OM Holdings Ltd

ASX:OMH

Earnings Call Transcript 2022-Q4

[Nicola Gosatti]

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, Investor Relations Consultancy Corporate Storytime.

OM Holdings is a vertically integrated and low-cost ferroalloys producer and has this week released a market and operations update for the December 2022 quarter.

I am delighted to have OM Holdings Managing Director, Mr. Adrian Low, with me again today, who is going to be running through an up-to-date investor presentation, which will -- then we will follow with a Q&A session.

We have received a large number of questions in advance of the webinar today, so it may not be possible for Adrian to address all live questions. We ask that you address any further questions to [e-mail], and we will respond to your query off-line.

So without any further ado, I'm pleased to hand over to Adrian, who will present his comprehensive update from the OM Holdings headquarters in Singapore. Adrian, over to you.

[Ngee Tong Low, executive]

Thank you. Thanks for the introduction, Nicola. So I'm just going to share my screen, and thank you, everyone, for dialing in this morning, and thank you for the overwhelming list of questions. We will try to work through as many as we can.

So without further ado, I am just going to skip to the meat of the presentation. And look, I think I did a sort of full year 2022 look-back a couple of weeks ago. And so here, I think we'd just like to again highlight the key milestones that we achieved in year 2022 as well as certain updates that have happened since. So once again, I think that the major achievement -- well, the single-most important achievement that we did in 2022 was the -- completing the acquisition of 25% stake of OM Sarawak. And so we are very proud that today, OM Sarawak is once again 100% owned subsidiary of OM Holdings Group.

Besides the OM Sarawak acquisition, I think a lot of shareholders have been asking about our tech status with respect to the pioneer incentive scheme that we received from MIDA, so I think we're ready to provide an update at this point in time. And the first 5 years has already lapsed. What we have achieved now is negotiating a new set of conditions, which are to be fulfilled by 2026. So if we fulfill these conditions, then the second 5 years period commencing December 2021, 70% of income will be tax-exempt. So this is the second 5-year tax incentive, and management believes that we will be able to fulfill all the criteria set out.

Besides developments on the corporate front, I think in terms of what we're physically doing with the bonuses, maintenance has been on schedule, on track last year. And so we did major maintenance for 6 manganese alloy furnaces. The last 2 are being completed as we speak. And so if you look at the sort of smelting paragraph, the furnaces undergo major maintenance works, 2 of them are silicomanganese and almost completed, and we have 6 more to go on the ferrosilicon front.

And so when you think of major maintenance for manganese alloys, it's quite a complex process because you actually have to remove the entire furnace lining. Ferrosilicon, that is not the case. So we expect that impact to be not as severe as it was last year.

Now having said that, I think if you look at full year production numbers, we achieved about 360,000 tonnes from Sarawak last year, FY '22. And this year, for FY '23, we are expecting to be producing more or less the same amount. So that's about 75% to 80% capacity utilization. And this will be the base case, okay? We do expect that there may be potential upside to this number as Chinese borders reopen. And I think we all monitor that situation very closely, and I guess, cautiously optimistic about these production figures.

Besides the sort of regular production furnaces for ferroalloys, we also managed to successfully modify 2 ferrosilicon furnaces to the production of metallic silicon. So again, for shareholders who've just joined us or were not familiar, metallic silicon is 99% pure silicon metal product. It's no longer alloy, and we are very, very, well, optimistic about the prospects of metallic silicon product because of its end user markets and all the talk around renewable energy and as well as -- especially in the solar field.

So these 2 furnaces have been converted. The first furnace is actually is undergoing hot commissioning and performance testing. So what that means is it is actually already produced -- producing metallic silicon. And the completion of commissioning is defined by a set of conditions that the EPC contractor must meet before we accept these furnaces as successfully passing the commissioning phase. So I think at this point in time, we are targeting output as well as specifications. So until those are met, I think the furnace will remain in sort of commissioning stage. And so I hope this addresses some of the queries that some shareholders might have.

The second furnace, we expect to commission once we optimize production for the first because in management's view, there is no point to running 2 furnaces in parallel and optimizing them at the same time. We much prefer doing one, and then once that is fully optimized, starting the second furnace, okay?

So this is a sort of brief schematic plan for 2023. And so we expect to be running between 5 to 6 furnaces each on the ferrosilicon and manganese alloys front. So this is a slight bump from last year. And we also expect to be running 1 to 2 furnaces.

The plan is to produce -- sorry, the plan is to have all 16 furnaces at full production by the end of this year. And so the base case scenario does reflect this but the upside that I mentioned earlier, the Chinese borders reopening, that will bring that date sort of earlier. The more work that we can get in, the faster it's going to happen.

