Better times seen for MSC this year

Lets remind ourselves again

THE sharp recovery in the global tin prices is a boon for tin miner and metal producer, Malaysia Smelting Corp Bhd (MSC).

Its share price in recent months has been on an uptrend touching a high of RM3.26 on Sept 8 from a low of RM2.21 on Feb 3 before settling two sen higher at RM3.20 on Thursday.

Year-to-date, the price of tin has risen by over 30%. The metal is currently trading at US$19,200-US$19,270 per tonne range on the London Metal Exchange (LME) and Kuala Lumpur Tin Market (KLTM).

According to industry observers, the fortunes of MSC are set to take a turn for the better this year after experiencing a 6-1/2 year slump in global tin prices.

 

Since early this year, tin has climbed steadily following declining supplies from the world’s top producing countries China and Indonesia.

The LME tin stocks in its warehouses are also depleting, down by 20% to about 4,460 tonnes in September from a month earlier.

MSC is the world’s second largest tin mining and smelting group with an annual refined tin production of over 30,000 tonnes.

It has an international smelting operation in Butterworth and tin mining operation is managed by its subsidiary Rahman Hydraulic Tin Sdn Bhd (RHT).

With tin prices improving, MSC chief executive officer, Chua Cheong Yong (pic) is optimistic that MSC international smelting plant and RHT mines are expected to perform satisfactorily and will generate strong cash flows for the current financial year ending Dec 31.

“While the overall refined tin production is not likely to change much, profit margin, especially on the mining side, will see some expansion in the environment of higher tin prices,” he adds.

Chua tells StarBizWeek: “We will continue to subscribe to the commodity price cycles model and, in our view, the main challenge for any resource based industry is to be able to build a business model and structure that will be resilient enough to ride through these cycles.”

“The current rally for tin is more supply driven rather than demand related. While tin demand is currently stable, the growth potential is expected to be realised only in the mid-term scenario as tin use in energy related industrial applications, particularly in the battery sector, gathers momentum.

Chua says MSC has been resilient to withstand the severe down cycle, particularly in 2015, which caused significant operating losses and large asset impairments by major global mining and commodity trading companies alike.

The management’s initiatives last year at implementing cost-cutting measures and being frugal in expenditure have strengthened the Group.

“Despite the difficult and challenging market environment in 2015 our core operations, were able to achieve commendable performances and the Group’s cash and liquidity positions have continued to remain strong.”

MSC’s financial position continues to be healthy as the operations generated strong cash flows of RM90.8mil in the first half of 2016.

In June this year, MSC has proposed to acquire Metal Reclamation Industries Sdn Bhd (MRI) through its wholly-owned subsidiary MSmelt Sdn Bhd for RM50mil in cash.

Chua says: “Therefore, the company’s current year focus will be to complete the acquisition by fourth quarter of this year.”

“As a result we will not, in the near term, be actively seeking for new tin investments opportunities.”

Chua explains further that one of the current company’s priorities is to complete the MRI acquisition and then to adapt and convert the MRI plant for tin smelting and integrate it into the group’s international tin smelting operations.

The MRI plant, which is located in Pulau Indah, possesses the new generation smelting technology which is a more comprehensive and efficient smelting process as compared to MSC Group’s smelting facility in Butterworth.

Besides more superior cost and operating parameters, the new technology is also better suited to address the increasingly stringent environmental requirements.

He also says: “We believe this technology will propel MSC Smelting Division into a more sustainable and competitive custom smelting force in the global tin industry.”

For Rahman Hydraulic Tin , the exploration programme to expand the mine’s resource base is ongoing, says Chua adding that: “We hope to be able to complete the programme in the near term. These priorities should keep us busy at least for the next couple of years.”

Having said that, Chua adds the group will still continue to invest in its future, even at times when (tin) prices are low.

Besides ongoing exploration programmes to expand the group’s tin resources, MSC has also participated in the private placement of Alphamin Resources Corp in 2015 to increase its equity interest in the company to 5%.

Alphamin is a Toronto Venture Exchange listed developer of the Bisie project, a very high grade tin prospect located in Democratic Republic of Congo.

“We believe the small entry investment will provide MSC Group with favourable and interesting growth opportunities when the cycle turns.”

“The movement in commodity prices, the stability of the local currency and any major policy adjustments in the advanced and emerging economies will continue to have impact on the group performances in today’s challenging macroeconomic environment,” adds Chua.

Tin Prices Seen Extending Climb as Global Shortages to Last

Bloomberg) -- Tin, which has surged more than 40 percent this year, is set to keep advancing amid continued shortages because supply is not coming on fast enough, according to Peter Kettle, chief analyst at research group ITRI Ltd.

