Tungsten stocks may offer some speculative appeal for investors—but they have some unique risks

Tungsten stocks may offer some speculative appeal for investors looking to diversify their mining holdings. However, we think you should take a cautious approach when considering investing in any tungsten stocks.

For those investors not familiar with tungsten, the metal has many uses, including as tungsten carbide in cemented carbides, which are wear-resistant materials used by the metalworking, mining, oil and construction industries.

Tungsten wires, electrodes and contacts are used in lighting, electronics, heating, and welding. As well, tungsten is used to make heavy metal alloys for weapons, radiation shielding, and weights. It is also used to make superalloys for turbine blades, tools, and wear-resistant parts and coatings.

Regulations against incandescent light bulbs are hurting tungsten demand and tungsten stocks.

Large amounts of tungsten are used in incandescent light bulbs, but governmental energy-saving regulations are forcing these bulbs off the market. That has hurt tungsten demand—and tungsten stocks. However, tungsten also goes into halogen lamps, and into electrodes for discharge lamp systems (such as compact fluorescent lights). Demand for these types of lights is rising. So far, though, this has mostly offset lower tungsten demand from incandescent light bulb makers. We’re not confident that tungsten stock prices will be unaffected in the long term. But there’s another issue tungsten stocks, and all mining stocks face, and it’s cash flow.

Cash flow can make or break Tungsten stocks

Simply put, cash flow is the amount of money flowing into and out of a business.

Mining operations like those conducted by tungsten stocks are particularly expensive businesses.

It’s not uncommon for mining companies like tungsten stocks to have negative cash flow. That means that to sustain their operations they typically need to sell shares at depressed prices to raise funds—and those share issues are highly dilutive to existing shareholders.

The cash flow of tungsten stocks is in many ways a better measure of the company’s performance than earnings (or usually losses). While reported earnings are subject to accounting interpretation and can be restated in later years, cash flow is a measure of the cash flowing into a company right now less cash outlays.

Investors should always examine carefully the balance sheet of any stock they are looking to invest—especially miners like tungsten stocks.

Here are five more tips to help you invest in tungsten stocks:

1. Focus on stable political regions: We generally stay away from tungsten stock mining companies operating in insecure and politically unstable regions. China accounts for most of the world’s tungsten mines, but there are mines around the world. We avoid mines in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
2. Look for longevity in reserves: When you invest in any resource stock, including tungsten stocks, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.
3. Invest in tungsten stocks with a broad base of operations: Even if the company has strong reserves, the best tungsten stocks with the least risk also have a diversified reserve base. That way they are not dependent on a single mine’s production or political stability in any one country. Mining companies can also increase their reserves by making acquisitions—with mineral prices down from their record highs, you may see an increase in mining company acquisitions at distressed prices.
4. Identify a partner: The best tungsten mines have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.
5. Pick the right location: We want to see favourable factors, like strong mineral showings from extensive drill programs, before we recommend investing in tungsten stocks that operate in hostile environments, like the high Arctic.

Have you had profitable experience investing in tungsten stocks? Share your experience with us in the comments.