China’s insatiable hunger for metals is well documented. This columnist recently published an article on China’s Resource Safari in Africa, highlighting China’s tightening grip on African mineral riches. The article also explained China’s alliances with certain African governments as a way to ensure access to metals to feed its burgeoning industrial sector. Meanwhile China has identified a series of metals as being strategic and has restricted export of these, and banned foreign direct investments for their development. Tungsten is one of them.

It is not as if China is strapped for tungsten. According to the US Geological Survey (USGS), China currently accounts for approximately 85% of the world’s primary tungsten (mine production) and approximately 65% of the world reserve base. So what prompted China to change from liberal exporter to thrifty accumulator in a relatively short space of time?

Tungsten has been an important aspect of our every day life and has a wide range of applications. Apart from the filament of the humble light bulb, tungsten is incorporated into wear-resistant materials used in metal working, mining, petroleum & construction industries, stainless and full alloy steels, manufacturing including jet engines, strategic applications in the defence sector and high temperature resistant alloys. That explains China’s desire to keep its tungsten to itself!

Compared to “glittering matter” such as gold, a steel-grey to tin-white coloured tungsten invokes little enthusiasm amongst resource investors. But what makes tungsten interesting are its chemical properties which contribute to the diversity of its applications. Tungsten has the highest melting point, lowest coefficient of thermal expansion and lowest vapour pressure of any metal. It is also corrosion resistant, stands up well to mineral acids, and alloys well with steel thus increasing its toughness. Clearly, tungsten is a metal we use and rely upon in our everyday lives so it’s hardly surprising that the Chinese consider it to be strategic.

Unlike many other metals, there are no significant close substitutes for tungsten; those that do exist involve considerable cost increase and compromise of product performance. Industries such as jet engine manufacture, defence and construction, where product performance is important, have studiously avoided experimenting with substitutes. The closest to a substitute, molybdenum, is even more expensive and has nothing like the range of characteristics tungsten offers as a metal. As such, it is safe, literally, to assume that tungsten is unlikely to be replaced.

The dynamics for tungsten are the same as those for other metals. The world economic growth underpins demand for tungsten and much of this demand come from industrial nations. Demand is particularly high from the US due to tungsten’s military and defence applications. Interestingly, the US has no domestic tungsten source and is entirely dependent on imports. As China restricts its exports, the US and other industrial nations are keen to secure alternative, more reliable supply sources. Canada naturally assumes prominence on the list of limited alternative supply sources.

Meanwhile, supply remains tight with China controlling 66% of world reserves. Of the total estimated reserves of 630,000 million tonnes, Canada and Russia account for just 8% and 7% respectively. This leaves industrial nations at China’s mercy and its decision to control exports has, indeed, become a matter of concern.

China’s ability to influence the tungsten market becomes evident if one goes back to the past tungsten price movements. When China unexpectedly curtailed its exports in 1963, tungsten saw a three-fold price increase. Subsequent reversal of the decision to release export restrictions prompted a gradual price decline, only to climb again in 2005 due to a similar restriction by China. While reasons behind such manoeuvres are still not clear, China’s present intent to curtail exports comes from its own tungsten requirements to feed local industries. As China emerges as a large outsourcing economy, Chinese industries demand tungsten and the authorities are keen to ensure an uninterrupted supply.

This strengthens the investment case of companies with exposure to tungsten, particularly those that are in close proximity to industrial nations. Despite its own tungsten reserves, Russia is yet to emerge as a reliable potential supplier. This makes Canadian tungsten companies particularly attractive due to their proximity to the key US market and the availability of advanced stage projects.

For tungsten prices to fall, China needs to revoke the export restrictions. Indeed, China has done so in the past and one would not find fault with such wishful thinking. However, that view implies a sudden slow down in the Chinese economy. If China’s current economic growth at 10% GDP is anything to go by, hopes of a slow down would prove to be less than realistic.

