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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone, and thank you very much for attending today's OM Holdings Investor webinar. My name is Nicola Gosatti, and I'm Co-Founder of Investor Relations Consultancy Corporate Storytime.
OM Holdings Limited is a vertically integrated and ESG-focused ferroalloys company and has this week released to market and operations update for the September 2022 quarter.
I am delighted to have OM Holdings Managing Director, Adrian Low with me again today to run through an up-to-date investor presentation, which will then be followed by a Q&A session. [Operator Instructions] So without any further ado, I am pleased to hand over to Adrian, who will present his comprehensive update from OM Holdings corporate headquarters in Singapore. Adrian, over to you.
Thank you, Ms. Nicola. Thanks for the introduction. Thanks, everyone, for joining us today, Friday morning. So I hope you can see my screen. Okay. So without further ado, I'm just going to go straight into the heart of the -- the update for Q3. And to be honest, I think there isn't really much in terms of production, things have been relatively smooth. But on the corporate side, I think shareholders and investors would have seen our announcement that we have completed all CPs on 15th of September our acquisition of the remaining 25% shares of the Sarawak bonds. So I think we look forward to guiding shareholders on completion of the transaction.
And today, that is anticipated to be on or before 13th of December being 60 days after the date of CP fulfillment. So that's on the acquisition front. I think we might have some questions on this, but I'll take that later in the Q&A.
So besides the acquisition, in Q3, we also repaid USD 6.5 million to a project finance facility. So that's as per fee agreement schedule. And in terms of production, we're sort of pleased to share that -- I think almost likely be able to achieve current target of 340,000 to 350,000 tonnes of ferroalloys from OM Sarawak in FY '22. And so again, I think if you were here last quarter, you will notice that the production has to be front loaded. So hasn't actually much -- sort of much to go in Q4, but the numbers are as you can see on screen, and I think everything is progressing relatively stably.
Major maintenance is on track. And I'm also pleased to announce that the 2 furnaces that we have commissioned have passed OM's testing in August this year. So right now, I think the only thing we are waiting for would be the 2 silicon metal furnaces. And if everything goes according to plan, from major's [ intermediation ], the first furnace should commission in the first half of December. So we're all looking forward to that, and we'll guide and update investors and shareholders once that happens.
Okay. So just moving on to the forward plan. I think most of us will be familiar with our full year 2022 development plan and beyond. So I think -- so if you just look at the column 2022, I think we have basically achieved everything we set out to do at the beginning of this year. And I think in due course, we will update the market with a sort of full year 2023 plan once we sort out sort of the ramp-up schedule or ramp-up profile for 2023. At this point in time, I think the focus really is on delivering the silicon metal project. And a lot of management's effort has been around achieving the right grade and positioning ourselves well for metallic silicon.
So post that, I think the next growth stage would be the 2 new manganese alloy furnaces. And I think as I've mentioned in the past, this -- number one, this is conditional on funding. So we -- when we announced this project, we will also, at the same time, share how we plan to fund it. But the idea is to deliver this in the next 2 to 3 years' time. And I think we'll see quite a lot of synergies, obviously growing manganese alloys. So again, once we complete that project -- that expansion project, we will be looking at just under 0.5 million tonnes of manganese alloys per annum, which puts us on a sort of seaborne trade basis at about 15% to 20% of the global market.
Okay. So I think I'd just like to take the opportunity, especially for investors, shareholders, who aren't familiar with the ferroalloys market. I would just like to take the opportunity during the webinar to briefly walk through what happened in the last quarter.
So we'll start with ferrosilicon. So looking at the price chart. It just tells you one thing, and that is that prices have fallen, but stabilized. So I think sort of the macro factors are sort of pretty obvious. Global demand has fallen with tightening the Fed, with what's happening in Europe with power prices and also what's happening in China with a lot of instability with respect to the real estate market and now, I think, politically as well.
