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  • Be Bold And Seek The Sizzle, Says VSA Capital's Paul Renken

    It's time to be bold, says Paul Renken, senior geologist and analyst with London-based VSA Capital. He seeks the "sizzle," or the narrative, in mining equities because the sizzle moves the story. But Renken remains selective and likes to see a significant discovery or acquisition that provides a clear path to investor returns. In this interview with The Mining Report, he recommends a veritable laundry list of companies in numerous commodities operating around the world.

    The Mining Report: You're a survivor. Mining investors want to know what they will need to survive 2015. What's your message?

    Paul Renken: Always know how much you can afford to risk in any particular situation, but it's probably the time to be bold simply because the sector has done worse than anyone has expected over the last year or so. That is essentially forcing out the weak players.

    TMR: Weak players?

    PR: Weak players are those looking for a short-term turn in a particular stock in order to make a short-term gain. There just hasn't been a significant move upward in virtually any of the commodities. In fact, just the opposite has happened. We've had a significant selloff.

    TMR: How should investors play this market? Are you seeking specific situations across all commodities?

    PR: We're being quite selective. For instance, the difficulties in the iron ore market are widely known-iron ore just dipped below US$70/ton-but there are some specific circumstances that warrant a closer look, simply because they were hit early and had the opportunity to fall farther than their peers. The firm is not particularly bullish on iron ore going forward but we expect that the price will be somewhat higher next year, so there is going to be a modest recovery.

    TMR: Are other commodities showing favorable support levels in this market?

    PR: We think that there is going to be continued strength in diamonds and colored stones. That has been a good market this year for equity investors as auction prices have strengthened. The growth market is in Asia for polished stones, both colored and white stones, diamonds and colored gemstones like rubies and sapphires. And that seems to be continuing.

    Another commodity that we like here is lithium. The confirmation that Tesla Motors Inc. (NASDAQ:TSLA) will build the "Gigafactory" in Nevada definitely strengthened the outlook for lithium. And other automobile manufacturers are attempting to make electric and hybrid vehicles both popular and commercially profitable, too.

    TMR: Gemstones and lithium. Any others?

    PR: We also see some good support on a longer-term basis for tungsten, simply because the market hasn't been flooded with too much material, unlike what has happened in iron ore and oil.

    TMR: Please outline your investment thesis for junior mining companies in this market.

    PR: We want to see sizzle in the story. It could be a deeply discounted cash flow position that the company is either acquiring or that has been inappropriately discounted. Some investors are also looking for a dividend yield that's relatively secure even though the commodity that the company produces has witnessed some weakness. Another angle is a significant discovery or an acquisition that was made via exploration drilling through a deal. These kinds of sizzle will help move these stories because there are too many junior companies where the project is going to stay where it's at without something to sell it. You also have to have confidence that the story will come to fruition rather than just a blind punt on the gambling table.

    TMR: What are some telltale signs that something is a legitimate story?

    PR: One thing is a clear timeline that is achievable for what the company intends to accomplish. That could be how long it will take to get a permit or how much money it will take to finance a portion of the exploration or development. Those two things let us know that management has a good understanding of the project as it develops. Another one is three-dimensional evidence that there is continuity of high-grade mineralization. An additional good sign is a simple and clear path to how a potential investor would make money because complications essentially make stories much more difficult to believe.

    TMR: How many mistakes are you willing to forgive before you sell?

    PR: If I were an investor in a project, I would have a clear vision as to how much I was prepared to tolerate. I could probably tolerate only one or two errors. But if I owned shares and it becomes clear that the reason I initially invested is not going to happen right away, I would be prepared to exit a position after the first mistake.

    TMR: Are you more willing to discount delays in a market where money is difficult to find?

    PR: The short answer is no. The reason is that most investors are not solely invested in natural resources. They have more than enough other opportunities to risk their capital. That's part of the problem with the sector. Equity performance has been so poor across natural resources for so long that the money has exited to less risky places.

