2014-02-21



Pat McKeough responds to many requests from members of his Inner Circle for specific investing advice as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week we had a question from an Inner Circle member about a mining stock that is relying on a price rebound in one metal, tungsten. North American Tungsten believes it has the potential to generate close to 15% of the world’s tungsten output. Pat examines the different uses of tungsten, including its applications in lighting. He also looks at North American Tungsten’s debt-heavy balance sheet and whether it can sustain its current level of operations without a significant rise in the price of the metal.

Q: Hi Pat: What do you think about North American Tungsten and the tungsten market? Keep up the good work. Many thanks.

A: North American Tungsten (symbol NTC on Toronto; www.natungsten.com) acquires, explores, develops and operates mineral properties, mainly tungsten, in the Northwest Territories and Yukon Territory. The company owns the producing Cantung mine, as well as the Mating project.

Cantung has the potential to generate about 4% of the world’s tungsten output. The company believes the Mating deposit, which could be in production in a few years, has about 10% of the world’s known tungsten resources. Low tungsten prices forced North American Tungsten to suspend operations at Cantung in October 2009, but it resumed production in October 2010.

Tungsten has many uses, including as tungsten carbide in cemented carbides, which are wear-resistant materials used in the metalworking, mining, oil and construction industries.

Wires, electrodes and contacts made of tungsten are used in lighting, electronics, heating and welding. In addition, tungsten goes into heavy metal alloys for weapons, radiation shielding and weights. Superalloys for turbine blades, tools and wear-resistant parts and coatings also include tungsten.

Penny stocks: Regulations against incandescent light bulbs hurt tungsten demand

Incandescent light bulbs account for a large amount of tungsten consumption. Government energy-saving regulations are forcing these bulbs off the market, which has hurt tungsten demand.

However, tungsten also goes into other types of lighting, including halogen lamps and compact fluorescent lights. Demand for these types of lighting is rising. So far, this has mostly offset lower tungsten sales to incandescent-bulb makers.

Tungsten prices hit a high of $470 U.S. a tonne in May 2011 before falling to a low of $295 U.S. in December 2012. Prices rebounded to $420 in mid-2013 before drifting down to today’s level of about $382.

North American Tungsten’s total debt of $29.6 million is 124% of its market cap. As well, it recently received an extension from HSBC on its $24-million line of credit from December 31, 2013, to June 30, 2014. The company’s cash flow needs higher tungsten prices to turn positive.

In the Inner Circle Q&A, Pat looks at whether North American Tungsten can sustain its operations without significantly diluting its shares while it continues to seek re-financing for its debt. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Government restrictions on incandescent bulbs contributed to a drop in tungsten demand and a setback for companies like North American Tungsten. Have you had stocks that suffered due to the imposition of government regulations or restrictions? Did the stock adapt and recover?

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