OM Holdings Ltd
ASX:OMH
Earnings Call Analysis
Q3-2023 Analysis
OM Holdings Ltd
The company has made a strategic decision to divest 90% of its equity interest in the OMQ project for USD 25 million. Coupled with this news is the company's revised production guidance for manganese ore. While projections hover above 400,000 tonnes for the calendar year, with an optimistic outlook reaching around 430,000 tonnes, the company also anticipates surpassing 400,000 tonnes as part of the 2023 plan to construct two new 33MVA furnaces.
The company has successfully navigated the volatility in the ferrosilicon market, managing to reduce costs significantly by $100 to $200 from the start of the year till December. This cost reduction, combined with a pragmatic approach to business cycles—focusing on a five-year average rather than transient conditions—has positioned the company favorably within the industry.
Given recent events, such as the cessation of a major manganese alloy smelter in Ukraine, the company expects the upcoming Q1 to outperform the current market scenario. This cessation removes a significant volume from the market, which may be advantageous for the company's competitive positioning.
The company is close to operating at full capacity, with all 16 furnaces expected to be fully operational by Q1 of the upcoming year. They are also pursuing strategic investments in sustainability and operational efficiency, such as investing in hydropower and mimicking European and South American models for forestry management aimed at sustainable energy use.
The company is awaiting final written approval from authorities on a potential tax exemption for an additional five years. This approval is critical to the company's financial planning, as a reversal of booked full tax value would significantly impact the financials. Furthermore, the company has communicated a clear dividend policy, with payments expected to range from 10% to 30% of profit after tax, a policy designed to be sustainable throughout market cycles and subject to examination and potential increase post growth phases.
Despite fluctuating alloy prices, the company remains committed to its maintenance schedule, which is essential for operational integrity. The maintenance activities, which have been ongoing since 2021 and expected to continue into 2023 and 2024, are staggered to ensure compliance with take-or-pay power contracts and to maintain a consistent market presence, thus reinforcing the OM brand.
The company concluded the webinar with an invitation to shareholders and interested parties to forward additional questions to their dedicated email and promised to disseminate the webinar recording via LinkedIn in the coming days. This event marks a comprehensive update and maintains open lines of communication between the company and its stakeholders.
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Together with me is [ Richie ], and we will be cohosting the quarterly webinar moving forward. OM Holdings is a manganese and silicon smelting company with vertical exposure in mining and trading. With me today is managing Director Adrian Low from our Singapore office. He will run through the key updates following the release of OM's Q3 2023 production and market update. [Operator Instructions] Without further ado, I'm pleased to hand over to Adrian, who will present the Q3 key update. Adrian, over to you.
Okay. Thanks, Jenny, and thanks, everyone, for dialing in this morning. We're here to present our Q3 quarterly updates and a few address [indiscernible] questions that we've received from investors. So without further ado, just jumping into the update. I think most investors would have seen an announcement that went out yesterday on the [ SSP ] that has been executed for the sale of OMQ. So again, just to remind everyone, we announced this a couple of months ago, and we are selling 90% of the equity interest in OMQ for USD 25 million, and this will -- our new partners will be Kunpen in China. We will retain a 10% strategic interest in OMQ in order to have this kind of collaboration with the new entity as we guide them towards a smooth commissioning.
So to that end, I think we will be providing raw material supply as well as marketing services for the products. And I think seeing it that we've just signed SSA, I think this will be completed in a couple of months' time. Otherwise, I think in Q3 in terms of production and what's been going on in Sarawak, things have largely remained the same. I think I spoke earlier this year about the need to manage costs and increase efficiencies in the downward market. And I think that still remains true. So if you look at what we've done in terms of the 2 silicon metal furnaces, they have been run on ferrosilicon and they are still producing ferrosilicon today. And we have also managed to increase the manganese ore production volumes. And so if you look at the guidance numbers, that's all been updated.
And I think on the top end, we are expecting something above 400,000 tonnes for the calendar year, okay? And in Q3, again, as usual, we repaid $9.3 million to project finance lenders, and we will continue to do so as we, in parallel, look at sort of refinancing and sort of debt options amidst what's happening now in the REITs market. So I think that there isn't a lot of visibility on what the most optimal path ought to be, but we will continue tracking that and look to progressing something perhaps in the first half of next year. But having said that, I think all options are still on the table. In terms of smelting, I think the numbers -- number of smelters -- sorry, furnaces that are operating are on the slide, I will not read through them. They're also provided in greater detail in our announcement. So fabrication works from metallic silicon furnaces, that's ongoing, and we do expect these furnaces to restart in stages in early 2024, okay?
