OM Holdings Ltd

ASX:OMH

Earnings Call Transcript 2023-Q2

[Nicola Gosatti]

My name is Nicola Gosatti, and I'm Co-Founder of Investor Relations Consultancy, Corporate Storytime.

OM Holdings Limited is a vertically integrated low-cost manganese ore and ferroalloys producer. And I am delighted to have OM Holdings Managing Director, Adrian Low, with me again today to run through an investor presentation following the release of OM's June 2023 quarterly production and market update. The presentation will be then followed by a Q&A session. [Operator Instructions]

So without any further ado, I'm pleased to hand over to Adrian, who will present his comprehensive update. Adrian, over to you.

[Ngee Tong Low, executive]

Thanks, Nicola. Good morning, everyone. Thanks for dialing in again, to our quarterly webinar. So I think everything has been very quiet since the last time we spoke, I think, 3 months ago. So I'm just going to dive into the details and answer any burning questions you might have.

So I think 3 months ago, you would have seen the same slide that you're seeing on screen. And you will notice that we have updated the numbers that you see on the chart. So just at a very high level, I think given where markets are today, we are in the sort of destocking phase of the commodity cycle, and this is true not just for ferroalloys, but sort of across the board for many, many commodities. And this is sort of the after effects of what we're experiencing post-COVID stimulus. So I think given the sort of environment really for most companies, what we can do is control costs, ensure that things are running as smoothly as we can run them. And on that note, we've actually tried to increase production, lower overheads. And I think this sort of goes back to the comments that we made maybe 3 months ago about capacity utilization. So we're very pleased to share today that we have advised those updates.

You also see that on the manganese alloy side that is substantially higher than -- on the high end, substantially higher than what it used to be and marginally high on the ferrosilicon side. So how does this -- how we've been able to sort of tweak these production numbers is on ferrosilicon side, investors and shareholders, what we call that, we have temporarily suspended silicon metal production at our silicon metal furnaces. We have halted that commissioning process. In turn, as I've said many years ago, these furnaces are dual use, and we have converted them for the temporary production of ferrosilicon. And so we have started this for the first furnace at the end of June. I think you would have seen that in the announcement. And we will look to convert -- well not convert, but produce ferrosilicon at the second silicon metal furnace as well.

So with that, I think we're looking at overall a full year figure of between 120,000 to 140,000 for ferrosilicon. And so that will bring output sort of heavier in the second half of this year. For the manganese alloy furnaces, I think when we introduced production guidance the first time this year, we always said that what we put out was a base case capacity utilization of about 75%, more or less the same as what we did last year. And so what we've done for the manganese alloy furnaces is try to ramp them up quickly as soon as workers become available. And so that's exactly what you see in the guidance figures here.

So I think the sort of top 3 key highlights for the last quarter would be these changes, first of all, on the ferrosilicon front, on the manganese alloy front. And semi, I think we have now looked through certain what went wrong with the silicon metal furnace and look to as a sort of base case target, look to resume production of silicon metal in early 2024. So this will most likely be January, pending any further changes to the sort of restart program. And last of all, we repaid just above USD 9 million to project lenders. And so this was always given the current sort of high interest rate environment, this is the wise thing to do and it was always sort of pilot plan.

So that's it at a very high level in terms of production updates. It's not very exciting. Nothing much has happened in the world. I think that's too different from the last 3 months -- sorry, from the last update 3 months ago. I will just share on the screen the sort of full year plan, just so we can see it in the context we had last year. So these numbers have been robust. We have revised the bonus numbers as well as the sort of total output of Sarawak. So on a combined basis, we're looking at between 340,000 to 400,000 tonnes for this year. So that's a meaningful bump up from last year. And so the future plan remains the same. We are looking to commission metal silicon furnaces next year. And with that, we'll sort of complete the first 3 roads, hopefully have all 16 furnaces up and running next year. This year, most likely we'll achieve, say, 15 furnaces, 15/16 towards the end of the year. And so hence, fulfill what we said 3 months ago, which was that once workers became available, we would try to ramp up production to approach full capacity utilization.

So I'm just going to spend the next 2 slides talking briefly about markets because I think investors and shareholders will notice that we have been publishing sort of weekly market numbers. And I think it's important to -- when you see those numbers falling, if they get sort of important to sort of frame everything in the right context. And so I think if you look at the chart on screen here, we're talking about ferrosilicon prices. And so you will notice the Blue Line has been continuously falling since around Q1. And this is matched by a continuous decline in Chinese ferrosilicon production as well. So that's -- again, that's the gray shaded area behind.

