THE BUZZ
Malaysia Smelting Corp (MSC) announced on Bursa Malaysia yesterday that it has made an addendum to the Strategic Alliance Agreement (SAA) between MSC and Optima Synergy Resources Ltd (OSRL) announced on 9 March 2012. The salient points in the addendum are: OSRL’s shareholding in Bemban Corp Ltd (BCL) will go up from 50% to 60%, and OSRL will inject relevant tin mining assets as consideration for BCL’s shareholding. The details are subject to PT Koba obtaining the approvals for the Bangka Island’s Contract of Works (CoW) extension.
OUR TAKE
A quick recap. PT Koba Tin’s CoW in Bangka Island is expected to expire in March 2013, less than a year from now. In March 2012, MSC entered into the SAA with OSRL on condition that OSRL assists MSC in extending the CoW and subscribes to 50% equity interest in BCL, MSC’s wholly-owned subsidiary, which also held a 75% effective interest in PT Koba Tin. Upon completion of the 50% subscription of BCL shares, OSRL will own 50% of BCL and effectively 37.5% of PT Koba Tin.
Further dilution in PT Koba. With the addendum announced, should PT Koba Tin successfully obtain approval for the CoW extension, OSRL will own 60% of BCL and effectively 45% in PT Koba Tin, while MSC’s equity interest in PT Koba will be diluted to 30% (previously 37.5%). As for the proposed consideration for its shareholding in BCL, OSRL will inject tin mining assets comprising its 75% interest in PT Mitra Pondasi (PTMP) at an agreed value of USD2.8m, derived from discounted cash flow on the 1,500 tonnes of tin resources, based on the Australian Joint Ore Reserve Committee (JORC)’s guidelines for reporting of mineral resources and ore reserves. The mine development works are expected to commence in the second half of 2012, with an estimated monthly production of 50 tonnes of tin-in-concentrates, which will partly cushion the impact of lower earnings from PT Koba Tin.
CoW extension gives PT Koba Tin more certainty. Although the dilution in equity interest might seem negative to MSC’s bottomline, we have already incorporated the worst-case scenario of no extension in PT Koba Tin’s CoW beyond March 2013. Meanwhile, we view the deal positively as it will enable MSC to comply with the Indonesia government’s new regulations, which stipulate that foreign investors can hold no more than 49% in mining companies. We believe this move will put PT Koba Tin in a better position to clinch the CoW extension for its Bangka Island mine. The estimated time-frame for completion is the third quarter of 2012, which may also suggest that the new partner may have the confidence in securing the CoW extension. This development is also in line with our view that PT Koba Tin may turn around in 2HFY12.
Higher volumes still key to PT Koba Tin’s turnaround. The extension of the CoW is likely to be for another 10 years, which will see PT Koba Tin continue with its regular tin mining operation using its own appointed third-party contractors and producing around 6,000 tonnes per annum, according to our estimates. The new partner also opens up the possibility that PT Koba Tin may effectively deal with the sticky issues associated with the small scale miners at the CoW areas. This implies that it may be able to resume collection of materials from the small scale miners, which may give rise to decent margins. At its peak from 2005-2006, the collection from small scale mining activities reached 15,000 tonnes a year. Even if such collection activities were to resume gradually, the higher volume will immediately bring down average overhead costs for every tonne of tin produced by PT Koba Tin. This unit also may leverage on its new partner to apply for a permit from the forestry authorities to mine in virgin forest areas within the CoW areas. This will not only raise the production but also enable the unit to obtain tin of higher quality at a lower production cost, considering that these areas are pristine.
Immediate risk from weak tin price. The good news aside, we are more concerned about MSC’s short-term earnings as tin price has been range-bound at about USD18,000 to USD20,000 per tonne in the past two months due to renewed economic worries over the debt crisis in the European Union. As tin price averaged USD20,500 per tonne in 2QFY12, significantly below our FY12 projection of USD24,000 a tonne, and may potentially deepen the loss in PT Koba Tin and narrow the profit contribution from Rahman Hydraulic Tin SB (RHT), we expect the company’s 2QFY12 results to be anaemic. Nevertheless, we continue to be hopeful of tin price’s recovery in the medium to longer term as the reinstallation and refurbishment of electrical and electronic production facilities in Japan and Thailand following the massive earthquake and severe floods may spur demand for solder, and hence tin.
Maintain BUY. While we are cautious on tin’s price movement, which is still subject to other factors and may impact MSC’s performance, we still like MSC’s: (i) continuous efforts to source for tin assets, for which it has ventured into the Democratic Republic of Congo in June 2012, (ii) its sound and solid fundamentals, (iii) our FV is derived on a conservative DCF discount rate, which is double that of MSC’s WACC, and (iv) the continued progress in restructuring PT Koba Tin. Also, we had not incorporated any possible extension of PT Koba Tin’s CoW, which may now provide a surprise upside for MSC. Therefore, we are comfortable in maintaining our BUY recommendation despite the potential of our FV RM5.60 being trimmed on a possible downward revision in earnings.
Source: OSK
No comments:
Post a Comment