Interestingly, companies outside China with exposure to tungsten are few and far between. TSX Venture listed North American Tungsten Corporation Ltd. (TSX-V: NTC) the only significant tungsten producer outside of China with an annual production of approximately 300,000 MTU tungsten. The Company's 100% owned Cantung mine and Mactung development project make it one of the few tungsten producers with both a producing mine and strategic development asset in the western world. Mactung is one of the world's largest known undeveloped high grade tungsten-skarn deposits, which has an indicated mineral resource estimate of 33,209,000 tonnes (0.88% WO3) and an inferred mineral resource estimate of 11,857,000 tonnes (0.78% WO3) (which are NI 43-101 compliant). Its flagship Cantung project has an estimated 2.94 million tons of indicated mineral resources (1.21% WO3) and 1.03 million tons of probable mineral reserves (1.17% WO3) (as of September 01, 2006, and NI 43-101 compliant)

TSX Venture (TSX-V: PLY) and Frankfurt (P1J) listed Playfair Mining is another interesting company focused on the exploration and development of tungsten projects. PLY has 100% controlling interest in four advanced stage Canadian tungsten projects, Risby, Lened, Clea and Grey River with combined 43-101 and historical resources totalling over 100 Million lbs of contained Tungsten. Each of these high profile targets possesses considerable potential to add more resources with further exploration. In the short term, the company's key priority is to aggressively advance its Grey River tungsten deposit toward production.

PLY is focused on expanding current tungsten resources and is positioning itself with a pipeline of projects ranging from grassroots exploration to near term production. Given the favourable price economics, PLY management is confident of adding value to shareholders. Aggressive drill programmes are in place for 2008 on three of PLY’s key properties.

Geodex Minerals Ltd. (TSX.V: GXM) is another Canadian company in the tungsten space. Its flagship project Sisson Brook is a large, open-pittable tungsten-molybdenum-copper deposit located near Fredericton, in the central part of the province. In November, 2007, Geodex received a positive Preliminary Economic Assessment or Scoping Study on Sisson Brook prepared by Wardrop Engineering Inc. and the company is presently working towards the completion of a pre-feasibility study in September, 2008.

Australian listed Vital Metals (ASX: VML) has a promising tungsten prospect in its Watershed project in far North Queensland, Australia. Watershed was discovered in 1978 by the Utah Development Company which carried out extensive drilling and other work leading to an Inferred Resource estimate of 13.9 million tonnes at an average grade of 0.35%WO3.

The investment cases of these companies rest on the growing world demand for speciality metals in the wake of emerging economic giants such as China and India. It is further strengthened by China’s decision to curtail tungsten exports in response to its own requirements. After all, there appear to be metals other than “glittering matter” that are equally attractive.

Border Collie

Sylvania Resources offers a simple business plan based on re-treatment of old tailings from former chromite mines situated in the world famous Bushveld Complex in South Africa.  The region is known as the world's biggest platinum producing area and hosts the biggest reserves of Platinum Group Metals (PGMs) worldwide.

The company’s real interest is in the higher value platinum group metals contained in the tailings, which promise to generate significant earnings. 

Given record PGM prices, and low capital and operating costs, the upside for Sylvania is enormous in our view.  In fact, the company is ramping up production at a time when chromite supply out of South Africa is likely to be impacted by power problems.

In common with the rest of the South African platinum industry, Sylvania faces ongoing issues with electrical power supply. Plant operations have been disturbed by planned and unplanned 'load shedding' activities by the State utility, Eskom. On the positive side, Sylvania's operations use relatively little power and are significantly less affected by power cuts than is the case for underground mining operations.

Focussing on the company's operations, both the Millsell and Steelpoort operations have performed in line with management's internal targets during the half year ended 31 December 2007.  Operations at these plants look set to further benefit from process improvement projects with a projected capital cost of about R30 million.

Elsewhere, construction of the Lannex plant is progressing and all long lead-time equipment items have been ordered. The plant will have double the capacity of the Millsell or Steelpoort plants, and looks set to be commissioned in the second half of calendar year 2008.

Meanwhile, construction of the Elandsdrift plant is expected to begin again towards the end of calendar year 2008.

The company's fifth project is its Chrome Tailings Retreatment Project (CTRP) – 25 percent owned by Sylvania South Africa (Pty) Ltd, a wholly owned subsidiary of the company.

The CTRP plant has been in production since January 2005, and has recorded a 43 percent improvement in attributable PGM production compared with the preceding six-month period. 

