Low-cost tungsten play Ormonde Mining to take-off

Ormonde Mining (LON:ORM) has flown under the radar of most investors as it has gone quietly about the business of developing its Barruecopardo tungsten project in Spain.

But in the next two years as it moves into production, the news-flow should come thick and fast, which will undoubtedly raise the company s profile.

What is bound to help is the story unfolding around tungsten itself, a strategic metal used in construction and manufacturing, and whose supply is in the hands of the Chinese.

The People s Republic is responsible for 77 per cent of the world s supply of primary tungsten, but is cutting exports in order to satisfy booming domestic demand.

This has delivered a double blow to the West as the price of tungsten trioxide has shot up from US$200 per metric tonne unit (the standard 10 kilogramme measure) to the current price of around US$320 per MTU, while a gap in supply has opened up.

The market deficit outside China is likely to be around 14,500 tonnes of tungsten metal per year by 2013, according to the Commodities Research Unit.

All of which makes for the perfect storm if you happen to be opening a tungsten mine.

The market is being driven by the actions of China, Ormonde s managing director Kerr Anderson told Proactive Investors.

It has similarities with the rare earth story, although tungsten is not a rare earth.

Rare earth projects tend to have a high capital cost, whereas the tungsten in our project is simple to process, resulting in really low capital costs.

The real similarity with rare earths is in the way that China dominates world production and is introducing measures to increase its control over the market, with a view to preserving domestic reserves and production for its domestic needs this is creating significant supply deficits outside of China.

However, even if this wasn t happening, our particular project would still be viable because of its low operating cost.

It is not about having a high tungsten price (which is a real bonus), but being on the low end of the operating curve.

So if prices do come back at some time in the future we are still very profitable.

Ormonde s plan is to have Barruecopardo up and running by the end of 2012, initially mining 500,000 tonnes of ore per year after a steady ramp-up.

The capital cost of that will be around 30 million with an additional 10 million needed to increase capacity to 800,000 tonnes, according to the consultants Scottt Wilson Mining.

This latter scenario would require converting Ormonde s inferred resource to the indicated category, which in turn would necessitate more drilling

The Scott Wilson study showed there is enough ore near the surface to maintain an open pit production for ten years, before the operation heads underground.

The project is based around a former mine in the Salamanca Province of Spain, which closed back in 1984 when tungsten prices plummeted.

The fact there has already been mining production on the site has two potential benefits. It sets a persuasive precedent which should be helpful during the permitting process.

It also means that the product is well known among potential buyers. And in fact it is a reasonably high grade.

Concentrates normally have to be at least 65 per cent tungsten trioxide. However, Barreucopardo has the capacity to produce concentrates of up to 78 per cent, which would make its output particularly sought after.

The fact that it requires nothing more than a gravity processing plant to get it to this stage explains why the cash costs of the operation are likely to be so very low at 80 per MTU, and it also makes the project far simpler to execute

In the past three months a section of the investment community seems to have cottoned onto the story with the shares rising more than 45 per cent.

But let s put that in perspective. Ormonde, in making that leap, is actually only clawing back lost ground. And in fact the stock is down albeit only marginally - on where it started 2010.

This of course means there is plenty of upside, particularly once the potential of the project is understood by a wider audience.

At a tungsten price of US$245 per MTU then Barruecopardo s operating cashflow is 9 million, according to the Scott Wilson study.

The figure rises to 14 million at US$290 per MTU and approximately 16 million at today s price - impressive for a company with a current market cap of just 16 million.

The other kicker is the possibility for expanded output, which has the potential to increase these cashflows significantly.

It should also be noted that the deposit is open at depth along the full 1.6 kilometres of strike, having only been drilled to an average depth of 250 metres.

The company anticipates that deeper drilling, which will take place following initial production, could result in a substantial increase in resources.

Those who know the company long ago recognised its potential.

Job Langbroek of the stockbroker Davy has set an 18p share price target (current price 5.5p).

He said: a combination of strong tungsten prices, recent financing and a very robust mining project suggest to us that the group has a real opportunity to deliver the in-situ value at Barruecopardo.

The hurdles to be cleared between now and the end of 2012 are the permitting process, financing and building the mine.

The Project will have considerable debt capacity and debt funding will be pursued as the main option to fund the 30 million mine development capital stage.

There may also be partnership and off-take deals to be negotiated, which might ease the financial burden. However the Ormonde managing director is tight lipped about any negotiations that might be taking place at this time.

All that leaves is the acquisition of the appropriate permits to mine and the company is devoting most of 2011 to this.

Its UK broker Fairfax believes it will be a straightforward, albeit long-winded route to getting the various approvals.

John Meyer, the mining analyst at Fairfax, said: Environmental studies are now well advanced, which is an essential aspect towards moving the project forwards and securing necessary permits.

Definitive technical economic evaluation programmes required to advance the project through to the engineering design phase are also being progressed.

These studies will contribute to securing required permits which will be the key determinant on project progress.

As Barruecopardo is a brown field development, we do not envisage any major obstacles towards permitting the operation as management follows the proper course of action to ensure government approvals.

All the talk thus far has been about Barruecopardo and rightly so. It is the main focus currently of the company in the run up to that production deadline of 2012.

But the company does have two other assets: the La Zarza copper-gold project in Huelva Province in Andalucia which is a 12.8 square kilometre permit 100 per cent owned by Ormonde. And then there are the gold properties in Salamanca and Zamora provinces, also in Spain.

The former is joint ventured with world s premier copper producer, Antofagasta, while the group is actively looking at third party funding to advance its gold assets.

However much of Ormonde s value is tied up in the tungsten project, which Fairfax reckons is hugely undervalued.

Setting a price target of 15.6p a share, Fairfax analyst Meyer told clients recently: Ormonde has an attractive asset with considerable upside potential both in terms of new resources expanding and extending the mine life, as well as through stronger tungsten prices.

There is growing market wide pressure to secure non-Chinese supplies of tungsten which makes Barruecopardo of potentially strategic importance to European consumers of tungsten.

The company also has a copper JV with Antofagasta on its La Zarza property in Spain, as well as a gold exploration portfolio that could add further value to the group.