While tungsten promoters may want to spin a tungsten mine investment that connects back to Warren Buffet as a rousing endorsement for the metal, the main factor in the move may be far more pragmatic.
Buffet’s Berkshire Hathaway (BRK-N) has an 80% stake in the privately held International Metalworking Companies (IMC) — a position it acquired in 2006 for US$5 billion — and IMC has made a significant investment in a tungsten project in South Korea that is owned by Vancouver-based Woulfe Mining (WOF-V).
But it’s a bit of a stretch extrapolating that Buffet believes tungsten prices are about to soar.
The more prominent motive for the deal is that IMC operates a large-scale, metal-cutting tool manufacturing plant in South Korea, 200 km south of Woulfe’s Sangdong tungsten project.
IMC’s facility is the largest metal-cutting tool producer and the second-largest tungsten consumer. With the plant expected to double production, it is little wonder IMC would lock-up a key supply source, especially when the mine’s location makes logistical sense.
And while vertical integration can benefit if the underlying commodity price rises, they are seldom done as a play on the metal price.
Woulfe’s president and chief executive Brian Wesson emphasizes the more practical aspects of the deal. He explains that Woulfe has been in talks with IMC for years over a possible partnership at Sangdong.
“They were the first people we went to see when we acquired the project,” Wesson says of his initial contact with IMC, which was made shortly after Woulfe’s management team took over the project in January 2010. “We knew they were connected with Berkshire Hathaway, and so we knew they had money in the bank. We thought they were the logical guys to be a part of this.”
IMC’s investment in the Sangdong mine amounts to a $35-million cash investment by IMC for a 25% stake in Sangdong — a former mine that was the world’s leading producer of tungsten, before it shuttered in 1992 after the Chinese flooded the market with their own cheaper metal.
According to Wesson, the second part of the deal is key. It will see the two companies joint venture into a new entity that will be responsible for upgrading concentrate produced at Sangdong into an end-user, quality product: ammonium paratungstate (APT).
Generally tungsten mines ship concentrate grading 67% tungsten to an upgrade facility that turns it into APT, but by creating its own joint venture, Woulfe gains IMC’s branding and its quality guarantee.
A chief concern amongst capital providers in the industry is often metal quality.
“What the deal really brings is that now the actual guy making the end product is a user of it, so there is no risk of quality control,” Wesson explains. “That’s why we gave them a 55% stake . . . so their brand is on the final product.”
Woulfe will have the remaining 45% stake in the new firm, which is to be called APT JV. The company will buy at least 90% of Sangdong’s production but has the option to buy 100%. Wesson says the prices will be paid at a slight discount to market, but that the terms were better than those offered by potential offtake partners.
IMC will put $19.25 million into the new company while Woulfe is required to put $15.75 million, but that amount will be made available to Woulfe by a loan from IMC.
IMC is also loaning the Sangdong project $5 million in cash immediately so that it can move into the development stage by mid-year. The mine is expected to reach production in the first half of 2013.
With IMC on board, Wesson is confident that the rest of the $135 million in capital expenditure needed to build the mine will be available using debt financing — which means there will be no dilution to current shareholders.
Thanks to the deal with IMC, Woulfe can approach bankers with a buyer as collateral and an end product that is guaranteed by IMC. Those two factors take a considerable amount of financing risk out of the project, and with declining risk comes declining interest payments on debt.
While recent deals in the gold-mining industry have priced debt financing for capital expenditure at 10%, Wesson believes Woulfe could reel in terms under 8%.
He expects to have the financing done by June, just after Woulfe completes its feasibility study on Sangdong and IMC signs off on the deal for good.
The Sangdong project is made up of three orebodies that are held within a mountain rising 500 metres from a valley floor. Wesson says the orebodies have a structure similar to coal seams: they are 10 metres high and run for 1.2 km along strike.
Mining will be done as an underground operation using cut-and-saw techniques. The mine has an 11-year mine life “because that’s all we’ve drilled so far,” Wesson says. “We know there’s a lot more ore, as there’s been good correlation between historic drilling and our drilling.”
The historic resource at Sangdong stands at 106.5 million tonnes grading 0.35% tungsten.
Woulfe has defined a 5.9-million tonne indicated resource grading 0.42% tungsten and 0.04% molybdenum.
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