Prices may rise to about $30,000 a metric ton in 2018-2019, Kettle said at an industry conference in Shanghai, an increase of 42 percent from the level now. The market will have a deficit of 10,000 tons to 15,000 tons this year and a similar shortfall in 2017, he said on Tuesday. Tin is among the top picks for researcher CRU Group next year, said Susan Gao, head of consulting in China.

Tin, used for soldering in electronics, has gained to the highest level in more than two years, and is the best performer after zinc on the London Metal Exchange in 2016. Top shipper Indonesia has curbed exports and inventories in sheds tracked by the LME have slumped to the lowest since 2004. Tin and zinc are “the standout stories in terms of structural supply constraints capable of tightening the market,” Standard Chartered Plc said last month.

“We’re in a very long-term trend of declining stockpiles,” Kettle said. “If stocks fall much further, we will get to a critical point that prices could go much higher than the medium-term equilibrium” of about $22,500 a ton, he said. ITRI is a U.K.-based company which supports the industry and helps to expand the metal’s use. The group is backed by producers and smelters.

Shipments by Indonesia, the world’s largest exporter, plunged to 52,617 tons in the first 10 months of this year, the lowest for the period in at least a decade, from 61,713 tons a year earlier, Trade Ministry data show. Global supply trailed demand by 20,500 tons in the first eight months of 2016, according to data from the World Bureau of Metal Statistics. LME-tracked stockpiles have fallen by more than half since May.

Refined output in the country may drop to about 60,000 tons this year, Jabin Sufianto, head of the Association of Indonesia Tin Exporters, said in September. That compares with 67,350 tons in 2015 and would be the lowest since 2002, according to WBMS data. Kettle said on Tuesday that Indonesian supply will be about 60,000 tons in the medium term.

While Indonesia’s production has been hurt by rains and mining regulations, it could be 60,000 tons to 70,000 tons this year and may rise slightly in 2017 if the weather improves, Riza Pahlevi Tabrani, president director of top producer PT Timah, said in an interview. Timah’s shares have more than doubled in 2016 and reached the highest in two years this month.

Prices above $22,500 are needed in the medium term to spur the supply required to balance moderate growth in demand, said Tom Mulqueen, an ITRI analyst. While Bolivian production is set to rise, output in China, Indonesia and Peru is faltering, he said. Tin for delivery in three months time added 1.2 percent to $21,100 on the LME by 10:48 a.m. in London on Tuesday.

Along with tin, Gao from CRU said at the conference that crude oil, nickel and zinc were also among her top choices for next year and that commodity prices overall were poised to rise further.

(Updates to add comment in penultimate paragraph.)

©2016 Bloomberg L.P.

November Tin price

NOVEMBER 2016 TIN PRICES 

DATE	USD	RM	EXCHANGE RATE	TURNOVER
1	20,650	86,519	4.1898	35
2	20,800	87,422	4.2030	29
3	20,750	87,005	4.1930	45
4	21,150	88,893	4.2030	28
7	21,530	90,727	4.2140	51
8	22,000	92,686	4.2130	41
9	21,700	91,324	4.2085	28
10	21,700	92,290	4.2530	35
11	21,600	92,416	4.2785	41
14	21,350	92,435	4.3295	64
15	21,000	91,182	4.3420	42
16	20,050	87,318	4.3550	55
17	20,050	87,959	4.3870	22
18	20,100	N.Y.A	N.Y.A	31

http://www.mtpma.org.my/index.php/statistic/2014-07-07-04-56-57

Global Tin Market

Tin solder is the largest end-use sector now accounting for 48% of global demand. The demand for tin solder is driven by substitution for lead solder and growth in demand for consumer electronics. Lower growth in consumer electronics and thrifting have reduced solder’s market share from 54% at the peak in 2010 to 48% in 2014.

Lead-acid batteries, the fastest growing end-use, represented 7% of the market in 2014. Chemical uses are also growing rapidly rising to 16% in 2014.
Tinplate for food cans was the second largest end-use in 2010. However, greater growth in other sectors have reduced its market share to 15% in 2014.
China is now the largest consumer of tin due to rapid growth in electronics manufacturing – it accounts for 35% of the global market.
Global tin demand is 365,000 tonnes or $9 billion dollars at a long-term price of US$25,000 per tonne.
Primary tin production at 290,000 tonnes has failed to meet demand for several years with growth in secondary supply to 75,000 tonnes required to bridge the gap.
China and Indonesia are the largest primary producers of tin accounting for 67% of global production. Both countries are likely to face declining supply due to falling grade and rising costs. Other established producers in South America and Africa face similar issues.

Declining stocks suggest that secondary may not grow fast enough to meet demand growth and cover the loss of primary supply.
New production from the Heemskirk Tin Project and other proposed tin developments is required to help bridge the supply-demand gap in the future.
Rising London Metal Exchange tin prices reflect the need for new sources of supply.