So it's not surprising. I think that prices have sort of come off driven obviously by destocking. But I think what's telling is that, number one, Chinese production, if you just look at the chart, sort of shaded green area behind from quarter 2 to quarter 3, Chinese production has fallen by 21% and that's sort of around the $1,600 ferrosilicon price level. And I think we should all note that today RMB is at -- it's past -- way past RMB 7 to the dollar. And I think historically, we've always been looking at RMB 6, RMB 6.5. So even in spite of that sort of massive depreciation of the currency, the USD prices actually have stabilized at about $1,500. So that tells us something about the level of pain produces iron. So I think we're well in the sort of destocking phase of the commodity cycle for ferrosilicon.
Okay. So moving on to the manganese side of things. So this year, obviously, we have very minimal exposure to manganese ore with Bootu having shut in December 2021. And so we've basically just been shipping out material that was being [ ready to deploy ] in January and February. So that's completely over now. So without exposure to manganese or -- which is the red line, you can see on the screen. And what we're most concerned with these days is the blue line, which is the price of silicomanganese.
And so I think sort of the broad macro factors driving manganese alloys have been very similar to ferrosilicon. So it's not so much of a sort of supply side issue moving prices in the last 3 months, I think it's more on the demand side. And so prices have come down, again, sort of stabilized a bit. But what's interesting is that manganese ore prices after brief surge in Q1 of this year, briefly touching $8, I think it reached a $8.05 per DMTU has come down again very, very rapidly. So -- and it's still doing sort of reestablishing this healthy spread between the price of manganese ore and manganese alloys. And I think this sort of goes back to what we said that the prices of alloy and ore has to be -- it's almost a law, 80% to 90% correlated. And over time, over sort of longer horizons, at pace to be sort of earning this conversion spread between the ores and the alloys.
So I think, look, on sort of the manganese alloys side, we're also looking at developments in Ukraine because obviously, Ukraine is home to the world's single largest manganese alloy smelter. And so post the Russia-Ukraine war, we'll look to see how supply looks like.
I think at this point in time, the investors are seeing a lot of producers are destocking as well. So while we don't really have a hard number that we can sort of point to, anecdotally, I think a lot of producers in Europe, in India have either sort of idle furnaces moved on to produce other products with healthy margins.
So on that note, I'm just going to skip to the typical slide that we always keep repeating and leave more time for Q&A. But again, OM Holdings today, I think, is a much simpler story. So forget about the trading business, forget about the mine's exploration, just look at OM Sarawak alone, look at the volumes, look at the prices -- sorry, look at the margins and where we stand sort of relative to the rest of the world.
And so what are some of these key factors. Number one, that we run on hydro power. It's 20-year to complete purchase price agreement. Number two, where we are in this part of the world, Southeast Asia where a lot of economies are still growing and steel consumption is still rising. And our proximity to our markets and our raw material sources and just the fact that we've been doing ferroalloys, I think, for over 25 years now. Those are our key strengths and we have to just multiply that volume.
So I think we do get questions on what -- where are we in terms of the price cycle. And I think that's well and fine from a day-to-day perspective, but that shouldn't distract us from longer-term valuations, which is what is the 10-year average sort of margin look like for smelting. And that's something I hope shareholders can take away.
Okay. So with that, I'm going to end the presentation, and we will start the Q&A.
Thank you for that update, Adrian. We'll now move on to the Q&A session for today.
Our first question is, would you please provide an update on the continuation of tax ruling limiting taxable object at the Sarawak operations?
Right. So I think it's probably asking about the tax holiday. Look, the first 5 years of the tax holiday have ended. And this year, 2022, what we've done is submitted our application for the second 5 years. So the second 5 years functions a bit differently from the first 5 years. 70% of our income will be tax exempt and 30% of that will be taxed at the Malaysian corporate tax rate. So I think that gives you an effective rate of about 7% to 8% for the next 5 years, okay?
So what is still unclear at this point is when the 5 years will start, right? So I think if you look at our numbers, we have provided the tax in FY '22 but there's a chance that the authorities will come back and say, look your second 5 years will start in 2022 and not 2023. So that's still dependent on them. So I think we'll provide an update once that's available.
