Tungsten and fluorspar may sound like dry subjects, but Jennings Capital Analyst Ken Chernin makes them positively magical. In this Critical Metals Report interview, Chernin transports us from Morocco to the dazzling Newfoundland coast, to "Tungsten Town" in Northern Canada. Along the way, we'll meet visionary leaders who work miracles with project logistics, winning fiercely loyal talent in the process. The two critical materials parallel the rare earths investment thesis, but Chernin's picks are more than a bet on shifting Chinese policy – they are compelling stories involving a war metal-turned global growth staple.
The Critical Metals Report: We're seeing bubbling interest in fluorspar, or calcium fluoride, and tungsten. Let's talk a little about their uses.
Ken Chernin: Tungsten is historically known as a "war metal" because it was primarily used in ballistics. Demand and pricing followed the historical path of conflict. In recent years, the biggest market has become something called cemented carbide. It is used primarily in specialty tools that need to withstand excessive heat and require extreme durability, like drill bits for oil and gas and mineral drilling. Right now, tungsten's demand is closely linked to gross domestic product, especially with China. The reason I like tungsten is I see it changing from a demand story to a supply story.
As for fluorspar, it is used throughout the world, primarily by the chemical industry, for refrigerants and foam products and in the manufacturing of aluminum, Teflon, refined petroleum products, glass and medicine. There are virtually no substitutes for many of its uses, and it is an essential ingredient in hydrofluoric acid.
TCMR: Are you saying you see potential supply problems with tungsten?
KC: Yes, I do. Tungsten, when I first looked at it, read like a rare earth elements (REEs) story in that 86% of global supply came from China. In REEs, it's around 95%. The Chinese government seems determined to restrict exports because it has made a significant investment in downstream, higher-margin industries using tungsten. Therefore, it is determined to keep what resources it has for itself.
TCMR: Just like the REEs.
KC: Exactly. I found in my research that only three tungsten mines outside of China have operated without extended closures in the past 60 to 70 years. As a result, there was an enormous loss of tungsten-specific knowledge. Tungsten mining and processing is very unique. Today, companies with brownfield or greenfield projects will likely have trouble finding the right people.
Another dynamic is that the higher-grade deposits have been depleted. A large proportion of the new projects are very low grade. Some are 0.09% grades, which is approximately three times lower grade than some tailing recovery projects.
TCMR: China is suffering from all the environmental impact of its mining activities over the years. We certainly would like to see more attention paid to cleaner projects.
KC: Absolutely. That's a very good point. China has moved to close smaller, less efficient tungsten as well as fluorspar mines and has implemented policies aimed at consolidating both industries. That said, in late January 2012, the World Trade Organization (WTO) confirmed its findings from a mid-2011 decision that China's export restrictions on several industrial raw materials, which included fluorspar, were in breach of WTO rules. Although China claimed that the export restrictions on these industrial raw materials were justified for reasons of environmental protection or conservation policy, the WTO did not agree. The complaint was brought by the US, Mexico and the European Union. In March 2012, the US, the European Union and Japan launched a new WTO dispute against China's export quotas on tungsten, rare earths and molybdenum, and China is again citing environmental and sustainability concerns.
TCMR: Can North American investors participate in the tungsten story?
KC: Absolutely. We published a research report on Sept. 26 on three publicly traded producers. They're all listed in Canada. They're all in production. Tungsten prices have dropped since a year ago to about $350 per metric ton unit (mtu) from $450/mtu (which is 10 kilograms). If we get another sudden spike, these companies benefit immediately. All three companies' contracts are tied to the market price of ammonium paratungstate (APT), which is the main tungsten intermediate.
TCMR: What are the names of those companies?
KC: Almonty Industries Inc. (AII:TSX.V), with a mine in Spain; Malaga Inc. (MLG:TSX), with a mine in Peru and North American Tungsten Corp. Ltd. (NTC:TSX), with a mine in the Northwest Territories of Canada.
North American Tungsten is the largest tungsten mine outside of China and the only tungsten mine in North America, so it has strategic importance. However, in my mind, its remote location presents a challenge. I refer to the company as somewhat of a swing producer, as it has been closed in the past owing to low tungsten prices.