so... whats the go with wlf(o) ? - summary

Discussion on the WLF thread's been fairly muted since the release of the DFS. Understandably so given many had hoped and envisaged a big share price spike following a positive DFS. So whats the go with Wolf?

Market Reaction?

Don't be too surprised at the "market reaction" to the DFS, and definitely don't let it fool you into thinking Hemerdon isn't a good project - from my experience its usually the "in" stocks surrounded by high amounts of speculative money and hype that see big emotional surges on announcements of this type. I've seen solid companies get sold off hard on fundamentally positive news. As an example: Boart Longyear in 2010 when it announced its first profitable period since the beginning of the GFC was sold down very hard initially... however it has rallied hard since then. I should know I was one of the chumps that sold on announcement when it started to get sold down thinking something was amis - I would have made a lot of money if I had stuck to my research. "Buy the rumor, sell the fact" is a king of investing cliches for a reason - because more often than not it in fact pans out that way.

The other thing to keep in mind is that many were sitting on quite tidy profits around the time of Wolf's DFS release - this stock has made impressive gains of late and if you look at the price and volume action even before DFS release you can clearly see distribution. This distribution began before the DFS came out.

Finally in this regard, we are dealing here with a particularly illiquid stock, which accentuates SP fluctuations - you know the way an illiquid stock runs extra hard on the way up? double edged sword - same goes for the way down.

So what of the DFS?

I'm no geologist, engineer or project manager. However even I can see a few factors that make this DFS solid to my mind. I'll add from the outset though that yes, the figures aren't as outstanding as many of us had hoped.

First, the DFS uses very conservative assumptions: if the Tungsten price were for some reason to be decimated tomorrow and fall by 25 or 30%, we have a project with a NPV that equates to $1.20 per share. That is to say, even if Tungsten demand takes a significant blow, we're at $100m or more NPV. Going on current Tungsten prices we're looking at an NPV that equates to around $2.00 per share. (these figures decrease proportionately to dilution). Similarly there is no optimistic assumption as to extensions of permitting (hence 9 year mine life) even though this is likely a given if the operation runs well. In other words in my view the DFS base case is getting close to a worst case scenario that shows that even in poor conditions the project is viable.

Second, and this point may seem facile so I'll be brief, the DFS is extremely comprehensive in my opinion - good, thorough disclosure. All variables are explored in detail in terms of their impact on profitability, and in particular there is a high focus on risk identification and management. I've seen DFS's with far less detail which, to be honest, don't appear particularly transparent or inspire much faith in the management.

So whats the go with WLF? This is what makes WLF/O stand out from the crowd in my opinion-

1. Tungsten (demand/supply): its essentially no different than (H)REE's a la Lynas et al, in that it is a strategic metal. It is a very rare metal that to a large extent cannot be replaced in many vital industrial and military applications, and in fact often to the extent that it can be replaced only Molybdenum and the like will do. Probably I don't need to mention that the Tungsten market is progressively tightening and that there is little supply outside China - a situation which will deteriorate further as Chinese domestic consumption is steadily increasing, which will constrain their exports.

2. Lack of natural competitors - all other potential ASX listed Tungsten plays that I've looked at have a miniscule resource compared to WLF and therefore project economics are poor. As we know, 4th largest Tungsten resource known, and perhaps (if it pans out) the next best Tungsten supplier outside China.

3. Super tight Registry - WLF has an almost miniscule amount of shares on issue. This is very surprising for a resource explorer / wannabe producer that has survived the GFC - most had to dilute the hell out of their registries to keep afloat. Furthermore, we have TWO cornerstone investors (Resource Capital @ 17%, Traxys @ 10%) which is more than the vast majority of companies in WLF's development stage can boast. Most can't manage even ONE. Amongst other benefits of this structure, it reflects strong institutional confidence in the project and recognition of the strategic importance of Tungsten.

4. Partnership with Traxys - apart from helping to secure supply contracts as already agreed, it is entirely possible that Traxys (a company with US$4.5billion annual turnover) will provide some cash upfront for WLF's capex to be repaid later in WO concentrate. In my mind this is a strong posibility (and is common in companies at WLF's stage of development) considering Traxys is a cornerstone investor. This will perhaps be in addition to traditional financing/bank loan. This would minimize the need for dilution of the registry down the track and thus protect shareholder value.

Those are my thoughts on the DFS, recent price action and generally about WLF. A bit of a vent on what I've been pondering on post DFS. WLF meets many strong investment criteria as pointed out above, IMO most importantly it is a company with little natural competition and a super tight registry with strong insto support. Of course it's very much speculative at this stage, but if the company can manage to minimize dilution (Traxys cash/offtake deal will go a LONG way here) there's great returns to be made in what is a strategically well positioned company.