Almonty Industries (OTCQX:ALMTF) is a listed junior miner with an exclusive focus on tungsten which it currently produces from its two properties in Spain and Portugal with plans underway to start production from its new project, Sangdong, in South Korea. The management at Almonty are proven money makers in the tungsten space having owned, operated and sold publicly traded tungsten miner Primary Metals (TSX-V-PMI) for a 30 fold profit in 2008. The Company is on the brink of completing a transformative financing and I believe its chance of success in this effort now justifies accumulating the shares in the market.
Almonty is reaching the closing stages of a 3 year effort to raise the $106m needed to pay to reopen and start operations at its Sangdong mine. When it opens, Sangdong will be the world’s largest, highest grade, and longest life tungsten mine. The Sangdong project which is effectively the redevelopment of an existing mine that operated 1916-1993, will be transformational to Almonty. The funding of Sangdong will be made up of $76m of debt which will come from KfW-IPEX Bank, one of the biggest banks in Germany, and the US$30m equity funding it is likely to complete soon. The debt was finalised in January when Almonty announced that KfW had approved the loan which will be 80% guaranteed by OeKB, the Austrian government bank, and effectively underwritten by a 15 year off-take agreement with GTP/Plansee, a leading European buyer that locks in profits for Almonty with a guaranteed price floor. Mining finance is an extremely challenging business for minor metals projects especially, and getting this very conservative bank’s backing is a considerable achievement. The loan carries an effective coupon of 3.1% per annum.
In order to draw down this loan, Almonty is currently putting into place a US$30m equity funding that it expects will close in the next few months. The exact terms of this issue have not been fixed or announced. The company is currently valued on the market at US$92m (CAD123m) and has its main listing in Toronto (AII.TO) trading in the US under the ticker ALMTF. The funding is most likely to be done at a slight discount to the current market price or through a convertible issue that would convert at a higher price in a few years’ time, which would result in a smaller dilution to shareholders. If we assume the highest possible dilution from a new equity issue – a pure equity raise of $30m at a 7% discount to the current share price in Toronto – i.e. shares issued at CAD0.6, compared to the current price of CAD0.65, then post-money valuation will be US$123m.
According to the Company’s forecasts, EBITDA from Sangdong (which will be the bulk of Almonty’s business) are projected to be around US$40m annually in the early 2020s, and are projected to double from around 2025 onwards as production ramps up full capacity. Those numbers would put Almonty’s expected post financing value of $123m on a forward EBITDA multiple of 3X 2022, falling to 1.6X from 2025 onwards.
According to the resource statement for the project, the mine has a minimum 12 year life with proven and probable reserves of 7.9m tonnes of 0.45% material, but with a total of 50.6m tonnes of inferred resources of tungsten bearing rock, Sangdong’s life of mine is likely to grow by several decades at least with further drilling, once operational. These expected resource upgrades would be accretive to equity value.
Tungsten is a very rare metal that is mined and produced for its unique characteristics which include being the hardest and having the highest melting point of all metals. It is used in materials to make machine tools, drill bits, aircraft, autos, military hardware and a fast growing number of high tech products such as semiconductors. Due to its critical importance to in the manufacture of drill bits, tungsten benefits from a strong global mining industry generally; prices last peaked during the last global mining peak of 2011/12.
The global tungsten market today is worth around US$4bn annually, which compares to activity in other minor metals such as lithium and rare earths each of which have global market sizes of around $3bn . Tungsten demand is projected by Global Market Insights (Global Tungsten Market Size and Share | Industry Outlook – 2025) to grow at an annual pace of 8% per annum for the rest of the decade, while supply is often unpredictable, as over 80% of mined tungsten comes from predominantly small scale mining operations in China, whereas China accounts for just under 50% of global demand for tungsten. With Sangdong, Almonty will account for 7-10% of global supply of tungsten. Due to its scarcity and unique characteristics, tungsten is classed as a critical material of strategic importance by the EU, and the US and British governments.
This China factor presents risks and opportunities for Almonty and the industry as a whole. Surplus production and/or stockpiles in China have sometimes depressed prices in the past, forcing mine closures elsewhere. It was due to Chinese dumping in the early 1990s that Sangdong was closed. Tungsten prices have been low since 2014, and are now roughly half where they were when they peaked in 2011. This long period of low prices has driven a large number of small miners outside of China out of business: Almonty is the largest survivor. Buyers of tungsten are large industrial groups who are uncomfortable depending upon this unpredictable source of material (typically small Chinese mines) and are sometimes willing to pay considerable premia to world tungsten prices in order to secure steady supplies. Almonty benefits from this scarcity factor as its existing European operations are selling material at premium prices to Asian buyers, and it was able to secure off-take terms for Sangdong that guarantee to a profit due to the price floor.
