Tungsten West Up 20.8% – How Have They Solved That Basic Problem?

Tungsten West (LON: YUN) shares are up 20.8% this morning, having been a shade higher too. The news is that they've solved one of the basic mining problems – how do you gain the capital to actually go mining? Of course, one way is simply to ask shareholders but that involves dilution. Another is to borrow, but banks tend to only actually lend to properly bankable projects – thus the name there, bankable. So when you're in one of the smaller – minor metals – markets it can be difficult to raise the capital required without so diluting the shareholder base as to make the project seem uninteresting.

On the other hand we've been using fairly sophisticated financial markets to finance mining for a couple of centuries now. It's just the nature of the beast that a mine requires a great deal of upfront capital spent upon it and so mine finance was one of those early adopters of all of the joys of capital markets. All that experience has given us a number of different ways of gaining access to the required capital. All have a cost, of course they do, but the existence of such options allows the optimisation of the capital structure.

What Tungsten West has announced today is that they're utilised one of these alternative forms of capital raising. Sure, it has a cost but TUN shareholders will pay this over time not as a call for cash right now.

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One of these alternative financing methods is to sell a royalty interest. There are those who will, in return for cash upfront now, agree to accept some percentage of the production revenue over the years of life in the mine. This is common in gold mining, is also used in these minor metals market. For these minors there is no terminal market. No futures market where price risk can be offset that is – in fact that's a useful definition of a minor metal, that there is no such terminal or futures market. Banks are unhappy about lending to such operations unless it's simply working capital for something already in production.

But there are royalty companies out there. Which are a little like investment banks specialising in these very minor metals markets. Get a project to a certain stage and they will, often enough, step in with the necessary finance to start actual production. Which is exactly what Tungsten West has negotiated: “The Company is happy to announce that it has signed a non-binding term sheet for a USD $30m (approximately £26m) royalty investment. (the “Term Sheet”) (the “Royalty”).” In short, they get the 30 million now (or when this is completed more accurately) and in return pay a percentage of production revenues off into the future. The benefit is that shareholders gain access to a mine that is now financed without having to – right now – pick up the costs of the financing.

There is one other little point here. Being able to gain this type of financing is a very good guide to everything we're told about the potential mine being correct. Precisely because the royalty investors are sophisticated in this very market we know the slide rule has been run over all of the assumptions. This is not proof perfect that everything will go to plan but it is still a good guide. Get financed in this manner and that is a check against all the underlying assumptions being made.