Thursday 20 September 2012

Malaysia Smelting Corp - Is Tin Price on The Mend?


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.

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.
Source: OSK

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