OM Holdings Ltd

ASX:OMH

Earnings Call Transcript

[Unknown Executive]

and to address the query post the webinar. So without any further ado, I'm pleased to hand over to Adrian. Adrian, over to you.

[Ngee Tong Low, executive]

Thanks, Jenny. Thank you, everyone, for dialing in to attend our webinar this morning. I think we are closing 2024, and it's already February. So very soon, we'll be releasing our 2024 full year results. So anything -- questions relating to the full year will, unfortunately, of course, be deferred until those results are out. So I think I would appreciate it if all the questions today were kept within the realm of operational details, so to speak.

So in 2024, I think we closed the fourth quarter more or less on track. So I think if you look at what we put out in our announcement, and indeed, looking at the numbers, you realize that we closed 2024 exceeding the upper end of the guidance by 3%. So I think that is meaningful for 2 reasons. One, I think we are on track in terms of how we are forecasting production. And two, I think really something that is perhaps not very visible to analysts and shareholders is the impact and additional tenant production has on fixed costs because the bonus, because the smelter complex is designed for 16 furnaces, this has an impact on the unit cost of production. So in terms of silicon metal production, we actually managed to commission the furnace. So some shareholders will recall that when we first converted the furnaces into silicon metal, there was an issue with the commissioning. This year, however, in 2024, we managed to successfully commission the silicon metal furnaces. That being said, I think, owing to market prices and just the broad trends in terms of silicon metal versus ferrosilicon pricing, we have opted then to then move those furnaces back into ferrosilicon production because the per furnace day utility is higher producing ferrosilicon. So I think some shareholders have already raised this in some form or shape. And that is the answer. It makes more sense, and it makes more commercial sense to be producing ferrosilicon today, while at the same time, I think the company stands ready to switch production depending on what the broader trends are.

Okay. In terms of sustainability, OM Sarawak was awarded the Champion award for the prestigious Diamond award under the large enterprise category. And this was a competition organized for Korean Sarawak, and our Sarawak mission involved describing the circularity of how we are treating byproducts and waste within OM Sarawak. And so obviously, that includes the ferrosilicon fumes, micro silica and as well as how we are repurposing and reusing slack, right? And so that includes both ferrosilicon slack, silicomanganese slack, which is reused in production as well as how we're selling silicomanganese slack to local enterprises. So for that, we were awarded the champion for this award.

In terms of financing, again, I think it's -- I probably said this for a few quarters now, but we repaid $2.4 million to project finance lenders in Q4. And so I think this will -- this has been going on for a while. And I think last year, we mentioned that we will be working on alternatives and looking at what the optimal capital structure for the company also looks like. And so that's something that's ongoing. And I think shareholders should be able to expect something within this calendar year.

Okay. In terms of production volumes, you can see our guidance for 2025. And so these are from the plans involved in the better production for FY 2025. And the numbers are as you can see below. So 170,000 to 190,000 tonnes for ferrosilicon and 270,000 to 300,000 tonnes for manganese alloys. So again, this depends on the product mix, and we do change that through the year, but we have sort of marginally lowered guidance based on looking at the maintenance plan of ourselves and also this year of Sarawak Energy, our main energy supplier.

So I think the details are pretty self-explanatory. I think on the mining front, really the mine remains on the care and maintenance. The intention is not to restart mining. And on the UFP front, everything has been installed. The optimization has been done. We've completed a trial production, and that has been relatively successful. We are doing a second trial in quarter 1 this year. And the idea behind that is to sort of put up the parameters of how we are selecting yield and trying to optimize what sort of manganese content we should be targeting. So once that is done, I think you will be in position to restart commercial operations at the mine.

On the smelting front, nothing significant has changed. 14 out of 16 furnaces have completed major maintenance, and this has been the case for a long time. We have deferred the 2 ferrosilicon furnaces mainly because they're running well. So there isn't really a reason to sort of accelerate the major maintenance. And there's no reason to spend the CapEx before it needs to be spent. That being said, I think in 2025, we expect to put those furnaces through major maintenance.

