Even as demand rises steadily, the world's largest non-Chinese tungsten mine will be exhausted by next year. So investors should be lining up to fund new mines, right? Not a bit of it, says analyst Mark Seddon of Tungsten Market Research. In this interview with The Mining Report, Seddon argues that a supply shortage could mean much higher prices, leading to handsome profits for those companies that get to market soonest.
The Mining Report: Tungsten is often called "rare." Just how rare is it?
Mark Seddon: It's not that rare compared to a minor metal such as rhenium, which is used in superalloys. The total rhenium market is maybe 70 or 80 tons per year, whereas the tungsten market is currently around 80,000 tons (80 Kt) per year of tungsten metal content. So tungsten's nothing like a rare earth element (REE), but it is considered a strategic metal.
TMR: How is tungsten strategic or critical?
MS: It's strategic in that it has industrial uses. It's used in hard metals, cutting tools, etc. It has military applications, as well. The U.S. Defense Logistics Agency built up a stockpile of tungsten over a number of years, which it has pretty much sold off now.
And tungsten is a critical metal due to China's dominance of the market. China accounts for 80% or more of supply in various forms.
TMR: Tungsten is often compared to rare earths, but the latter's price is highly dependent on high tech. This is not true of tungsten, correct?
MS: Yes. Tungsten's main uses are industrial; the largest end user is in cemented carbides, what are known as hard metals. Those can be used in things like cutting tools, mining tools, drill bits and wear parts. So tungsten's demand curve tends to follow gross domestic product growth quite closely, whereas REE demand growth is more volatile.
TMR: But tungsten prices are rising.
MS: Yes, tungsten has risen in price because of a change in Chinese policy. Some 10–15 years ago, you could buy as much tungsten as you wanted from China, and the price of ammonium paratungstate (APT) fell to about $100/metric ton unit ($100/mtu). APT rose to a peak of $470/mtu in 2011 and was above $400/mtu in 2013.
Recently, the market has been a bit quiet. Today, APT sells for about $370/mtu.
TMR: So would it be reasonable to say that, as with REEs and other metals, the Chinese have decided they want to keep production for internal use?
MS: China is now less interested in exporting natural resources and much more interested in adding value to them. Internal demand in China for tungsten, REEs and so on has been increasing as its GDP has grown, recently about 7–10%/year.
China has made very little investment in new tungsten mines, so it is really struggling to maintain production at current levels, which also would put pressure on exports because, obviously, it just doesn't have the material available for export.
TMR: Given the tightening of supply, where can we expect tungsten prices to go by 2020?
MS: In the short term, I expect that prices will end 2014 quite a bit higher than now and continue rising in 2015. The only significant new supplier that has entered the market recently is the Nui Phao project in Vietnam. This is owned by the Masan Group, which is privately held. It came onstream in 2013, and is, as far as I know, still ramping up to production capacity.
In the longer term, major new tungsten supply will likely not enter the market until the second half of 2015. So the pressure on prices is really going to be upward, especially considering that Europe expects reasonable economic growth this year and slightly better than that in 2015. My feeling is that production shortages will result in rising prices at least until 2016–2017. Then, depending on how much new supply enters the market, a leveling off may occur.
TMR: Given that there's no futures market for tungsten, prices are determined by individual end-user contracts, correct?
MS: Yes. Tungsten prices are discovered, if you will, from data on ores, concentrates and APT provided by such publishers as MetalBulletin, Metal-Pages and Platts. The main price that's followed is ATP. There are two prices in China: the internal Chinese price and the export price, which is a shipped-on-board Chinese port price. There's also a European APT price. However, because China dominates the market so thoroughly, Western prices tend to follow the Chinese example.
TMR: Given the paucity of non-Chinese supply and the exhaustion of North American Tungsten Corp. Ltd.'s (NTC:CA) CanTung mine in Canada by 2015, how great is the need for new Western tungsten mines?
MS: The need is fairly great. CanTung is the largest single mine outside China, with production of about 2.8 Kt/year tungsten metal content, about 3.5% of global supply. As you say, it's nearing exhaustion, and its production will have to be replaced. It's unlikely to be replaced by the Chinese. Steady growth in tungsten demand of 4–5% per year, which is lower than it has been for the last decade, would add, say, 3–5 Kt per year tungsten metal to demand. Current producers outside China do not have the capacity to increase production significantly.
TMR: So how many new mines will be required to meet this rising demand?
MS: Pretty much one major new project coming onstream every year.
TMR: What is the average initial capital expense (capex) of tungsten projects compared to other metals?
MS: I would say no more than $100 million ($100M), probably a bit less. Quite a few current projects reside in the $50–75M range.
TMR: That's quite modest.
TMR: That raises the question of why tungsten projects have such difficulty in being funded, especially given expected rising demand and prices.
