Steel Sector (2) - Perwaja still odds on in Bukit Besi, but when? OVERWEIGHT

- According to a report byThe Edge Weekly, Perwaja Holdings is set to receive a lion’s share of the Bukit Besi mining area in Terengganu. Bukit Besi covers ~2,400ha of land. With some 50 million tonnes of iron ore deposits carrying a FE (ferrous) content of up to 70%, the area is widely regarded as one of the largest iron ore mines in Malaysia.

- According to the report, Terengganu state government officials are still evaluating the iron ore mining concession in Bukit Besi, although they remain committed to carving out a large tract to Perwaja as was agreed last year. Apparently, the delays in the awards are attributable to the tedious process in evaluating a mine – i.e. from exploration right to exploitation. Perwaja is believed to have applied for more than 1,000ha.

- It was reported last December that the Terengganu government would allocate four plots of land of ~600 acres each. Two of these were supposed to have been allocated to Eastern Steel – a JV between Hiap Teck Ventures and China’s Shougang group and Chinaco Investment Pte Ltd – and Perwaja. Further, the Lion group is another major player that is eyeing a concession in Bukit Besi.

- The Star subsequently reported last May that iron ore players were in the dark over the status of the iron ore concessions. The local daily had claimed back then that only Eastern Steel was given the actual size of its mining area (600 acres). The local daily also quoted industry officials as saying that for economies of scale, the mining concession size should be 500ha or more with a minimum lease period of 10 years.

- Our initial take is that both Perwaja and Eastern Steel would be in a strong position to secure mining rights in Terengganu. The former already has an existing mill in Kemaman, while the latter is in the process of setting up a RM1.8bil integrated facility.

- Perwaja would ideally also be able to tap local ore for its proposed iron ore concentration and pelletisation plant, which will likely be used as feedstock for its Direct Reduced Iron (DRI) products that is eventually processed into steel. We gather that Phase 1 is supposed to be ready by 1Q13 although initial reports had indicated that a trial run was possible by early-2H12.

- That said, we are unsure if and when the mining awards would actually crystallise after several delays – as the spectre of the 13^th   General Election looms ahead.

- For now, we prefer to stick to long steel players that are leveraged to an expected uptick in domestic steel demand moving into 2H12. Our bets are on Ann Joo Resources and Lion Industries.

- In addition, we single out Ann Joo as an immediate beneficiary of an increasing proliferation of mining activities within Malaysia. Our channel checks indicate that the group already sources close to 90% of its iron ore supply from local mines at considerably cheaper prices compared to imported ore.    

Source: AmeSecurities