Wolf Minerals – Reactivating Tungsten Mining in England

Hunter Hillcoat is a mining analyst with Investec Securities in London. Before Investec, Hillcoat spent 7 years as an analyst with the Austock Group, as a resources analyst. Hillcoat has a BSc Honors in Geology from the University of the Witwatersrand in Johannesburg and an MBA from Curtin University of Technology. Investec recently revised their buy rating price target for Wolf Minerals Limited to 29.4p down from 31.6p.

Tungsten Investing News recently talked with Hillcoat regarding his coverage of Wolf Minerals. Wolf trades on the London exchange under WLFE and on the ASX under WLF.

Tungsten Investing News:  Your target price for Wolf dropped very slightly despite the company’s recent positive

news, based on lower spot prices for tungsten. Can you give us a quick overview on what you see for the tungsten market going forward?

Hunter Hillcoat: Yes, to illuminate, for the long term price that we use, there’s a blend of the spot prices and the Roskill long term price that was derived from a report that they did last year, and therefore, while the long term price that Roskill provided hasn’t moved, the spot price has moved, and it pulled down the average. We don’t model the supply-demand fundamentals of Tungsten and thereby try and derive what forward pricing will be. So we are relying quite heavily on experts like Roskill to provide us with our forward price assumptions. We have to recognize that there’s a spot market as well, so we can’t blindly follow Roskill and that’s why we do a blended long term number. In the near term we do a mark to market adjustment, depending on where the market is, but that doesn’t impact Wolf obviously since it’s not in production.

As is the case with most commodities, China is the key driver. It dominates raw supply and is also the world’s largest consumer and we expect that, notwithstanding it’s World Trade Organization membership, that it will continue to restrict exports of tungsten, thereby creating a tighter market. As it increases its production of secondary products, it’s also going to have some impact on production of the rest of the world’s secondary products. But with China moving down the value chain it just cannot afford to export as much raw material as the rest of the world would like. So, like everything, it’s going to be tied to general global economic activity but particularly to China, and we’d expect as China’s economic activity continues to grow that the supply-demand fundamentals will continue to tighten.

Now, Roskill does point out that it expected 2013, ’14, into ’15 to be an over-supply from new production coming on stream. But generally the assumptions that it was making in terms of the new production have proved to be optimistic and therefore we shouldn’t see the glut of supply that they might have thought. The potential downside for Tungsten is too much supply, but we expect that supply not to come on as strongly as some might imagine, and for the market to gradually go into deficit and support the longer time price that Roskill is using.

TIN: Wolf Minerals seems to be rapidly moving towards production on their Hemerdon Mine in the south west of England. There aren’t a lot of exploration or mining development stories in the UK in general. Can you give us some context?

HH: No, not at all, and for obvious reasons. There’s strong competition here in the UK for land use. There’s very restrictive authorities and environmental authorities that prohibit or at least slow down the development of mining activities, and there’s a sense that anything that could have been done in the UK had already been done. The advantage Hemerdon has it that it was an existing project with an existing mine license, so Wolf didn’t have to jump through the numerous hurdles a new development project would face, which has made life a lot easier for them.

What is also encouraging for Hemerdon is that in the immediate vicinity of the project there are operating clay mines, so the local community is used to mining. It’s not virgin territory that the mine would be working from.

TIN: What was mined here in the past, was it clay?

HH: No, there was an original tungsten operation, spanning back historically. They mined tungsten over here during World War I and II, but the existing operations in the surrounding area are all clay mines.

TIN: And why did they stop mining there?

HH: It would have been the economics at the time. In a wartime situation, you needed to produce product no matter where you got it from. When, at various stages, the tungsten price hadn’t been strong enough to support continued mining from this operation. Looking into it’s history, the project was seriously looked at by a company called Amex, in the 1970′s and early 80’s. They did their drilling and sampling program, but it didn’t stack up from an economic point of view. And of course with China flooding the tungsten market in the 1990′s to realize foreign exchange, they depressed prices of all these sorts of commodities to the extent that they became unprofitable for most international operations.