Global tungsten prices are unlikely to fall much further without putting much of Chinese production under pressure. Currently tungsten concentrate prices are around $235 per MTU (MTU is one tenth of a metric tonne or 100 kilos) globally. This compares to production costs at China’s large state-owned companies that typically run at around $205-245 per MTU. At Sangdong the cost of production is projected to be US$125 per MTU due to higher grades, better recoveries, and greater scale. Chinese tungsten stockpiles have been run down in recent years and typical Chinese mines are small, frequently dangerous, and lower grade than Sangdong, with small defined resources.
While Sangdong can flourish at current low prices due to its low cost structure and the insurance of an off take agreement which guarantees purchase of material at market price or a floor of $183/MTU, longer term it is perfectly possible that prices will rise, as periodically China runs short of tungsten, driving prices up. A number of industry analysts believe that if Chinese demand for the material continues to grow while new local supply of tungsten is not expected to keep pace, with the possibility that China will be eventually become a net importer of tungsten.
Almonty management believe that once it is up and running, the Sangdong mine will be of great interest to strategic buyers, most likely in Korea or Japan which are two of the world’s biggest importers of tungsten. Almonty management know a thing or two about selling to strategics: in 2008 a company that they previously owned, Primary Metals, sold the Panasquiera tungsten mine in Portugal to Sojitz of Japan for $67m, having purchased it for $3m only three years previously. Almonty was founded with the proceeds of that trade, and their aim is to do it again, another reason, albeit a speculative one, to hold on to the shares.
Minor metal mines such as rare earths are difficult to finance, and doubly hard to sell in public markets as their price dynamics are extremely hard to follow. The Fortress Value Acquisition (FVAC) and MP Minerals deal aimed at reviving the Mountain Pass rare earths mining property in California through its purchase and funding by FVAC sets down an important marker about what is possible in capital markets today. Led by a strong metals prices, mining equities are finally back in favor to such an extent that even this relatively obscure asset, that produces poorly understood rare earths is being readied to face the public markets when the deal completes in late 2020.
The FVAC-MP deal contains many of the same very compelling elements to the Almonty funding apart from timing (both are due to complete in 2H20 when Almonty should complete its funding and FVAC will complete its acquisition of MP Minerals). Both are funding a minor metals mine through the public markets. Lke Sangdong, Mountain Pass is a formerly producing mine producing minerals (rare earths) the global production of which is dominated by China and thus of growing strategic concern to buyers in the rest of the world. Both FVAC and Almonty are operating in relatively stable jurisdictions (South Korea and California), and both are hoping to provide an alternative, non-Chinese source to buyers of their critical materials.
Due to all of these similarities, it is worth comparing the valuations that they offer to investors. On this basis, the FVAC-MP looks relatively expensive. The FVAC-MP Minerals merger will value the combined post money company at just under US$1.5bn post money based on a projected run rate EBITDA of US$252m in 2023 – a 6X multiple. If the Almonty funding goes through as I expect it to do as detailed above, it will have a post money valuation of $123m, compared to EBITDA of around $40m from 2023 (a 3x multiple) onwards, falling to a 1.6x EBITDA multiple from 2025 onwards.
FVAC also faces greater market risk, in my view. The rare earths global market is today worth around US$3bn, and is around 85% Chinese controlled, and the rare earths industry is far more complex and costly to enter than tungsten. The Chinese dominance of rare earths extends beyond mining to processing, and breaking into that global monopoly will be harder (for FVAC this will necessitate investing and entering the downstream processing business) than Almonty’s task of building upon its already established presence in the global tungsten business.
Due its larger numbers, US location, US listing and big US backer (Fortress Investment Group), and the fairy dust of a projected demand explosion for rare earths from the electric vehicle industry that they have cited as a reason for a revival in rare earths, FVAC-MP Minerals will have a greater US audience than little Almonty whose founders and management are from the US and UK, but which is relying largely on German debt and equity partners, and thus seems distined to trade a valuation premium to Almonty, but this disparity in future valuations and risk profiles is striking. Almonty could prove to be the tortoise to FVAC-MP’s hare.
Disclosure: I am/we are long AII.TO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.