A taste for tungsten—Finding the sweet spot for investors

TGR: How would that compare with recent years?

RB: The peak was in 2011 when the average price was about $425/Mtu. Even as demand was increasing sharply in the mid-to-late 2000s, prices were only around $250/Mtu. The current highs are above the peak for most commodities, which came around 2007–2008.

TGR: The strongest year of the last seven was 2011, with about 95,000 tonnes of tungsten consumed. How long before we rise above that number?

RB: Maybe next year. It may take another couple of years to exceed 95,000 tonnes but we're not seeing anything exciting on the growth front.

TGR: A large amount of the supply comes from recycling. Is that putting a lag on pricing?

RB: The use of scrap is already high, especially in North America and Europe, and has probably been built into current pricing. Scrap is unlikely to have a significant impact on prices going forward.

TGR: China's Fanya Metal Exchange has been an active tungsten buyer this year. Do you expect that to continue? What will the net effect be?

RB: Tungsten stocks have been growing quite quickly over the last couple of years; somewhere close to 20% of the total market is stock on Fanya. These suppliers can get 80% cash for delivery onto the exchange whether that material is used or not. It's a win-win for producers, a bit like the London Metals Exchange (LME). The difference is that unlike the LME, Fanya stock levels haven't had a big impact on price. Most metals on Fanya, certainly the rare metals on the exchange, have increased in price because it is an investor-driven market. I'm not sure that tungsten is as investable as other metals on Fanya like indium or gallium or bismuth. The tungsten market is much larger and lower priced.

TGR: How is Fanya different from the LME?

RB: The idea behind an exchange is that it provides more transparency into a market. Then firms can start setting up hedging and effectively derisk their supply chain. Fanya is a little bit different. Fanya doesn't have a large amount of liquidity like the LME, so there isn't a lot of material going in and out of the warehouse. It's more akin to precious metals on the purchasing side, but, instead of gold, investors are buying indium or other rare metals that may have an attractive growth outlook. Much of the consumption is normal people buying small volumes of metal as an investment. That's driving demand.

TGR: Doesn't that ultimately bode well for tungsten given that investors are buying with the aim of making a profit?

RB: Possibly, but the industrial consumer isn't going to be supportive of rising prices. If the Fanya exchange causes tungsten prices to rise, as has happened with some other metals, you will probably see less business happen in the tungsten market between suppliers and end users. It might have a negative effect.

TGR: You recently produced a report called "Tungsten Market Outlook 2014." What about the market stood out as you put the numbers together?

RB: The main picture is one that is echoed in other commodities. Much of the perceived demand growth shortly after the global economic downturn, say from 2010 through 2012, wasn't actually consumed. It was mostly restocking. Rather than a significant increase in consumption, there was a rebound in demand. A lot of companies geared up into what they thought was fast demand growth, but actually demand growth has been quite slow. Since 2012 or so there has been a decline in demand as companies use up the material that they stockpiled. Supply has overshot consumption.

TGR: But that is slowly changing.

RB: Yes, the market is balancing out. Going forward we will see better balance in the tungsten market. We are now seeing steadier growth in consumption and suppliers are gearing up for a steadier growth outlook.

TGR: So the slow, steady climb has once again begun and a number of tungsten projects are waiting for financing in a difficult market. The ideal path is to have an offtake partner with deep pockets. Are there some examples?

RB: The most successful project of recent years has been Wolf Minerals Ltd.'s Hemerdon tungsten mine in the U.K., where 80% of production over at least five years will be sold to offtake partners GTP and Wolfram Bergbau. Both are major processors, and connected to carbide tool manufacturers (Plansee and Sandvik). Hemerdon is a brownfield site that was operated both before and after the Second World War.

The main reason the project got the green light is that the supply of tungsten from the U.S. defense national stockpile will run out this year. The stockpile has been providing some 2,000 tons of tungsten concentrate to the global market for about 10 years. GTP and Wolfram Bergbau needed an alternative and Hemerdon was the most advanced project, and the necessary capex wasn't a huge obstacle. Of course, the offtake agreements helped enormously. Now the question is: how much more material do they need? There is plenty of concentrate supply out there. That's the problem for any company trying to develop a project. How do you fit your product into a market that is already well supplied?

TGR: What are other ways tungsten projects get financing?

RB: From time to time larger trading companies will invest into mining projects to secure supply, but they may not have a guaranteed offtake. They may sell it in the open market. Another path now is private equity. Private equity is becoming more important in mining and with better commodity expertise private equity is likely better positioned to determine a good project from an average one. But even private equity is unlikely to put money into a project without a buyer for the material.

TGR: Are there other companies that are financing through offtake agreements?

RB: Carbine Tungsten Ltd., a smaller producer, received money from Mitsubishi Corp. in Japan to finance a tungsten recovery operation in exchange for a guaranteed supply of tungsten. The processors help get some projects started.

TGR: Will Carbine need further financing?

RB: The company is producing tungsten from stockpile and tailings material. It has 12 million tons (12 Mt) of stockpiled material and it has received $15M from Mitsubishi to process it.

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