Okay. Thanks, Adrian.
Our next question, what are the future expansion plans for the company?
Right. So I think -- look, the immediate plans are obviously silicon metal. And post that, we will be looking at delivering the 2 larger furnaces at Sarawak. And beyond that, so let's say, call it a 5-year horizon, I think beyond that sort of what we're thinking about and not necessarily committing ourselves to, would be sort of in 3 categories. So the first category of sort of growth plans would be, do we like silicon metal? And how do returns look now that we -- do we want to convert more ferrosilicon furnaces to silicon metal? And sort of what are the geopolitics around that commodity because it's so essential for the solar industry, and it's essentially monopolized by China. So that's called that Category 1.
Category 2 would be -- I think we get questions then on power. And do we have enough power to sort of fund or fuel all the growth projects that we have. And so the answer is some years ago, I think we talked about heat recovery. And basically, what that means is that we've got 3 furnaces with super-hot gases leaving the exhaust. And I think the technology today is sufficiently mature enough to take that energy, drive some turbines and generate power. And so that would be sort of on the green side. How do we sort of recover all of the waste energy that we're generating? That's two.
And I think sort of the third basket of growth would be looking at silicon and looking at manganese and the sort of green and renewable applications, which should we chase and how can we position ourselves in Sarawak to take advantage of that, right? And so I think from the silicon side, that's sort of going down to one path and sort of going down that value chain, basically from silicon metal you end up with a polysilicon and then that goes all the way down into solar panels.
And then on the other hand, we have manganese where you can produce either EMM or manganese sulfate, which would then be used in battery cathodes, and eventually sort of -- that falls into the EV, sorry, which is obviously very popular today. So I think that would be sort of the third basket, but we're obviously in very early days and to reach a sort of a bankable feasibility study. But I would say these are some of the things we'll think about in the next 5 years.
Thanks, Adrian, for that comprehensive answer.
Our next question is, what is the company's dividend policy?
So the short answer to that is we do not have a definitive policy. And I think this actually ties into another question that shareholders might ask. But look, we've done quite a bit of engagement with institutional shareholders who've been sort of sitting on the sidelines this year, especially in Malaysia. And the overwhelming comment there has been that it's more fine to have a stock that's not necessarily too liquid, but it's important to have a clear dividend policy in place. And so I think that is what we're working on right now.
I think historically, if you look at what we've paid out in, say, in the last 3 or 4 years, that number has been between 20% to 25% of net profit after tax. So that is a starting point that we would like to formalize and I think that can be done as early as this year. It's actually now in sort of a drafting stage and before going to the Board.
So look, that's something we'll update the market again in due course, but it is something we might pull out that's something we're working on.
Thanks, Adrian. Our next question, does the current low trading volume reflect a lack of fund manager engagement by OM Holdings? Taking into consideration the net profit performance, the low volumes does seem strange. What is the company's plan to improve institutional ownership?
Yes. So this is -- that's a good question. Look, I think what we've been doing -- so let's sort of step back a few years. I think we listed on Bursa, Malaysia in 2021 because of the institutional interest then. So we got ourselves listed in June. We were at a point looking to do a placement, just to sort of provide that initial liquidity without which -- it's essentially sort of again shares being moved into Malaysia. Past that, we didn't do the placement, obviously, because we thought the price was not appropriate. I think we then managed to get ourselves cleared and became sharia-compliant, which then opened up the investable fund space where a lot of public funds, public institutions saw us as attractive. So this all happened, I think, over the last 6 months.
So -- and so here we are today in sort of a situation where the interest has been climbing. But obviously, the market has been -- let's just say, the timing has been wrong. So I think what we're trying to do today, sort of going back to what I said earlier about the dividend policy, that's probably the next logical step is do a lot of organic engagement, bring potential shareholders, institutional investors, analysts on site, onboard more research analysts.
I think the fact that a lot of large institutions see us as potentially interesting stock and the fact that we're getting more and more analyst coverage. It's a signal of quality. So I think it is absolutely correct to see that the volumes are not commensurate with the quality of the company. And that's something obviously we're trying to address.
