Is Tungsten West just a colourful story or worth a deeper look?
“…Shares were riding high at 80p shortly after the IPO. Though much money has yet to be raised, and with obvious further risks attached, maybe at 4p Tungsten West is worth a speculative punt…”
Tungsten West (AIM:TUN) is attempting a delicate financial balancing act to restart production at the highly prospective Hemerdon tungsten and tin mine in Devon.
TUN joined AIM in 2021 with high hopes of becoming ‘the largest tungsten producer in the Western World’. Tungsten is high on EU and US lists of critical metals needed to produce electric car batteries, semiconductors, wind turbines and other transition technologies. Western economies are seeking alternative sources of tungsten in markets currently dominated by China, which boasts some 90pc of the world’s tungsten reserves and accounts for 80pc of international mine production.
Hemerdon is also prospective for tin, which, though no more than a by-product of the mine’s tungsten production, may still be sufficient to make it one of the world’s top 20 tin producers. The mine’s location was recently picked out by the UK Critical Minerals Intelligence Centre as one of eight British sites considered vital for home-grown clean energy technologies.
TUN takes stock
Surging energy prices and wider inflationary pressures cooled expectations last year, rising operations costs obliging TUN to put the project on hold to allow the company to take stock of its strategy. A new Feasibility Study was commissioned, and in September the company agreed a non-binding term sheet for a $30m royalty sale, scheduled for completion this year. Though TUN had cash reserves of £14.9m the company’s half-yearly results for the six months ended 30 September 2022 showed staff costs and other operations expenses had increased significantly, recording capital expenditure for the period of £6.4m and a half-yearly loss after taxation of £5,126,282 (2021 half-year: £4,990,226).
An updated Ore Reserve Estimate (ORE) and revised internal Mineral Resource Estimate (MRE), significant elements of the revised Feasibility Study, were published late last year. The ORE was 101.2 Mt at 0.14pc tungsten and 0.03pc tin, a 60pc increase in ore tonnage and 10pc increase in contained metal from the 2021 estimate, allowing TUN to claim Hemerdon as ‘the second largest reported … tungsten reserve globally’. The MRE was 351.5 Mt at 0.12pc tungsten and 0.03pc tin, a 7pc increase in tonnage and 1pc increase in contained metal from the previous estimate.
The completed Feasibility Study, published in January, forecast ‘strong project economics’, notably a base case post-tax Net Present Value (NPV) of £297m with an Internal Rate of Return (IRR) of 25pc, and an upside case post-tax NPV of £415m with an IRR of 32pc. The figures were based on an estimated Life of Mine (LOM) of 27 years and an annual average steady-state mining rate of 3.5 Mt per annum, equating to an average annual production of 2,900 tonnes of tungsten trioxide in concentrate and 310 tonnes of tin in concentrate. The Study projected LOM post financing free cash-flow of £550m.
TUN has already sunk £12m of capital expenditure into the project, allowing significant progress on bulk earthworks and civil engineering. More than £200m has been invested in Hemerdon over its full life time, including the development of significant infrastructure, the pre-stripping of the open pit, construction of the mineral processing facility and a fully funded restoration bond. The Study estimated remaining project CAPEX at £31.1m (as of October 2022).
The Study set out ‘a revised ore delivery and waste mining strategy, a split phase approach to operational ramp-up to the full design specification, a new primary and secondary crushing method and location, a re-optimisation of the operating strategy for the XRT ore sorters, re-design and re-engineering of the feed preparation, ore sorter buildings and structures, and a re-evaluation of the operation of unit processes and expected recoveries.’ TUN is aiming ‘to bring Hemerdon back into production in the fourth quarter of 2023’.
TUN’s restructuring has encompassed a significant review of the company’s management team, notably the appointment of new CEO Neil Gawthorpe earlier this year. Mr Gawthorpe has held senior positions at Allied Gold, where he focused on operations in Mail and Cote D’Ivoire, and Sierra Rutile Limited, which has evolved into the world’s largest rutile producer.
‘Tough decisions’
Last month the company further developed its strategy to satisfy the conditions for completing the remaining funding required to complete the project and take Hemerdon into production. ‘Tough decisions’ to ensure deliverability will be required to implement cost saving initiatives over the coming months, the options including ‘but not limited to’, cutting the costs of operations, deferring capital expenditure, selling surplus assets, and raising additional funding from specialist debt providers or strategic investors – or by raising further equity. If funding falls short management will consider the ‘last resort’ option of putting the project into ‘a care and maintenance programme’.
TUN said it would undertake an immediate £6.96m placing, stressing that the ‘funds raised from the Placing will not be sufficient to see the Company through to cash generation’, its intention being ‘to fund the business through the planning and permitting process and completion of the required Project funding.’ As at March 2023 the company had cash reserves of £6m which, combined with placing, were expected to be sufficient to fund the business for at least six months.
The evolving strategy outlined plans for a £25m debt facility and a £35-40m equity raise in the future to bring the project into production. Discussions are underway with ‘several mining specialist lenders’, which have provided the company with updated debt term sheets. In the mean time a major programme of cost reduction will be implemented to allow finalisation of the full project funding process. Work on completing the project design, earthworks and civil engineering work already underway will continue to ensure the site is ready for the capital-intensive construction works the securing of full project funding would allow, but other construction activities will be put on hold until the exact design requirements necessary for developing a planned mineral processing facility are clarified.
TUN completed the £6.95m fundraise last month, as planned, and announced an Open Offer to raise another £2m. The company also hopes to raise a further £1m by liquidating inventory and other surplus assets left by the previous operator.
Outlook
TUN’s loss of momentum has been mirrored in the company’s share price, which has fallen nearly 90pc over the past year to 4p, reducing its market cap to £7.25m. TUN was riding high at 80p shortly after its IPO. Like so many small cap commodities the company presents a prospect shimmering with promise, but with an uncertain road to funding. That said Hemerdon has undeniable appeal: a significant resource on UK soil that promises to plug a definite supply gap, one that is tightening as geopolitical tensions worsen.
Small cap investors looking for opportunities to support Britain’s efforts to both green its economy and strengthen the country’s native supply networks might wish to keep an eye on TUN’s colourful story. As economic conditions ease Hemerdon may finally come on stream, though much money has yet to be raised, and, in the current economic and political climate, further uncertainties may yet have to be overcome.