So I think it's not really surprising given the macro environment. But for the first couple of months of 2023 and definitely in the sort of last quarter of 2022, ferrosilicon prices have sort of flat lined between $1,600 to $1,700 for the longest time. And I think that was due to 2 reasons. One, the macro environment wasn't as bad. And two, I think costs remain relatively elevated, especially when you look at the price of coal, coke reductants. So 2 things have changed. Well, both of these things have changed since then. I think the market demand, especially in China, has seeking attempt for worse and the products of these raw materials have been falling.

So obviously, on a return basis, although sort of ferrosilicon prices have been falling continuously from better part of this year. I think costs have come down as well. So I think the destocking cycle, if you look at the gray area, we'll just -- you'll have to let it run its costs. I think something that's interesting to note is that in Asia, besides China, Russia is often cited as the second largest export. And I think in their case, some of the local producers have switched the production of ferrosilicon to other ferroalloys. I think they have switched -- it's the chrome manganese and other alloys that might be better consumed domestically in Russia. So that will have an effect eventually at some point on the net volumes being brought into the market.

So that's it on the ferrosilicon front. I'm just going to talk through manganese very quickly. So I think if you look at just ignore what's happened in the past, but just look at 2023, story has been largely similar to what sort of played out in ferrosilicon. In this case, the main exporters of manganese alloys have been many producers. They have completely stepped up their volumes and replaced all the volume that the world has lost through Ukraine.

So I think, again, it's similar in the sense that: #1, we are facing just very, very challenging macro environments in the case of manganese alloys, so China because they can't really export manganese alloys, but rather sort of cope of demand and especially demand in Europe. It's also similar to ferrosilicon in the sense that costs have been coming down. And in this case, that would be the cost -- sorry, that will be the price of manganese. And you can see that, that red line has been trending down rather sharply as well this year. Again, the sort of brief spike in January, February 2023. It was due to sort of accidents and disruptions to global miners to sort of the largest miners of manganese alloy. But since then, lacking any fundamentals, prices have trended down.

So again, I think for manganese alloy and ferrosilicon, these are very sort of China-driven commodities unlike manganese alloy, which is a pure sort of ex-China market. So I hope that has given you a sense of what's happened in the last 3 months. Unfortunately, I think it's been more or less quiet. But I would just like to end this webinar with a short note on sort of the long-term growth prospects of the company. Again, I think a lot of people we chat with and talk to should warming up to the idea that ferroalloys is not a 6-month outlook market. The market cycles can last between 2 years all the way if you look at 2016 and sort of that credit cycle can last between 2 to 6 years. And so it's really about sort of staying your cost and planning with the long-term view in mind.

And so on that note, I will again remind investors and shareholders that why we're doing what we're doing is marrying our know-how of the ferroalloy markets with renewable, sustainable hydropower out of Sarawak. And I think this is sort of core thesis that will not change. I think it has demonstrated that sort of stood the test of time. And I think the sort of benefits from sustainable hydropower will only increase here on out. So there are a lot of plants sort of for the next 2 to 5 years, including sort of the final expansion project as well as projects around what we're going to do with our carbon footprint, heat recycling and that sort of things. So we look forward to presenting that to investors and shareholders at the appropriate time. So I'm just going to stop sharing my screen and we can take questions at this point.

[Nicola Gosatti]

Thank you, Adrian, for that update. And we have received quite a number of questions, so we'll jump straight into it. Our first question is, which furnaces are the most profitable at the current alloy prices? Is it ferrosilicon furnaces at USD 1,330 per tonne or manganese alloys at USD 880 per tonne? Please answer in terms of profit per furnace, not profit per tonne.

[Ngee Tong Low, executive]

Right. Okay. Sorry, I've lost you there for split a second, but I think I got just over question. And just before I answer the question, I think it's very interesting to note we are at the end of July and the prices that have just been read, so if you contrast that with the prices of the end of June, things have really sort of slipped considerably in just the span of 20 days. So I think I really do think we are quite a fair bit into destocking cycle. And hence, you see sort of prices moving very, very erratically at this stage. But to answer the question, I think at this point in time, if we were to look at sort of the prices of manganese that have just been released last week for forward delivery and for prices of -- and if you look at the prices of reductants, coke, semi-coke that sort of stuff.