Not ones to rest on their laurels, the company recently announced that it was to acquire an interest in ASX-listed Great Australian Resources Limited (GAU).

Whilst Sylvania remains a focused, tailings re-treatment company, the GAU deal shows that it is also aligning itself with companies that have potential hard rock near-surface platinum resources.

We maintain our faith in Sylvania Resources' simple but lucrative business model of tailings re-treating in South Africa, with rising PGM prices further adding to its attraction.

Anglo American
Border Collie

The major corporate reorganisation being undertaken at Anglo American (LSE, AAL) by new CEO Cynthia Carroll appears to be paying dividends, with the company announcing record underlying earnings of US$5.8 billion for the year ended 31 December 2007, which was up 5.3% on the previous year. The solid result was due to continued strong metal prices for the group's key commodities, whilst sales volumes were also higher.

With respect to business components, strong contributions came from Base Metals, Platinum, Ferrous Metals' core businesses and Industrial Minerals, which all achieved record operating profit in the year. On the other hand Coal recorded lower operating earnings due to a sharp reduction in contribution from Coal Australia.

The contributions from both Paper and Packaging and Gold were lower than the prior year due to the demerger of Mondi in early July and the reduction of the Group's shareholding in AngloGold Ashanti from 41.6% to 16.6% during October.

We believe the company made good progress last year in line with its objective of becoming a leading focused mining company. To achieve the goal of focusing on its three commodity businesses - precious, base metals and bulks, further steps in the Group's restructuring were completed successfully during the year.

With respect to organic growth, Anglo has a very strong $12 billion project pipeline spanning several countries currently under development. Looking further out, an additional US$29 billion of projects are under consideration.
This month, Anglo American announced that it had entered into a memorandum of understanding (MOU) with China Development Bank. The MOU represents a long-term commitment to establish a strategic relationship to identify and develop a pipeline of natural resources projects in China, Africa and elsewhere.

In South Africa, the electrical power supply problems are causing disruption to mining operations across the country. At present, Anglo says it is difficult to accurately forecast the medium-term impact of power shortages on the company's businesses.

With respect to the global economic outlook for 2008, Anglo believes that global commodity demand remains strong and seems likely to remain so throughout the year. It says that global commodity supply continues to be constrained by skills shortages, rising capital and operating costs, longer permitting processes and strong exchange rates in many of the countries where key operations are located. Industry inventories are therefore likely to remain low and continue to underpin prices.

We continue to maintain our positive view on the outlook for the majority of Anglo's products, as we remain confident that any slowdown in the US economy will be offset by ongoing strength in Asia, particularly China and India.

Anglo's shares continue to trade on what we regard as a modest prospective price-earnings multiple of around 12 times for 2008, which is entirely reasonable for such a strong growth company and pretty much in line with its sector peers BHP Billiton and Rio Tinto.

Once again fact is more extraordinary than fiction. Schoolboy Miliband has admitted that, in the past, US planes carrying terrorists did land on British soil, despite his party assuring two previous parliamentary inquiries to the contrary. Now, I couldn’t give a rat’s arse whether they landed or not, after all there’s enough terrorists already living here. But it does beg the question, “ Is this yet another case of this government lying to its voters, or did the US have so little respect for Yo Blair that they decided not to tell him?”

No wonder so many MPs are in favour of the European Union. Once again, the European Union's internal anti-fraud squad has confirmed that it's investigating alleged abuses of MEPs' expenses totalling about £100m. These guys make our domestic MPs look like mere shoplifters.

Saturday was a cracking day, although we didn’t get the right result. Wasps were in devastating form with Josh Lewsey questioning why the hell Balshaw is playing fullback for England, and Haskell proving exactly why he is playing for his country.

This week’s been another strange sort of week. Quite a bit of it was spent doing some undercover work, testing out the efficiency of the National Health Service. And I’ve got to say that in this instance it passed with flying colours. Also my Plan B, devised last year, proved to be pretty useful. Last year, after a series of losses from trying to trade forex in tricky, trendless markets I came up with a solution. Part of the solution was to start trading options on FTSE, but I’ve extended that to messing around in the odd equity. Generally this has been profitable, and certainly hasn’t led to the losses incurred from ‘boredom trading’ forex.

