A quick glance at the bellwether mining plays on the TSX and TSX Venture clearly indicates that things have turned around in the sector. And on December 22nd, 2013, when the Venture sat at 888.18, we predicted this market rally was likely to unfold (Click here for report). In fact, the bigger names, and more liquid stocks on the Venture, have been on a tear, some up 100% or more in the last 3 months. The TSX is close to a 3-year high (above 14,200), while the TSX Venture has risen to a 10-month high, hovering around 1,025.
News out of Perth, Australia, confirmed that capital raised by the global mining sector jumped 180%, to $US6.2 Billion, in Q4 2013 vs. Q3 2013, according to SNL Metals & Mining.
With developed economies growing at a sluggish pace, governments from Japan to Europe to the United States are debasing their currencies in a bid to bolster domestic exports, and promote infrastructure projects. Commodities are the direct beneficiaries of such government action, and miners’ profit margins are on the rise.
From coffee to natural gas and gold, commodities are once again leading all asset classes in appreciation. And that trend is not going to change anytime in the near future.
So what metal looks attractive, right now?
At the end of the day you want to search out a metal that has established demand, with strong long-term fundamentals and is expected to enter a deficit, or already in one. And, you want to get involved before the masses do…
Tungsten Demand Expected to Rise
Tungsten is one of the few metals where demand is expected to outpace supply in the coming years, and there is a potential treasure trove of profits to be made by miners of the metal. The massive profit potential, unfortunately, has even attracted organized crime to get involved with tungsten mining.
The day after Christmas, Bloomberg reported that Colombia’s government was preparing to seize a tungsten mine run by the Revolutionary Armed Forces of Colombia (FARC).
According to Bloomberg, “tungsten mined for the profit of FARC makes its way into the supply lines of the makers of BMWs, Ferraris, Porsches and Volkswagens, computers and BIC pens.”
Bloomberg continued “Apple Inc. and Samsung (005930) Inc. have also bought material from that tainted supply line. The parts are used for iPhones, iPads, iPods and Galaxy mobile devices.”
What does that say about the tungsten industry when a criminal enterprise is illegally mining the metal and somehow getting the ill-gotten commodity into consumer products?
While we don’t know exactly how much of the tungsten these multinational corporations use was being supplied by FARC, we do know that the companies weren’t told of its origin. Bloomberg reported that“buyers are exporting tungsten from the FARC mine to international buyers by hiding the ore’s true origins.”
A criminal mining operation like FARC’s simply would not exist if demand for tungsten wasn’t increasing and supply levels weren’t so tight. Bloomberg released a very intriguing report on the industry, and the underground criminal enterprise looking to capitalize on the supply constraints. Click here to view Bloomberg’s presentation titled Tungsten’s Tainted Trail.
You most likely heard about tungsten back in the mid-2000s, when it, along with molybdenum and some other lesser known metals used in infrastructure projects, skyrocketed in value. While molybdenum, and other previously unknown metals have seen their prices collapse since that mania phase, tungsten hasn’t.
Unlike so many commodities that come in and out of vogue, tungsten has a proven level of price and demand stability unmatched by almost all other metals. And tungsten prices are up more than 400% since 2003… this is a metal with staying power. It’s not a fad investment.
Buffett’s Berkshire Hathaway Connection
Warren Buffett is not a big commodity investor. He seeks revenue growth. In respect to gold, for example, Buffett sarcastically stated,
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Interestingly, it appears he feels quite differently about tungsten, a metal with enough practical demand to allow Mr. Buffett to see its investment worthiness. As recently as 2012, Warren Buffett’s Berkshire Hathaway, through its IMC International Metalworking unit, agreed to invest $80 million in one of the world’s largest tungsten mines, located in South Korea.
In respect to Berkshire Hathaway’s investment, Forbes contributor Eric Savitz wrote,
“While the deal may come as a surprise to the outside world, those with knowledge of tungsten understand that it’s a crucial but disappearing resource that continues to affect all of us.”
As one of the hardest metals in the world, combined with having the highest melting point and lowest vapour pressure, global demand for tungsten has been growing at roughly 6.5% per year, since 2010(source: Tungsten supply Article – Roskill).
Bear in mind, the last four years haven’t exactly been boon years for the global economy, yet tungsten demand continues to increase at an impressive clip.
Given its growing applications, tungsten’s price has been remarkably stable, in comparison to virtually every major metal, for more than a decade. Its price has maintained its uptrend since 2003.
Where does tungsten supply come from?
Much like the rare earth and graphite market, China is by far the largest miner of tungsten, accounting for roughly 80% of global mine production in 2012. Russia was the second largest producer at around 5% and Canada third at 3.5%.
Two communist countries control approximately 85% of global tungsten production – an unnerving statistic for any company in need of the metal. It’s no wonder FARC, an organized crime group known to use terror tactics, with ties to the Russian Mafia, has tried to capitalize on this shortfall.
China overwhelmed western producers in the 1990s with its low production costs for tungsten, due to poor environmental standards and cheap labor. The ensuing supply glut depressed prices and put most western and politically-safe located tungsten assets on the shelf.
