The news flow and LME tin price movement seem to indicate that tin prices are recovering. LME tin price sank to its lowest at USD17,125 a tonne in July 2012 but bounced above USD20,000 a tonne the following month. FY12 has indeed been a difficult year for Malaysia Smelting Corp (MSC) as it experienced weak tin prices and flooding at its Philippines mining site. While its Indonesian unit PT Koba Tin still faces uncertain over the extension of its Contract of Works (CoW), a rebound in tin price may help to mitigate the losses. As we have factored in the worst-case scenario, our RM3.62 FV suggests at least a 10% upside, which prompts us to upgrade MSC to Trading BUY. That said, we caution investors that any potential negative development may hurt the share price again.
Efforts to support tin prices. In August, various news flows indicated that tin prices are heading for recovery. Among others, the main drivers are: i) Chinese buyers had returned to the market, ii) the top tin producer in Indonesia, PT Timah, confirmed a few weeks ago it had stopped spot sales pending an improvement in prices, and iii) Indonesia, the largest tin exporter, has idled 70% of its tin-smelting capacity due to unfavourable tin prices. Reuters on 17 Aug 2012 reported that more tin exporters have joined the group in banning the export of tin as prices were too much below the economical price. On 22 Aug 2012, Bloomberg reported that the idling of Indonesian’s smelting plants may lead to a global tin shortage.
Efforts to support tin prices. In August, various news flows indicated that tin prices are heading for recovery. Among others, the main drivers are: i) Chinese buyers had returned to the market, ii) the top tin producer in Indonesia, PT Timah, confirmed a few weeks ago it had stopped spot sales pending an improvement in prices, and iii) Indonesia, the largest tin exporter, has idled 70% of its tin-smelting capacity due to unfavourable tin prices. Reuters on 17 Aug 2012 reported that more tin exporters have joined the group in banning the export of tin as prices were too much below the economical price. On 22 Aug 2012, Bloomberg reported that the idling of Indonesian’s smelting plants may lead to a global tin shortage.
Tin prices bounce back. The possible tin supply shortage caused tin prices to move upward. LME tin price had hit the lowest of USD17,125 a tonne in July 2012 but had been recovering since. Tin price is now hovering around USD21,500 a tonne and may possibly stabilize at above the USD20,000 per tonne level. Given that tin producers have been struggling when the tin was at uneconomical low prices, we are of the view that low tin prices are not sustainable.
FY12 a challenging year. Indeed, FY12 has been a very challenging year for MSC. We are relieved it is getting the mining concession extension for Rahman Hydraulics Tin (RHT) and has made the right move to venture into the rich tin depository territory of the Democratic Republic of Congo. On the other hand, it is still waiting for the outcome of its application for the extension of PT Koba Tin’s CoW, with the negative Indonesian news flows painting a negative view that it will lose the concession. On top of that, the plunge in tin prices from the high of USD25,880 a tonne to USD17,125 a tonne in 2012 has forced MSC to write-down its tin slag inventories on the book and thus recorded a massive loss of RM44.1m in 2QFY12. Apart from the tin issues, its associate, once a significant profit contributor to the group, was also badly affected the flood in its mine area in Philippines, furthering denting its bottomline.
PT Koba Tin remains uncertain. While we reckon that the negative news flow from Indonesia has mellowed down, the uncertainty in securing the CoW extension still remained. Management has guided that the partnership with local company Optima Synergy Resources Ltd (OSRL) remains intact and that the application towards getting the extension is still on track. We believe the recent recovery in tin prices will help to mitigate the losses from its Indonesian arm and consequently help MSC buy time to secure the extension.
How should investors take position? As we have switched our valuation on MSC to the worst case scenario – losses of RM28.2m in its FYE December 2012 and failure in extending PT Koba Tin’s CoW – we have valued MSC at its 1x FY12 BV and subtracting the BV of PT Koba Tin and Gulin Hinwei, we thus derived a FV of RM3.62. With its share price having plunged to RM3.23, which we think may be due to negative market sentiments and stunned investors overselling the stock after it reported massive losses in 2QFY12. We are maintaining our FV at RM3.62 at this juncture as we have incorporated in all these bad news. As this FV offers >10% upside potential, we are therefore prompted to upgrade MSC to a Trading BUY.
Investment risks remained. Though we have upgraded the stock to Trading BUY, there are still risk factors to watch out for. We see downside risks being: i) the coming 3Q results may not be healthy, and ii) the possible negative announcement that MSC may not be able to secure the CoW extension for its PT Koba Tin may hit the share price again. We believe that we may see more positive recovery coming in only in its FY13.
How should investors take position? As we have switched our valuation on MSC to the worst case scenario – losses of RM28.2m in its FYE December 2012 and failure in extending PT Koba Tin’s CoW – we have valued MSC at its 1x FY12 BV and subtracting the BV of PT Koba Tin and Gulin Hinwei, we thus derived a FV of RM3.62. With its share price having plunged to RM3.23, which we think may be due to negative market sentiments and stunned investors overselling the stock after it reported massive losses in 2QFY12. We are maintaining our FV at RM3.62 at this juncture as we have incorporated in all these bad news. As this FV offers >10% upside potential, we are therefore prompted to upgrade MSC to a Trading BUY.
Investment risks remained. Though we have upgraded the stock to Trading BUY, there are still risk factors to watch out for. We see downside risks being: i) the coming 3Q results may not be healthy, and ii) the possible negative announcement that MSC may not be able to secure the CoW extension for its PT Koba Tin may hit the share price again. We believe that we may see more positive recovery coming in only in its FY13.
Source: OSK
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