Merger with Woulfe makes tungsten major

The announcement of the merger between Almonty and Woulfe (CSE:WOF) took us by surprise despite the fact that we had been advocating the creation of a geographically diversified Tungsten player for some years now. The combined business will have two producing tungsten assets located in Spain and Australia and pre-construction assets in South Korea and Spain. We had also mentioned Woulfe as maybe the initiator of this process rather than the target. In any case it’s good news.

Almonty’s principal assets are the Los Santos tungsten mine, producing 1,100 tpa of WO3, and the Wolfram Camp tungsten and molybdenum mine in Queensland Australia, which produced 700 tonnes of WO3 in 2013. It is working towards the commissioning of the Valtreixal tin/tungsten mine in north western Spain with anticipated production in 2017.

The mining space has needed a tungsten champion for some time now (as do some of the other specialty metals). A series of one-mine/one-country Tungsten plays have come to grief due to their mono-focus and their failure to look beyond the mine-life of their main asset. Almonty dared to make a move on Ormonde to secure its future in Iberia and when blocked did not skulk off to sulk but rather regrouped and added an asset in Australia. Now it is adding short-term production in South Korea.

The Prize – the Sangdong Tungsten-Molybdenum Project

Korea, located 187km southeast of Seoul. However this is subject to a third party – the very fickle Israeli group IMC – which may purchase a 25%-ownership interest in Sangdong for US$35 million. The property is comprised of 12 Mining Rights with an aggregate area of 3,173 hectares.

The Sangdong project was, before its closure in 1992, the world's leading producer of tungsten for 40 years. Low metal prices, not the exhaustion of resources, led to the mine's premature closure. The historical production rate averaged 600,000 tpa mainly from the six-meter thick Main Vein.

The scoping study indicates that the property has over 40 years' of mine life remaining. Substantial underground infrastructure is in place and Woulfe has reopened the mine to a distance of 1.4 km. The above-ground infrastructure includes access to roads, water and power.

Drilling conducted by KORES in 1980-1987 discovered a deep molybdenum deposit below the remaining tungsten skarn resources. The molybdenum content in the Sangdong mineralized zones ranges from 0.04% to 0.06% MoS2 and an additional zone of molybdenum mineralization, as outlined by historical drilling, lies below the Sangdong mineralized zones.

Woulfe recently completed a de-risking review of its final Feasibility Study report based on the Tetratech 2012 feasibility report on the Sandong project. We shall discuss mining plans further along in this review.

The Deal

In late January it was announced that Almonty had entered into an agreement with Woulfe Mining to merge the businesses of the two companies. Those with longer memories will recall we have covered Woulfe several times in the past, with fluctuating sentiments towards management, but never wavering in our interest in the asset itself.

The deal in this instance was a non-binding letter of intent to combine the businesses of the two companies and create what Almonty claimed to be the leading tungsten company outside of China.

Under the terms of the LOI, Almonty shall acquire all of the outstanding common shares of Woulfe at a price of CAD$0.08 per share to be satisfied by each Woulfe share being exchanged for a fraction of an Almonty common share, with such fractional Almonty common share having a fair market value on the effective date of the proposed Transaction of CAD$0.08 (fair market value will be determined based on the Almonty volume weighted average trading price for the five trading days ending on the third trading day prior to the effective date of the Proposed Transaction). The Almonty issuance is capped and collared and cannot be greater than 0.1231 of one Almonty common share (CAD$0.65 Almonty VWAP) or less than 0.0942 of one Almonty common share (CAD$0.85 Almonty VWAP).

The CAD$0.08 price represented a 22.7% premium to Woulfe’s 30-day volume weighted average price for the period ending January 26, 2015. Upon completion of the merger, Woulfe shareholders will own approximately 41% to 48% of the merged entity, depending on the Almonty VWAP. Frankly this is a VERY good deal for the shareholders of the beaten-down Woulfe. Most prominent amongst these are the Dundee group of Ned Goodman.

Completion of the merger is subject to the usual due diligence process by both companies, which is expected to be completed within the next 30 days.

The Resource

There have been various resource estimates on this deposit since its listing in Canada. After the Dundee interests ousted the management group it went through the usual “blame the outgoing management” routine and determined: “after a detailed review during the calendar year 2013 that it was urgent and necessary to reassess and de-risk the 2012 TetraTech Feasibility Study of the Sangdong Project”. While we are no great fans of mining consulting firms, we found little to fault in the original FS as the Wesson’s has applied a requirement that capex come in as low as possible with copious use of cheaper labour (imported from Fiji) and second-hand equipment.

Now while the Wesson group is never renowned for being as solicitous of GS&A as of capex, we felt this rewriting of history was just as excuse to mothball the project pending better financing markets and IMC getting their act together on whether they were supporting the project or not.

Woulfe commissioned AMC Consultants Pty Ltd. of Melbourne in August 2014 to undertake a Mineral Resource Update.

Conclusion

The long awaited consolidation is happening but alas it’s only one company initiating the process. If the current deal plays out to plan then we would expect maybe one or two more mines to be rolled in, and we should not discount the possibility that Almonty will circle back to gets its teeth into Ormonde at some point.

Our strategy call on Almonty remains a Long stance with our target price for the next 12-months remaining at CAD$1.32.

Read the full study by Hallgarten