The Chimp had the better of me this week; his breakeven position over the week was the best this year, but still left him 1500 pips in the red. My only forex trade cost me 445 pips, slashing my year to date figure to 322 pips. The overall F-T accounts benefited from various equity trades, but I don’t allow them to distort the forex position.

Friday 15th February. How ironic that a month that saw only my second loss in options since starting, and a shrivelling of the testicles that I might never recover from, ended with the market less than 1% lower than last options expiry.

Monday 18th February. Ouch! I did my nuts today on a damned Euro trade. I’ve been in the camp of traders that reckon the Euro is overdue a sell-off, and it probable is. The problem is that having just had the first sell-off it doesn’t seem prepared to do anymore just yet. I arrived late at the party with the Euro having already fallen 60 pips against the Dollar. I thought it had broken key resistance around the ’45 level so sold a fiver at $1.4621, which ended up being close to the day’s low. That’s fine, and getting it wrong is fine, but I’d marked this as a longer-term strategic deal with a whopping great stop loss. I’d placed my stop at $1.4705 to give the trade room to bounce around a bit before falling, as planned, towards $1.42. So what wasn’t fine was getting blown out within 24-hours for a whopping great 445-pip loss.

Tuesday 19th February. Once again I’ve got to hand it to Mother Nature, she does know best. Recently I’ve been bemoaning the appearance of some unwelcome fatty bubblewrap that’s covered my abbs. But today, I found out that it had all been put in place for my benefit. Without going into the boring details I unexpectedly spent the day in hospital, which was pretty useful on two counts. Firstly, hopefully I’m in better health than when I went in and, secondly, I managed to read quite a lot of a book on forex patterns and trading. It’s the sort of book you need to be stuck on a train, or in a hospital, to get down to reading. Anyway, the net result of having various needles, scans and x-rays (no, no white gloves were involved!) was that I have to stick a needle in my stomach for each of the next 3 days. Now I’ve seen others do this before, and frankly, the prospect of shopping with Mrs F-T had more appeal than ever abusing myself in this way. Until recently I was seriously concerned that a needle would break on the abdominal muscles leaving metallic splinters just below the surface. But now, no worries. When I was told to pinch some fat near my belly button it was easy, and I’ve got enough to spare for the next two day’s injections as well.

Wednesday 20th February. To be honest I’m not clever enough to multi-task, but Mrs F-T could have told you that. Recently I’ve been trading a few more equities and I’ve found it difficult to keep just 2 eyes on the vast array of charts. I’ve been following FTSE, £$, Euro£, Barclays, Friends Provident, Euro$ and Xstrata fairly closely, plus all the occasionals like £Yen, $Yen, gold, oil and Google. Today my small bet in Xstrata looked more exciting as it took a sniff at the 4000 level, but it was unable to hold the interest there. I resolved to buy some more if the price retreated to 3900p, but its arrival coincided with Wall Street opening. By the time I’d watched the Street fully open my chance had gone. Instead, I bought some Barclays. I’ve been messing around with it in a demo account and doing OK, so I thought I’d put it to the test, just in a fiver. On the daily chart it seemed to have broken above the downtrend line, which acted as good support this morning. After making £200 in the demo this morning I was lured into buying some for real at 486p this afternoon. At the moment the trade is flat, having been up 5p earlier. Still, if it stops me losing a packet in Euro$ it’s got to be good. Oh, and my short in FTSE is looking OK again.

Thursday 21st February. Wa hey! Look at Xstrata go. Sorry, I’m continuing the equity theme of this week. That’s where my open bets are and I’m determined not to get distracted. It’s really quite exciting being on the right side of a move like that, and, for once, I wasn’t sucked in to buying more at the most extreme levels. One of the big downsides of being a private investor is the period when you know something’s happening, but you can’t find out what. When the Xstrata price shot above 4200p I assumed the bid had been announced, but it later transpired that it was only a story from the Brazilian Sun! I used the afternoon’s sell off to add to my position, just in case. Another brief trip to hospital today to have something like kryptonite injected into my arm. Still, it should help Mrs F-T when all my body parts are glowing bright green tonight.

