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Right now, small cap managers are looking to contribute to a $3 million to $5 million equity raising of a small tungsten mining company, King Island Scheelite (KIS - share price 26 cents) in order for it to do further drilling.
With a current market cap of $16 million, King Island Scheelite is not going to be another Lynas Corp overnight, but its fundamentals look similar and its share price has been heading in the right direction, being up 44 per cent over the past six months.
Advertisement: Story continues below They could do worse than emulate Lynas. Shares of the local producer of rare earths - a variety of materials vital for production of some electronic products - have risen from 15 cents in January 2009 by a factor of almost 15 to their current level of $2.22, implying a market capitalisation of $3.7 billion.
Rare-earths producers have enjoyed a massive surge in late 2010 thanks to China's move to limit supplies of rare earths, which it can do since it accounts for close to 96 per cent of the world's supply. Similarly, China produces 80 per cent of the world's tungsten and has said it will reduce the rate at which it supplies this increasingly valuable mineral to the rest of the world.
Tungsten, which is a derivative of the ore scheelite, is used for cutting tools, such as drill bits. Its demand is forecast to grow from 62,000 tonnes in 2010 to 90,000 tonnes in 2015 due to increasing industrialisation, particularly in Asia.
China's tight grip on tungsten supplies reflects its desire to control as many inputs into the production process as possible. Such dominance may help Chinese manufacturers sharpen their competitiveness against rivals in other countries.
Tungsten price surge
The tungsten price has increased by more than five-fold between 2005 when it was around US$50 a tonne. The period happens to coincide with the timing of King Island's purchase of the Tasmanian mine from Rio Tinto. Today, the metal's price is over US$250 a tonne.
On the basis of the value of its existing reserves, or the amount of tungsten it can mine economically, King Island is worth $1.26 a share. Its steep discount is because it needs to raise more money. After its current raising, it will need to raise $20 million in October and then $40 million to $50 million after that to go into full production.
One of the factors that has made Lynas so attractive to investors is its high grades, or the concentration of rare earths in every tonne of ore mined. A higher grade means that even if other producers come along, your mine can still be economic.
King Island has an average grade of 1.3 per cent, which is at the top of the range for those (few) tungsten producers that are outside China.
Tony Haggarty, the founding director of Excel Coal, whose fortune is estimated at $450 million is on the board. As a small investor, it's always good to know you are alongside industry heavyweights.
KIS Price at posting:
30.6¢ Sentiment: None Disclosure: Not Held
