Malaysia Smelting Corporation (MSC), one of the world’s leading integrated producers of
tin metal products, is set to derive
steady income from its custom tin smelting and mining operations in
Malaysia and Indonesia. That said, the
group’s long-term value will be enhanced by efforts to acquire new tin assets
and divest its remaining non-tin assets. Assuming the worst-case scenario for
its foreign mining concessions, as well as an aggressive WACC for its tin
smelting and mining DCF and a moderate BV on its non-tin business, we arrive at
a SOP-based FV of RM5.60. We initiate coverage on MSC with a BUY rating.
Century-old
integrated tin player. With a history dating back to 1887, MSC is the
world’s second largest tin metal producer with a combined installed capacity of
60,000 tonnes per year (tpy) at its facilities in Penang, Malaysia and Bangka
Island, Indonesia. The Penang plant, the
group’s cash cow, is expected to grow at
a moderate pace in tandem with the addition
of refined capacity and increasing tin concentrate supply from Central Africa.
Leveraging on
favourable tin market cycles via mining. In 2002, MSC moved upstream after
acquiring a 75% stake in PT Koba Tin, which has a Contract of Work (CoW) to
mine tin in a concession area of 41,700ha in Bangka Island. MSC’s wholly owned
Rahman Hydraulic Tin SB (RHT), which it acquired at end-2004, has a tin mining
lease for a 601ha concession area in Perak, Malaysia. This local mine has
confirmed resources that can last almost until the end of the lease period in
2030, which will enable RHT to benefit from any upcoming upcycles in tin
prices. Although our valuation assumes that the PT Koba Tin CoW will expire in March
2013, MSC has brought in a new Indonesian partner which will eventually turn the unit into a
locally controlled entity, a move that will augur well for a potential
extension of the mining lease for 10 more years, plus other benefits.
Value accretion set to materialise. MSC is still
pursuing opportunities to expand its tin resources in Malaysia and
Indonesia, and has identified several prospective tin mineralized areas for
exploration and development. Discussions are also ongoing in relation to
possible acquisitions of suitable tin assets. The group is also evaluating
several tin prospects in the Democratic Republic of Congo (DRC), which has been a significant source of tin concentrates
for the group. As potential new mines
are not incorporated into our earnings model, any new concession awarded to MSC
will definitely boost its valuation. This aside, the divestment of non-tin
assets that kicked off in 2009 has come to its tail end, with only a few assets
remaining to be hived off. After a few rounds of impairment for some of its
lossmaking entities (which resulted in only their nominal values being recorded
in MSC’s books), its other businesses still offer decent returns. This
reinforces our view that the group will see upside surprises moving forward.
Source: OSK188
No comments:
Post a Comment