On that sort of replacement cost basis, I think ferrosilicon would be the winner at this point in time and not just on a per furnace per day basis, but also on a per tonne basis. So manganese alloy has sort of fallen behind the ferrosilicon carbon. And I think this is part of the reason why we have increased ferrosilicon production as well, although we do expect both to sort of trend down.

On a sort of forward-looking basis, I think what's happened now is very interesting because for manganese alloys, if you look at the last 6 years, I think we are now approaching a point in time where the ore price and the alloy price has become a bit dislocated. We are low even by historical standards. So I think what this is reflecting is just this very ferocious destocking of inventory, both by producers, notably India and also by consumers. And we are seeing a lot of customers, especially for manganese alloys booking orders. Historically, they would have booked a month, 2 months before shipment. Today, we're seeing people book alloys for shipment within 2 weeks. And so that just reflects where the inventory has moved and sort of who's financing the inventory, although the net tonnes in the cycle and the entire system sort of remains unchanged.

[Nicola Gosatti]

Thank you, Adrian. That leads us into our next question. If OM Holdings management consider that silicon metal will be the most profitable per furnace, will the company build more silicon metal furnaces rather than manganese alloy furnaces and will OM Holdings access to low cost [ allocate ] to OM Sarawak a strategic advantage as a silicon metal producer.

[Ngee Tong Low, executive]

So I think the answer is yes to the second question. For silicon metal and ferrosilicon, we have done this sort of cost benefit analysis and sort of the earnings spread between the products historically. And I think I've been asked this at this webinar as well. And I think the answer at that time which still remains the case is that, looking back historically, back testing those numbers, silicon metal is just better. The interesting thing is both of these are produced out of China, but ferrosilicon has a 25% export tax and silicon metal does not. So even without that export tax, silicon metal is a better performer, and I think that's reflecting the power cost that we have at Sarawak.

Going back to the first question, why don't we produce -- sorry, why don't we build more silicon metal furnaces?

The answer is that silicon metal is a much more power-intensive product to smelt. It makes more sense to smelt them in smaller furnaces and what we're trying to achieve with the 2 new furnaces is lower sort of manpower dependency sort of more efficient output. And that means larger furnaces. And so it's easier to smelt manganese alloys in sort of 33 MVA furnace. These are at this point in time now, sort of part with the course for a lot of larger Chinese smelters, well it's not the case in other parts of the world.

So what would make more sense and what the company is considering at this point is to build the 2 new furnaces for manganese alloys and see how silicon metal performs, not the market, mind you, but how the furnaces perform next year. And with that information, we will then be able to decide should we increase the amount of silicon metal we're going to produce in the final mix. And if so, it would make more sense to convert existing furnaces, 25.5 MVA furnaces to produce silicon metal instead of building new ones. So it's sort of an indirect answer, but I hope that, that sort of given you a sense of why we're not building silicon metal furnaces.

[Nicola Gosatti]

Okay. Thank you, Adrian. Our next question, how will each segment of your company's business and earnings unfold over the next few quarters given the changing global environment for your company's products, rising interest rates, sanctions, impacts, competition, et cetera.

[Ngee Tong Low, executive]

Okay. So that's a big question. I just picked up a couple of keywords. And look, I'll try to answer as comprehensively as possible. On the sanctions front, I think, unfortunately, nothing much has really changed. The world is still buying products from Russia, especially we not a sanction company, the reason why anyone can't buy product that you're offering. So I think in terms of ferrosilicon, we have seen some marginal reduction in demand for Russian origin products, but I think this doesn't really translate into sort of price changes on a net basis because there will be people willing to buy that, and it's really just a game of musical chairs.

On sort of the macro environment front, I think it's sort of what I've been saying earlier about where we are in sort of the macro cycle and as well as the commodity cycle. So on the macro front, I think with high interest rates, demand is not really there. And obviously, geopolitical events in Europe have prevented sort of demand coming back as well. But the longer this goes on, the more suppressed demand will eventually sort of make its presence felt. And so then that brings us to the commodity cycle. What's happening in the commodity cycle is in spite of that reduction -- sorry, not withstanding that reduction in just global demand, I think the oversupply situation remains severe, especially in manganese alloys. And so this is a very sort of classic situation where everyone wants to be the last [ man ] standing because at some point, prices will recover, things will rebound, and we don't want to have stock reduction just before that happens.