    TMR: Let's start with gold. Gold has bounced up from its bottom of US$1,140/ounce [US$1,140/oz] in early November to as high as a little above $1,230/oz in early December. Please give us your thoughts on gold's fundamentals and how those numbers will influence its performance in 2015?

    PR: At the beginning of the year VSA Capital thought that gold would spend some significant time between US$1,100/oz and US$1,200/oz, but not below that level. We're still working on our forecast for 2015; we expect some modest improvement, but we don't see any big move to the upside-given what we see in current economic and trading activity. There is, however, a tremendous sense of concern-I wouldn't call it foreboding but there is concern-about what is going to happen when the U.S. starts to implement rising interest rates and, in particular, what will happen with the bond market because institutional money is heavily vested there.

    By all measurements the bond market is significantly stretched. If everyone decides to leave bonds and head for the exit at the same time, not everybody is going to get out without significant losses. The U.S. Treasury market is so big and liquid that most of the money will go there, but some of it could go into gold and silver. Even small percentages of the bond market money moving to gold and silver would cause a significant price jump.

    TMR: What are some gold-focused equities that you're following?

    PR: We follow quite a few gold stocks for various reasons. Randgold Resources Ltd. (NASDAQ:GOLD) is a producing stock that is considered a bellwether for gold. It only produces gold, so it's a clean measurement as to the equity movement with gold prices. It's widely followed.

    TMR: Will silver rebound in 2015?

    PR: Silver has been anything but steady over the last couple of months, with a rather drafty fall from US$21/oz all the way down to US$14/oz. It is now around US$17/oz. The real disappointment is that worldwide industrial manufacturing activity is not stronger because silver is largely an industrial metal. The silver-gold ratio is into the 70s-something we haven't seen for years. Silver should outperform gold if manufacturing activity improves because the uptake on ounces produced would be far better. I expect silver to be more volatile than gold as it moves into the $19-21/oz range again next year. That would be a 20% gain.

    TMR: What are some silver-focused equities VSA is tracking?

    PR: We regularly follow Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE]. It's one of the stocks that institutions tend to have in their portfolios, particularly Mexican institutions. By the same token, it's also a stock with consistently falling grades in its overall production profile. We want to see how that affects its margins.

    Another stock that we follow quite closely is Endeavour Silver Corp. (NYSE:EXK). It has a $280M market cap but has witnessed declining margins in 2014 as a result of the declining silver price. It is well-run company, though, so we think those margins will improve.

    Also, Fortuna Silver Mines Inc. (NYSE:FSM) has outperformed its production guidance in the two recent quarters. We think investors should take a look at it.

    TMR: What's the sizzle with Fortuna?

    PR: It caught my attention because it exceeded its production guidance on its operations, as well as its forecast margins between cash costs and all-in costs. We want to see companies that are improving their economic fundamentals on a production basis and don't have to worry about making those improvements by selling assets.

    TMR: When we talked with you in the summer, we discussed tungsten and its market fundamentals. You said earlier that you see modest long-term growth in tungsten prices.

    PR: Earlier this year the World Trade Organization ruled against China's export tariffs on molybdenum and tungsten, and we are uncertain how the Chinese will react. Some commodities like tungsten are highly dependent on one particular country's production or export activity. In this case, it's China. China imposed tariffs because it wants to make sure that it has as much tungsten and molybdenum as necessary to support domestic manufacturing. We doubt China would flood the market with tungsten as it did in the 1970s because the market dynamics are very different. The current ammonium paratungstate [APT] price is around US$350/metric tonne unit [$350/Mtu], which is fair. We think that the tungsten price overall is going to stay steady, if not rise in tandem with inflation in 2015.

    TMR: Can most of the suppliers make money at $350/Mtu?

    PR: Yes, most of the established suppliers can make money at that price.

    TMR: And, finally, let's talk about lithium. Should investors buy into the hype surrounding the lithium necessary for the growing market for lithium ion batteries?

