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The market has not always been this strong. In fact a good way to tell how high a price might go for any commodity is to look back at how bad it used to be. Tungsten ticks 3 important sentiment indicators:
The first is the taste test. The very mention of the metal must leave a sour taste in some investors mouths who lost money in previous downturns. "Be careful of tungsten" has been regular feedback since we acquired Bodó in January this year owing to the market crashes of 1992 and 2015 when China dumped excess tungsten stocks onto the market.
The second is a lack of access to funding which causes endless delays in new projects. A great example is Almonty Industries' (Mkt cap CA$200 million, TSX AII) incredible Sangdong tungsten deposit in South Korea. Sangdong should be producing today, but access to debt funding has taken longer than expected with the lender requiring an incredible 110 condition precedents to be satisfied. To be honest, I would have given up after 10 but to their credit they stuck with it over two years and are now ready to draw down the $75 million facility.
The third and final key ingredient is a rarity factor in finding new world class tungsten deposits. Given that exploration for tungsten stopped after the 1992 price crash it is fair to say that nothing has been found lately.
Due to the difficulty in accessing funding we have a window where there is almost no new supply coming online in the next 12 months, just at a time when demand from semiconductor, electronics, military, oil and mining industries is strong. Strategic stockpiles of tungsten that were once in abundance in the US, Russia and China also appear to be at critically low levels and the fact that China and Russia account for 87% of global supply is causing great concern amongst western buyers.
If I was a fund manager I would buy a basket of pure play tungsten producers like Almonty Industries, Tungsten West and Group 6 Metals which I call the Big 3.
Tungsten West (Market cap £123 million, ticker TUN.L) is the most advanced with their already-built Hemerdon operation that has raised £45 million capex for front-end work on the mill to improve recoveries and grade. Hemerdon supplied Britain with tungsten during WWII and has the potential to produce up to 3,800 tonnes of tungsten a year or a little over 4.8% of new supply to the market.
King Island Scheelite, now called Group 6 Metals (Market cap $A130 million, ticker G6M.AX) owns the Dolphin project, a world class Tungsten desposit in Tasmania. As a kid my dad and I would drive past the mine on our way to the farm when it employed 900 workers. It has sat idle since 1992 and Group 6 appear to be fully financed to start construction next month for a capex of A$112 million. When it hits its stride it has the potential to produce 3,100 tonnes a year or 3.9% new supply.
Almonty Industries as we mentioned has the biggest project that could one day produce at least 4,000 tonnes of tungsten or 5.1% new supply. It last operated in 1992 and was once South Korea's biggest exporter in the 60's.
One common challenge all three projects are now facing is rampant inflation in the industry. Just as they finally get access to money, their budgets might need a closer look. Time will tell how much this impacts their start up times and ability to ramp up. The longer their mines take to hit their stride the higher tungsten will go. In reality even if everything goes perfectly to plan, a big mine takes at least 12 months to find its full potential as the mill is fine tuned and mining faces its usual challenges. While the industry waits for the Big 3, the market needs one new mine the size of Tungsten West each year just to keep up with demand.
This is why we are excited about our high grade Bodó tungsten mine. It was last producing only two years ago and has a good working mill and infrastructure. Our plan is to spin Bodó out of Pilar Gold and give it access to fresh capital to grow faster on its own. Pilar Gold will keep a stake in the group but we want to distribute shares to our existing shareholders of Pilar Gold to thank them for their incredible support over the last 3 years. Any feedback on the best way you want us to spin it out would be great.
Click on the link below for the updated presentation after the teams visit this week.
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