So 2 things, I would say, continue view of organic engagement. So if you follow us on LinkedIn, you will see that, that activity has stepped up over the last 2 months and get more analyst coverage. So look, [indiscernible] has recently initiated coverage. So I encourage everyone to check that out. And I think there will be another analyst releasing research in the coming weeks. So again, stay tuned for that. And besides that, I think we sort of formalized dividend policy, just to continue the engagement work. So I think there's no really sort of silver bullet to this. It's really just pushing all fronts and reaching out to people and educating people about the industry.
Thanks, Adrian. Our next question is in 2 parts. It is pleasing to see strong production in sales at OM Sarawak during the September quarter. First part of the question, what grade of silicon metal will be produced once the furnace conversions are complete? And secondly, what is the approximate land of cost at Sarawak for 1 tonne of quartz that's used in producing ferrosilicon and silicon metal?
Right. Okay. So to answer the first question, the entry level grade for silicon metal is 553 grade. So that's 0.5 iron and then aluminum and calcium. So I think we're actually going to start ourselves with raw material that can sort of, let's say, theoretically reach chemicals grade, so 441, 421 and 411, but target 553. So for starters. And so what that means is we will be fairly unconstrained in terms of sales strategy and at the same time, have enough of a sort of ramp-up curve because I do think, as with our experience in ferrosilicon, there will be a sort of a [ commonization ] period and the learning curve before sort of able to reach those grades. But to begin with in mind by those high-quality raw materials, we start off with a low grade stuff out in market and then sort of move on from there. So I think the entire process is probably going to take 6 and 9 months. So by third quarter and 2023, we'll have a good idea of what sort of the overall picture and overall strategy will look like.
But yes, so short answer would be start with 553 hopefully, and then 421 and 411 and then see where we can move from there. So the second part of the question, sorry, Nicola, could just repeat that again?
Okay. Second part of the question was, what is the approximate land of cost at Sarawak for 1 tonne of quartz that's used in producing ferrosilicon and silicon metal?
Yes. Look, I think historically, that number has been $40 to $50, probably at the peak of the sort of freight $70 or so, but I think that number is going to go down. It's definitely going down now, but I think next year, it'll probably go down -- go back closer to what it was historically.
Okay. Our next question, the September quarterly update reports that the plant design capacity of silicon metal is 21,000 to 24,500 tonnes per annum, which is 50% of the ferrosilicon comparable furnace production. Do you expect the silicon metal profit per tonne to be double that of ferrosilicon? And does the extra profit justify the capital cost as well as the down -- year downtime for the conversions?
Yes, that's a great question. So that testing the silicon metal prices at the 553 grade at the time we decided to do this, the answers are overwhelming, yes. So it sort of simulating the costs from, I think, must be 2015 to 2020 or something like that. The short answer is that, yes, the additional margin truly compensates us for the reduction in productivity.
And what is interesting about silicon metal is it gives you a lot more optionality in terms of where you place the material, whether that's in the U.S., in Europe, or in parts of Asia at moments of crisis and the volatility of the price of metal is a lot higher than ferrosilicon. So again, that's -- that creates a lot of opportunity for us as well.
So yes, and it does justify the shutdown time. And I just like to add that if you look at the full sort of maintenance and conversion project time frame, it's not actually a year of the furnaces being shut, right? It's actually only a couple of months of the furnaces that are going to be converted, being shut. And the lead time -- I think the bulk of the lead time is really getting these parts fabricated and then delivered from China into Sarawak.
Okay. And our next question, given the global geopolitical instability and particularly full recessionary impact to the global economy. How do you envisage the company the impact with respect to growth and profitability in the near and medium term? Do you believe that currently low prices for ferroalloys are already reflecting these economic risks?
