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Tungsten is yet to recover but Wolf Minerals is worth a look

By Gary Newman | Friday 6 January 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Many commodities have enjoyed significant recoveries in price during 2016, but tungsten hasn’t been amongst them and isn’t far off of the lowest levels seen during the past decade.

Part of the continued weakness has been down to a significant weakening the Yuan against the US Dollar, especially towards the end of 2016, to a current level of around $0.14 to the Yaun.

Levels of inventories/stockpiles have also caused weakness as they had been high, but towards the end of the year in China – where most tungsten is produced – they had returned to more stable levels. Alongside that the amount produced from mines was also a fair bit lower last year.

Things are looking a bit more positive though going into 2017 and some analysts are expecting prices to be up to 25% higher by the end of 2017 – although I would always take those predictions with a large pinch of salt given the movements of other commodities such as gold and oil in recent times, as compared to what the consensus of analysts expected!

Moving forwards, there is also an expectation that prices for the metal will become more stable, as currently much is sold at the spot price and liquidity is low. Canadian listed Almony Industries announced a couple of months ago that it had entered into one year fixed price off-take agreements with several of its customers, at a price equating to $269/MTU for APT (ammonium para tungstate) - $210/MTU for contained tungsten - as compared to a spot price of $200/MTU at the time.  

The low spot prices in recent times have been very bad for AIM producer Wolf Minerals (WLFE), which was a company that I had high hopes for a couple of years back prior to production commencing, but since then it has seen its share price slump to the current level of 5.25p to buy.

Given that the company had managed to secure finance for its Drakelands mine, in Devon, things had looked very promising, but since then it has been blighted by production problems as well as low prices, and there had been concerns about its debt as well – all of which have contributed in the drop in market cap to the current level of around £55 million.

But I can now see potential from here, albeit with plenty of risk attached as it needs to get production up to the sort of levels that the feasibility study for the project was based upon, as well as relying on Tungsten prices rising in the coming years.  

There have been some positives in recent months though, with the mining licence being extended from 2021 to 2036, which significantly extended the mine life and enabled the company to refinance its debt beyond 2021. It also received permission from Devon County Council to move operations to 24/7 on a permanent basis.

In terms of finance, back in April the main shareholder, Resource Capital Fund, agree to an equity facility for £25 million and subscribed for the full amount of of shares at 9.19p, to take its holding to over 56% in total.

Then more recently in October it reached an agreement with its lenders and offtake agreement partners, to refinance the £64 million debt outstanding until June 2023, with no repayments due until January 2018. That also sparked the offtake partners extending their agreements on a similar basis.

On top of that, Resource Capital Fund agreed a bridging loan for a minimum of £20 million, and up to £30 million, which becomes a convertible loan if not repaid within a year.

Operationally the company has also been making headway and looks to be resolving the problems it has had with processing the ore – which has cost it a fortune and caused the financial difficulties – and it has been showing increased production as a result of the changes in the processing plant, with the most recent report showing the highest level achieved since mining operations began.

Shares in the company are largely not in the hands of private investors, and alongside Resource Capital Fund (56.21% currently), Todd Corporation holds 24.03% and tin offtake partner Traxys Projects has 5.12%.

So if you are looking to invest in a junior miner with plenty of upside potential, then Wolf is definitely worth a look, given that it is already at the production stage, is funded, and seems to be well supported by its major shareholders. Just make sure that you consider the risks as well and invest an appropriate amount to reflect those, as it does still have the potential to fail in the event that tungsten prices remained very low for a number of years.

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