North American Tungsten undervalued, analyst

Vancouver – Despite positive drill results at its Cantung mine and ownership of one the world’s largest undeveloped tungsten deposits aptly named “Mactung” some analysts who recently visited the mine question whether North American Tungsten (NTC-V) can cut it in the Yukon. In the past two quarters the company has posted growing losses, leaving some wondering how North American 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 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 North American Tungsten’s Cantung mine don’t faze Thompson although he doesn’t gloss over them either. He calls the company undervalued and has set a target price for North American 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 18 months is an improvement. Efficiencies are better and there has been a slight drop in mining costs.” Yet he admits there have recently been serious problems at Cantung.

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 December 31, 2007, North American Tungsten reported net losses of $4.0 million for a deficit end of period of $10 million. In the second quarter the bleeding continued, with net losses increasing to $5.5 million with a $15.7 million deficit end of period.

“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 says Cantung is a cash flow 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 North American 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 North American 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 because of 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 oil, labour, etc. will ensure capital costs over $300 million at Mactung.

Part of the reason he’s so rosy on Mactung is in large part due to his bullish stance on tungsten prices. He notes that some analysts have set longterm targets at over $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 kilograms 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.”

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 zero 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, “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 North American Tungsten?

“I only expect them to deliver Mactung.”