TORONTO (ResourceInvestor.com) -- In the past few decades, tungsten prices have been up and down like a toilet seat at a mixed party. According to the International Tungsten Industry Association, since 1950 tungsten prices have "fluctuated between a nadir of $10 per MTU in 1963 and a peak of $175 in 1977." This all changed in 2005. Since January tungsten prices have moved from the $60 range to break the old high, at the very least in nominal terms, with recent prices quoted at about $220 per MTU.
Investors should note that tungsten is not traded on an exchange, such as the London Metal Exchange (LME), and the only price information that is available globally is published by the London Metal Bulletin and is based on information elicited from producers, consumers and traders.
Tungsten has many diverse commercial, industrial, and military applications. The most memorable for the electrical and engineering layman would be the light bulb filament. The largest use, accounting for more than 50% of demand is in cemented carbide - wear resistant materials used by the metalworking, mining, oil, and construction industries. Steels and alloys represent another 25% of global tungsten consumption and tungsten is found in tool, stainless and full alloy steels, as well as super alloys. Mill products manufactured from tungsten metal are mainly used in the lamp industry and for electrical and electronic contacts, and make up about another 8% of consumption. Chemical applications and products, such as catalysts and pigments, account for the remaining 9% of tungsten demand.
Pricing, Supply and Demand
The wildcard in terms of tungsten pricing has always been the Chinese who control roughly 75% of the world's reserves in the metal, and supply about 85% of world consumption, currently running roughly 50 thousand tonnes per annum. The Chinese and to some extent the Russians have pushed the price down in the past by flooding the market with cheap tungsten.
On that front, however, things appear to have turned a corner. The Chinese are no longer exporting tungsten, but are focusing on finished product tungsten goods. Also, China recently took measures to curb tungsten exports in order to boost supply inside the country. Reuters recently reported that the Chinese need to keep more of the metal to make cemented carbide, a hard material for cutting tools.
Further, a crackdown on illegal private mines is underway and it is believed that Minmetal, the large Chinese conglomerate that recently took a run at Noranda, is consolidating tungsten mines and now controls something in the order of 70% of tungsten production in the country.
All of this adds up to what some analysts believe is a supply shortfall of around 7,000t by 2007 that will most likely have to be met outside of the PRC, even if it is to be fed back into the maw of that economic juggernaut. Presently, there are few major tungsten mines in the free world with the majority of production coming from Canada, Portugal, Austria, Bolivia, and Russia; depending on your definition of 'free'.
Publicly Listed Tungsten Vehicles
North American Tungsten [TSXv:NTC] controls the Cantung and Mactung tungsten mines in the Yukon which collectively hold 15% of the world's tungsten reserves - or the lion's share of reserves outside of China. These deposits were discovered by Canada Tungsten whose share price skyrocketed from about CDN$1 to CDN$40 in the 1970's on the back of what were then new highs for the metal.
The company has reconstituted itself after recent financial difficulties and is now cashed up and debt free. NTC hopes to begin production of an annualized 400,000 MTU of tungsten this August. Cantung will produce tungsten at about $60 per MTU and the company told Resource Investor that "there have already been expressions of interest to supply almost three times what Cantung can produce." Furthermore, the company is structuring supply contracts with a 12-month initial term and a floor price of $100 per MTU. NTC will then offer buyers a 20% discount on all tungsten sold above that price, which means that if one takes the current tungsten price of $220, the company would receive almost $200 per MTU. It does not take a rocket scientist to figure out the level of cash flow that will be thrown off (hint: $55 mil). NTC's present market capitalization is only CDN$75 million!
Tiberon Minerals [TSX:TBR] with a market capitalization of CDN$100 million is 77.5% owner of the Nui Phao Tungsten/Fluospar deposit in Vietnam. The company is presently completing a feasibility study on the project which it should have by the end of June, along with a mining license from the Vietnamese government. Present projections are for an open pit mine that would cost $210 million to build and would be the world's largest tungsten producer with annual production of 431,900 MTU of tungsten at a super low cost of $13 per MTU when copper, gold and bismuth byproducts are factored in. Fluospar production from the mine is not used in that calculation, otherwise the cost to produce an MTU of tungsten would be negative.
Tiberon President and CEO Mario Caron told Resource Investor that the production timeline would see "startup at the end of 2007 with delivery of tungsten to clients in the first days of 2008." The company is working on an offtake agreement with an initial term of 5 years, which Caron said he hopes to have finalized in the near term, and which would give Tiberon full upward price participation in tungsten going forward. It appears that at today's tungsten prices, Year 1 cash flow from the production of the tungsten alone is worth nearly the entire market capitalization of the company.
Despite a few false starts, Caron believes that fundamentals in the tungsten market generally are more favourable this time, and the current run appears to have legs.
Chinese supply-demand can be fickle, and the tungsten market has had a bumpy ride as a result, but indications are that, as with most other commodities, the Chinese are eating up inventories and may switch from being net exporters to net importers. If this is the case and there is not a large stockpile just around the bend waiting to blindside the market, tungsten prices should remain around current levels.
Despite impressive looking charts, the share price of publicly listed tungsten vehicles like North American Tungsten and Tiberon Minerals do not factor in the enormous profits that will accrue at $220 tungsten, and investors looking for a speculation still have time to board the proverbial train.