MIDAS SHARE TIPS UPDATE: Wolf leaps along after backers dig deep to start up tungsten project

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The demise of the British mining industry has been hotly debated since Margaret Thatcher took on the pit workers in the 1980s. 

Now a new mine is about to open in the UK, the first in 33 years. 

It is owned by Wolf Minerals, it is based near Plymouth and it will produce tungsten – a valuable metal used in a range of industries, such as oil and & gas, mining, construction and aerospace.

Breaking ground: Boss Russell Clark hopes the mine, near Plymouth,will deliver dividends in three years’ time

Midas recommended Wolf in January 2012, when the shares were 19p. At the time, we said the firm might need to raise new money, which could shake the price. So it has proved. Today, the stock is 13.375p.

Last March, the group raised £99 million via a placing at 16p a share. At the time, the stock was trading at nearly 26p, but the new shares were sold at a substantial discount because the fundraising was so big, quadrupling the size of the company.

In recent weeks, the price has been hit by general antipathy towards small mining stocks. This is unjust as the outlook for Wolf is promising.

Back in 2012, Wolf was at an early stage in its development. It had secured the rights to the mine, but it needed to raise cash from shareholders and project finance from bankers. It also needed environmental permits and had to secure the orderly transfer of 15 households, including an elderly man with a trout pond, all located close to the mine site. All these tasks have been achieved. The householders have been well compensated, the trout have been eaten and community relations are strong.

Wolf also raised £75 million from banks at the time of the share placing, so it now has ample funds to take it through to production.

The group has started building the processing plant and sales are set to start next September, so the group should be in profit in 2016.

Tungsten is an unusual metal. Exceptionally hardwearing, it is widely used in industry to make cutting tools, component parts and steel alloys. The metal costs about $35,000 (£22,000) a ton and Wolf expects to produce 3,500 tons a year, implying annual revenues of more than £75 million. The company is also one of the lowest-cost producers in the industry – overall costs will be about £15,000 per ton, so the profit margins should be extremely healthy.

The tungsten market is largely controlled by China, which is responsible for 80 per cent of global supply, but it holds about 60 per cent of reserves. In other words, its stock is diminishing.

China also accounts for more than 60 per cent of demand, so there is a real need to boost worldwide supplies. 

Wolf Minerals should help. Other mines are under consideration elsewhere, but Wolf is the closest to production.

Chief executive Russell Clark is committed to rewarding shareholders. The group cannot pay dividends yet but should be able to do so in three years. In the meantime, the stock price should rise. Brokers forecast profits of £20 million for the year to June 2016, rising steadily thereafter.

Midas verdict: Wolf Minerals has come a long way in the past two years.

Existing shareholders should stay with the stock. New investors should find value at the current 13.375p price.

Traded on: AIM Ticker: WLFE Contact: 01752 720766 or wolfminerals.com