TMR: Before we get into your other two companies, can you explain your fondness for brownstone projects?
RK: I confess that I am biased toward a certain kind of brownstone project because I'm partial to overlooked, under-valued assets that have been victimized by circumstance. In cases like those I profiled, these projects represent low risk, high return opportunities.
People tend to forget (and bankers tend to shy away from financing) a large swathe of brownstone projects. Many of these projects were shuttered not because they ran out of ore, or grades deteriorated or they were poorly managed, but because something unforeseen happened to kill the price of the metal they were producing.
In the case of tungsten and graphite, commencing in 1982 when Deng Xiaoping had China "turn outward" in the general direction of a market economy, projects all over the world were closed because they could not compete with the flood of inexpensive supply from China's command economy. That was how China came to control so many specialty metal markets: The government more concerned with amassing foreign currency reserves and seizing control than they were with profit, and as we've seen, now that they have control, they are exercising it by squeezing supply. As a result, western companies are beginning to take security of supply seriously.
TMR: And this is opening the door for non-Sino sources such as Carbine Tungsten Ltd. and Valence Industries Ltd.
RK: Exactly. In essence, Carbine Tungsten Ltd. and Valence Industries Ltd. are models of perseverance and innovative finance.
Both have taken an incremental approach based on putting historic mines back into production in stages, counting on the quality of their product to help them progress toward full production. We have every reason to believe at this point that they will make it.
Carbine Tungsten has the Mount Carbine tungsten mine in far north Queensland, which operated last as a joint venture between the Roche brothers, Treibacher and Sandvik from 1973-87, with production averaging 0.16% tungsten trioxide.
With funding tight and commercial lenders loathe to commit funds to either mining or reprocessing operations, Carbine Tungsten has adopted a phased approach to putting its mine back into production on a "shoestring" budget.
In 2011 during Phase 1, the company undertook an equity raising to purchase a used processing plant for AU$1.1M in order to start reprocessing tailings from past operations. The goal was to demonstrate the quality of its tungsten trioxide product for potential clients.
In 2012, Carbine Tungsten brought in a new operations and management team with a successful track record led by Jim Morgan, and for the last 17 months it has been processing feed from the 2 million tons (2 Mt) of tailings that grade 0.1% tungsten trioxide. Production has stabilized at roughly 1500 metric tonne units (MTU) per month, which admittedly is nothing to write home about, but with the AusIndustry R&D Tax Incentive, it has been sufficient for the company to operate at breakeven.
Optimizations continue, and the company is currently weighing an $800K investment to improve recoveries and adapt to the wet conditions, which would both make operations more profitable and extend the remaining eight-month life of mine (LOM) to 16–18 months.
More importantly, however, the delivery and acceptance of the company's tungsten trioxide product has cemented its relationship with offtake partner Mitsubishi Corp. (8058:JP), which has participated by means of two non-dilutive pre-paid offtake agreements of AU$400K each. To date, only one of these facilities has been drawn down, and Mitsubishi has purchased all of Carbine Tungsten's production.
This product approval has proven critical in opening the door to a return to full-scale production, albeit incrementally.
TMR: What's the next step for Carbine Tungsten?
RK: Carbine Tungsten is in the process of finalizing a roughly AU$15M funding facility from Mitsubishi, the terms of which are understandably being withheld, to progress to phase 2, in which the company expands the plant in order to process the roughly 12 Mt of mineralized waste material grading 0.075% tungsten trioxide.
The phase 2 plant expansion will be the backbone of a larger plant expansion planned for phase 3 and will incorporate x-ray sorting to improve the grade of the mill feed as well as recoveries. It will be more profitable than Phase 1. Environmental permitting is in place.
Importantly, Mitsubishi has committed to purchase 80% of Phase 2 production and 50% of Phase 3 production.
In 2012, Mota-Engil made a AU$2M investment in Carbine Tungsten toward Phase 3 for hard rock development, a feasibility study and various approvals to put the mine proper back into production. The JORC-compliant resource consists of 47 Mt at 0.13% WO3 with a high-grade zone under development that currently indicates 4.5 Mt at 0.32% WO3.
Phase 3 will see a final AU$40M expansion of the plant, and production in the vicinity of 2,650 tons per annum of tungsten trioxide would commence within 18 months of securing financing. With Mitsubishi committing to the purchase of 50% of production, Carbine Tungsten's management is currently in discussions with potential offtake partners and debt funders.
Continued strides in expanding production combined with success in securing offtake agreements from a return to full-scale mining support management's intention to minimize equity dilution going forward.
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