And so I think it's very, very sort of classic game theory kind of prisoner's dilemma kind of situation where everyone's consensus not aligned, but rather sort of encouraging the production of more and more ferroalloys. And you will -- ironically, you will also notice that we have revised our production guidance upwards this year. And so that's sort of playing into the same dynamic. But I think that's why it's very important to highlight our key strengths in terms of the power prices and sort of having the sustainable power from Sarawak.

[Nicola Gosatti]

Thank you, Adrian. Our next question is in 2 parts. What are the expected costs of the silicon metal furnace rectification? And is there any potential claim for damages or compensation against advisers? And are you confident that the technical issues will be resolved to facilitate nameplate production levels from the furnaces in calendar year 2024.

[Ngee Tong Low, executive]

Right. So we don't have a figure in terms of total cost at this point in time. Will there be damages claimed? Will there be some kind of claim? Yes, there will be. There will be some kind of claim for rectification and that's the sort of split of that is what's being discussed and negotiated. Is it major? It's not sizable in the scheme of things, that's what I can share at this point. In terms of achieving the nameplate capacity for silicon metal next year, I think if the first furnace progresses smoothly in Q1, we will look to commission the second furnace 3 months after. So that will bring us close to but not actually reach the 4 years nameplate capacity next year. But definitely, on a run rate basis, we will at least achieve that hopefully by middle of next year.

[Nicola Gosatti]

Thank you, Adrian. Our next question. Are you able to provide guidance regarding movements in inventory, receivables and payables to provide the audience a feel for profitability for the first half of calendar year 2023?

[Ngee Tong Low, executive]

So unfortunately, we are not in a position to provide that information at this point. Do note that our first half financials will be available in just around a month's time. So stay tuned, and we'll talk through that and answer any questions investors might have at that time.

[Nicola Gosatti]

Thanks, Adrian. Our next question for how long will the major maintenance programs referred to in the presentation take furnace production off-line?

[Ngee Tong Low, executive]

So I think a lot of the work has been done. You all noticed that -- that's actually part of the reason why we were able to increase second half guidance. And so I think there are a few furnaces that where we have delayed major maintenance. I think they should be wrapped up by the end of the year, if not early next year. But these are -- we're talking about furnace weeks, and that's not really sizable in the scheme of things. So yes, I would say, as far as Sarawak's output is concerned, major maintenance isn't really a factor at this point.

[Nicola Gosatti]

Okay, Adrian. And our final question for today. Apart from dividends, does the company consider other capital management strategies, such as share buybacks or prioritizing debt reduction?

[Ngee Tong Low, executive]

Yes. Look, that's a great question. I think it's always a tough thing to balance between debt repayments and doing things on the equity front. Look, if we had cash and debt wasn't pressing issue, i.e., if we had lower levels of debt, interest rates weren't so high, it would be a great time to sort of do buybacks and -- because that would give you sort of the biggest bang for buck. But unfortunately, I think it's a situation where we're balancing things on multiple fronts. One, on the project finance side because just to give you a sense of what the factors are. One, there's a repayment schedule that has been agreed upon to near interest rates are high. And we are doing a lot of things with an eventual sort of refinancing in mind, either at the end of this year, if not early next year to sort of unlock the remaining value from what's been good stream from project finance.

And so these are some of the constraints that the company has. But absent all these things, then yes, I think it would make a lot of sense to do something on the equity side and sort of future scenario where we have completed all these growth projects, it would then make sense at that point in time to consider what we're doing with the cash being generated. Should that be distributed in terms of dividends? Or should we actually be reducing the share issue. So I think those are all things that we're thinking about. It just isn't the best time to actually do it at this point.

[Nicola Gosatti]

Thank you, Adrian. That does appear to cover the majority of the questions from our audience today. If you do have any further questions, please feel free to forward them to [e-mail]. We will make a recording of this webinar available via OM Holdings and Corporate Story Time social media accounts in the coming days. So this concludes our webinar and thanks to everyone for attending and thank you to the OM Holdings team and Adrian for the update. Thanks, Adrian.

[Ngee Tong Low, executive]

Thank you. Thanks, everyone.