The fate of tungsten began to rapidly change in the early 2000s, however, as the Chinese government began controlling the industry through the imposition of production and export quotas. The reason it began controlling the market was because tungsten became a key commodity for new technologies, was increasingly being used in drill bits for oil and gas exploration, engine nozzles, military applications, electrodes, touch screens, smart phones and much more.
As the world evolved technologically over the last 25 years, and emerging markets rapidly expanded, China realized that if it didn’t stop the mass exportation of tungsten, it would find itself at the mercy of a foreign producer. We saw similar tactics used by the communist government for graphite and rare earths.
The Chinese government also removed export rebates on tungsten products as it frantically attempted to slow down its deteriorating supply. Government officials realized they had made a critical economic error as the country’s tungsten ore reserves dropped from approximately 4.2 million tons to 1.9 million – a decline of more than 50% in just 8 years (2003 to 2011). So, now, with a wiser and more strategic Chinese government, it will be up to the rest of the world to mine tungsten in order to meet global demand.
Euro Pacific Canada (a firm launched by famed commodity investor, Peter Schiff) published a report in 2012, titled Tungsten: The Metal of the Future. It stated,
“By the early 2000s, consumption of tungsten increased to approximately 50,000t. The increase in demand spurred the Chinese government to tighten their policies in regard to tungsten production. These policies included further increasing reserves and developing downstream processors, similar to actions partaken in the RE market. The combination of these policies, China’s extensive infrastructure, and the growing scarcity of global supply, resulted in the decrease of exports out of China; in fact China once again became a net importer of tungsten. This in turn has increased the global supply risk for tungsten and placed it as one of the most highly critical elements according to the British Geological Survey. Tungsten was also declared a U.S. “conflict metal” in 2010 and identified by the EU as one of 14 ‘critical’ minerals.”
Once China became a significant importer of tungsten, tremendous pressure was put on American tungsten stockpiles and naturally, prices shot up.
According to the US Geological Survey, from 2000 until 2011, the US stockpile of tungsten fell from around 35,500 tons to 7,500 tons.
Why is Tungsten Demand Rising?
In pure form, Tungsten has the highest melting point of all metals, at roughly 3,400 °C. Its ability to withstand heat has made it not only in demand, but irreplaceable for many 21st century applications. Not only can it resist extreme heat, but tungsten carbide (WC) has a hardness comparable to that of diamonds – while being much cheaper, of course.
Tungsten has many uses. From armor-piercing tank shells to rocket engine nozzles, its military and industrial applications are vast.
The whitish grey metal is corrosion resistant and fire-proof. It is used in drill bits for oil and gas exploration and high-tech industries, such as in electrodes for solar panels and nuclear equipment. Tungsten is also used in the creation of touch screens and various hand held tablets. It is even used in experimental nuclear fusion devices for its heat resistance qualities.
Tungsten’s primary use is in cemented carbides, otherwise known as hardmetals. The uses and applications within the hardmetals industry are almost infinite. The International Tungsten Industry Association describes hardmetal tools:
“Hardmetal tools are the workhorses for the shaping of metals, alloys, wood, composites, plastics and ceramics, as well as for the mining and construction industries.”
As the energy industry expands, and technology continues to evolve and countries update infrastructure, a massive amount of tungsten will be needed – perhaps this is why Berkshire Hathaway took a stake in one of the world’s largest tungsten mines.
What the Mining Industry is Saying
Core Consultants provides consultancy services to commodity research firms and mining companies across four continents, including: Africa, Asia, Europe and South America. Core’s Founder, Lara Smith, updated her stance on the tungsten market in July of 2013. She stated,
“Based on China’s decision to limit exports to the rest of the world, we estimate that the primary tungsten market is in deficit and, this year, we expect the deficit to be in the order of 15 000 t.”
15,000 tons is a massive deficit. Consider that in 2005 it was projected by analysts, according to Resource Investor, that the tungsten industry was headed for a 7,000 ton deficit in 2007.
This expectation sent prices for the metal on a parabolic rise, nearly quadrupling from 2003 to 2006…that is the type of price appreciation investors dream of.
Lara Smith also mentioned that tungsten is expected to become highly scarce from 2015.
No End in Sight for Tungsten Demand
According to Roskill and ITIA, global consumption of tungsten is forecast to increase from 67,000 tons (in 2011) to 95,000 tons by 2015. That’s nearly a 50% consumption increase over just a 5 year period.You’ll be hard-pressed to find another commodity expected to have such a massive increase in consumption over the same period.
Tungsten Demonstrated Price Stability – A Rarity Among Metals
In a late 2012 report, Money Morning Global Resources Specialist, Peter Krauth, stated that,
“I think tungsten looks like a great commodities play going forward — new supply is very limited outside China.”
And that, “It is however a difficult market to play, as investment options are limited mostly to very small cap junior mining companies that carry higher risk.”
While risk is evident in the junior mining market, so is the potential for substantial reward. We are playing the tungsten market with exposure to just one company – to be announced in next weekend’s report.
All the best with your investments,
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