    PR: There is an awful lot of hype and the hype has gotten ahead of what is actually happening. We recently published a lithium piece that determined that the economies of scale would finally develop in the electric vehicle market when at least 0.5-1M vehicles were produced per annum. Tesla is building its Gigafactory in Nevada to produce enough batteries for 0.5M vehicles, so it is definitely trying to produce enough batteries for the commercial electric vehicle market to take off. The Chinese have been locking up lithium deposits in order to be sure that if the market does reach critical mass, it will be the Chinese automakers that have secure lithium supplies for these batteries.

    TMR: Are you following some graphite companies?

    PR: Yes. One is producing now out of Madagascar on a small scale, StratMin Global Resources Plc [STGR:AIM]. It has a £7M market cap.

    TMR: What's one thing we should watch for in 2015?

    PR: You can be quite certain that commodity prices are going to be more volatile than they have been this year, particularly if we start seeing changes in U.S. interest rates, because institutional money will look for places to allocate money. We're talking about billions and billions of dollars moving from one asset class into another.

    TMR: Thank you for your insights, Paul.

    This interview was conducted by Brian Sylvester of The Mining Report and can be read in its entirety here.

    Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.

    Want to read more Mining Report articles like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit The Mining Report home page.

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Fortuna Silver Mines Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Paul Renken: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship, or had in the past 12 months, with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
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    Dec 16 4:09 PM | Link | Comment!
  • Two Countries You Might Be Surprised To Find Hallgarten's Chris Ecclestone Likes Now

    How tight is money in the mining industry? So much so, according to Chris Ecclestone, mining strategist with Hallgarten & Co., that juniors are punished for resource estimates because the market believes they can't afford to develop their properties further. In this interview with The Gold Report, Ecclestone explains that canny juniors are choosing past-producing properties, which boast dependable resources estimated by majors and already existing infrastructure. And he names two current gold producers he believes are woefully undervalued.

    The Gold Report: Gold rose to $1,200 per ounce [$1,200/oz] Nov. 21 and has stayed close to that price since. Is this evidence of the end of the bear market?

    Chris Ecclestone: It's evidence of a bump upward in gold. The rise has not been so robust that one would be persuaded the tide has turned.

    TGR: What's your opinion of the hypothesis that there is an organized shorting campaign to bring gold down to $1,000/oz?

    CE: I don't believe it. Gold is being pushed around on pretty low volumes by buyers and sellers. The Indian trade isn't what it was. Western buyers are just not there anymore, particularly large speculative buyers.

    TGR: The Toronto Stock Exchange has had recent highs led by mining stocks. Are we seeing a recovery in precious metals equities?

    CE: There's an outsized correlation between the gold price and gold equities. Gold will drop 5%, and then gold equities drop 20%, but it's not so sticky on the way back up. Investors have seen over and over again that being a first mover on gold equities is not worth the effort.

    TGR: Why has the gold price fallen so precipitously?

    CE: People are just not feeling inflationary at the moment. Quantitative easing [QE] is being tapered, and the money supply apocalypse has not occurred. Exhaustion eventually sets in when the same old argument keeps being trotted out and proved wrong.

    TGR: What about the trillions of dollars in new money created since 2008?

    CE: Much of it is being sterilized and recycled and has gone off to other places. The gold bulls talk about the printing presses being run endlessly, but what has happened since 2008 in the West is not comparable to what happened in Zimbabwe in 2008 or Germany in the 1920s. This isn't funny money. It's still owed to the government and will have to be repaid.

    QE consisted of the U.S. government loaning money to banks. The banks loaned it to hedge funds that then put it into emerging markets. One of the reasons why markets like Brazil have been so floppy over the last year is the carry trade is over, and the money is coming back to the original borrowers. They, in turn, are flipping it back to the Federal Reserve or into the U.S. equity markets, which after a brief hiccup are again ebullient. At least it's not going into the U.S. property markets again, which is a good thing because that bubble is not with us anymore.

    TGR: You stress the importance of mining jurisdictions. Which jurisdictions once thought mining friendly are no longer so?