So I think when you look at the total production numbers, I mentioned earlier that we are expecting around the same 360,000 tonnes this year, and that's what we did last year. So you do have to look at it from the perspective of the fact that metallic silicon furnaces are less productive than ferrosilicon furnaces. So actually, in converting these furnaces, the sort of total possible capacity has gone down slightly in sort of metric ton terms, but that doesn't change sort of the economics of what we're doing here. Okay. Okay. So I have 2 more slides, and I thought I'd sort of talk through what's been going on in the markets. And so shareholders might be aware that there's now a weekly price page on our website. And I think we've had a lot of feedback over the last few years about being able to sort of see and track ferrosilicon, silicomanganese prices on a weekly basis. We do understand that this is a very niche product and not everyone has sort of paid subscription access to prices. So we have put out weekly prices on our site. So please do check that out.

Coming back to ferrosilicon. I think the last 4 months, 4 or 5 months has been a period of -- has been the longest period I think in recent history where ferrosilicon prices have stayed constant. So we have been range-bound between 1,600 to 1,700. There's a lot of text on screen. I'm not going to read through that. But the long and short of it is that I think we are in a phase where China is becoming less and less competitive. The costs remain elevated. It has not really come down in China. And I think where the exchange rate is right now, USD to CNY of around 7 is at a point that is historically high, right? So I think there is further upside to be had from that point.

But if you look at the actual movement of ferrosilicon, you will notice that in 2022 when we compare the first half and the second half, removing seasonality and stuff like that, there's actually been a significant decrease of ferrosilicon exports out of China. So I think we believe that this is at cost, and this is sort of a few years ago -- or not a few years ago, maybe a year ago, I was talking about where the new flow from ferrosilicon prices would be in. And just looking at price action, this appears to be more at this point.

Okay. So moving on to manganese alloys. I think the situation for manganese alloys slightly different from ferrosilicon. The sort of narrative, I think around what's been happening in sort of manganese alloys markets has been the sort of knee-jerk reaction after the invasion of Ukraine that led to massive stockpiling of manganese units in anticipation of replacing the units that Ukraine would not produce. We ended up in production for most of 2022 and have only really sort of curtailed production, I think, towards the end of 2022.

And so then here, the story is very much about when will this destocking of manganese units ends. And if you look at the price action, so that's the blue line, silicomanganese, just looking at recent price movements suggest that, that may be near the end. We are cautiously optimistic, but I think we may not be out of the woods yet. We've had a lot of false starts in the past.

So that's something we are actively monitoring. If you look at it from a sort of ore versus alloy kind of spread, you will notice that the blue line and the red line, although they're sort of both increasing again, there's a healthy spread between our input costs and what we're selling the products for.

So the lines sort of will cross towards the end of 2022. So as we always say, this sort of price action for ore and alloy is sort of [ temporary ], they move at the same time. And so when you have this kind of lag effect when consuming the ores 2, 3 4 months after we purchased it, after you see the price on a chart, this creates variations in sort of our earnings. And so I think that will -- this has, sorry, both on the ferrosilicon side and on the manganese side meant that earnings have decreased in the second half of 2022 as compared to the first half, but I think this is only to be expected with prices normalizing and sort of the markets normalizing. I think going forward, we look forward to prices reflecting healthier demand from steelmaking after sort of, well, close to 5% fall in steelmaking as reported by World Steel in 2022.

Okay. So that's the end of the market segment. And again, I think I would just like to do this sort of key takeaway. And we really are a much simpler story now. OM Holdings is just about being the lowest cost producer of ferroalloys in the region, if not the world. And so that's sort of supported by green hydropower. I think doesn't get greener than that. So it's -- I think we are a big part of the sort of decarbonization -- global decarbonization agenda when you look at how do you procure all your basic materials in an environmentally friendly way. And just given where we are in Malaysia being a very, very neutral production base, we're also a big part this demobilization story where the supply chains become -- where your supply chains become very, very sensitive. And yes, I think I'll stop my presentation on that note and perhaps move on to the questions.

[Nicola Gosatti]

Thanks so much for that comprehensive update there, Adrian. We'll just get you to stop sharing your screen.

[Ngee Tong Low, executive]

Okay. There we go.

[Nicola Gosatti]

Thanks so much, Adrian. We'll now move on to our Q&A session for today. And our first question is in two parts. So silicon metal seems to be a commodity that is tied to industries that are flourishing. Would management, feel that it would be best to consider further expansions into silicon metal? And will you be considering higher purity products for the semiconductor value chain?

