Keep an eye on NA Tungsten, says Haywood’s Thompson

VANCOUVER — Some mining analysts who recently visited the Arctic tungsten assets of North American Tungsten (NTC-V) question whether the company can cut it in the Yukon, despite positive drill results at its Cantung tungsten mine and its ownership of Mactung — one the world’s largest undeveloped tungsten deposits.

In the past two quarters the company has posted growing losses, leaving some wondering how NA Tungsten will survive if it can’t make money mining WO₃ at today’s strong tungsten price.

But analyst Chris Thompson, who covers the company for Haywood Securities, and is just back from a site visit there, begs to differ. His outlook on North American Tungsten?

“Rosy,” he says. The recent quarterly losses stemming from the Cantung mine don’t faze Thompson — though he doesn’t gloss over them either. He calls the company undervalued and has set a target price for NA Tungsten of $2.30. At presstime August 15, the company closed down 10% at 73.

“What we’ve seen from the operation over the last eighteen months is an improvement,” says Thompson. “Efficiencies are better and there has been a slight drop in mining costs.”

Yet he admits there have been serious problems at Cantung recently.

Last year started with some good news. At a mine where Thomspon says recoveries must be greater than 74% and head grades higher than 1% (anything under that and “it’s gonna be a battle,” he says), head grades at Cantung picked up from 1% to 1.3 %.

But in the fourth quarter, the head grades faltered, dropping off to 1.1%. The slide continued in the following first and second quarters, dropping down to 1.03%.

The result? In the first quarter ending Dec. 31, 2007, NA Tungsten reported net losses of $4.0 million for an end-of-period deficit of $10 million. In the second quarter the bleeding continued, with net losses rising to $5.5 million.

“They’ve had a lot of problems recently,” Thompson says. He attributes the dipping head grades to technical difficulties in pillar recovery. At Cantung he says about 50% of the operation is pillar recovery.

“Obviously Cantung is a high cost mine,” Thompson says. “Even with high APT tungsten prices, Cantung is break-even.”

And with recent high grade drill results at Cantung, Thompson still doesn’t believe the mine will do much better than that. Results include 7 metres grading 2.98% WO₃ downdip of the west extension workings, about 100 metres below the 3700 level. He says the grades could extend the mine life by two years, which Thompson says has about one year left of pillar recovery.

Still Thompson characterizes Cantung as a cashflow-neutral operation. “And that’s putting it nicely,” he adds.

So how does this relatively bleak outlook on Cantung translate into the value he places on NA Tungsten?

“I tell all my clients that 85% of that value is based purely on Mactung,” he says. Based on a 2006 resource estimate, the Mactung deposit holds a whopping 33 million indicated tonnes grading 0.88% WO₃. At the moment NA Tungsten is in the throes of a feasibility study for the project, expected sometime in September.

And if Cantung is what Thompson refers to as “basically a scavenging operation” with inherent inefficiencies, he says Mactung would be a brand new mine with lower operating costs and savings realized from economies of scale. In other words he thinks it will make money.

But it won’t come cheap. Thompson notes capital costs in a previous feasibility study were about $288 million. This time round, “the Capex is gonna be north of that,” he says.

Although he calls the last feasibility “complicated”, as compared to what he expects will be a simpler design in the new one, he believes escalating costs for oil, labour, etc., will ensure capital costs over $300 million for Mactung.

Part of the reason he’s so rosy on Mactung is due to his bullish stance on tungsten prices. He notes that some analysts have set long-term targets at over US$300 for the metal.

He attributes his bullishness to tightening supply. China, the world’s largest user and producer of tungsten, recently became a net importer of it and imposed export taxes and prohibitions on tungsten to protect its domestic supply.

Thompson believes that Mactung is one of the few deposits in the world set to fill increasing demand. “There’s no mine out there like Mactung coming on line,” he says.

He also doesn’t believe the additional supply will depress tungsten prices. He says a lot of people were worried about Cantung’s effects on the market, but those never materialized.

Instead, he paints a strong tungsten demand picture.

Currently the world supply is 9 million metric tonne units (MTU) of WO₃, from both primary production and scrap (each MTU contains 7.93 kg tungsten). Demand is at about 8.5 million MTUs. Assuming what he calls a realistic growth in demand of 5% per annum, “Demand is going to be 12.5 million MTUs in five years.”

With 800,000 MTUs each year required to meet that figure, “we’re going to need a new Mactung every year,” he says.

“So if you’re bullish on Tungsten prices, will Mactung have an effect on prices?” he asks.

“No,” he answers.

Another part of his bullish outlook is the lack of tungsten projects coming online any time soon. By and large, he says, a long period of low tungsten prices ten years ago provided no incentive for exploration.

“This created a gap, a hiatus in the tungsten pipeline,” he says.

And by size, of those exploration and developmental projects out there such as Largo Resource’s (LGO-V)Northern Dancer project in the Yukon, he believes that “no one is near Mactung.”

Ultimately all these projects coming on stream will only “fill in the gaps” and may not even that, he says.

His message to NA Tungsten?

“I only expect them to deliver Mactung.”