    CE: Chile was a great favorite for years, but it now has some black marks against it. Yamana Gold Inc. (NYSE:AUY) has been hit with a new levy described as a noncash tax charge. How can you have a tax charge that's noncash? It either is or isn't, particularly when levied retroactively.

    Barrick Gold Corp.'s (NYSE:ABX) problems with Pascua-Lama are much more than a simple capital expenditure [capex] blowout. Capex exploded because the process took a lot longer than expected on the Chilean side, not the Argentinean side. Then there's the water problem. Many Chilean projects at whatever capex cannot get water because it is needed at lower altitudes to service the urban areas.

    Mexico has been a happy hunting ground for Canadian miners over the last 10-15 years. When I was based in New York, investors would ask about the cartels. They were told not to worry because they weren't active in mining areas, only in Tijuana. That's now been dispelled as a myth.

    TGR: How is the mining industry dealing with this threat?

    CE: I went to a presentation recently where a company said it was employing people to maintain good relations with the cartels. This sounds like skating on the thin ice of the international anticorruption rules. The miners are not paying off the government but paying off some gangsters threatening to blow up their mines or roads unless they employ some of their factotums as a security force.

    Then there's the issue of royalties. We heard for years that they would never rise in Mexico. Well, after 10-15 years of the country being open for mining, the government had not realized the increased revenues it expected, so it decided to squeeze more juice out of that lemon.

    TGR: Which jurisdictions have become more mining friendly?

    CE: One that potentially could surprise Canadian miners is Bolivia. It has been in the dog house for a long time because of one or two incidents. Another is Cuba. Frankly, Cuba has been mining friendly, it's just that people haven't been willing to admit that companies like Sherritt International Corp. (OTCPK:SHERF) [S:TSX] have had a pretty good run there.

    TGR: What type of companies are likely targets?

    CE: Juniors with companies with unfinanceable projects, basically anything over $500M. A good example is Chesapeake Gold Corp. (OTCPK:CHPGF) [CKG:TSX.V] and its $4 billion, 18.5 Moz gold Metates project in Mexico. Goldcorp Inc. (NYSE:GG) owns about 9% of Chesapeake, and only Goldcorp has the money to finance Metates. This is too rich for Agnico Eagle Mines Ltd. (NYSE:AEM) or even Yamana Gold Inc. (AUY).

    Majors such as Goldcorp, Newmont Mining Corp. (NYSE:NEM) and Barrick Gold need to plug holes in their future production, and only companies of this size can realize projects such as Metates.

    TGR: The majors have their own bottom line problems. How can they pay to take on new assets?

    CE: I think they'll pay with shares. Their takeover targets will be able to justify cheap sellouts to their shareholders by pointing out that cash payouts would be derisory, and the buyers will not want to dilute their shares; they need their cash to develop their new properties. They can tell the shareholders that by taking the shares, if the acquisition works out, one plus one will not equal two but rather three, four or five.

    With regard to base metals takeovers, I believe that the zinc story is going to lift off. There are now no properties in the development stage owned by small companies. That means the projects that will be acquired by the majors such as Lundin Mining Corp. (OTCPK:LUNMF)[LUN:TSX] will be in much more formative states.

    TGR: Do you see base metal prices rising in the near term?

    CE: I think nickel could go up despite the Chinese putting on a brave face about the Indonesia shutdown. If copper trades above $3 a pound [$3/lb], it's a good place to be. Everybody's profitable. I'm really bullish about zinc, which I think could break through $1.20/lb in the first half of 2015 and then perhaps rise above $1.50/lb. That would be a pretty massive move from the $0.80/lb where it was wallowing a few months ago.

    TGR: Gold and silver, where do you see them going?

    CE: I wouldn't be surprised to see silver remaining between $15/oz and $18/oz. I don't see gold going much above $1,300/oz in the near future. Declining production will underpin the future gold price. The gold production trend was up slightly over the last decade, but now the big mines in South Africa are pretty much finished, and it's much harder to get grade in new gold mines.