So moving on, I think if you look at the 2023 revised volumes on the top end, we are looking at something around 430,000 tonnes. And I think we will most likely end up above 400,000 tonnes. The full range of numbers have just been provided that to be consistent what we've been announcing throughout the year. And looking to our future, the plans remain the same. I think for next year, we will be able to complete [indiscernible], ending with metallic silicon. And again, in the future, we will be looking towards building the 2 new 33MVA furnaces, okay?
So moving on, I think, some of the questions that we received of -- a lot of the questions we've received have been around what's going on in the market? When do we expect things to change and how pricing looks like. And so obviously, to that, I think we have to respond with this truism that the market is the market. But I think we can still give some commentary around ferrosilicon and manganese ore markets. And I think for the ferrosilicon side, what is true is that the -- on the supply side of ferrosilicon, that has been incredibly volatile. And so we have seen sort of severe supply cutbacks in China only to see that sort of retrace in the last couple of months.
But globally, I think more generally speaking, we have seen supply reduction in Europe. We have seen supply reduction in Russia. And so I think on the global front, the picture is perhaps a bit different from how things look like just from a pure China kind of context. And I think if you see that kind of [indiscernible] and supply, actually, what's -- I guess, what's sort of playing out in the background as changes in the prices of raw materials. And I think this is one of the questions that we had. But I think if you look at the cost of producing ferrosilicon in, say, January this year compared to what it would cost us produce ferrosilicon in December. And I would say that's a cost reduction in order magnitude of $100 to $200. So that is a sizable cost reduction. And I think we will continue to sort of optimize costs and not pursue any kind of production strategy too aggressively, but just a key pace with the market, both in terms of raw material and in terms of sales. So that's ferrosilicon.
Moving on to manganese alloys. I think there's a very similar picture here between manganese alloys and ferrosilicon. With the one key difference being the country in question. So for manganese alloys, I think looking at Indian output and production that has remained an overhead. We will confess that has remained stuck around for much longer than we expected. And looking back, the only way to sort of rationalize and understand this is that with the amount of margins that have been made in 2021 and 2022 -- well, first quarter of 2022 in the amount of financing that has entered the space that has propped up a certain amount of raw materials and products circulating in the market. That credit expansion has taken a much longer time to digest than we anticipated. And I think you have to think about this against the backdrop of expanding steel market in India.
Steelmaking in India, I think, is one of the only bright spots this year in terms of steel production. And so as that steel production grows, so does alloy production. And it just happens that they're not really in lockstep at the moment. It just happens that to the sort of boom years of 2021, there has been an overinvestment in alloy production capacity, and we're just seeing that sort of moderate right now as we approach the end of 2023. So I think, again, unfortunately, at this day, we're not out of the woods yet, but we do see signs that as we approach December, that's the end of the financial year, we do see signs that a lot of people are sort of making an effort to reduce inventory ahead of calendar close financial year-end. And so that gives us some optimism that Q1 next year would be much better than what we're seeing right now in the market.
One of the news is outside of India, I would hazard to say the world's largest manganese alloy smelter in Ukraine has recently just stopped. So they were continuing production through the war, capacity of over 1 million tonnes, even though they were running only a fraction of total capacity, that volume has now removed from the market as well. So I think this is not new to us. I think we've been in this industry for a long time, and these cycles come and go. The key thing is to know where our cost position is. And I think we're incredibly fortunate to be where we are in the cost curve and to be able to expand production and thereby sort of increase efficiencies and lower overheads even with the market being in such a tough environment.
And so this is the most important thing that I think we should leave with investors and that is that it's always about the 5-year average and not about the instantaneous market condition. So if you look at just the -- sorry, the alloy prices, I should have mentioned this for ferrosilicon, but it's not too different. The 9 months average price for 2023 was $988. If you look at our website, we post -- the price updates, the first number is 8, it's not starting with the 9. And even with the first 3 months -- first 3 quarters, sorry, that was almost 30% year-on-year decline. So I think investors might have had me say this before, but when ore and alloy sort of declines at the same rate, we do still have to consume the ore 2 or 3 months after it's been purchased. So there's this natural lag effect, that will only reverse when things stabilize and/or when we see kind of volatility in both the ore and alloy market prices. And so that's what we're looking out for, okay?
With that, I think we've come to the end of the presentation. I'm just going to leave more questions -- sorry, leave more time for Q&A. But the story remains the same. Strong margins, a very stable foundations off of which we're operating. We will remain prime beneficiaries of this high-priced cost environment and as the world starting to put a price on carbon so the hydropower that we're using in Samalaju will increasingly -- while not currently monetize both that will increasingly become an asset, even more of an asset of the company. So yes, I think I'll stop there and just leave time for questions.
