Even as demand rises steadily, the world's largest non-Chinese tungsten mine will be exhausted by next year. So investors should be lining up to fund new mines, right? Not a bit of it, says analyst Mark Seddon of Tungsten Market Research. In this interview with The Mining Report, Seddon argues that a supply shortage could mean much higher prices, leading to handsome profits for those companies that get to market soonest.
The Mining Report: Tungsten is often called "rare." Just how rare is it?
Mark Seddon: It's not that rare compared to a minor metal such as rhenium, which is used in superalloys. The total rhenium market is maybe 70 or 80 tons per year, whereas the tungsten market is currently around 80,000 tons (80 Kt) per year of tungsten metal content. So tungsten's nothing like a rare earth element (REE), but it is considered a strategic metal.
TMR: How is tungsten strategic or critical?
MS: It's strategic in that it has industrial uses. It's used in hard metals, cutting tools, etc. It has military applications, as well. The U.S. Defense Logistics Agency built up a stockpile of tungsten over a number of years, which it has pretty much sold off now.
And tungsten is a critical metal due to China's dominance of the market. China accounts for 80% or more of supply in various forms.
TMR: Tungsten is often compared to rare earths, but the latter's price is highly dependent on high tech. This is not true of tungsten, correct?
MS: Yes. Tungsten's main uses are industrial; the largest end user is in cemented carbides, what are known as hard metals. Those can be used in things like cutting tools, mining tools, drill bits and wear parts. So tungsten's demand curve tends to follow gross domestic product growth quite closely, whereas REE demand growth is more volatile.
TMR: But tungsten prices are rising.
MS: Yes, tungsten has risen in price because of a change in Chinese policy. Some 10-15 years ago, you could buy as much tungsten as you wanted from China, and the price of ammonium paratungstate (APT) fell to about $100/metric ton unit ($100/mtu). APT rose to a peak of $470/mtu in 2011 and was above $400/mtu in 2013.
Recently, the market has been a bit quiet. Today, APT sells for about $370/mtu.
TMR: So would it be reasonable to say that, as with REEs and other metals, the Chinese have decided they want to keep production for internal use?
MS: China is now less interested in exporting natural resources and much more interested in adding value to them. Internal demand in China for tungsten, REEs and so on has been increasing as its GDP has grown, recently about 7-10%/year.
China has made very little investment in new tungsten mines, so it is really struggling to maintain production at current levels, which also would put pressure on exports because, obviously, it just doesn't have the material available for export.
TMR: Given the tightening of supply, where can we expect tungsten prices to go by 2020?
MS: In the short term, I expect that prices will end 2014 quite a bit higher than now and continue rising in 2015. The only significant new supplier that has entered the market recently is the Nui Phao project in Vietnam. This is owned by the Masan Group, which is privately held. It came onstream in 2013, and is, as far as I know, still ramping up to production capacity.
In the longer term, major new tungsten supply will likely not enter the market until the second half of 2015. So the pressure on prices is really going to be upward, especially considering that Europe expects reasonable economic growth this year and slightly better than that in 2015. My feeling is that production shortages will result in rising prices at least until 2016-2017. Then, depending on how much new supply enters the market, a leveling off may occur.
TMR: Given that there's no futures market for tungsten, prices are determined by individual end-user contracts, correct?
MS: Yes. Tungsten prices are discovered, if you will, from data on ores, concentrates and APT provided by such publishers as MetalBulletin, Metal-Pages and Platts. The main price that's followed is ATP. There are two prices in China: the internal Chinese price and the export price, which is a shipped-on-board Chinese port price. There's also a European APT price. However, because China dominates the market so thoroughly, Western prices tend to follow the Chinese example.
TMR: So how many new mines will be required to meet this rising demand?
MS: Pretty much one major new project coming onstream every year.
TMR: What is the average initial capital expense (capex) of tungsten projects compared to other metals?
MS: I would say no more than $100 million ($100M), probably a bit less. Quite a few current projects reside in the $50-75M range.
TMR: That's quite modest.
TMR: That raises the question of why tungsten projects have such difficulty in being funded, especially given expected rising demand and prices.
MS: One of the biggest problems is that tungsten is not a terminally traded product, like gold, silver, copper, etc. So banks have difficulty in hedging their price risk. I've done quite a lot of work for various projects producing marketing reports and price forecasts, and my experience has been that 50% of potential banks and other institutional investors reject tungsten projects out of hand due to the lack of futures markets and the hedging they provide. The other 50% simply doesn't know much about tungsten, and so it is quite low on their list of priorities.