TIN: Wolf has offtake agreements with Global Tungsten Powders and Wolfram Bergbau und Hutten, both current tungsten consumers in Germany. Will Hemerdon replace supply from an existing mine or add new capacity?

HH: Hemerdon would add more new capacity, but at the same time you are getting declining production from China, declining exports from China, and therefore that new capacity is necessary to meet western demand.

TIN: The company website still says they expect production in 2014, but you are forecasting 2015. Is there anything in particular you think might cause delays, or just normal delays encountered in a project of this size?

HH: Nothing in particular to Wolf. Clearly there are still some hurdles it needs to cross, but they are minor hurdles. The reason for our delayed start was just reflecting what has happened with the mining sector generally. It’s just that companies struggle to deliver projects on time, not necessarily their own fault, but there are contractors, consultants and various third parties involved that tend to slow these things down, so as equity house we’ve just taken a slightly more conservative view.

TIN: Wolf’s financing has progressed significantly in recent weeks. Currently they have 75 million pounds of senior debt from ING Bank and Caterpillar Financial, 82 million US dollars from Resource Capital Fund and the recent equity financing of 20 million Australian dollars. How far in their development will this get them?

HH: If they had all of that, that would give them more than give them enough money. Unfortunately it doesn’t quite work like that because the 75 million pounds had a requirement that they raise a significant amount of equity which just wasn’t going to be possible. We estimated another 50 odd million pounds in equity. So the 82 million plus the 20 million equity financing actually replaces that senior debt.

So what they have now is $82 million in debt – the $75 million bridging facility and $7 million royalty payment – and then $20 million in equity. Now, bear in mind that the bridging facility only has a limited life span. But that should get them pretty well along, assuming they can start their construction soon because the bridging facility only last until the end of this year. So assuming they can get going on that it should take them quite significantly along their development path, bearing in mind that the total construction cost, including contingencies, is about $170 million. So with that amount they’d have close to two thirds of their development capital.

TIN: Right, so 75 million of the funds from Resource Capital Fund is a 12 month bridge facility like you said. What options do you expect there to be for replacing these funds at the end of the term?

HH: Assuming that there’s some improvement in the market they could always go back to the equity option. Wolf has, as you would have seen from my note as well, a significant base of strategic equity investors behind the company, who assumedly are quite willing to contribute to their share of the remainder of the equity so that there is a possibility to raise equity through the course of this year. There’s a possibility to bring in other strategic investors who can inject more capital, thinking back in line with the offtake funding agreement that they had with Global Tungsten and Wolfram Bergbau before. There’s an opportunity to do something along that line and of course because the project will be significantly further de-risked there’s a potential to put in place some sort of debt agreement that will replace the bridge facility as and when it becomes necessary. Obviously they can’t draw an additional debt line with the facility in place, but you could have a crossover period where it just gets transferred from one to the other.

TIN: Right. But I guess the bridge will allow them to move significantly towards production, and, in theory, increase the value of the company, so equity would be done at a higher price

HH: That would be the rationale for it.

TIN: Wolf seems on a path to construction and production at this point. Do you see any significant hurdles for them still to overcome?

HH: No, nothing significant. As I said, the key constraint, or key concern would have been getting requisite licensing and they’re well advanced in that. They’ve recently got their water license, and the only one they still need to get is approval for the waste dumps, but that is expected to be largely a formality the same way the water licenses were. There are still some land purchases to be made, but nothing that you would see as being a significant hurdle.

TIN: Wolf seems to be one of a number of companies that are building significant value and completing milestones getting significant attention from the market. Are there one or two of the companies you are covering that you want to tell our audience about?

HH: The sector I cover, together with my colleagues, includes a lot of emerging junior companies, and we have seen the market has taken a risk-off  approach across our space generally.  The result is that we now believe that the sector offers a great deal of value. But to be realistic about it, it is rightfully reflecting risk and so I’m going to avoid that question until we see a market where we can become more comfortable that the risk concerns have has been overcome.

TIN: For members of our investor audience who want more information on Wolf, what is the best way for them to contact you?

HH: Probably via the Wolf website. Our contact numbers are on the Wolf website on the section on the website that points to analyst coverage.

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