There’ve been times when I’ve been accused of being a bit too in favour of the shirt tail hanging down, rather than being lifted by a man with a dodgy moustache, but this surpasses even me. Reuters reports on an Israeli politician blaming their recent earthquakes on the laws allowing homosexuality. Mind you, doesn’t San Francisco suffer from the odd tremor?

China has been making considerable in-roads into the African resources space. In addition to oil projects ranging from Sudan to Angola, China is also making investments in the mining sector. China is now Africa’s third largest trade partner behind the US and France. So how did China establish itself in Africa? What are the implications to the resources sector?

Champions of human rights and good governance in Africa are in for a rude shock. Non Governmental Organisations (NGOs) that promote such causes are likely to receive less funding, and even less moral support, from their usual backers in Europe. During the EU-Africa Summit in December, Mr. João Cravinho, the Portuguese minister responsible for the summit, claimed that the Europeans had been “excessively simplistic” in their recommended preferred governance in Africa. The cynic in me interprets this as a resignation of some EU leaders in order to allow Africa to have its own version of democracy.

If human rights organisations and NGOs were listed companies, they would be on the sell list of analysts. Since such distasteful recommendations are not needed on unlisted entities, maybe it is appropriate to explore what brings about such negative sentiments. So what prompted the EU’s change of heart towards Africa’s apparently dubious practices of governance and corruption?

Among many possibilities, attempts to catch up with China in gaining a share of Africa’s vast mineral and hydrocarbon wealth is gaining considerable credence. It was six long years after the first summit that the EU arranged the party in Lisbon with politicians from 53 African countries and 27 European countries. Interestingly, invitees included Robert Mugabe, which prompted Britain to boycott the party. Maybe European countries feel benevolent towards former colonies, but more likely, they realise that they are left out of African riches as the Chinese have made serious inroads across the continent.

Trade between China and Africa started shifting gears in 2000 with the establishment of the China-Africa Co-operation Forum. By 2006, China-Africa trade had reached approximately $56 billion compared with just $2 billion in 1999. During the same period, Africa’s imports from China quadrupled to $26.7 billion while exports to China reached $25 billion. By the end of 2006, China marked its position in Africa as the third largest trade partner behind the US and France.

China’s expansion to Africa, however, became a matter of considerable concern amongst western policy makers upon the realisation of its growing influence in the African resources sector. Oil and gas was, indeed, the largest export item from Africa to China, accounting for 61% of exports in 2006. Metal & minerals accounted for 14% of African exports in the same year. Clearly, China is competing with established resources players from the west including Africa’s former colonial masters.

A closer look at China’s main trade partners in Africa would provide a better understanding of its real focus. In 2005, China’s main African trade partners were South Africa and Angola accounting for 18.3% and 17.6% of total Sino-African trade respectively. Other top trade partners included Sudan (10%), Nigeria (7%) and Congo (6%). The top 10 trade partners who accounted for 80% of Sino-African trade are all resource rich countries. Nothing much has changed in that equation, even today!

Interestingly, the list also includes countries with dubious records of governance. For instance, Sudan is widely criticised by the West over its human rights violations, Nigeria over corruption and the Congo over blood diamonds. Except for South Africa, all the other countries above remain plagued by human rights violations, poor governance, press gagging, associations with extremists (e.g. Algeria, Egypt and Libya) and in some cases, remnants of past civil conflicts (Congo and Nigeria in the Niger Delta). In an attempt to improve these matters, the West has been preaching from the democratic doctrine to these countries. Clauses of good governance were attached to trade and aid, presumably with all good intentions.

Against this backdrop, the Chinese approach to Africa rings a marked difference. Unlike the West and former colonial masters, China is willing to do business with no questions asked. China is also willing to give aid, develop infrastructure and make investments with no conditions attached. Corruption and good governance, according to the Chinese officials, are matters to be left with respective African leaders.

China’s hands-off approach has instantly won them many a good friend in Africa. The Chinese President, Mr. Hu Jintao, started 2007 with state visits to eight countries from January 30 to February 10. This was followed by a series of similar visits by several high profile leaders and business magnates. Not surprisingly, Sino-African business has taken off with oil and metals at the forefront.