Okay. So -- that's a great question. So I think the short answer is, yes, I think it's priced in -- and the first thing that sort of brings to mind is I've always looked at the plot of -- sort of the scatter plot of manganese ores versus manganese alloys. And given that it's up to 80% to 90% correlated, the ask rate is pretty high. And so you can sort of track where you are relative to history, and we are actually sort of -- it's actually priced below where it should be historically.
So I think that's interesting but that tells you that the market is oversupplied and the price is clearing that oversupply, that's why priced between [ $1,000, $2,100 ], and that's why the prices of ferrosilicon are between $1,500 to $1,600. Although I think in the last 2 weeks, we have seen signs of -- potential signs of rebound. So I think it's too early to call that.
So I think it's fully priced in. I think sort of going back to the first part of the question on where the global macro economy is heading. Look, I think it's heading down, right? That's no questions about that. So I think if you look at the prices of ferrosilicon and manganese alloys, they're not always driven by the same things. So during Q3, I think they were both on [Technical Difficulty] they're falling. And obviously, in 2021, both is driven by supply rising. Earlier in history, there were periods when [Technical Difficulty] since end of 2017, when we essentially doubled, whereas manganese alloys really moved much. And so what that tells us is that it is driven by their own supply and demand strategy [Technical Difficulty] faster than the decline [Technical Difficulty] in steel production and [Technical Difficulty] will depend on how quickly produces destock.
And if steel production hasn't sort of overcorrected because at the end of the day, steel is still needed for basically everything we do, and that will change at some point in time. And I think we have seen -- the history in the last few years has proven to us that a lot of times, purchases in steel mills sort of overshoot the forecast more often than not. So look, I think we've got to see what the catalyst will be for the next recovery, but I think we're not overly concerned with the downturn at this point.
Okay, Adrian. [Technical Difficulty] today is, in the company's view, what are the major risk factors for the business in calendar year 2023?
That's a big one. What are the major risks for the company in calendar year 2023? Look, I think the focus today is really on the 3 products, ferrosilicon is very mature. Manganese alloys just earning the conversion spread and silicon metals are sort of a new product for us. So I think -- let's address them one by one. And so I would say for ferrosilicon, the greatest risk factor for us today is a complete about turn in Chinese policy, meaning sort of abandoning sort of new growth policies and returning to sort of industrialization phase, so China in the last 15 years kind of stage. And I think the risk of that is not high -- sorry, the risk of that -- yes, it's not high, it's low. And I don't think maybe what's happened recently in China's Congress, they're not really about to sort of reverse because of the economic policy. And obviously, what that means is sort of China dropping its export tax on ferrosilicon. So that's on the ferrosilicon side.
On the manganese alloy side, I figure risks are fairly low. I think there are [Technical Difficulty] the nature of the supply is such that, it's fairly self-correcting and then tends to sort of correct itself very quickly in sort of 3 to 6 months' time as opposed to China. So I think there are really risks on that front. And lastly, silicon metal, obviously, the risk would be more around production and then not achieving the grades that we set out to achieve.
And finally, obviously, I think on labor side, that's something -- that's a question that we get now and then so might as well we addressed it. The issue with labor from China to Malaysia, I think that risk has gone down a lot, right, in the last 18 months with a lot of programs and initiatives we've been doing. I think we sort of compressed the requirement for sort of [ skill currently ], but just a couple of positions, say, superintendent, deputy superintendent, some of the metallurgists [ for furnace ]. So I think that risk has gone down a lot. But obviously, it's still there.
So in a hard scenario, we see China stops issuing passports, that would then be an issue. But I think, yes, besides that, everything seems to be okay at this point. So those would be sort of 4 risk factors or 3, if we remove manganese alloys.
Well, thank you all for participating in today's webinar. That appears to cover the majority of questions from our audience. If you do have any further questions for Adrian, please feel free to e-mail them to us at info@corporatestorytime.com. We will make a recording of the seminar available via OM Holdings and Corporate Stories on our social media accounts in the coming days. So that completes our webinar for today. So once again, thanks to everyone for attending. [Technical Difficulty]. Thanks, Adrian.
Thanks, Nicola. Thanks everyone for dialing in.