Off-take agreements and conference call The off-take agreements are of course a positive thing. The off-taker values the relationship with a supplier that can provide high quality material on schedule. Having off-take deals to cover the full production from the three active mines over the next 5 years indicates that is viewed as a reliable long-term partner by these customers. The company should be solvent and able to support the construction of the other mines (Sangdong and Valtreixal) at attractive conditions.
- Are the terms of the off-take agreements adequate to support planned activities of the company over the next five years? Off-take agreements are established on the basis of two converging needs: the off-taker needs quality material on a reliable schedule (time and amounts) and it is willing to commit to a long-term contract. the miner needs to sell its product on a regular and predictable basis and is willing to discount the product to the prevailing market price (spot prices in the case of tungsten) according to some agreed formula. It is in the best interest of all that the agreement should be affordable in the long run to both parties. For a minor metal like tungsten which has a very thin spot market the floor price on the off-take insures that the miner has enough margin even when the spot market dries up and prices collapse like at the end of last year. Off-take agreements are trade secrets of the parties involved, but some info is available from technical reports and MD&As.
- From Los Santos NI 43-101 TECHNICAL REPORT: "The majority of production is committed under a long-term contract, that was extended when Almonty acquired control of Daytal, and now expires in September 2016. This contract calls for delivery, in 1 tonne Bulk Bags, in standard short container lots per consignment, of tungsten concentrate grading plus 65% WO3. As per standard industry practice, the price paid per tonne of concentrate is based on the number of contained metric tonne units ("mtu") of Tungstic Oxide (WO3). This unit price varies for individual consignments according to the prevailing Ammonium Paratungstate (APT) price as published during the week of shipment in Metals Bulletin magazine ("the Metals Bulletin price"). The details of the contract, including the APT discount rate applicable, are strictly commercial- in-confidence and may not be disclosed, but equate to industry norms. There is a floor price of $250/mtu for APT in the contract."
- Tungsten prices are quoted in $/mtu of APT. Almonty sells Tungsten concentrate, not APT. Based on its higher tungsten content APT (88% tungsten) carries about a 40% premium over WO3 concentrate (65% tungsten content). So the "floor" on the Los Santos product (WO3 concentrate) is $175/MTU. which is what Almonty received for its sales in the last quarter according to MD&A and financials. The all in cash operating costs at Los Santos dropped from $220 in FY 2014 to $150 in FY 2015, allowing the mine to remain profitable in FY 2015. Given the price floor in the off-take agreement, if Almonty is able to contain its all in cash costs to the current level, there should be a small margin of profitability built in even at these depressed tungsten spot prices. The low spot prices are not the full story anyway, because the off-take market is many times as large as the spot market for tungsten.
- Conference Call. The CFO was very dry and kind of just read from the financial tables. was probably not too comfortable with all the red ink. But Mr. Black was irrepressible ("this was a great year!"). Of course they spent money to acquire the new mines and cash has been depleted, but isn't that what investment spending does, even at these bargain basement prices? Black took a few minutes describing the role of the five properties in the acquisition strategy of the company. Made it sound like there was actually method to the madness after all. At the end he made sure to say that Almonty is done with buying new properties at this point. The company now has a full plate and needs to concentrate on developing the assets. It was good to hear they have a bold vision for the future but also maybe they know when and how to start being practical. As all the producing mines now have assured long-term off-takes, the development of Sangdong can be taken credibly to financial sources for favorable terms. It is not unreasonable to expect a decent financing for Sangdong in the near future from Korean or German banks (not the double-digit deals from the usual Bay Street sharks) and including an IMC (or plan B) off-take.