[Ngee Tong Low, executive]

Right. Okay. So I'll take the first question first. Will we consider expanding further into silicon metal? Yes. Then the question becomes, do you want to give up manganese alloys? Or do you want to give up more ferrosilicon? And I think the jury is still out. We don't know which to give up at this point. And if you look back at sort of one of the slides that I shared, we always have this plan of building 2 more much larger manganese alloy furnaces. So that is still in the cards. I think once we complete that exercise, we will be able to increase the efficiency of producing manganese alloys. And then we can then look back and say, do we really need 10 furnaces, 25.5 MBA producing a single product? And perhaps then the answer would be, let's sort of tweak what those small furnaces are doing and then produce more silicon metal from that. But I think that really depends on -- that's a few years out, right? And that really depends on what the demand mix looks like then, okay?

Will we consider sort of, sorry, like an expansion into sort of downstream industries? Was that the question?

[Nicola Gosatti]

So the question was, will you be considering higher purity products for the semiconductor value chain?

[Ngee Tong Low, executive]

Right. Okay. So I think the objective for silicon metal production is to go as pure as we can. So that is a function of sort of efficiencies and know-hows in production and as well as, well, just doing, looking for more raw materials that have very, very low impurities. And so we will try to go as low as we can, and that naturally sort of falls into sort of the semiconductor solar basket, and that is the objective.

[Nicola Gosatti]

Thank you, Adrian. And our next question is the 2 new proposed furnaces are proposed to be powered using recycled heat from the existing 16 furnaces, how is that project going? And how near is it to being a reality?

[Ngee Tong Low, executive]

Right. Okay. So in the sort of terminal state, the 2 new furnaces will be powered by recycled heat. But because of the power inventory that -- I guess we've mentioned this on and off. Because of the -- sorry, power that we have in inventory, because of not running at full capacity in the last 2 years, that power can be consumed and offset once these new furnaces come online.

And so for the first couple of years, we actually do not need extra power, and that is the entire sort of premise behind timing these things in this way. So 16 furnaces, build 2 more, consume all the power inventory. And a big chunk of that has actually already been paid for. Then 1 or 2 years out, build heat recovery and then have that sort of feed the 2 new furnaces or Plant C, as we call it. So I think that's the plan.

And so if you think about it from a sort of time line perspective, Plant C, the 2 new furnaces would be 1 or 2 years out. And then 1 to 2 years after that, probably commission the sort of heat recovery system.

[Nicola Gosatti]

Okay. Our next question. Adrian, you spoke some time ago about a feasibility study into OM Holdings producing battery-grade manganese. I see Jupiter, another shareholder of Tshipi, is also looking at this. Is there any progress to report on this?

[Ngee Tong Low, executive]

Yes. Okay. That's a great question. So we don't have -- we haven't had sufficient material to actually make sort of a formal update, but what we've done, and you have to look at it in the context of where we were. I think a year ago, we were talking about what we do with OMQ. And since on, we were saying, I think at the point I said a few options open to us. One is perhaps consider MSM, so manganese sulphate, and sort of look at it -- look at transforming the logistics facility. So we have actually had preliminary information on sort of costing and that sort of thing in terms of producing it in China. And in the process of doing that, I think we realized that, there are lot plants coming online in China, when we're talking about high purity manganese sulphate. And what's driving the market now with respect to manganese being used for batteries, so although the growth trajectory is probably going to be quite impressive, the base number is very, very low.

And I think the jury is still out as to what the cost economics would be producing it in China versus producing it in Sarawak. And so that's what we're trying to understand. And a lot of the demand and a lot of the -- well, not demand because it actually is in physical demand, but a lot of the interest has been driven by the Inflation Reduction Act signed by President Biden that sort of restricts your supply chain when you're looking at EVs going into the U.S. And I think we have to be cognizant of the fact that this can change anytime.

So I think we're looking at it from a much longer -- in sort of longer time frames. We're looking at it from a sort of a 10-year horizon and really thinking about what the real cost competitiveness of [indiscernible] to get in Sarawak would be because power is not a super high cost component when it comes to the production of manganese sulphate. So that's a long way of saying we don't have a concrete update, but we are still working on it at this point in time.

[Nicola Gosatti]

Thanks, Adrian. Our next question, can you describe the company's dividend policy and ongoing strategy around capital management?

[Ngee Tong Low, executive]

Okay. So I think the company's strategy is to minimize the cost of capital and -- while delivering all the projects that we wanted to deliver. So I think when it comes to -- I'll just sort of -- dividend first. And that's something that we have been engaging shareholders and potential investors, especially institutional investors around. And we are in the process of looking at what we've done for the full year 2022. And how we'll -- how we're going to articulate our dividend policy going forward. And I know at the end of 2022, I did say that we will be sharing that very shortly. So do bear with us. I think once we have the full year results, earnings for 2022, we will be able to give shareholders and investors guidance on what that might look like, and earnings are coming out at the end of the month. So I'm not going to jump the gun and sort of go into that.