Alright. Thank you, Adrian, for the presentation. We will now move on to the Q&A session. So the first question received is on MetSi. And please, could you provide a precise update on MetSi, any outlook for 2024?
So yes, updates on the ferrosilicon. Look, I think what's happening right now is we have a good understanding of what's happened in the furnace and what I spoke earlier about the [indiscernible] and temperature controls and all of that, we have got the new set of superintendents, metallurgists on route to Sarawak. And we are very confident of launching that in early 2024. In terms of the physical fabrication and what's happening on site. So what is happening is metallic silicon furnaces are producing 99% silicon. And so they are a lot less forgiving than ferrosilicon furnaces. And because of that, the furnaces have to rotate because in a ferrosilicon furnaces sort of [indiscernible] units [ secondly, very freely ] and distributed heat and improved reactions.
But in a silicon metal furnace [indiscernible] rotate. And so the rotation mechanism is part of one of the key areas that we are refabricating. And so that is actually ongoing. And so that has no impact on what we're actually doing with the furnace, which is producing ferrosilicon. And so once both these pieces fall in place, we will be able to restart and reestablish the commissioning proceeds process with ferrosilicon.
Thanks Adrian. I think that covers one other question on MetSi fabrication work flow. So the next question relates also to MetSi. It says that in our report, it is mentioned that both MetSi furnaces will recommence commissioning by next year. Does this imply that ferrosilicon will seize production during this phase?
Yes. Yes, absolutely. So what happens in the ferrosilicon conversion is we will gradually step up the purity of raw materials, reduce the iron units, [indiscernible] rotations and adjust sort of the power input. And so what that will do is you will sort of see a step-up from 75% purity to 85% to 90%. And then from the 90% to 99% range, then that might take a week or 2. And so I think you'll probably take something like a month to complete the conversion from 100% ferrosilicon to 100% metallic silicon. So this is a bit different from what we were attempting to do earlier this year where it was a cold start. Now we are moving from ferrosilicon to metallic silicon. It's a hot start. And throughout this period of time, obviously, we will be producing products of a wide variety of ranges. And we have full confidence that we will be able to place that into the market in any case.
Thanks Adrian. And the next question is, when do you expect to operate all 16 furnaces?
Right. So that's a great question. I mean we are close to operating all 16 furnaces right now, in fact. And so I think with the last maintenance out the way early next year, we should be in full operation by, say, Q1.
Right. Thanks, Adrian. We received a few questions on sustainability, specifically on carbon reduction initiatives and whether OM has any plans on having sustainable plantation to harvest for the company's alloy productions. So the new carbon border adjustment mechanism being introduced in EU was also mentioned and whether this has any impact on us.
Okay. So that's quite a few questions in one. Let's address the CBAM one because that's fresh on my mind. Look, CBAM reporting is now mandatory for anyone who imports manganese alloys into Europe. So a lot of our customers have been requesting for Scope 1, Scope 2 emission data. This year, our sustainability report comes with assurance. So those numbers have been verified by a third party is not just what we see what we're imaging. A lot of customers in the U.S. that have these requirements have also now requested information on this. And so I think on the CBAM side, we will obviously benefit from having a lower Scope 2 footprint.
And circling back to what you asked, that's the first bit of the question, what are we doing in terms of actually reducing that footprint. And so I think for Scope 2, right, very, very practically one of the points that was on the slide was heat recovery. And so heat recovery, what that means is we have mentioned this in the past, but I think we have seen that this technology has matured in China and Europe. And around the time of [indiscernible] the 2 new furnaces, what we call Plant C or after, we will be planning to build the system to tap on all the waste heat and thereby generate enough power. And so based on initial estimates, this is estimated to be 40 megawatts. And so if you think about it, the sort of carbon footprint of that is 100% identical to what we're producing now, right?
The amount of carbon that's being emitted in hemisphere is exactly the same. So on a unit kilowatt-hour basis, we will be able to lower that Scope 2 emissions. In terms of Scope 1 -- so the second part of the question in terms of forestry management and sort of things. That's something we've talked about in the past as well. And sort of related but not directly -- not quite the same. This year, we announced revolving. And so look, I think without sort of jumping the gun, we are working on something. I think at this point in time, sort of premature to announce. But we are working on mimicking how some of the other plants in Europe and South America, how they are managing their own sort of sustainable source of wood for producing charcoal and how the charcoal can end up in furnaces in a very, very controlled and sustainable way. So that's all in progress. And I think we will look forward to updating the market when that is released.
Thank you, Adrian. That is quite a handful of information there. All right. The next question is, what is the ideal configuration and future direction considering now that one, ferrosilicon is more profitable than manganese alloys; and two, considering the demand from LNG assuming they will consume [indiscernible] entire set of production.
