Infrastructure - Smelter Asia still in the fray OVERWEIGHT

- The Star reported today that Smelter Asia Sdn Bhd is still in negotiations with Sarawak Energy Bhd (SEB) for the supply of power in excess of 600MW for the development of an aluminium smelter in Samalaju Industrial Park, Bintulu. We gather that negotiations are still ongoing although it is uncertain at this juncture how long the talks would continue.

- To recap, Smelter Asia is a JV between Gulf International Investment Group Holdings Sdn Bhd (GIIG) and Aluminium Corp of China (Chalco). Both parties inked a pact last April to jointly construct a US$1.6bil (RM5bil) aluminium smelting plant with an annual capacity of 370,000 tonnes.

- GIIG is controlled by tycoon Tan Sri Syed Mokhtar Al-Bukhary and UAE-based businessman Mohamed Ali Rashed Alabbar. State-backed Chalco is China’s largest aluminium producer.

- Smelter Asia is proposing to build a 370,000-tonne  smelter. This would be almost of a similar capacity as Press Metal’s facilities (combined Phases 1 & 2) when the latter’s own new 240,000-tonne smelter commences operations in stages by end-3Q12. But, the reported US$1.6bil valuation for the Smelter Asia facility is higher than our estimate of ~US$900mil for both of Press Metal’s facilities in Mukah and Samalaju combined. 

- This latest development also follows an announcement by Sarawak Aluminium Co (Salco) – a JV between Rio Tinto Aluminium (M) Sdn Bhd and Cahya Mata Sarawak – to call off its plans to build a RM7bil smelter after  it failed to strike a deal to purchase electricity from SEB. We understand that the negotiated power tariff was for the supply of 750MW for the project.

- We maintain our view that Press Metal has already stolen a march over its rivals – as Phase 2A of its Samalaju smelter is targeted for commissioning by September, followed by Phase 2B in mid-2013. 

- More importantly, Press Metal is among four pioneer investors that have already secured long-term power supply agreements (25-years) with SEB at attractive rates. Its Samalaju smelter is expected to take in 480MW of power, adding to the estimated 200MW it already receives in Mukah (combined: 680MW).

- Furthermore, we gather that it would probably take two to three years for any new startups, including Smelter Asia, to commence operations.

- We continue to like Press Metal for its strategic transformation into the largest integrated producer of Aluminium products within ASEAN. The stock is only trading at alluring FY12F-14F PEs of 6x-10x against robust EPS CAGR of  23%. From an end-user standpoint, it is also a direct play on the commissioning of Bakun Dam through its attractive long-term power supply agreement with SEB.      

Source: AmeSecurities