The rare metal that’s got Warren Buffett excited
Investment Director – The Fleet Street Letter
David Stevenson Jun 19, 2012
Watching where Warren Buffett invests has become a cottage industry.
No wonder. Regardless of what you think of the 'Sage of Omaha’s' more recent track record, his long-term performance is hard to argue with. He’s not the world’s most famous investor for nothing.
The other thing Buffett is famous for is hating gold. So when he buys a stake in a mining operation, it has to be worth noting.
What’s got Warren so excited about this particular hole in the ground? And can you profit from it too?
The world can’t do without tungsten
IMC Group is one of the world’s largest metalworking product firms. It’s 80% owned by Warren Buffett’s holding company Berkshire Hathaway. And IMC has recently invested $80m in a mining project.
It isn’t in the US, or indeed anywhere near it. It’s at Sangdong, in South Korea, and it’s controlled by a firm called Woulfe Mining (TSXV: WOF).
The deal gives Buffett a 25% stake in what was the world’s most productive resource of one rare metal - tungsten.
What’s so special about tungsten? It’s hard to know where to begin.
Tungsten is ultra-hard, dense and strong. It’s also highly resistant to corrosion and wear. And it’s fire-proof - it has the highest melting point of all pure metals, and the second highest of all the elements after carbon.
Pure tungsten is used mainly in electrical products. But in alloy form – due to its hardness - tungsten has many applications, from industrial to military.
It’s employed in incandescent light bulbs, X-ray tubes and electrodes in arc welding. Tungsten carbide, a compound of tungsten and carbon that’s three times stiffer than steel, is used to make drill bits for oil and gas exploration, circular saws and jewellery. The metal’s ability to withstand extreme heat makes it irreplaceable in the manufacture of rocket engines.
In fact, global demand for the metal has been growing at around 6% a year for ages. And the world is now become totally dependent upon it. That’s because in most of the metal’s uses, there’s no alternative. Indeed, “without tungsten, Western manufacturing comes to an end”, Woulfe’s investor relations manager Nick Smith tells Tungsten Investing News.
What’s more, the future needs of high-tech industries are set to drive demand even higher. Tungsten is crucial for the manufacturing of electrodes used in solar panels and nuclear equipment. And it’s a vital component in touch screens of smart phones and tablet devices.
This means the world’s tungsten miners will need to lift overall output from last year’s 68,000 metric tonnes (m/t) to 96,000 m/t by 2016 just to keep pace with demand.
Sign up for a 3-week FREE trial of MoneyWeek
and get the following free as well
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
But tungsten supplies are under threat
But “the problem is that supplies of tungsten are desperately short”, notes Don Miller in Resource Investor. “Tungsten prices have rocketed from about $180 three years ago to roughly $430 per metric ton today”.
In a recent British Geological Survey report, tungsten even got right to the top of the 'endangered list' of metals of economic value.
Why? It’s down to China. The country has been buying up raw supplies of tungsten and curbing exports of the metal. As the Chinese control 60% of the world’s reserves and 83% of global production these restrictions have had a big impact. In fact, China is now a net importer of tungsten and expects to use all its supplies to support its own manufacturing firms.
Sure, as we’ve pointed out before, the country’s growth rate is slowing fast, and could drop a lot further. Yet as my colleague Matthew Partridge said in February, despite this, the Chinese still plan to double their military spending by 2015. That will mean more weaponry – and extra need for tungsten to make bullets and missiles. So the shortage is likely to get much worse.
“That means the rest of the world is scrambling to find new resources and open new mines [which] takes a minimum of three years”, says Miller. Yet “tungsten mines are very difficult to operate, processing large amounts of material to harvest relatively small amounts of metal. No more than five mines supply most of the world’s tungsten outside China and Russia”.
No wonder that the US and the EU have recently highlighted tungsten as a key strategic metal that needs stockpiling.
Should you follow Buffett’s foray into the mining business?
So, getting back to Mr Buffett, his interest in Woulfe Mining’s South Korean operations is starting to make a whole lot of sense.
“The Sangdong deposit hosts one of the largest tungsten resources in the world and was the leading global tungsten producer for more than 40 years prior to closure in 1992”, says Woulfe.
Why did it shut? Well, 20 years ago, it was low metal prices rather than supplies running out that caused the mine’s closure. But as you can see, now it’s a very different story.
Last week Woulfe raised $20m to buy mining kit. And the firm is pushing ahead with re-opening the Sangdong facility. It will start an access tunnel next month and plans to open its tungsten processing facility in the second half of next year.
So now the key question for investors – should you follow Mr Buffett into the tungsten business?
First, a serious health warning. Mining anything is a very tricky business. Re-opening a facility that closed 20 years ago is bound to be fraught with difficulties. In fact there could be more possible problems than I’ve space to describe. So I must stress that this is a high-risk, volatile stock which might not make any profits for a long time – if ever.
Without going into detail here, other tungsten extraction stocks – such as the London–listed £29m market cap Ormonde Mining (LON: ORM) the equally small Canadian-listed Almonty Industries (TSXV: AII), or Aim-listed Wolf Minerals (Aim: WLFE; ASX: WLF), which is hoping to re-open a tungsten mine near Plymouth – are also high risk.
But to repeat, it’s clear the world will need much more tungsten. And if you accept you could lose all your investment down a tungsten mine, the flipside is that you could - one day - make a packet from buying into one. We wouldn’t stake your pension on it, but if you’re looking for a destination for some of your more speculative money, the sector is worth exploring.
David also writes for a very distinguished group of investors – who’ve included an MI5 agent, peers and politicians in the past. See how this advice could change the way you invest here.
• This article is taken from the free investment email Money Morning.
Sign up to Money Morning here .
Our recommended articles for today
Common arguments against gold are that it pays no interest, is useless, and is impossible to value. But that's all nonsense, says Dominic Frisby.
Wonga’s small business loans may not be perfect, says Matthew Lynn. But by shaking up the credit market, it is doing the country a favour.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.