MS: One of the biggest problems is that tungsten is not a terminally traded product, like gold, silver, copper, etc. So banks have difficulty in hedging their price risk. I've done quite a lot of work for various projects producing marketing reports and price forecasts, and my experience has been that 50% of potential banks and other institutional investors reject tungsten projects out of hand due to the lack of futures markets and the hedging they provide. The other 50% simply doesn't know much about tungsten, and so it is quite low on their list of priorities.
This funding deficit is obviously not just a problem for tungsten mines. It applies to rare earths, antimony, graphite and other minor minerals.
TMR: Tungsten is not as glamorous as metals such as gold and silver and, as discussed above, is not high-tech, like rare earths. Is this part of the problem?
MS: That's certainly a possibility. Tungsten's uses are almost exclusively industrial, so it's a steady metal, not a sexy one. It is perceived that the rewards to be gained in REEs might be that much greater, but then obviously the risks associated would also be greater.
Tungsten is not a metal that is much discussed, unlike rare earths, which have been featured in the global media since 2011, when the Chinese export restriction become widely known. However, studies done by the European Union, etc., place tungsten in the top three of most-critical metals.
TMR: There was a long article about tungsten in the Financial Times in March.
MS: True, but that's probably the first major article on tungsten in the Financial Times for years, even though China's export restrictions are a decade old.
TMR: Significant past European tungsten production originated from the Iberian Peninsula. Are we seeing significant developments there today?
MS: Almonty Industries Inc.'s ($AII:CA) Los Santos mine in Spain is actually producing. It's not a huge operation. It just published its production figures for Q1/14: 17 mtu tungsten trioxide (WO3) or 135 tons tungsten metal content for the quarter. If that trend continues, it would mean 540 tons/year tungsten metal produced annually.
TMR: What's the most advanced Iberian project?
MS: The Barruecopardo project, also in Spain, which is owned by Ormonde Mining Plc (ORM:LSE), an Irish company. Almonty tried to buy that project, but its bid was rejected by Ormonde.
TMR: Would Barruecopardo be a bigger project than Los Santos?
MS: About three times larger: 1,800 tons/year tungsten metal. As much as CanTung produces, about 2.5% of current global production.
TMR: Ormonde published a definitive feasibility study (DFS) in February 2012. When is production scheduled to begin?
MS: Barruecopardo is still not fully funded, so it's difficult to say.
TMR: According to the DFS, the project has a pre-tax net present value (NPV) of $164.5M, a 52% internal rate of return (IRR) and a two-year payback period. The capex is $66.5M, and the Noble Group has agreed to buy the first five years of tungsten concentrate produced. So why isn't this project fully funded?
MS: There are quite a few tungsten projects working toward full funding. Many of them reach something similar to what Hollywood calls "development hell," where the studio has the script but can't get started without funding, and it goes around and around.
TMR: Is there a major European project that has got full funding?
MS: The Wolf Minerals Ltd. (WLF:ASX) project at Hemerdon in Devon, England, has fully met its initial capex of $197M, but that took quite a while. Construction has begun, and production should begin in H2/15: about 2.8 Kt tungsten metal annually over an initial 10-year mine life.
TMR: In this environment, how much of a premium is attached to getting a mine in production first?
MS: Hemerdon's projected operating cost is about $105/mtu APT. Compare that to the current APT price of $370/mtu, and you can forecast a high margin, if prices remain at similar levels. So the earlier a company can get into this market, the more it will benefit. And should new projects remain unfunded, prices will remain high.
TMR: Speaking of media coverage of tungsten, Forbes in May noted that Warren Buffett and Berkshire Hathaway have agreed to invest $80M in a South Korea project. What do you think of this, considering Buffett's oracle status?
MS: The project is called Sangdong. It is owned by Woulfe Mining Corp. ($WOF:CA), which is headquartered in Vancouver and not to be confused with Wolf Minerals, which is an Australian company.
Sangdong published a DFS in 2012 but seems to have run into difficulties. There has been considerable turnover in senior management, three CEOs in 13 months, for instance. Although Buffett is looking at investing, it's difficult to see what's going on there. There have been no announcements about construction or anything like that. One would have thought Sangdong would be well along the development path by now.
TMR: Woulfe's market cap is under $40M. Wouldn't it just be easier for Berkshire Hathaway to buy the whole company?
MS: Somebody with Warren Buffett's deep pockets could do that quite easily.
TMR: What is happening in Australia?
MS: Carbine Tungsten Ltd.'s (CNQ:ASX) Mt. Carbine project in Australia has an offtake agreement with Mitsubishi Corp. ($MSBSHY). It is actually in production already, processing tailings.
TMR: How big is the project ultimately planned to be?
