Location, processing and capital can make the tungsten market a tough place to be, but dwindling supply and insubstantial production indicate a coming price swing. In this interview with The Metals Report, Ken Chernin, equity research analyst with Jennings Capital, talks about why investors have ignored tungsten in the past and which companies could be a "tungsten global force."
The Metals Report: Tungsten is used in many applications—to make tools, drill bits, glass bottles, aluminum cans, steel and wire—because it has a high melting point and is very dense. It's a very useful metal, but the British Geological Survey called it an endangered substance in a 2012 report. Why is that?
Ken Chernin: Tungsten ranked second behind rare earths in the British Geological Survey's 2012 supply risk index based on a number of factors like location and concentration of production and reserves, but the report highlighted that tungsten (as well as rare earths) has lower recycling and low substitutability. The supply risk for tungsten stems from China's role in the industry. China accounts for approximately 83% of global tungsten concentrate production and about 62% of global tungsten reserves. China became a significant player in tungsten production in the mid-1980s. By the late 1990s, it had flooded the global market with tungsten causing concentrate prices to plunge below most western producer's variable cost. As a result, the vast majority of western mines were closed.
With low tungsten prices, there was very little investment in new tungsten projects in the past 20-plus years. Given that only a handful of tungsten mines operated without significant interruptions, technical experience in the Western world has essentially evaporated. Therefore, finding a team with experience working with tungsten is a significant barrier to entry. Furthermore, North American Tungsten Corp. Ltd.'s (NTC:TSX) Cantung mine in Canada's Northwest Territories is the most significant producer in terms of volume outside of China and has historically been somewhat of a swing producer, which likley didn't make the tungsten industry appealing to investors.
TMR: Tungsten is not listed on the London Metal Exchange and is traded on the spot market, which generally leads to more price volatility. What's your forecast for ferrotungsten prices for the remainder of the year?
KC: The benchmark for tungsten concentrate is ammonium paratungstate (APT), which is the key intermediate product and most commonly traded tungsten material. The APT benchmark is based on FOB Rotterdam. Tungsten demand is correlated with growth in gross domestic product (GDP). While Europeans' consumption of tungsten is down, Europe only accounts for 12% of global consumption. China and the U.S. account for 55% and 13%, respectively, and their two economies are doing much better. According to Bloomberg, consensus estimates for growth in GDP for China and the U.S. averages 8.03% and 2.50%, respectively, for 2013, 2014 and 2015. The consensus estimate for Europe's growth in GDP during the same period is only 1%. Therefore, there is certainly an argument that APT prices are artificially low and should be higher than the current average of $350/metric ton unit ($350/Mtu), which is up 8.5% relative to the end of 2012.
TMR: This time last year we were looking ahead to a boom year in terms of tungsten pricing. Then the bottom fell out of the market. How did that happen?
KC: I believe that this was largely the result of end users stockpiling tungsten concentrate when prices were rising. In the latter half of last year, they depleted these stockpiles.
TMR: This is a nebulous market, mostly defined by end user agreements. What do investors need to know about it?
KC: As in any mining story, grade is very important. I also like good logistics and supporting infrastructure. But tungsten differs from other industrial metals and minerals and can be a tough metal to process. In fact, it is so specialized that experience with any other metal or material is not transferable. Furthermore, there are primarily two minerals that contain tungsten—wolframite and scheelite—and each requires different milling techniques. Therefore, having geologists and a metallurgist who have significant tungsten specific experience is key.
TMR: Which costs more to process, a wolframite deposit or a scheelite deposit?
KC: Wolframite generally requires a simpler process. The most significant difference between processing wolframite versus scheelite is that scheelite necessitates froth flotation. Flotation is essential in processing scheelite because the scheelite is particularly brittle, and the crushing circuit results in a significant portion of the scheelite crystals being reduced to micro particles, which are too fine to be recovered in a traditional gravity separation circuit.