VANCOUVER (THE CRITICAL METALS REPORT) -
Tungsten and fluorspar may sound like dry subjects, but Jennings Capital Analyst Ken Chernin makes them positively magical.
In this Critical Metals Report exclusive, Chernin transports us from Morocco to "Tungsten Town" in Northern Canada.
The two critical materials parallel the rare earths investment thesis, but Chernin's analysis is more than a bet on shifting Chinese policy-it's a compelling story involving a war metal-turned global growth staple.
The Critical Metals Report: We're seeing bubbling interest in fluorspar, or calcium fluoride, and tungsten. Let's talk a little about their uses.
Ken Chernin: Tungsten is historically known as a "war metal" because it was primarily used in ballistics. Demand and pricing followed the historical path of conflict. In recent years, the biggest market has become something called cemented carbide. It is used primarily in specialty tools that need to withstand excessive heat and require extreme durability, like drill bits for oil and gas and mineral drilling. Right now, tungsten's demand is closely linked to gross domestic product, especially with China. The reason I like tungsten is I see it changing from a demand story to a supply story.
As for fluorspar, it is used throughout the world, primarily by the chemical industry, for refrigerants and foam products and in the manufacturing of aluminum, Teflon, refined petroleum products, glass and medicine. There are virtually no substitutes for many of its uses, and it is an essential ingredient in hydrofluoric acid.
TCMR: Are you saying you see potential supply problems with tungsten?
KC: Yes, I do. Tungsten, when I first looked at it, read like a rare earth elements (REEs) story in that 86% of global supply came from China. In REEs, it's around 95%. The Chinese government seems determined to restrict exports because it has made a significant investment in downstream, higher-margin industries using tungsten. Therefore, it is determined to keep what resources it has for itself.
TCMR: Just like the REEs.
KC: Exactly. I found in my research that only three tungsten mines outside of China have operated without extended closures in the past 60 to 70 years. As a result, there was an enormous loss of tungsten-specific knowledge. Tungsten mining and processing is very unique. Today, companies with brownfield or greenfield projects will likely have trouble finding the right people.
Another dynamic is that the higher-grade deposits have been depleted. A large proportion of the new projects are very low grade. Some are 0.09% grades, which is approximately three times lower grade than some tailing recovery projects.
TCMR: China is suffering from all the environmental impact of its mining activities over the years. We certainly would like to see more attention paid to cleaner projects.
KC: Absolutely. That's a very good point. China has moved to close smaller, less efficient tungsten as well as fluorspar mines and has implemented policies aimed at consolidating both industries. That said, in late January 2012, the World Trade Organization (WTO) confirmed its findings from a mid-2011 decision that China's export restrictions on several industrial raw materials, which included fluorspar, were in breach of WTO rules. Although China claimed that the export restrictions on these industrial raw materials were justified for reasons of environmental protection or conservation policy, the WTO did not agree. The complaint was brought by the U.S., Mexico and the European Union. In March 2012, the U.S., the European Union and Japan launched a new WTO dispute against China's export quotas on tungsten, rare earths and molybdenum, and China is again citing environmental and sustainability concerns.
TCMR: Can North American investors participate in the tungsten story?
KC: Absolutely. We published a research report on Sept. 26 on three publicly traded producers. They're all listed in Canada. They're all in production. Tungsten prices have dropped since a year ago to about $350 per metric ton unit (mtu) from $450/mtu (which is 10 kilograms). If we get another sudden spike, these companies benefit immediately. All three companies' contracts are tied to the market price of ammonium paratungstate (APT), which is the main tungsten intermediate.
TCMR: Let's talk about fluorspar. What is it used for?
KC: It's calcium fluoride-51.1% calcium and 48.9% fluorine. The uses depend on the grade, of which there are three. Acid grade is 97.5% purity. Metallurgical grade goes for much less and chemical grade does not account for much of the market.
Acid grade is what we're interested in. Global production of fluorspar in 2011 was 5.6 million tons (Mt). World market value is only about $2 billion (B). However, that feeds a $30B end market, which is not substitutable. It cannot be replaced. Like tungsten, demand is relatively inelastic. Price won't really impact how much is used.
The biggest market is fluorcarbons. It's in your brake lines, it protects your gas tank and it's in your refrigerator. You can't make Teflon without it. It's in your air conditioning. In fact, for refrigeration and cooling, you really can't replace it, unless you use carbon dioxide (CO2) compression.
TCMR: Many consumers in developing countries don't currently have refrigerators and they want them. Is that an essential part of the demand picture?
KC: Absolutely. China has invested billions of dollars going downstream. The biggest use for this is hydrofluoric acid. From there, we go into fluorochemicals, the fluoropolymers, which is your Teflon, and your photovoltaics, or solar panels. It has green energy applications. But China went downstream. It started producing the hydrofluoric acid and has excess capacity. It went further downstream and built factories for refrigerants. Now it is building fridges and air conditioners.
TCMR: Can China produce enough of its own hydrofluoric acid to supply its own needs?
KC: It has the capacity for the hydrofluoric acid. I believe China will be a net importer of fluorspar in the near future. China has the purest fluorspar, next to Morocco. Fluorspar from every region has various impurities, and fluorspar users typically blend concentrate from various mines. The higher purity for acid fluorspar does go for a premium.
TCMR: Explain to me why fluorspar is so rare from a geological perspective.
KC: That's a good question. There simply aren't many undeveloped deposits that have sufficient grade, scale and/or infrastructure and good logistics.
TCMR: Do you have any final thoughts for us?
KC: Tungsten is typically low grade, and the lower the grade, the less room for error. Furthermore, if a company doesn't have a team with tungsten-specific experience, you very well could be looking at headaches and stumbles. Scale, of course, along with logistics is also important. I look at power lines, roads and workforce.
TCMR: Fluorspar's investment thesis involves escalating consumer demand for the products that contain the material, is that correct?
KC: Yes, and that China doesn't seem to be opening its door. Although the WTO has upheld the complaints we discussed, the country appears to continue to make strides into higher-margin, value-added fluorochemical products, and likely needs its internal production.
TCMR: This has been fascinating. Thanks for sharing your insight.
KC: It's been a pleasure.
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