    TGR: You've written that brownfields projects "trump" greenfields projects. Why?

    CE: Basically the work's been done already. We know that there's something there and that it's mineable. In many cases, juniors don't have the money to pay for preliminary economic assessments [PEAs] or preliminary feasibility studies [PFSs]. And if they don't have the money for that, then what's the point of drilling to make the resource bigger? In any case, we all know the market tends to hit stocks that come out with larger resources because that indicates the companies must move on to PEAs and PFSs they can't afford. Those projects are stuck.

    TGR: Is there a way out?

    CE: A number of companies have recently been looking at old mines with historic resources. These used to be treated like the old aunt hidden in the attic. Now the attitude is even though they are not NI 43-101 compliant, these resources were calculated to a very high standard by companies like BHP Billiton Ltd. (NYSE:BHP) and Noranda. We're not talking about Bre-X here. If the historic resource is reliable, why shouldn't companies mine projects on that basis?

    Another advantage of historic resources from shuttered mines is that they were calculated day-by-day as the mine moved forward. These are not theoretical blobs supposedly under the ground. These are real deposits that were really being exploited. These mines have ramps and adits, all sorts of infrastructure. Even if all the equipment has been removed from aboveground, having roads, electricity hookups and water constitute significant savings that you just do not get with greenfield properties.

    TGR: Heading into 2015, what should investors in the gold space be looking for in companies?

    CE: Production and past production. Production is kingly, and past production is princely. Anything else, stay away.

    TGR: Chris, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Christopher Ecclestone is a principal and mining strategist at Hallgarten & Company in New York. He is also president, CEO and a director of Geodex Minerals. He was previously head of research at an economic think tank in New Jersey, founder and head of research at the Buenos Aires Trust Company and a corporate finance and equities analyst and freelance consultant on the restructuring of the securities industry in London. He holds a degree from the Royal Melbourne Institute of Technology. Ecclestone is an author at InvestorIntel.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher ofThe Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Goldcorp Inc. is not associated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Christopher Ecclestone: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Dec 15 3:01 PM | Link | Comment!
  • Robert Baylis: A Taste For Tungsten—Finding The Sweet Spot For Investors

    Finding the right combination of factors for an investable tungsten operation is no easy matter, says Robert Baylis, managing director of London-based Roskill. Much of the tungsten space is held privately but some publicly traded equities offer leverage to future demand growth. In this interview with The Gold Report, Baylis says investor success in this space depends on finding that sweet spot where low capital and operating costs act as the honey needed to lure end users into offtake agreements or outright takeovers.

    The Gold Report: Europe plays a more dominant role in tungsten supply and pricing than the U.S. Is that likely to change in the near term?

    Robert Baylis: China is the dominant player in the tungsten industry, but both Europe and North America have an impact on the market. Europe is probably more important when it comes to pricing because the main benchmark for the industry is APT, ammonium paratungstate, and one of the key reference points for pricing is the FOB EU APT quotation. Europe also has more diverse end users, whereas there are fewer players in North America.

    Processing capacity outside China is mainly in North America and Europe. The major producers in the U.S., Global Tungsten & Powders Corp. [GTP], a division of Plansee SE, and Kennametal Inc. (NYSE:KMT), are significant players. In Europe, Wolfram Bergbau-und Hutten AG of Austria, a division of Sandvik, and H.C. Starck, a private firm, are the key participants. Russia is also an important supplier.

    TGR: How did China become the world's dominant tungsten player?

    RB: Prior to the 1980s most of the tungsten produced in China was used domestically and most of the tungsten processors, some of which we have already mentioned, were buying significant volumes of concentrate from a variety of mines around the world. Enter China. Chinese tungsten reserves are considerable and the cost in the 1980s to mine them was lower than at mines elsewhere. When China started exporting tungsten concentrate to Western processors in the early 1980s, a lot of the existing tungsten mines shut down owing to price competition. In the early 2000s, China implemented export quotas to prevent tungsten concentrate from going to foreign processors in order to develop its domestic processing industry and move beyond being a raw materials supplier. Today China is the largest producer both of tungsten concentrate and intermediate products.

