Upbeat Report

Posted Proactive Investors (4 December)

HAZ has improved its financial footing and sharpened its focus on the ATC ferrotungsten operation in Vietnam by closing the sale of two Western Australian tungsten exploration properties to Tungsten Mining (ASX:TGN).

The deal first flagged in October has now been confirmed following a due diligence process and is expected to be settled this month.

Under the terms of the sale, Hazelwood will receive A$1 million in cash and 5 million Tungsten Mining shares.

The company intends to use the sale proceeds for ATC operations, including purchases of tungsten concentrate and working capital.

An amount of $500,000 is also earmarked for further reduction of a working capital debt facility signed last year with investment vehicle Siderian Resource Capital.

The sale – which offloads the Mulgine and Big Hill tungsten projects – will eliminate the company’s outgoings on tenement and exploration commitments.

This is in line with Hazelwood’s strategy of focusing on meeting increased production from the 60% owned ATC plant, where ongoing ferrotungsten production has recently attracted increased sales interest from Japanese buyers.

Significantly, this will result in a 30% increase in January sales.

In September, three Japanese buyers contracted to acquire Ferrotungsten from the plant at prices above spot prices on the European market.

The contracts are with major buyers of ferrotungsten in the Japanese market and the ferrotungsten contracts are for six monthly periods, with monthly call-offs, which are relatively common in the market.

Momentum on this front is interpreted as a reflection of the positive impact on Hazelwood’s business model following the appointment last year of Mark Warren as chairman.


Refinancing plan

The sale of Hazelwood’s exploration assets is strategic in that it generates immediate cash while still maintaining upside to exploration through the shareholding and higher tungsten prices through the continued focus on ATC operations.

This move is part of a recapitalisation plan set in October, which also included the Japanese sales contracts and a $7.4 million entitlement offer underwritten by GMP Securities Australia up to $3 million.

The plan allows Hazelwood to deliver further value from ATC, deliver future growth to shareholders and pursue a revised repayment schedule for the Siderian loan.

The revised schedule includes an extension of the due date which enables Hazelwood to complete the interim capital raising and generate cashflow from operations over the remainder of financial 2016 before making a final payment.


ATC success

ATC is performing in-line with expectations, with delivery on sales contracts into Japan a key highlight.

ATC has signed sales contracts with three prestigious Japanese customers for approximately 55% of planned production volumes over the next six months.

Production runs from August and September were used for exports from Haiphong in September and October.

Shipments to date total about 100 tonnes of product. A further production run is planned in coming weeks to meet further monthly requirements under the contracts.

In addition to production, sales and marketing achievements, ATC has enacted a number of operational improvements and cost savings that will enhance future profitability.


Analysis

The sale of Hazelwood’s WA exploration assets is a major step in its recapitalisation plan and is especially impressive given recent volatility in tungsten prices and equity markets.

The deal supports company financing as a new debt repayment schedule allows for the latest ATC sales contract success to underpin value accretion through concrete operational deliveries.

Significantly, the award and delivery of the latest Japanese contracts demonstrates ATC’s ability to produce premium-grade ferrotungsten.

It also reflects strong customer acceptance of ATC products and provide a strategic opportunity to produce increased production volumes into Japan’s important ferrotungsten market.

While tungsten markets have been volatile, the spread between tungsten concentrate (feedstock) and ferrotungsten prices has remained relatively consistent. This has allowed Hazelwood to pursue a “make to order” strategy under new management.