Tungsten – Hard Not To Love
Tungsten (W) takes its name from the Swedish words, tung sten, or heavy stone. Because it retains its strength at high temperatures and has a high melting point, tungsten is used in many high-temperature applications, such as light bulb, cathode-ray tube, and vacuum tube filaments, heating elements, and rocket engine nozzles. Due to its conductive properties, as well as its relative chemical inertia, tungsten is also used in electrodes.
Its high melting point also makes tungsten suitable for aerospace and high-temperature uses such as electrical, heating, and welding applications, notably in the gas tungsten arc welding process.
The hardness and density of tungsten are applied in obtaining heavy metal alloys. High-speed steel, may contain as much as 18% tungsten. Superalloys containing tungsten are used in turbine blades and wear-resistant parts and coatings. In its defense applications, tungsten, usually alloyed with nickel and iron or cobalt to form heavy alloys, is used in kinetic energy penetrators as an alternative to depleted uranium but may also be used in cannon shells, grenades and missiles to create supersonic shrapnel.
Chinese in the Mix – Yet Again
If one thing dominates the specialty metals space it is the dominance of the Chinese. Despite this dominance for some decades now, we are betting on a breakdown of this ability to call the shots due to the Chinese having squandered their dominance in loss-leading sales resulting in exhaustion of deposits leading ultimately to a loss of 800-lb gorilla status. This process is in train and thus NOT completed yet. The next decade shall see this decline become apparent.
We see in tungsten the same dynamic that other specialty metals have experienced over recent decades. During the 1980s and the 1990s, China, with the world’s largest reserves and lowest cost of production, flooded the world market. This drove down the price of both APT (Ammonium Paratungstate) and WO3 concentrates to below the production cost of most other producers. Amongst the distortions this produced was that APT prices, driven downwards by Chinese processors, were only marginally above the price of concentrates at about USD$50 per MTU (metric ton unit = 10kg).
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The distressed price in the world market quickly drove many tungsten mines and APT producers in the Americas, Asia and Europe out of business and led to their closure. Moreover, outside of China, exploration and mine development programs were quickly abandoned.
However, the distressed market price for tungsten concentrates and its products began to change in 2003 and more markedly in 2004-2005 propelled by the rapid growth and emergence of the Chinese economy in the world marketplace. As in other metals the rapid growth of Chinese demand for tungsten products for its domestic market triggered a tightening of the availability outside of China which was coupled with the Chinese government’s policy curtailing mining projects and taxing the export of tungsten concentrates in order to conserve resources for future domestic needs. This led to a price surge in 2005 with the price of APT moving rapidly from below $80 to nearly $300 per MTU. This in turn sparked a recovery in Tungsten recycling, so the price stayed in the $250 range for the ensuing five years. However, with recycling at its max (37% of global supply in 2010 according to the USGS) and demand for Tungsten still high, the APT price took a further step upwards to around $460. Since then it has eased back.
Just as in Rare Earths and other specialty metals the Chinese government is curtailing mining programs and strongly “encouraging” downstream processing of concentrates to higher value added products such semi-finished and finished tungsten products. We might also note that before the 2008 slump China had become a net importer of tungsten concentrates and scrap.
In 1Q11, China’s Ministry of Land and Resources announced that authorities in the country had identified and ordered the clean-up of more than 280 illegal mines in an effort to regulate the exploration of valuable minerals. The number of exploration licenses for minerals such as Rare Earths, tungsten, tin, and antimony were reduced to 116 from 400 in eleven provinces and regions in the country via spot checks led by teams dispatched by the ministry. This campaign, initiated last June by the ministry, has aimed to end the supposedly illegal excavation of valuable minerals. The ministry earlier ordered that the clean-up of illegal mines should be completed before the end of November 2011. These measures, ostensibly, were in an effort to conserve resources.
The average annual price of tungsten since 1950 has fluctuated between a nadir of US$10 per metric ton unit in 1963 and a peak of US$175 in 1977. After that point it sagged back to trade in a $50-75 band for several decades before its revival in the new century.
The chart below (from Metals Bulletin) shows the recent price trends for APT, with a clear recovery being evident since its nadir in mid-2009. More interesting though is that the current price vastly exceeds levels pre-2008, which is a different look to most other industrial metals.
During the last five years, trade in concentrates has diminished and the market has relied more and more upon the APT quotation as a price guide since APT is the product traded in the largest quantity.
Prices are mainly based on the quotations published twice a week by London’s “Metal Bulletin”, although other trade journals also publish quotations or indicative prices.
Our latest projections are shown in the table below.
Prices peaked in 2014 and then started a light decline mainly because Western world production did not pick up and China started slowing. Losing Malaga’s mine from the production picture meant that the projected production from other mines was not enough to seriously move the price lower. Frankly not enough is known about the China dynamic to explain the likely actions there. For instance, was China restricting export quotas a ploy to get prices up or does it reflect some sort of production problem, either short- or long-term within the Tungsten supply chain within China? Pricing even at the near $400 level for 2015 projected here is enough to give handsome returns to most mine reactivation plans or low capex de novo projects.