    China's export quota went into effect in the early 2000s when the market was at its strongest and that put some pressure on supply. As such, tungsten processors in the rest of the world turned to recycling tungsten and other sources of supply. The result is that Western processors have diversified their supply chain and are now less reliant on China.

    TGR: Reuters reports that China is expected to remove export quotas for tungsten and molybdenum in 2015, which could obviously lead to more tungsten and molybdenum coming to market. Please tell us about the potential impact of China's decision to remove those quotas.

    RB: Under a recent World Trade Organization decision, China was told that it must remove its tungsten export quotas. And while that could have some impact, there is no longer significant reliance on Chinese exports. Had this happened in, say, 2007, the impact would have been stronger.

    The impact will be on pricing, because the Chinese export quota also restricted the number of suppliers to the rest of the world. If that restriction were relaxed, the Chinese domestic APT price and the EU APT price would perhaps normalize because domestic prices in China are lower than those in the rest of the world. There may be a small drop in price in 2015, but there won't be a large drop as Chinese mines are no longer so low cost. EU APT is the main benchmark for the rest of the world. In China, companies like China Minmetals Corp. [CMIN:CH] and the Ganzhou Tungsten Association [GTA] publish tungsten guiding prices for concentrate and APT. That's a good indication of the domestic price for tungsten in China.

    TGR: What's the difference between APT and ferro-tungsten? Why does one garner a lot less money than the other?

    RB: Ferro-tungsten is used mainly to produce harder-wearing steels for tools and the like. Like any ferro alloy, the iron content helps it bond with steel. APT isn't used very much as a product. It's an intermediate. It will become tungsten powder and get used in many different applications. Most of the trading starts at the point of producing APT. Also, APT is a relatively consistent product globally, so it's easy to set a benchmark for, whereas concentrate can vary considerably in terms of tungsten content and deleterious elements.

    TGR: What investable themes should investors expect in the tungsten space over the medium term?

    RB: The industry for tungsten is driven by macro-level growth. Automotive, machining and electronics are the main industries using tungsten. In the short or medium term it's unlikely that we'll see any rapid increase in demand. On the supply side, the key thing to look at is the cost position of China versus the rest of the world. China is no longer as competitive on tungsten mining costs. That means that producers elsewhere could enter the supply chain and compete with existing producers, even mines in China. Look at companies that are well supported, have offtake or can get offtake contracts with processors, and that have low operating costs.

    What is the sweet spot for that group? It's difficult to finance mining projects and few capital intensive projects will get financing. The sweet spot is probably those projects that are around or less than $100 million [$100M] in capital expenditures [capex] and with all-in operating costs [opex] less than $250 per metric tonne unit [$250/Mtu] of APT equivalent.

    TGR: What's your current price forecast for EU APT for 2015 and 2016?

    RB: We believe that tungsten prices will remain stable in 2015. If the removal of the Chinese export quota brings more clarity between EU APT and Chinese domestic prices, then the EU APT prices could fall a little. EU APT has fallen under $350/Mtu but is unlikely to fall below $300/Mtu in the next year or two.

    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: 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: Your report discusses three clusters of tungsten projects. Category No. 1: Large, high-capex, low-opex, low-grade. Category No. 2: Midsize, low-capex, low/medium-opex, midgrade. Category No. 3: Midsize, low-capex, high-opex, mid- to high-grade. Can you rank those for us?

    RB: The medium-capex, medium-opex, relatively high-grade deposits are the ones that stand out. That's the sweet spot for tungsten projects. The projects that have advanced the quickest and achieved the most success are those in that range.

    Those with high-opex or high-capex or both present challenges. If you're prepared to take a lot of risk on a big mine that may produce a lot of material, then you could be successful-but prices have to stay high. When the price is high you can develop almost anything. You ought to look at the projects that can compete with existing producers at the lower end of the cost curve because that's going to lower risk.

