THE BUZZ
The Star reported on Saturday that the Indonesian government
has imposed a 20% tax on some raw
metal ore exports, and will
prohibit shipments of raw materials unless miners submit plans to build
smelters. The export ban will definitely affect mining companies, especially
for those having long-term agreements with external parties. The rules are a precursor to a total ban on raw material
exports by 2014. According to the report, tin ore is among the metals in the
export ban list and Malaysia Smelting Corporation (MSC) operates its tin mining
activities in Indonesia via its
subsidiary, PT Koba Tin.
OUR TAKE
Not a concern to MSC.
We believe PT Koba Tin’s tin mining operations in Indonesia will not be
affected by the Indonesian Government’s latest move. The export tax is only applicable
to unprocessed and non-value added raw metal ore. Since MSC has its own tin
smelting plant in Bangka Island and produces concentrated tin metal ingots
which are considered value-added products, the ruling does not affect MSC in
any way. In fact, the ban on raw tin ore
exports was already implemented by the Indonesian government a few years
back. Therefore, we think it would be appropriate for us to maintain the status
quo for MSC and not change any of our assumptions.
Weaker start, but
lookout for 2H. As stated in our initiation report, MSC’s Indonesian operations
are currently undergoing a
restructuring exercise. As such, we anticipate some gestation activities to take place at PT Koba Tin and
thus, it is expected to post negative results in 1HFY12. Based on the movement
of LME tin prices, we note that the price of tin is averaging at USD23,000 a
tone in 1QFY12 which is below our
assumption of USD24,000 a tonne for FY12
and thus, we expect lower
contributions from another MSC subsidiary,
Rahman Hydraulic Tin SB, which has tin mining operations in Perak, Malaysia.
We have already factored in a weaker start to FY12 but remain positive on PT Koba
Tin’s ability to turnaround in 2HFY12.
Moreover, tin prices may surge in the medium
term as the reinstallation and refurbishment of
electrical and electronic production facilities, which were devastated by the
massive earthquake in Japan and severe floods in Thailand, will lead to a surge
in demand for solder and hence, tin.
Reiterate BUY,
unfazed by potential weaker start.
While there are still no new developments
on the extension of PT Koba Tin’s
Contract of Work (CoW) or mining concession which will expire in March 2013 and potential award of new mining concessions in
the Democratic Republic of Congo, we choose to maintain the status quo for MSC
as per our initiation report. Although we are anticipating a weaker 1HFY12, we still
think that MSC justifies our BUY recommendation with its FV remained unchanged RM5.60,
given that: (i) it is trading way below its peers on the basis of both book value
and earnings multiple, (ii) the discount rate used in our DCF valuation is very conservative, which is
twice the group’s actual WACC, and (iii) the potential turnaround of PT Koba
Tin in 2HFY12, which could boost the performance of MSC moving forward.
Source: OSK188
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