TMR: North American Tungsten's Cantung mine is one of the highest-grade tungsten deposits in the world and also a high-cost mine, mostly because of its remote location. Is North American Tungsten looking at ways to reduce its costs?
KC: Yes. It suspended operations from October 2009 to October 2010, when tungsten prices plunged. Logistically, it's a challenge. The location's remoteness will always be an impediment. Earlier this year operations were disrupted for a two-week period due to roads being washed out. Another challenge is that it is power by diesel generators.
The company invested in optimization during the 2009/2010 shutdown, and the results in the past couple quarters have been good. Last quarter, revenues were down 60% versus the previous quarter, due to a delay in the renewal of its supply contract. Operationally, average cash cost of production was $221/Mtu. We were expecting $251. Average production was up 7% to almost 90,000 Mtu. Recoveries were 79.5%. That's an impressive recovery for scheelite.
TMR: What are some other tungsten players that investors ought to know about?
KC: I don't cover Woulfe Mining Corp. (WOF:TSX.V), which has the Sangdong brownfield project in South Korea, but it looks interesting. Before it closed it was one of the larger mines in the world outside China. International Metalworking Cos. (IMC), a subsidiary of Berkshire Hathaway Inc. (BRK:NYSE.A), has a potential agreement in place with Woulfe. Pending the conclusion of due diligence, IMC will invest CA$35M into the Sangdong mine for a 25% interest. Then it will invest a further CA$19.5M in the APT plant for a 55% interest in the APT. Under the terms of the agreement, it will actually put about CA$35M in. This will cover Woulfe's investment, and Woulfe will pay it back out of sales. Under the agreement, which is not definitive, a minimum of 90% of the concentrate produced is guaranteed under the agreement with IMC. If the due diligence comes through, the project appears to be close to being financed.
TMR: How sensitive are these companies to fluctuations in the price of APT?
KC: Most companies are very susceptible to APT prices, but virtually every producer works on offtake agreements based on trailing prices, so they are not at the mercy of sharp declines in the spot prices. But companies with lower cash cost will best weather the storm.
TMR: Thanks, Ken.
KC: My pleasure.
Ken Chernin has been an equity research analyst with Jennings Capital since November 2008. Prior to joining Jennings, Chernin was a special situations analyst at an Atlantic Canadian investment dealer, where he focused on Atlantic Canadian oil and gas, utility, food retail and real estate companies. He also worked as a research associate for a Toronto-based brokerage firm and in risk management for a Canadian funds management firm. He has corporate governance experience with the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto and the Canadian Coalition for Good Governance. Chernin holds a Master of Business Administration from the Rotman School of Management at the University of Toronto and a bachelor's degree in communication from Saint Mary's University, Halifax.
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