Hemerdon is not dead.
Make no mistake about that.
Yes, inflation has pushed projected power costs up by two and a half times at the famous tungsten development in Devon, and yes diesel prices are up.
So too, for that matter, are ammonium nitrate costs. Ammonium nitrate is a key input for blasting, and by a rough reckoning it’s shot up in price by four times over the past couple of months.
Steel and cement costs are also up.
So, headaches all round.
But Tungsten West PLC (AIM:TUN) did have one thing going for it.
Although a feasibility study was in place, and economic models had been constructed over all sorts of aspects of Hemerdon, construction hadn’t actually begun in a meaningful way.
So, unlike one or two other operations which have gone into production recently predicated on a pre-Ukraine economic environment, there was room for manoeuvre.
And Tungsten West has moved rapidly.
First off, the parameters for the old project are gone.
Running in parallel with those triple digit cost increases, the price of tungsten has only risen by around 6% across the same time period. Tin, it’s true, is up by a whopping 240%, but although Hemerdon does have a significant tin component, what happens to the tungsten makes or breaks the project.
Having said all that, the inflation blow-out wasn’t as bad as it sounds.
Under the old plans, Hemerdon could still have made a profit at the operating level, even allowing for all the price hikes. The problem was that it wouldn’t then also have been able to make its debt payments. And now is not the time to be on the hook for serious debt without the means to service it.
So, one thing we can say for certain about the new plan which Tungsten West is putting together is that there will be no debt component given its existing cash reserves that stand at £28mln.
In a way, that will make Hemerdon unusual in funding terms for a smaller-scale mining project. But on the other hand, if the streamlining of the operation which is now underway is able to dispense with the capital expenditure that the debt would have covered – why not do it?
As the old adage has it, nobody who wasn’t in debt ever went bust.
So, although it’s back to the drawing board for chief executive Max Denning and his team, it’s not back to a blank slate.
What they will be doing over the coming months is focusing on how to make Hemerdon work in an economic environment that no-one would have predicted just a few short months ago.
And they are confident they can do it.
Denning has stated unequivocally that he expects to have Hemerdon up and running by next year, and that a plan detailing how that can be achieved is likely to be available within a few months.
There will be several areas of focus, including the obvious: making the project more energy efficient.
But more broadly, says Denning, the company will focus on three areas.
There will be a focus on cutting the capital costs, the operating costs and the tonnage. There will be a focus on delivering a higher margin operation. And there will be a focus on reducing the ore processing by by-passing the front-end of the plant.
How all those elements will balance out in the new plan remains to be seen.
What is clear though, is that for now at least Hemerdon will be substantially smaller. Early estimates suggest that the output rate under the revised plans will be something like a half or two-thirds of the rate originally planned.
“We are focused on bringing Hemerdon back into production without borrowing any money,” says Denning.
“We are planning a high-margin, smaller operation which optimises our three key revenue streams in tungsten, tin and aggregates.”
A reduced operation will allow Tungsten West to sell a greater proportion of its waste material that is spat out of the tungsten plant as aggregates, which means far less costs incurred with dumping it on the tip.
Another reason why all these options are available is that the grade of the metals is relatively high. Other operations that have gone under lately worked with lower grades and consequently had less room for manoeuvre.
And that should reassure any investors who are skittish about Hemerdon’s inglorious past. The issues encountered by the previous operator, Wolf Minerals, were almost all to do with plant and processing, and nothing to do with grade.
Which means that the basic premise of Tungsten West remains intact: if it can get the processing right, there remains a profitable operation to be had at Hemerdon.
The mineralisation at Hemerdon is such that the quartz veins that carry the tungsten run through different types of material, some of which is higher than others. That allows for a lot of flexibility in mine planning, not to mention the efficient management of Tungsten West’s other side-gig: producing aggregates for the local economy.
What’s more, the new and revised plans need not be for all time.
“We can scale up again if the market conditions change,” says Denning. And if, on an optimistic view the economic situation does return to something like it was before the Ukraine invasion, then the scaling up of Hemerdon could be funded by cash flow from the existing operation.
Debt and Hemerdon have never got along very well in the past. In the future, it looks like they won’t have to.