    The other issue is that the large-capex projects will produce a lot of tungsten. Where is that material going? There are only five or six processors outside China. Who are you going to sell it to? That material will be more than one supplier can handle in a year. That's what has happened in iron ore. Rio Tinto Plc (NYSE:RIO), Vale S.A. (NYSE:VALE) and BHP Billiton Ltd. (NYSE:BHP) have invested in low-opex operations that can weather the price downturn. They gain market share as the price comes down and others go out of business. In less transparent commodities in much smaller industries, it doesn't work that way. It's not going to work in tungsten.

    TGR: What are some development-stage projects with preliminary economic assessments or feasibility studies that suggest the opex costs would be in that $250/Mtu range?

    RB: The most advanced is Ormonde Mining Plc's [ORM:LSE] Barruecopardo tungsten project in Spain. The feasibility-level opex at Barruecopardo is around $130/Mtu. The company recently secured a mining permit. It's a relatively low-opex, low-capex, medium-grade, medium-output project similar to Hemerdon. Ormonde has an offtake agreement with a trading company, Noble Group, but needs someone to put up the capital for development.

    TGR: Will Ormonde get the money?

    RB: It's certainly possible. Ormonde could be competitive at that operating cost range. It's a question of where the tungsten concentrate will end up. There's a limited number of tungsten buyers. Having an offtake agreement doesn't necessarily mean it will be able to sell to processors at a profit. China imports some tungsten concentrates. If the concentrate is good quality and low cost, it could find a market there. If it were to go to a Western processor, then it's probably going to have to displace material from an existing operation. That's going to be harder to achieve.

    TGR: What's the biggest challenge facing these companies?

    RB: Securing a customer is probably the biggest challenge. If we look at rare earth elements, for example, companies struggle to sell the material that they produce because the market isn't big enough. They must displace existing suppliers. If you can't sell into China, you have limited options on where else to sell. The tungsten market provides more options as Europe, North America and Japan still have a large share, but supply and demand is still dominated by China.

    TGR: Who is likely first past the post?

    RB: Barruecopardo should be next; it's the most advanced. Ormonde just needs to find the money to develop it. That's probably the leader in development-stage tungsten projects.

    TGR: On the opposite side of Canada in the Yukon there are three major tungsten projects. Do those fit into the cost curve?

    RB: The two big ones there are similar to Sisson. One of those is Largo Resources Ltd.'s (OTCPK:LGORF) [LGO:TSX.V] Northern Dancer.

    Largo's Northern Dancer is less remote but the capital costs are high. Largo has a tungsten asset in Brazil that is on care and maintenance because of a severe drought. Largo is concentrating on its vanadium assets in Brazil and would probably bring the tungsten operation in Brazil back into production before it starts any further development on Northern Dancer.

    TGR: What are some things to watch for in 2015?

    RB: Watch for the impact of the loss of the Chinese export quotas. China may replace the quota with other domestic policy. For example, it could impose a more stringent mining quota on domestic operations or increase the resource tax to limit the loss of upstream concentrate to processors outside China. In tungsten scrap use, there will likely be some growth but that is getting close to peak use. Of course, some new supply will enter the market once Hemerdon enters production late next year.

    TGR: Do you have some final thoughts on the tungsten market heading into 2015?

    RB: It's probably going to be similar to 2014. You'll see a largely balanced market with steady pricing. Prices may fluctuate in the short term on different factors, but it's unlikely to be much different from this year.

    TGR: Thank you for talking with us today, Robert.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Robert Baylis is managing director of Roskill Information Services Ltd., which is based in London and provides research and consultancy on industrial mineral, minor metal and steel alloy markets. Baylis joined Roskill in 2006 focusing initially on the cobalt market. He first started researching the tungsten market in 2011, co-authoring and editing Roskill's 11th edition of its multi-client tungsten report published in 2014. Since 2011, he has also undertaken several single-client research projects on tungsten, as well as advancing Roskill's tungsten research, specifically on secondary production, Chinese domestic production and production costs.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

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