North American Tungsten Corpor NTC
April 25, 2005 - 2:32pm EST by
2005 2006
Price: 0.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 104 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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At current prices of Tungsten, NTC trades at one times earnings. Let me repeat that, at current spot Tungsten prices, NTC trades at one times earnings. Rarely have fortunes turned for a company as they have for NTC, the western world’s largest tungsten producer. In December of 2003 NTC went belly after two customers cancelled their purchasing agreements. However, after two of the largest producers of tungsten in the world merged and suddenly cut production and China cut exports of Tungsten, the price of tungsten has exploded from $64 in January to its most recent price of $260!

What is Tungsten and what is it used for?

From the International Tungsten Industry Association:

“Pure tungsten is a shiny white metal and, in its purest form, is quite pliant and can easily be processed. Usually, however, it contains small amounts of carbon and oxygen, which give tungsten metal its considerable hardness and brittleness. For decades, scientists have worked to overcome the brittleness problem, and this brochure will show they succeeded. Tungsten features the lowest vapor pressure of all metals, very high moduli of compression and elasticity, very high thermal creep resistance, high thermal and electrical conductivity and, last but not least, a very high coefficient of electron emission. The latter can even be improved by alloying tungsten with certain metal oxides.

Tungsten is an essential commodity. It makes an important contribution, through its use in cemented carbide and high speed steel tools, to the achievement of high productivity levels in metal and wood working, construction, mining and wear-protection, on which the world’s economic well-being depends. In the household, tungsten is used in light bulbs, television sets, magnetrons for microwave ovens and other electrical consumer products.”

I would add that basically tungsten hardens anything from saw blades to weaponry.

Tungsten is produced where?

Eighty-five percent of the world’s supply is in China. China maybe uses 35% of their own production. Outside of China, you have some production from Russia, a small Tasmanian mine that is idle, one in Portugal, and you have a mine in Vietnam that is scheduled to open in 2008. Oh yeah, and you have the western world’s largest mine that was shut down in December of 2003, that just happens to be owned by NTC.

What in the world has gone on with Tungsten prices?

The control of that production in China has been consolidating. China Minmetals, which is a giant state company, took over one of the biggest producers in the Jiangxi province. The new company is called Jianxi Tungsten and they have actively pursued “stabilization” in the market, meaning they cut production growth to 5%, despite demand in Chain increasing last year over 20%.

At the same time, the government (read: Jianxi Tungsten) has gone about shutting down as many illegal tungsten mines as possible. It has even gone to the lengths of not allowing many other mining companies to buy explosives to mine tungsten. Then add on some electricity shortages where most of the tungsten is produced. And finally, the Chinese government has actually cut export quotas of tungsten to keep as much of it in the country as possible. The supply of tungsten has come to a grinding halt as demand is surging.

So what happens when 85% of a market suddenly cuts supply and production while demand is surging? In January, prices were $64 a ton. The last price that I saw was $260 a ton and rising. In one article, a trader expects prices to reach $300 soon.

North American Tungsten emergence from bankruptcy

NTC’s plan of reorganization was approved in November of last year, but the plan was conditional on the company raising C$3 million, which they did in January. They have since had several private placements to get the money to restart production of their mine. Luckily, most mine workers were still around and the shutdown was so recent that the mine is in good shape.

North American Tungsten will be producing by July/August

NTC is in the process of reopening the plant by July or August. Right now they are working on the plant getting it ready to be operational. While they do this, they actually will be starting to stockpile ore. So, by the time they officially open in July or August, they will have tungsten ore to pump out immediately.

The mine should produce 400,000 tons a year, and that year one. So, 2006 production will be 400,000 tons.

Reserves are enormous

But that production is just from its CanTung Mine. They have much more tungsten reserves through their wholly owned MacTung Deposit. It is estimated that they potentially have 50 million tons of reserves and resources. Historically, they have spent over $25 million developing this resource. We should see further news on this in the future.

Earnings model: Cash flows could be more than the market cap in just one year

We already know that NTC will produce 400,000 tons a year. NTC has to pay a 1% royalty to produce tungsten, and there are transportation charges for about $6 a ton. NTC also has $60 in cash costs to do everything else. So, we know that at $250 a ton for tungsten, NTC is going to make C$90 million in cash flow a year. Now I don’t know what the tax situation of NTC will be, because they emerged with a huge amount of tax loss carry-forwards. And they are the Canadian type of tax loss carry-forwards. Also, I have just estimated the pre-tax cash flow. And I am estimating that there are 115 million shares fully diluted.

Below is the table that gives you the cash flow estimates at different prices of tungsten. I estimate that the company is fairly valued if tungsten were to collapse to $100. Anything higher and the stock will explode.

Tungsten price@ $100 $200 $250 $300
minus 1% royalty $1.0 $2.0 $2.5 $3.0
Transport Chgs. $5 $5 $5 $5
NTC's net price $94 $193 $243 $292

Pre-tax cash costs $60.00 $60.00 $60.00 $60.00

pre tax margin $34 $133 $183 $232

pre-tax CF (000s) $13,600 $53,200 $73,000 $92,800

in CAD (000s) $16,864 $65,968 $90,520 $115,072

pre-tax CF/share $0.15 $0.57 $0.79 $1.00

Price/(pretaxCF) 6.7 1.7 1.2 1.0

Value @ 5 times $0.73 $2.87 $3.94 $5.00
Value @ 6 times $0.88 $3.44 $4.72 $6.00
Value @ 7 times $1.03 $4.02 $5.51 $7.00

Risks and Unknown

That China could relax their export quota and increase production of tungsten and crush the price is the biggest risk, but they have been working at this for a couple years now. Plus, if you controlled 85% of the world’s supply why wouldn’t you try and control prices and drive them higher? If the biggest new mine to come on stream is three years away, why not make hay while the sun shines?

Another risk factor is that the stock is on the Vancouver exchange and not the Toronto, though the company told me they will apply for the Toronto exchange soon. Sometimes the Vancouver is a bit like the Wild West, but I am comforted that the only reason this company is there is due to its recent bankruptcy and emergence.


Between one large Chinese producer and the government of China, there is a new monopoly in tungsten, and there is little supply that can come online anytime soon. There is only one public company that is going to be producing come July that you can invest in. They have no debt, and are the only incremental supply outside of China.

And they only need one year to really earn their market cap. If prices stay stable, the stock is worth C$4-C$5 a share. If prices rise it could be as much as C$7 a share. If prices collapse more than 60% to $100, the stock is probably slightly undervalued to fairly valued, so there is protection. The closer we get to July though, the more this stock will move higher. My three month stock target is C$2 a share, or 122% higher.

One last thought is that I think North American may be an acquisition target. This is just speculation on my part, but if I was the Jianxi, why not take out the additional 6% of supply to further control the market. And there may be others who are looking at needing supply or are suddenly interested in a company trading at one times earnings.


1) Commencing production of mine in July
2) Listing on the Toronto Stock Exchange
3) Update on MacTung deposit
4) May 2nd, big roadshow to introduce company to the public
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