Comments on news of the past week 1. Korean financing and extension of reserves for the Sangdong mine.
This is good news, particularly if the Tungsten market continues to improve. Looks like the price drop in May-June is over and July rebound is being sustained by price guidance increase from Chinese providers. Opening the mine in 2018 is a delay from what was hinted previously (late 2017), but should be doable on a reasonable time schedule and will likely dovetail with construction for the Winter Olympics in nearby Pyeongchang.
- KDB commits to provide 50B KRW loan for construction. It is a good start. Now there are a few questions to be answered, including the following: What are the conditions for the loan? A commercial loan is good because it does not dilute the shares of the company, but it requires guarantees and it will need to be repaid.
- If this is a vanilla tyoe commercial loan, the interest rates should be around 5% with a repayment schedule to match the expected life of the mine, so it is important that the reserves of Sangdong have been substantially expanded (implying a longer commercial life for the mine). I would like to see if the Korean government (central or provincial) has placed any guarantees, favorable rates or other incentives to the loan.
- From the announcement, the loan will require the fulfillment of conditions, including EPC contract, off-take agreement and raising equity-linked facilities for the rest of the development cost. These are my quick thoughts on the requirements:
a) EPC contract. Pre-EPC contract was given to POSCO E&C, which is a large Korean construction firm, with good mining expertise. So I expect POSCO E&C will get the EPC contract.
b) Off-take agreement. TaeguTec (IMC) will probably get the off-take agreement, just because it is physically close to the mine and it has a long history of working at the Sangdong site (TaeguTec, former Korea Tungsten, operated the Sangdong mine originally). If that happens, I expect the remainder of the loan owed by Almonty to IMC will be paid in tungsten from the off-take.
c) Equity-linked facility to complement the loan. Almonty has done the latest placement of 2-year 5% convertibles at 55c. Assuming the remainder of the funding needed to develop the mine is 25B KRW (30M CAD). Raising 30M CAD will require selling 85M shares at 35c (current share price) or 55M shares at 55c (price of ATC-linked placement). Mr. Black promised a favorable (not too dilutive) deal. I have to think that a mixed equity / off-take deal is at least being considered.
- Extension of Sangdong reserves. The updated reserve estimate of 7,900,000 tons at a grade of 0.45% WO3 is an increase of almost 80%. It is a large increase and will extend the life of the mine to well over 20 years. Increase in reserves was obtained by extending the mine assessment to level -6 (was limited to level -2 in the previous assessment). There are 7 levels below -6 that were historically mined. So if the mine is restored to its original vertical extension it is not unreasonable that its life would be pushed to 40 years, as indicated by Mr. Black in several occasions. In September there will be an updated NI 43-101 technical report on the mine that includes levels -3 to -6. These used to be indicated as flooded levels.
2. Developments in the ATC acquisition.
The acquisition of ATC (majority owner of the ATC Vietnam ferro-tungsten plant) is proceeding, but in a non-linear way. Short story: I don't know quite what to make of this deal yet.
Here is a quick look at the development of this transaction, through news released recently:
- At first it looked like Almonty wanted to unload the unprofitable Australian mine (Wolfram Camp) to the ATC company: cut the losses, get equity in the ATC company just in case it works out and move on.
- One month later Almonty proposed to acquire the ATC company and to open a trading position in the ASX. The Almonty PR said: "The acquisition will provide Almonty with the ATC’s interest in the Ferro-tungsten Project in Vietnam and thereby a downstream ferrotungsten production capability". OK. I can understand Almonty is looking to more value added and a growing market for the final product. But Ferro-tungsten is new territory and some questions should obviously be asked, like who is ATC? and why is this acquisition a good bargain?
- ATC used to be called Hazelwood and had some Tungsten exploration properties in Australia, in addition to a 60% partnership on the Vietnam Ferro-tungsten plant. The properties were sold one year ago. Also late last year Hazelwood changed its name into ATC. The Ferro-tungsten plant is owned in partnership (60/40) with a local metal company. The plant started production 2 years ago and has off-take customers in Japan, and lately the plant has also been working with tolling customers on off-spec product. These are customers that bring in their own material and take away the finished product made to their own specifications. Nothing wrong with that: a company should take the business wherever it can find it. however there has been apparently some less than straight business going with these tolling customers.
- From the latest quarterly: Ferro-tungsten plant is currently shut down due to concerns have risen as to the operation and performance of the plant under the ATC's 40% joint venture partner, in particular the amount of off-spec Ferro-tungsten produced and the connection of the 40% partner to the tolling customers. The plant has stopped production pending a full review of operations. In the meantime, the long-term off-takers are not being serviced.
- Why would Almonty still want the burden of taking in recently troubled and presently money-losing ATC on top of the yet unprofitable Australian mine? How does Mr. Black plan to make the combination of these two work? The Australian mine seems to have problems with the quality control (impurities) of its product. A plausible way to address that would be to use it in a dedicated facility that is designed to use it without problems. This is my speculatoin and may or may not be what Mr. Black has in mind. Either way I think he should explain the objectives of the acquisition and provide a plan.