Almonty Industries: Black’s second act?

Almonty Industries (AII-V) may be a relative newcomer to the Toronto Venture Exchange—it listed just nine months ago—but the junior tungsten producer is probably better known in the industry for its management depth.

Chief executive Lewis Black was previously CEO of Primary Metals, and along with Daniel D’Amato, currently a director at Almonty Industries who also worked at Primary Metals, successfully structured a deal in 2008 to sell the company to Japanese metals conglomerate Sojitz for a price roughly twenty times earnings—or a thirty-fold return on investment over three years.

Now Black and his team at Almonty is advancing exploration, development and production activities at the Los Santos project, a producing tungsten mine the company acquired in late September last year located in western Spain, about 50 km from Salamanca. (The mine is 255 km northeast of the Panasqueira tungsten mine, which Primary Metals sold to Sojitz Tungsten Resources.)

For the full year ended September 2011, the Los Santos mine, which started production in 2008, produced 61,599 metric tonne units of tungsten concentrate. In the first quarter of 2012, Los Santos produced 16,889 metric tonne units of tungsten concentrate.  

Jonathan Lee, an analyst at Byron Capital Markets in Toronto who has a speculative buy rating on the stock and a target price of $1.25 per share (Almonty was trading at $1.02 at presstime within a 52-week range of 61¢-$1.23), notes that since taking over the mine, overall recoverable yields have moved from 45.5% to  57%.

In a research note to clients on June 12, Lee said he believes there is potential to increase recoverable yields further to generate better margins because Almonty plans to spend additional capital on equipment. The company has ordered a new flotation cell, which it expects to install in the third quarter of this year, and it has already installed a hydrosizer—which uses a stream of water to isolate and remove heavier, coarse impurities.

These equipment purchases should increase yields to more than 70%, which should in turn kick production and revenues, higher, cut operating costs, and increase earnings, Lee reasons. For its part, Almonty forecasts it can reach recoveries of 65% by Dec. 31, 2012.

“In the near-term, the installation of the hydrosizer should lower operating costs starting in Q2/2012,” Lee claims. “By Q4/2012, we believe the installation of the flotation cell will increase yields to 72%, driving operating costs down from $190 per tonne currently.”

The mine life of Los Santos extends into 2017, but the company plans to lengthen that lifespan with the help of a four-year drill program that will add up to a total of 28,000 metres, or 7,000 metres each year.

With drilling estimated at a cost of about $145 per metre, Lee forecasts the company will spend about $1 million a year on its expansion program. “For each year of resource added, we expect Almonty to add cash flows of up to $12.5 million a year,” he continues. “This is significant for a company that has a current market capitalization of less than $40 million.”

Drilling this year will be infill “to upgrade the resource and optimize the mine plan,” Lee explains, but subsequent drill programs in 2013, 2014 and 2015 “will expand the resource along strike and at depth.”

Los Santos has proven and probable reserves as of Dec. 31, 2010 of 1.76 million tonnes grading 0.33% tungsten trioxide (WO3) for 5,823 tonnes of WO3. Measured and indicated resource stand at 1.85 million tonnes grading 0.35% WO3 for 6,554 tonnes of WO3, while inferred resources tally 1.29 million tonnes at 0.29% for 3,790 tonnes of WO3.

As a producer, Almonty is benefiting from high tungsten prices, Lee adds. APT tungsten is currently trading at about US$400 per metric tonne unit, although over the past year it has reached as high as US$450 per metric tonne unit. (According to Lee’s estimates, the company receives about 80% of the APT tungsten price through its current off-take agreement because it produces tungsten concentrate—“a pre-cursor to the typical APT tungsten price.”)

Almonty bought Los Santos for $14.4 million in cash, 5.56 million common shares and 3.7 million warrants at an exercise price of $1.25 per share, Lee adds, noting that the mine originally opened for a total cost of A$70 million ($71.8 million) by Heemskirk Consolidated (HSK-A).

Los Santos is accessible by paved road and the mine is powered by diesel generators, but the company is looking into bringing electricity to site to trim costs.

The company has about 37 million shares outstanding and 5.8 million options and warrants. “With positive cash flows that more than cover G&A and a drilling program to increase the resource,” Lee concludes. “We do not expect Almonty to dilute shareholders to expand the Los Santos project…earnings growth will only deliver better shareholder value.”

Tungsten became a strategic metal during World War II because its resistance to high temperatures and its strengthening of alloys made it an important raw material for the arms industry. Demand for tungsten in the tool making and industrial equipment industry took off during the post-war industrial boom. (Tungsten is largely alloyed with carbon to create tungsten carbide, which is used in high-speed manufacturing and machine cutting tools.) Tungsten has the highest melting point of all metals, is harder than steel, and is one of the densest materials on the periodic table.