Newcrest's hidden gem

A surge in tungsten prices has left Newcrest sitting pretty on a very lucrative asset.

PORTFOLIO POINT: The rapid appreciation of tungsten prices in recent years means Newcrest is sitting on a highly lucrative asset in its O’Callaghan’s deposit.

Soft metal, soft share price: That’s the prevailing picture of Newcrest, Australia’s biggest gold miner. But the company’s share price might not be 'soft’ for much longer, thanks to the potential development of a mine producing one of the world’s hardest (and hottest) metals, tungsten.

Buried deep inside Newcrest’s forward planning department, and 300 metres beneath the ground at the Telfer gold project in WA, is the O’Callaghan’s polymetallic discovery – an orebody rich in tungsten, copper, zinc and lead.

Discovered five years ago, O’Callaghan’s has been quietly studied by Newcrest as a useful addition to Telfer, an ageing gold mine suffering from rising costs, and a factor in Newcrest’s share price limping along at around $28.58 – a price which is 33% below the stock’s 12-month high of $42.42, set in April last year.

With the potential to generate annual sales approaching $US280 million, O’Callaghan’s would make a modest contribution to Newcrest’s revenue ($4.1 billion last year) and profit ($1 billion).

But there are strategic factors at work in the world of tungsten which make it more important than first meets the eye, including the potential for the metal to extend the life of Telfer, and for outside interests to urge Newcrest to develop O’Callaghan’s (and possibly help meet the estimated $500 million capital cost).

In its last public statement on the possible addition of tungsten to its inventory of metals, Newcrest management estimated that O’Callaghan’s could lower the cost of gold production at Telfer by between $US100-and-$US150 an ounce, an important contribution to a mine which last year produced gold at $A728 an ounce, but is expected to see the cost rise to $A842/oz this year, and then up to $A962 in 2013.

Since the company’s last comment on O’Callaghan’s, contained in briefing papers released last August, the project has disappeared from view. A spokesman told Eureka Report this week that nothing had changed since then, with a pre-feasibility into the tungsten project expected to be completed this year.

Nothing may have changed at Newcrest as far as tungsten is concerned, but a lot has changed at an international level, with the metal named, along with rare earths, in a World Trade Organisation dispute.

The US, Europe and Japan are alleging that China has broken trade rules by withholding supplies of essential metals from the global market, jeopardising manufacturers who rely on exotic elements for the production of their high-tech electronic products and armaments.

Rare earths, a family of 17 oddly-named elements such as lanthanum, praseodymium, and dysprosium, attracted most of the headlines associated with the WTO case, but it is tungsten which sits higher on a “critical metals” list.

Last year, the British Geological Society (BGS) compiled a list of metals it regards as exposed to “supply risk” because their production is dominated by one country, or they are in high demand and short supply.

With 10 as the highest possible score for what might be called endangered metals, the rare earth family scored 8. Tungsten scored 8.5, thanks largely to China accounting for an estimated 85% of global output, and because it had a habit of using export controls to regulate the availability of tungsten to the rest of the world.

Significantly, the BGS also rated O’Callaghan’s as the world’s biggest undeveloped tungsten deposit.

Best known to some people as the metal used as the filament in light bulbs, tungsten has a number of special properties, including extreme hardness and a high melting point. It is as perfect for lighting as it is for mineral exploration drill bits, artillery barrels and tank armour.

During its period of maximum use (and that means wars), tungsten assumes extreme importance. When peace breaks out, war-time stockpiles are released, killing the price. After the collapse of the Soviet Union, that meant a sharp fall in the tungsten price, the closure of tungsten mines, and the shelving of planned developments.

Today, thanks to China’s market control and rising industrial demand for super-hard and heat-resistant metals, companies around the world are dusting off their tungsten mining plans. These include Venture Minerals, with its Mt Lindsay project in Tasmania, and Wolf Minerals, with its historic Hemerdon project in Britain – a mine which played a crucial role in both world wars as the source of tungsten for the British military.

China’s heavy foot on the tungsten pipeline is a reason for the metal achieving the status of world’s top performer last year, rising in price by around 35% at a time when many other metals were falling.

Generally traded in a form called ammonium paratungstate (APT), the tungsten price has more than doubled over the past two years, rising from around $US180 per metric tonne unit of APT to around $US430/mtu today.

When sold in its pure metal form (which happens rarely), tungsten fetches around $US40,000 a tonne, and that’s a number to bear in mind when estimating the theoretical value of O’Callaghan’s to Newcrest, and the future of the Telfer gold mine.

In last year’s briefing papers, the potential size of O’Callaghan’s was revealed for the first time, with Newcrest estimating that the tungsten project would cost between $400 million and $500 million to develop.

The key elements at O’Callaghan’s include:

  • A 3 million tonne-a-year processing facility;
  • Annual output of between 5000 and 7000 tonnes of tungsten metal, plus copper, zinc and lead; and
  • First production around 2015.

At the upper level of output, O’Callaghan’s would account for about 7% of annual world tungsten production, which is around 100,000 tonnes a year.

If the tungsten price holds the current $US40,000/t level, annual production from O’Callaghan’s could be worth $US280 million, with costs benefitting from infrastructure shared with the Telfer gold mine.

On those assumptions, Newcrest management reckons O’Callaghan’s could generate sufficient funds to effectively lower the cost of producing gold at Telfer by between $US100 and $US150 an ounce.

For Newcrest management, the prospect of becoming a tungsten producer might not be attractive without a partner specialising in exotic metals.

Two years ago, Eureka Report’s sister publication Business Spectator interviewed then-chief executive of Newcrest, Ian Smith, with one question focussed on O’Callaghan’s and the level of interest from a partner.

Smith replied: “We don’t really want to get involved that much in the tungsten market, or marketing. We are looking for an offtake partner who would take the tungsten off our hands rather than us spending a fair bit of managerial time on the marketing side of the metal.”

A lot has changed since Smith said that in February 2010. The price of tungsten has doubled and the metal itself has become a hot international potato.

With the price high and western governments worried about future tungsten supplies, there is likely to be strong demand for Newcrest to make a decision on developing O’Callaghan’s sooner rather than later.

From a strict investment perspective, O’Callaghan’s is not a big project for Newcrest or its shareholders.

But the high level of international interest in the metal could see the gold miner add tungsten to its range of products, or bring in a third party to develop and market the metal, or make a tidy capital profit by selling the deposit to another miner.

Whatever Newcrest decides in regard to O’Callaghan’s, its shareholders are in line for an unexpected tungsten bonus.

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