Prospective Tungsten Producers (Far East Capital Report)
“Re-emergence of a Specialty Metals Sector
”Speciality Metals Require Special Attention"
• We are seeing the revival of the mining sector progressing beyond the obvious bulk commodities such as iron oreand coal, and base metals such as copper, lead and zinc, to speciality metals that are used in the steel productionprocess.
• Many of these speciality metals have seen dramatic increases in their prices. The small volumes in which theytrade, often at spot prices and volumes only, has worked in favour of producers with Chinese buyers willing topay record prices.
• Specialty metals include antimony, cobalt, molybdenum, tungsten and vanadium, amongst others. Each has itsown supply issues and their availability is often dependent on their co-products. For example the porphyrycopper deposits can supply cobalt and molybdenum as by-products. Antimony is often found with gold.Vanadium is frequently found with uranium.
• Care must be taken to look at the primary economic metal in a style of deposit and assess whether the increase incopper, for example, is going to disproportionately boost world supply of molybdenum.
• We are cautious about vanadium as the supply will be boosted significantly as uranium projects come on streamover the next few years. Speciality vanadium projects will also come on-stream.
•Tungsten doesn’t see to face the same by-product issue of other speciality metals, thereby increasing confidenceas to the sustainability of the higher prices. However, tungsten projects may be affected by prices of a frequentco-product - molybdenum.Our Spreadsheet Provides a Comparative Analysis
• The attached spreadsheet gives investors a chance to compare tungsten companies listed on the ASX, along withone Canadian listed company. This spreadsheet is presented as a “work in progress” that we intend to update on acontinual basis, as and when information becomes available.
• None of the ASX listed companies are producing yet. The first cab off the rank will be Queensland Ores, whichwill commission in approximately six months. QOL has come along way over the 14 months we have beenmonitoring it. Most of the plant is on order and there has been a significant firming up of numbers and estimates,leading us to view QOL’s figures as the most reliable in the table. Yes, there are cheaper stocks on the forecasts,but we believe there is still a significant risk of sizeable cost increases with these – just as QOL has alreadydisclosed. We see QOL’s numbers as the Base Case. There is upside above these on expectations of reserveincreases from strike and depth extension, plant expansions and high grade pipes that have been excluded fromthe resource population. (Note that the QOL numbers do not include anything for the Mt Cannindah copper/goldproject, which is currently being assessed for development. This could be just as profitable as the Wolfram Campproject.).
• The next two producers, if schedules can be met, will be Thor Mining in March 2008, along with King IslandScheelite.
• The metallurgical and technical risks for all of these projects should be manageable given that they were allprevious producers that had closed due to low tungsten prices approximately 20 years ago. It is amazing what a400% increase in commodity prices will do to the bottom line!
• All of the projects have varying issues to overcome – some more than others. All numbers have been pre-projectfinancing. Some companies may use straight equity (QOL), others a combination of debt and equity (THR) andothers will use joint venture finance (KIS). Whatever the exact route, we should expect that there will be adilution level approaching 100% of current equity, for all projects. In most cases a debt financed mine will bevery difficult to achieve from conventional lenders due to the inability to lock in long term sales volumes at fixedprices. It also leads to banker interference in the running of an operation.
• A very interesting figure is the cash operating costs per MTU (metric tonne unit). A company such as QOL has aMTU cost of US$28 compared to a selling price of U$220/MTU. This is because of the significant molybdenumcredit. Thor Mining is in a similar, though not quite as impressive position of having an MTU cost ofUS$65/MTU, also due to molybdenum credits. King Island Scheelite and Vital Metals don’t have the benefit ofthe credit, so their unit costs are much higher. These are also higher capital cost projects with potentially longermine lives, on lower grades.
The dark horse in the pack is Paradigm Gold with a small resource in NSW. The Company believes that therecould be potential for 1 mill. tonnes of high grade ore, but that remains the objective of a drilling program. Wehave assumed only half this tonnage; that was all that was needed to come up with some very impressive back-of-the-envelope numbers. (Disclosure: FEC is underwriting the 1 for 4 entitlement issue, to raise $1.6m
THR Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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