The Serious Players
The steam has certainly gone out of the Tungsten space as the bulk of players have been unable to maintain the excitement surrounding Tungsten of a couple of years back through the mining market slump. The grim reaper took down Malaga, which was the most advanced and historic producer. The dire state of the market has not helped North American Tungsten get its follow-on project moving and companies like Largo have stepped back from their tailings reprocessing scheme in Brazil to focus on another metal (Vanadium). Colt (GTP.v) had seemed ready to go live in Portugal and is now focusing on its gold, in a two-horse race. Playfair Mining ditched its Tungsten and headed towards Irish gold (no jokes about leprechauns please). Woulfe Mining (WOF.v) had a management convulsion and went from being production- oriented to being a perpetual drilling story under Dundee’s aegis. This gives the stock the dubious distinction of being an entirely new category which we have called ex-near-producer!
Almonty Industries (AII.v), the name says it all in that the company sees itself as producing something and that it does. The company bought Heemskirk’s mine in the province of Salamanca in Spain and has steamed ahead with production. In recent times it made a rather half-hearted run at merging with the AIM-listed Ormonde Mining (ORM.L, which owns the advanced Barruecopardo project in the same province). That came to naught after zero effort was put into the challenge. Almonty though has the cashflow and team that comes from having an existing operation and that should help it get its second mine going or expedite it bolting on another property in the Iberian Peninsula or further afield. We wonder whether Colt’s mothballed project could prove tempting. The management at Almonty are hedge fund type guys and thus totally different to the usual wheelspinners who want to just drill ad infinitum. We have a sneaking suspicion that Almonty may yet resurface with Ormonde in its sights.
The dilemma of North American Tungsten (NTC.v) is that its Cantung mine has a finite life and is not making enough money to fund internally the construction of its successor, Mactung, nor is the company making enough money to inspire investors to even want to fund such a project. Despite the very healthy APT price, NTC’s revenues were $79.8 million – down 26% from fiscal 2012. While it had positive cash flow from operating activities $3.7 million – these had decreased by $17.4 million from fiscal 2012. The end result was a net loss of $13.3 million ($0.06 per share), deteriorating a further $3.4 million from fiscal 2012. That cashflow was positive was the only consolation. With capex on Mactung in the Yukon standing at CAD$356mn, the prospects of that getting off the ground look slim.
Wolf Minerals (WLF.ax, WLFE.L) have soldiered on with their low-grade deposit Hemerdon Ball tungsten and tin project in Devon, in the south-west of England and are on the verge of production. All kudos must go to these fellows. Having tin in the mix also gives them an extra feather in the cap. The company secured a total funding package of approximately A$212 million (from RCF, ING and Unicredit as well as equipment suppliers) to fund development of the project, which was also more than its competitors could achieve. Interestingly the capex at the latest calculation is only $123.2mn, so the company has more than provided for its needs compared to so many other miners who keep returning to the well because they got it wrong the first time. Production is expected to begin in mid-2015. Full year production is expected to be 3,450 tonnes of WO3, and maybe more interestingly 360 tpa of Tin. It certainly helped that the new open-pit mine was not on virgin territory as it is surrounded by old clay pits. With a market cap of AU$100mn it also has the healthiest valuation in the space. We are not sure it deserves a higher valuation than Almonty. Resource Capital of Denver obviously don’t doubt the attractions for they have built up a 36.4% stake in the company.
Tungsten is a metal that has failed to capture the market’s interest due to generalized ignorance of Tungsten and its supply/demand dynamics. If investors can get into a lather over Rare Earths and Lithium then we feel that Tungsten is just as deserving of attention, maybe even more so.
Tungsten, in theory, should be a bellwether of industrial activity, more than virtually any other metal as it is directly levered into machine-tool manufacturing as the swing factor in its demand (the relatively non-variable part being lighting uses). However, the “spoiler” here is China which distorts the Tungsten market as much as it has distorted so many others, So you have a situation like now where Western Tungsten demand is weakish but Chinese demand is strong (and the Chinese have slashed exports) so up goes the price. We could also have a situation, such as now, where Western demand recovers and Chinese demand slows (and/or exports rise) and the price marks time. The lesson here being that ostensible demand does not matter in some metals, instead all that matters is China’s attitude.
Overall there now exists a window of opportunity for tungsten producers, outside of China, as end users scramble to secure alternative, more reliable sources of supply. Any broader economic recovery (than the current anaemic version) should lead to heated competition for tungsten concentrates in the global market between Chinese and non-Chinese processors and consequently result in an increasing price structure for tungsten and its products in the future. A jump in prices of APT to over $500 would not be unthinkable beyond 2016.
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