Much to the delight of African leaders, China shares their view that sovereignty precedes over human rights. This is further complemented by generous aid packages including infrastructure investments in the region. China also maintains a cordial relationship with Mr. Mugabe and turns a blind eye to atrocities in Darfur. It is not just a coincidence that many of the Chinese investments happen to be in resource rich countries. Commercial potential appears to be China’s main criterion for selecting investment destinations in Africa.

So far, it is the energy sector that has been the focus of Chinese investments in Africa - largely through Chinese state oil companies such as China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and China Petrochemical Corporation (Sinopec). Significant investments include a $2 billion loan to Angola in exchange for oil contracts, several exploration contracts and refinery acquisitions in Algeria by CNPC, $2.3 billion investment in Nigeria by CNOOC and several similar deals of varying sizes in Kenya, Uganda, Congo and Sudan. China purchases nearly 60% of Sudan’s production and 25% of Angola’s production. Clearly, Africa is a major energy supplier to China.

Chinese interests, however, are not limited to oil and gas but also to base metals, precious metals and minerals. China has considerable investments in copper and cobalt projects in the Congo and Zambia; Platinum, coal and chrome in Zimbabwe; iron ore, coal, nickel, and aluminium in several other countries. Interestingly, China has given generous aid to most of these countries and package loans, including those for infrastructure development.

Aid combined with trade deals is a time tested business model which was originally introduced by Europeans. The practice was followed by the US and Japan with tremendous success. For instance, Japan made generous contributions to South Korea, Taiwan, and China after World War II, in the form of export credits and soft loans, with the proviso that such facilities should be used to procure Japanese goods and services, including Japanese construction equipment and services. One could argue that Africa is merely following the same model.

That theory, however, does not hold water as there were no blatant violations of human rights or disregard to democracy by the regimes of recipient nations at that time. No leader in any developing nation would be able to challenge Mugabe in his ability to lead nations to chaos and destitution. One would also be hard pressed to find examples of atrocities comparable to those in Darfur, performed by regimes that were recipients of western or Japanese aid. That is where China’s hands-off approach becomes less than inspiring.

It is admirable that China is, indeed, engaged in several social projects across Africa. They include telecommunication projects in Ethiopia, road projects in Kenya and the first space satellite in Nigeria. However, these investments have not helped burning issues such as employment as the Chinese bring their own labour. It is also alleged that the Chinese bring prisoners to work in African mines. China is also involved in arms trade to African nations such as Sudan in exchange for oil purchases. Its dealings with corrupt regimes have even led to the divergence of development funds from intended social projects to fatten the purses of politicians. China’s no accountability policy, in other words, is not exactly in Africa’s interest.

However, matters are unlikely to change anytime soon and the West appears to be gradually coming to terms with it. The EU is fast changing its attitude towards the African style of governance and even relaxed its own travel ban to accommodate Mugabe for the conference. In an attempt to recover its losing grip on the African natural resources pie, Europe is currently promoting trade deals named European Partnership Agreements (EPA) with Africa. EPAs, however, have instilled little enthusiasm amongst African leaders. Competition between China’s “no conditions” approach and Europe’s “relaxed conditions” approach can result in only one winner!

Attempts by Europe to win Africa back appear to be too little and too late. Africa prefers China’s hands-off approach. Unlike the EU, China does not preach, attaches no conditions related to human rights and asks no questions on good governance. If Europe is to compete with that it will have to follow a similar model. Europe always had the desire to look clean but continued to maintain trade relations with less than democratic regimes. That even worked in the past. One example is doing business with the South African apartheid regime but banning sporting ties. Back then, of course, there was little competition from China. Changing winds appear to have prompted Europe to change its model as well.

So what are the implications from the resource investing perspective? Watch for smaller companies with assets in Africa as China would be looking to acquire those that have advanced stage projects. Cuddling up with governments does not always lead to good licences and projects and China is aware of that. That may prompt China to look for acquisitions, and such acquisitions are expected to be at hefty premiums.

Amongst metals, copper, cobalt and iron ore appear to be the most sought after by the Chinese and, therefore, companies with exposure to those metals in Africa would prove to be attractive investments. China’s African safari is far from over and it is up to astute investors to make use of ensuing developments in the resources sector.