mine in Spain; Colt Resources (TSXV:GTP) with an advanced staged tungsten project, Armamar-Meda in north central Portugal; Playfair Mining (TSXV:PLY) with several tungsten projects in Canada and North American Tungsten (TSXV:NTC) with a producing CanTung tungsten mine, as well as the feasibility-stage MacTung mine located in the Yukon.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.