Yes. So that's right. Look, LNG, so I mean for those who don't know, LNG, electro magnesium is a company that's based in Australia, and they are commissioning a magnesium plant. It's a very interesting technology where they're sort of recycling waste and production of magnesium is -- mainly consumes ferrosilicon as a reductant. And so it's almost like call it a one-to-one consumption. So we [indiscernible] have been speaking to them for the last, I'd like to say, 7 years. And so we're very pleased that this is finally going ahead.
But if that does happen, it will obviously change completely the way we look at the product mix. So I think all options are on the table. We do not rule out with Plant C, the 2 new furnaces commissioning. We do not rule out post commissioning that some of the existing furnaces should be reconverted if those products proved to be more profitable. So obviously, we will look at everything. But the information at this point in time does not lean in any direction.
Thanks, Adrian. The next question relates to the Malaysian tax. Any decision for the additional 5 years exemption?
Yes. So -- yes, thanks for that. I think we get this question every webinar. But look, we appreciate shareholders' patience on this. What is currently provided now in our financials is we are booking in the full tax value. And we have -- so obviously, that will be reversed as and when we receive a final written approval from authorities. OM standing right now is that the ball is in their court, the last interaction with them was a consultation session actually just last month and sort of a final report of the conditions that have been set out. So again, just to remind shareholders and investors, the reason why this is quite different from the first 5 years is the first 5 -- the conditions for the first 5 years was an investment commissioning. So once you've invested, then you [indiscernible] by default method requirements.
The second set of 5 years has to do with ongoing compliance and ongoing efforts to develop local suppliers to contribute to local employment. And so that's something that's a forward-looking target. And so we are -- we have been working with the authorities on giving them satisfaction that we will be able to satisfy all the requirements. And so I think once that is in place, probably we had November announced so probably by early next year, we will be able to look at reviewing those numbers and reversing them from our financials.
Right. Thanks, Adrian. The next question relates to our dividend policy. Whether this will be implemented as we announced earlier? And what could the company do to increase dividend payout?
Yes. So look, what we announced earlier this year, our sort of maiden dividend policy is a range of 10% to 30% profit after tax. And so we will stick to that policy. The objective when the Board approved the policy was to have something that's sustainable that will give shareholders some kind of reward through the market cycles. And in terms of increasing that percentage payout, I think that is not currently feasible because that dividend policy was designed a growth phase, right? Post growth, so post [indiscernible] and post heat recovery, I think that will warrant management and the board to reexamine the dividend policy and then look at distributing more cash flows to shareholders. So I think that's definitely part of the plan. We're just not in a position at this point in time to relook at that, especially given current market conditions.
All right. Thanks, Adrian. And I think we have time for just one last question. So could you explain more on the timing of major maintenance? And should the company consider continuing major maintenance until completion when alloy prices are lower now?
Does the company contain -- okay. So look, I mean, yes, so I think we've had variations of this sort of questions in the past and around the timing of major maintenance and sort of timing of the market, if you will. And so looking at the [indiscernible] to that is you have to do maintenance when you have to do maintenance. I think the only thing that we have sort of really postponed was in 2021 when ferrosilicon was $4,000 and then manganese alloys was, I don't know, above $1,500. We postponed major maintenance for 12 to 18 months and really pushed our furnaces to the limits. And so obviously, after that, regardless of what happens to the market, then you have to do maintenance. So that's sort of the backdrop of what's been happening since 2021, right? So major maintenance has been -- as investors and analysts know, has been going on through 2022 to 2023.
And the reason why you keep hearing about it and we stretched out as we have to stop furnaces progressively, and we can't just stop a big chunk of production for 2 reasons. One, we do have a take-or-pay power contract. You have to smooth out consumption; and two, it doesn't help the market and doesn't help with building the OM brand to have -- to be able to sell products in one quarter and not be able to sell products in another quarter. So I think that's sort of the reason why you're seeing all these things sort of push out up to 2021, so from 2022 and all the way until now. And so keep in mind that [indiscernible] couple of months for each furnace to be maintained. That's sort of the reason why it is the way it is and then that's the reason why it's been paced up and stretched up to 2024. So I hope that answers the question, Jenny, it was then a bit of a question that I didn't get.
No, I think you covered the question.
Okay, great.
All right. So I think thanks, Adrian, for all the questions answered, that appears to cover the majority of the questions that we received from the audience today. If you do have any further questions, please forward them to investor.relations@ommaterials.com. We will be making a recording of this webinar available through our LinkedIn in the coming days. So this concludes our webinar for today. Thank you, everyone, for attending, and thank you, Adrian, for comprehensive update.
Thank you. Thanks, everyone, for dialing in. Thanks, Jenny.