A taste for tungsten—Finding the sweet spot for investors

Finding the right combination of factors for an investable tungsten operation is no easy matter, says Robert Baylis, managing director of London-based Roskill. Much of the tungsten space is held privately but some publicly traded equities offer leverage to future demand growth. In this interview with The Gold Report, Baylis says investor success in this space depends on finding that sweet spot where low capital and operating costs act as the honey needed to lure end users into offtake agreements or outright takeovers.

The Gold Report: Europe plays a more dominant role in tungsten supply and pricing than the U.S. Is that likely to change in the near term?

Robert Baylis: China is the dominant player in the tungsten industry, but both Europe and North America have an impact on the market. Europe is probably more important when it comes to pricing because the main benchmark for the industry is APT, ammonium paratungstate, and one of the key reference points for pricing is the FOB EU APT quotation. Europe also has more diverse end users, whereas there are fewer players in North America.

Processing capacity outside China is mainly in North America and Europe. The major producers in the U.S., Global Tungsten & Powders Corp. (GTP), a division of Plansee SE, and Kennametal Inc., are significant players. In Europe, Wolfram Bergbau-und Hutten AG of Austria, a division of Sandvik, and H.C. Starck, a private firm, are the key participants. Russia is also an important supplier.

TGR: How did China become the world's dominant tungsten player?

RB: Prior to the 1980s most of the tungsten produced in China was used domestically and most of the tungsten processors, some of which we have already mentioned, were buying significant volumes of concentrate from a variety of mines around the world. Enter China. Chinese tungsten reserves are considerable and the cost in the 1980s to mine them was lower than at mines elsewhere. When China started exporting tungsten concentrate to Western processors in the early 1980s, a lot of the existing tungsten mines shut down owing to price competition.

In the early 2000s, China implemented export quotas to prevent tungsten concentrate from going to foreign processors in order to develop its domestic processing industry and move beyond being a raw materials supplier. Today China is the largest producer both of tungsten concentrate and intermediate products.

China's export quota went into effect in the early 2000s when the market was at its strongest and that put some pressure on supply. As such, tungsten processors in the rest of the world turned to recycling tungsten and other sources of supply. The result is that Western processors have diversified their supply chain and are now less reliant on China.

TGR: Reuters reports that China is expected to remove export quotas for tungsten and molybdenum in 2015, which could obviously lead to more tungsten and molybdenum coming to market. Please tell us about the potential impact of China's decision to remove those quotas.

RB: Under a recent World Trade Organization decision, China was told that it must remove its tungsten export quotas. And while that could have some impact, there is no longer significant reliance on Chinese exports. Had this happened in, say, 2007, the impact would have been stronger.

The impact will be on pricing, because the Chinese export quota also restricted the number of suppliers to the rest of the world. If that restriction were relaxed, the Chinese domestic APT price and the EU APT price would perhaps normalize because domestic prices in China are lower than those in the rest of the world. There may be a small drop in price in 2015, but there won't be a large drop as Chinese mines are no longer so low cost. EU APT is the main benchmark for the rest of the world. In China, companies like China Minmetals Corp. and the Ganzhou Tungsten Association (GTA) publish tungsten guiding prices for concentrate and APT. That's a good indication of the domestic price for tungsten in China.

TGR: What's the difference between APT and ferro-tungsten? Why does one garner a lot less money than the other?

RB: Ferro-tungsten is used mainly to produce harder-wearing steels for tools and the like. Like any ferro alloy, the iron content helps it bond with steel. APT isn't used very much as a product. It's an intermediate. It will become tungsten powder and get used in many different applications. Most of the trading starts at the point of producing APT. Also, APT is a relatively consistent product globally, so it's easy to set a benchmark for, whereas concentrate can vary considerably in terms of tungsten content and deleterious elements.

TGR: What investable themes should investors expect in the tungsten space over the medium term?

RB: The industry for tungsten is driven by macro-level growth. Automotive, machining and electronics are the main industries using tungsten. In the short or medium term it's unlikely that we'll see any rapid increase in demand. On the supply side, the key thing to look at is the cost position of China versus the rest of the world. China is no longer as competitive on tungsten mining costs. That means that producers elsewhere could enter the supply chain and compete with existing producers, even mines in China. Look at companies that are well supported, have offtake or can get offtake contracts with processors, and that have low operating costs.

What is the sweet spot for that group? It's difficult to finance mining projects and few capital intensive projects will get financing. The sweet spot is probably those projects that are around or less than $100 million ($100M) in capital expenditures (capex) and with all-in operating costs (opex) less than $250 per metric tonne unit ($250/Mtu) of APT equivalent.

TGR: What's your current price forecast for EU APT for 2015 and 2016?

RB: We believe that tungsten prices will remain stable in 2015. If the removal of the Chinese export quota brings more clarity between EU APT and Chinese domestic prices, then the EU APT prices could fall a little. EU APT has fallen under $350/Mtu but is unlikely to fall below $300/Mtu in the next year or two.

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