independent report

TMR: Discuss the three phases of Carbine's Mt. Carbine tungsten operation. How did a company with a market cap of less than $20M bring on board a giant like Mitsubishi Corp as an offtake partner?

RK: If I might answer the second question first, to explain the reasoning behind why one of the fifty largest corporations in the world would effectively partner with a micro cap like Carbine Tungsten, I would remind readers that over the last few years, relations between Japan and China have become increasingly strained. In 2010, China cut off REE supply to Japan in retaliation for a relatively minor fishing incident in the vicinity of some disputed islands in the South China Sea.

Since tungsten is one of the most strategic of specialty metals, being critical in a range of industrial and military applications, and China largely controls the global tungsten market, we find it entirely understandable that the Japanese would be determined to secure a reliable, non-Sino source.

Carbine Tungsten meets that need.

Japan, having been made painfully aware of its supply chain vulnerability, has reacted in an entirely rational manner. With global instability on the rise, we expect security of supply to become an increasingly dominant issue. The West, and especially the EU, will follow suit shortly: They simply have no choice.

As for Carbine Tungsten's circuitous route to production, I've mentioned that securing commercial funding for specialty metal projects is nigh on impossible these days. If that were not enough, even in good times commercial banks do not fund tailings reprocessing operations, so Carbine Tungsten getting its operation going at all is something of a feat of dogged determination and perseverance.

Mt Carbine was a truly massive operation that produced tungsten from 1973 to 1987. The average grade was 0.16% WO3, but at the time they were using visual ore sorting and only targeting Wolframite, which is black; Scheelite, the other form of tungsten, is white and difficult to differentiate from quartz and was ignored for economic reasons, despite constituting roughly 20% of the tungsten content. The Mt Carbine mine was operated by the Roche brothers, Sandvik, and Treibacher until the Chinese flooded the market with tungsten and undermined the economics of the project. It has sat dormant since.

Unable to secure funding, in 2011 Carbine Tungsten went to its shareholders for a little more than AU$1M to purchase a used plant to begin reprocessing the 2 million tons (2 Mt) of Scheelite-rich tailings, which grade 0.1% WO3.

Unfortunately, the plant it purchased could only recover WO3 in the 75 micron or larger range, but the company was able to recover sufficient product for Mitsubishi to evaluate. In this respect, the plant amounted to little more than a commercial demonstration plant Carbine Tungsten has fine-tuned over the last 22 months, growing average production to 1,500 metric ton units per month (1,500 MTU/month).

Mitsubishi has purchased 100% of production and participated further by means of two pre-paid off-take agreements. Between the improved OPEX and the AusIndustry R&D refund, the tailings operation is operating at breakeven or a small profit. More importantly, it has cemented its relationship with Mitsubishi.

The company is currently trialing a Wet High Intensity Magnetic Separation (WHIMS) unit to recover the sub-50 micron fraction, which means that an AU$500K-800K investment could help it recover an additional AU$8M in WO3 from the tailings, doubling production and rendering the project solidly profitable.

Phase 2 will see Carbine Tungsten add a AU$14M expansion to its plant to process 12 Mt of mineralized waste grading 0.75% WO3, but again that grade is based on historic figures that did not include Scheelite, so a rough doubling of that grade would not be an unreasonable expectation. The modular plant will be the backbone of the larger still Phase 3 plant and will incorporate intellectual property (IP) from the ongoing R&D, as well as x-ray sorting to improve mill feed and recoveries, which will substantially improve profitability. Mitsubishi has committed to taking 80% of production from Phase 2.

An off-take for a funding agreement with Mitsubishi for the entire AU$14M required for the plant is pending, but curiously it recently paid Carbine Tungsten AU$1M for 2.7% of Phase 2 production. This means that the Japanese, who have been conducting due diligence on the project for a number of years now, apparently place a value in the AU$36-37M range just for Phase 2, while the market as a whole only values Carbine Tungsten in its entirety at roughly AU$23M.

Phase 3 will see the return to full-scale open pit mining. Mt Carbine's resource measures 47 Mt grading 0.13% WO3, and there is a high grade zone of 4.5 Mt grading 0.32 % WO3. Mota-Engil invested $2M in Carbine Tungsten in 2013 for hard rock development, a feasibility study and approvals.

The return to full-scale mining would require an additional AU$40M plant expansion but would lead to production of 2,650 tpa of WO3 within 18 months of securing financing. Mitsubishi has committed to taking 50% of Phase 3 production. There is also significant exploration upside both from the Iron Duke deposit, which is a new discovery, and Petersen's Lode, a high-grade (6%) historic prospect.

http://www.theaureport.com/pub/co/6063#quote