Is Ekovest investible? - felicity

from felicity.
http://www.intellecpoint.com/2016/11/is-ekovest-investible.html
After the article on Ekovest a month ago, its share price has since rose from circa RM1.95 to now around RM2.18.

(Before I deliberate on this topic, I would like to insist, I have always been very careful when putting my positive comments on a company as it has to be a long term value stock. My definition of a long term value stock is always about one potentially can be putting away his/her money for years as investments and the fundamental of the company has to be of creating value to its investors. Value investment is always a subject of debate as is it just an undervalued stock or is it also a very good company which will consistently provide better value than other companies among its peers. In my perspective, it is always more of the latter where it will continuously provide investment value, than the former i.e just cheap stocks but can also be poor in terms of business performance.)  

Ekovest to me is putting itself to be a company with recurring revenue from its assets although at this moment, it is still more of a construction company. I will put the composition of its construction:property:toll businesses at the moment to be as follows 60:15:25. (I know, I am aware of how I described Gadang)

In 3-4 years down the road though, Ekovest is going to be a very different company. That is very important to me as its composition will be more like 35:15:50 in the order of construction:property:toll. Why?

Its toll business itself may potentially be even bigger than LITRAK. As it is, for DUKE 1, after its 6th to 7th year of operations it has started to register good profits (cashflow wise, would be even better). By the time DUKE 2 and SPE becomes operational, it could be a very substantial toll operator than a construction outfit. (I would be even more amazed if its construction arm is to be just as big, which means that it will be getting more jobs)

Yesterday, in a Q&A session, the CEO of EPF put down that for his private equity investments, he is looking at IRR of between 10% to 13%. He further mentioned,

“If you look at the types of assets that we have been investing in, they would typically have an IRR range of between 10% and 13%, depending on the risk profile of the assets, the tenure of the concessions and the security of cashflows

“For instance, a power plant asset which has secured power purchase agreements would be in the lower range, while something that has a bit more revenue volatility would be in the higher range,”

I will take it that for DUKE as it has some volatility, EPF is probably looking at around 11%. In today's low interest rate environment, where US is offering almost zero, 11% is very high. I would not mind putting my money in stable investment which returns 11% IRR.

From that perspective, I will take the positives and negatives - if I am an investor of Ekovest, it is willing to let go 40% for 11% IRR, this is a negative. I am sure that it can get better deals elsewhere.

From a positive standpoint, Ekovest still has 60% of that asset which it stands to gain 11% IRR at valuetion of (RM2.825 billion) still for more than 40 years (in fact more, as a concession investment such as DUKE has a definite concession period, hence when doing a DCF it will take into account that definite period - not indefinite period in which case they use terminal value). So for any investors, even putting money for DUKE already has his money worth with very strong IRR. For me, if the IRR of 11% is right, Ekovest's 60% ownership could translate into at least a good multiple of what the EPF is paying for as concession assets has good value - just look at LITRAK which still enjoys 16x PE despite its concession to remain around 15 years?

And as mentioned in previous article, what about Ekovest's other assets such as SPE, its construction business and property projects? They must have worth some good numbers as well.

Is it investible though?

Now, after the above, is Ekovest an investible stock? There are several benchmarks to a company. Firstly, even if it is to make money, bring in good cashflow (remember, some red chips (China's) companies showed profits, cashflow but without or little dividends) - would the management be ready to share part of it in the form of dividends? Here are the track record of the company's dividend payment since 2000.

Dividend and net profit of Ekovest from FY2000 to 2016

I am quite comfortable as although for certain years, its dividends to net profits dropped (2012 - 2013) - that, I believe was mainly due to the company needed funds for the acquisition of DUKE assets. Ekovest does pay dividends every single year during the period in review.

The management has mentioned of its willingness to pay some of its return of RM1.13 billion to shareholders. That has yet to be announced. If I am to read its cashflow requirement, the amount should not be too low - i.e. less than RM100 million.

Another thing which was of concern to me was that the free float for Ekovest was way too low for some time - somewhere in the range of 5% to 10% as it is still a very tightly held stock - through Lim Kang Hoo's family, Haris Hussein (brother of Hishamuddin Hussein) and an old partner of Lim Kang Hoo, Khoo Nang Seng. In the last few months, the two groups except for Lim Kang Hoo has disposed off some of their shares. One may think that they are selling early which is a bad sign, but that has also translated into more liquidity for the market. (Frankly, I do not know how to read this.)

Ekovest has not been a much followed stock because funds do not like low liquidity stocks especially the sell side brokers. They are not able to introduce much to their clients as there are not much stocks to buy. That to me is changing for Ekovest. If I am to read right, some if not all portion of Haris Hussein's sale 6 months ago went to several funds.

As it is still at good value, I see the funds coming in a bigger way - as they are becoming visible for the bigger guys. That's how I see it as it is surfacing some of its value.