MS: Around 2.6 Kt tungsten metal per year—slightly bigger than Barruecopardo and slightly smaller than Hemerdon. If that succeeds, this would be a major project.
TMR: Are there any notable tungsten projects in North America?
MS: North American Tungsten has a Yukon project even further north than CanTung. It's called MacTung and the company published a feasibility study in 2009. It projects almost 6 Kt annual tungsten metal production, which is bigger than any of the other projects we've discussed, but initial capex is $402M.
Largo Resources Ltd. ($LGO:CA) has quite a big project in Yukon, just over the border with British Columbia, called Northern Dancer.
Northcliff Resources Ltd. ($NCF:CA) has the Sisson project in New Brunswick. It hopes to be in production by 2016 at around 4 Kt tungsten metal capacity per year. According to its January 2013 feasibility, Sisson has a $418M post-tax NPV, a 16.3% IRR and a 4.5-year payback period. Initial capex is $579M.
TMR: Northcliff has investment from Todd Corp. in New Zealand.
MS: Yes, and it is part of the HDI/Hunter Dickinson group of companies. It has a record of bringing mines into production. In the past, the junior mining company would do the initial resource work and prefeasibility study, possibly even up to the DFS, then the project would be sold to a bigger mining concern that would bring it into production. But that's not happening in the current climate.
TMR: Isn't it true that in recent years many junior mining companies have foundered after they overextended themselves attempting to bring projects to production?
MS: You're right. But needs must, as they say. The juniors can't sell their projects to larger mining companies because they are not interested. The larger companies are consolidating in precious metals, copper and so on, while leaving minor metals to the juniors.
TMR: Largo's Northern Dancer has molybdenum, as well as tungsten. To what extent does a tungsten project with other metals make it more prospective?
MS: It depends on which other metals. Tungsten tends to occur on its own. Hemerdon has some tin but not very much. Sisson has molybdenum. This is a credit against the tungsten costs, so it can only help. But tungsten projects must be treated as such. If a company is relying on byproduct to get it over the line, that would be dangerous because if the byproduct price takes a dive, then it is left with a very marginally viable project, if that.
TMR: Which of the projects we've discussed seem most likely to succeed?
MS: Hemerdon is pretty likely to go ahead because it's fully funded and in construction. Sisson looks to be a pretty good bet because it has HDI behind it, and Todd Corp. is invested in it. It is making good steady permitting progress but still needs financing and will not produce until 2016–2017, at the earliest.
TMR: What about other projects?
MS: Vital Metals Ltd. (VML:ASX) has the Watershed project, and Hazelwood Resources Ltd. (HAZ:ASX) the Cookes Creek project. Both are in Australia. Blackheath Resources Inc. ($BHR:CA) has the Covas project in Portugal.
Most tungsten projects have similar size, deposit grade and production costs. If only one besides Hemerdon were to go ahead, it would be difficult to say which one. It always comes down to funding, and that is obviously down to the bankers. Picking winners in this business is hard, which makes investing in mining projects that much more risky.
TMR: Let's say that only one or two of these major tungsten projects begins producing in the next couple of years. So we have a tungsten shortage leading to a significant price increase. Then the financial institutions worry they've missed the boat, finance a bunch of projects, and we end up with a bubble. A possibility?
MS: This is the problem. No market is run with perfect efficiency, and you do get cycles. It is quite possible we will see more volatility in tungsten prices in the next several years. To repeat, there doesn't seem to be enough projects ready to begin production in the next five years to cope with the expected increase in demand and the exhaustion of CanTung.
The logical conclusion would be that tungsten prices will rise. Depending on how tight the market gets, that rise could be quite rapid. When tungsten prices got over $450/mtu for APT in mid-2011, this sparked interest in tungsten from those who were normally not interested in it.
TMR: We saw much the same with rare earths that year.
MS: When prices go crazy, everybody thinks, "We should be in REEs. Or tungsten." Or whatever. If that leads to a whole slew of projects suddenly hitting the market at the same time, the pressure on prices would be inevitably downward. History shows that this is the way things tend to happen.
TMR: So we could see a collapse in tungsten prices?
MS: It is actually quite difficult to see a bust situation in tungsten because it's quite difficult to see enough projects coming on to make prices crash. Prices could come down, but they should still be significantly higher than 10-15 years ago.
TMR: Mark, thank you for your time and your insights.
Mark Seddon has over 25 years of experience in the commodities industry. He is director of Tungsten Market Research Ltd. in London and was formerly managing director of Roskill Information Services and a sugar trader with Louis Dreyfus. He holds a Bachelor of Arts in European business administration from Middlesex University, as well as a Diplôme d’Études Supérieures Européennes de Management.
Source: Kevin Michael Grace of The Mining Report
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