This funding deficit is obviously not just a problem for tungsten mines. It applies to rare earths, antimony, graphite and other minor minerals.
TMR: Tungsten is not as glamorous as metals such as gold and silver and, as discussed above, is not high-tech, like rare earths. Is this part of the problem?
MS: That's certainly a possibility. Tungsten's uses are almost exclusively industrial, so it's a steady metal, not a sexy one. It is perceived that the rewards to be gained in REEs might be that much greater, but then obviously the risks associated would also be greater.
Tungsten is not a metal that is much discussed, unlike rare earths, which have been featured in the global media since 2011, when the Chinese export restriction become widely known. However, studies done by the European Union, etc., place tungsten in the top three of most-critical metals.
TMR: There was a long article about tungsten in the Financial Times in March.
MS: True, but that's probably the first major article on tungsten in the Financial Times for years, even though China's export restrictions are a decade old.
TMR: In this environment, how much of a premium is attached to getting a mine in production first?
MS: Hemerdon's projected operating cost is about $105/mtu APT. Compare that to the current APT price of $370/mtu, and you can forecast a high margin, if prices remain at similar levels. So the earlier a company can get into this market, the more it will benefit. And should new projects remain unfunded, prices will remain high.
TMR: Speaking of media coverage of tungsten, Forbes in May noted that Warren Buffett and Berkshire Hathaway have agreed to invest $80M in a South Korea project. What do you think of this, considering Buffett's oracle status?
MS: The project is called Sangdong. Sangdong published a DFS in 2012 but seems to have run into difficulties. There has been considerable turnover in senior management, three CEOs in 13 months, for instance. Although Buffett is looking at investing, it's difficult to see what's going on there. There have been no announcements about construction or anything like that. One would have thought Sangdong would be well along the development path by now.
TMR: Isn't it true that in recent years many junior mining companies have foundered after they overextended themselves attempting to bring projects to production?
MS: You're right. But needs must, as they say. The juniors can't sell their projects to larger mining companies because they are not interested. The larger companies are consolidating in precious metals, copper and so on, while leaving minor metals to the juniors.
TMR: Which of the projects we've discussed seem most likely to succeed?
MS: Hemerdon is pretty likely to go ahead because it's fully funded and in construction. Sisson looks to be a pretty good bet because it has HDI behind it, and Todd Corp. is invested in it. It is making good steady permitting progress but still needs financing and will not produce until 2016-2017, at the earliest.
TMR: Let's say that only one or two of these major tungsten projects begins producing in the next couple of years. So we have a tungsten shortage leading to a significant price increase. Then the financial institutions worry they've missed the boat, finance a bunch of projects, and we end up with a bubble. A possibility?
MS: This is the problem. No market is run with perfect efficiency, and you do get cycles. It is quite possible we will see more volatility in tungsten prices in the next several years. To repeat, there doesn't seem to be enough projects ready to begin production in the next five years to cope with the expected increase in demand and the exhaustion of CanTung.
The logical conclusion would be that tungsten prices will rise. Depending on how tight the market gets, that rise could be quite rapid. When tungsten prices got over $450/mtu for APT in mid-2011, this sparked interest in tungsten from those who were normally not interested in it.
TMR: We saw much the same with rare earths that year.
MS: When prices go crazy, everybody thinks, "We should be in REEs. Or tungsten." Or whatever. If that leads to a whole slew of projects suddenly hitting the market at the same time, the pressure on prices would be inevitably downward. History shows that this is the way things tend to happen.
TMR: So we could see a collapse in tungsten prices?
MS: It is actually quite difficult to see a bust situation in tungsten because it's quite difficult to see enough projects coming on to make prices crash. Prices could come down, but they should still be significantly higher than 10-15 years ago.
TMR: Mark, thank you for your time and your insights.
This interview was conducted by Kevin Michael Grace of The Mining Report and can be read in its entirety here.
Mark Seddon has over 25 years of experience in the commodities industry. He is director of Tungsten Market Research Ltd. in London and was formerly managing director of Roskill Information Services and a sugar trader with Louis Dreyfus. He holds a Bachelor of Arts in European business administration from Middlesex University, as well as a Diplôme d'Études Supérieures Européennes de Management.
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