So capital management, more broadly, I think we are in a sort of in an environment where it's obviously a high interest rate environment, and it's, depending on which bank report you're reading, give you different indications as to what you should do about debt. And so I think what we're doing right now is looking at it from the perspective of, look, we have a $200 million-plus project finance facility. Are we able to lower that cost of capital? And so when should we do it? So I think we're keeping options open, speaking to a lot of sort of financial institutions and banks and really just watching what's happening on the -- what the Fed is doing on each front and see if we can lower that cost.

I think at this point in time, we have mentioned this before, we do not wish to dilute shareholders. And that's an expected cost of capital right there as well. So yes, I hope that answers the question.

[Nicola Gosatti]

Okay. Our next question, how is management addressing the issue of labor shortage? And will the reopening of China help with this issue and demand for steel products more broadly?

[Ngee Tong Low, executive]

Right. Okay. So we didn't have this issue last year, but we had this issue 2 years ago. And I think from right now, at this point in time, the issue isn't really serious because we still have a couple of furnaces that have been maintained. But as we progress in the year, Q2 down, there will be 1 to 2 furnaces that can potentially be brought online faster if we had more workers from China. And we've actually done a fair bit of work to sort of mitigate this by reducing the number of headcount that we need from China. And so it's really sort of superintendents, foremen that you need that have sort of decade-long experience. But all the other positions, we have localized. So I think we've reached a point where it's really a few key men that you need to have that working experience in front of furnaces for 10, 20 years. But everyone else is going to come out of the UNIMAS training program that we announced and we talked about last year.

So I think we will see this 1- to 2-furnace gap sort of open up after Q2. And the sooner we get workers in from China, the faster we can close that gap, and then sort of doing sort of raise production beyond the base case scenario I talked about earlier.

So I think it is -- it's too early to say that we're super optimistic about workers coming in from China. But I think all the signs that we see in China with borders opening, with people being able to travel, a lot of colleagues coming in from China that we haven't seen in 2 years, we're actually seeing them next week. I think all these are positive signs that there will be a massive reopening and the workers will be sort of fully traveling again from Q2.

[Nicola Gosatti]

Okay. Adrian, another question for you. As interest rates rise and the risk of a downturn is on the horizon, does management feel that it is prudent to postpone the CapEx for the 2 additional furnaces planned in 2023 in order to build up a cash buffer and return some of the profits as dividend to the shareholders?

[Ngee Tong Low, executive]

Right. So I think the 2 new furnaces, that will always be conditional on finding funding at an appropriate cost. And so I think we have talked about this for the last 1 or 2 years. And if the opportunity to buy the 25% stake wasn't there last year, that -- those funds would probably have gone towards building the 2 new furnaces. And so I think shareholders will notice that we have postponed these plans and sort of being flexible around how we've staged our growth plans.

And I won't comment on sort of the dividend. I think that's sort of partly answered by what I said just now, but we will not sort of push ahead to complete that project just for the sake of doing it as soon as possible without considering funding options and the cost of funding.

[Nicola Gosatti]

Okay. And another question for you, Adrian. This is regarding the completion of the hydro dam in 2027. Has OM Holdings negotiated for additional electricity for future potential expansions?

[Ngee Tong Low, executive]

Yes. That's a good question, really. Look, we constantly in talks with Sarawak Energy, obviously, around how we are staging production. We do give them regular notice on what sort of power consumption requirements are and what our future plans are. And so I think everyone is aware, both on our side and their side, that with the expansion of the 2 furnaces, there will be no net impact on the power we're consuming. And contractually, there's also a bit of a flex space where we can draw more power than the 350 megawatts sort of sticker number of the contract.

So I think for now, there actually isn't a need for more power even with the 2 new furnaces and especially post-heat recovery plant. We will be able to sort of expand production without actually subscribing to new power.

And I think the shareholders should also be aware that the power prices of new entrants or sort of new contracts will obviously not be at the old prices when we signed that. So I think we are weighing those sort of options. And for now, there's no need and no discussion for taking significant amounts of extra power.

[Nicola Gosatti]

Thanks so much, Adrian, and that appears to cover the majority of questions that we have from our audience today. We are going to make a recording of this webinar available via OM Holdings and Corporate Storytime's social media accounts in the coming days.

So thanks to everyone for participating today, and this concludes our webinar. So once again, thanks to the OM Holdings team and Adrian for the update. We appreciate your time.

[Ngee Tong Low, executive]

Thank you. Thanks, Nicola. Thanks, everyone, for dialing in.