Okay. So that's it for production guidance. In terms of the markets, so the next 2 slides, usually, I talk about what's going on in the ferrosilicon and the manganese alloy markets. And for ferrosilicon, I think if you look at what has happened through 2024, it's not been very exciting, I must admit. And prices have been on a steady downtrend for a couple of years now. You will notice this sort of towards the second half of last year. And I think that's really a sort of gradual reaction to the reduction of supply of ferrosilicon from places like Russia. And that then -- the gain then becomes kind of eroded towards the end of last year as markets declined, I think, primarily due to pressure both in China as well as the rest of the world. I think in the long run, the demand and supply of ferrosilicon is more or less balanced. And we have found, in a sense, our place in global markets. And so that means that there won't be unnecessary price wars or buying your way into markets and that sort of activity.

So I think we are convinced that OM Sarawak today compared to pre-COVID, we are in a structurally much stronger position just by looking at the power tariff differential between what we enjoy in Sarawak and in China. Russia remains well cut. So I won't speculate on that, but there is that differential there as well.

If we move on then to silicomanganese in the next slide. You will see that 2024 was a lot more exciting for manganese alloys. And so we saw from Q1 last year, the force majeure then at Salt that led oil prices spike, I think, by 4x, and that led silicon manganese prices, the blue line, to increase by [ 20 bps ] -- by 20% to 30%. And then both then declined very, very rapidly to close at a much lower level at the end of the year. So I think that 2024 was a year of sort of whipsaw and overreaction both on the increase and on the decrease. And I think Q1 out from Q1, we will see normalization of these prices. So what that means is that manganese alloy prices today are close to $4. The closing price [ December ] was 4 0 8. I think for Q1, we expect some increase between $4 to $5 per DMTU and for silicon manganese prices that closed at $885 at the end of December. That should normalize to range between $900 to $1,000. So I think these are sort of normal price ranges for manganese and they go head in hand as we see with the exception of '21 and 2022 during COVID, typically, the correlation between these 2 prices on a monthly basis should be close to 80% to 90%. So this is our expectation. And with these sort of standard patterns, the profitability of OM Sarawak is -- has been very, very stable within these ranges.

So that is all we have to share today. And I think there are a few questions. So let's leave more time for the Q&A.

[Jenny Voon, executive]

All right. Thank you very much, Adrian, for the presentation. We will now move on to the Q&A session that we have received.

The first question relates to the ultra fine plant at our Bootu Creek mine. Would you be able to share some insights as to how -- why it has taken such a long time to upgrade the UFP? And why it has been taken close to 5 years, mainly?

[Ngee Tong Low, executive]

Right. So first of all, I think it hasn't really taken 5 years. I think we have asked the question, you might be looking at sort of today and when the UFP has launched. So I think, obviously, the reason why we had to do this rectification was that the screening efficiency when the UFP plan was commissioned wasn't optimal. The screens were performing fully scrapping out mud and everything else that has gone into the tailings stuff.

So when it was commissioned in 2020, obviously, that was during kind of peak COVID and the rectification exercise, trying to understand what should be done and what can be done, took a long time, right? And the actual full commercial reassessment was actually done kind of post -- or around the same time as my closure for 2021, 2022. And then from that point on, I think the Board only gave its -- things to proceed at the end of 2023. So from then on, the time it takes to indent the screens, that happen sort of redesign and install them and go into sort of trial production took about 9 months, I think, so most of 2024, and we were in place to restart towards the end of last year. And indeed, I think, right now, in Q1 2025, we're doing a second trial.

So if you look at that in context that there are reasons for various delays in the process, and having said that, I think the ERP is complementary to the economics and profitability of the group, right, and as well as the cash generation. It's not maybe the main project that we should be pushing for and unnecessarily accelerating. So that's also part of the reason why it has taken the amount of time it has. So we want to restart the plant in the right place at the right time with the right economics.

[Jenny Voon, executive]

Great. Thank you, Adrian. Moving on to the second question. So there are 3 parts to this question. So the first one is whether you will be able to provide some general comments on the execution of our past projects. I think that will probably revolve around the conversion of furnaces and about major maintenance.

And the second part to this question is actually what is the industry standard for maintenance? And why does it seem to take almost 0.5 year per furnace.

And the third part is actually answered in your first question earlier, and that relates to the UFP. So I think maybe we can tackle the first part first, which is providing some general comments on the past projects.

[Ngee Tong Low, executive]

Sure, sure. So look, I mean, if we're talking about Sarawak, really, that's the conversion project. So I also remind shareholders that we started off the Sarawak project with 16 ferrosilicon furnaces, right, in 2014. So that was actually the agreed-upon package with project finance lenders and in consultation with them at that time. Obviously, that was not ideal in 2016. At the end of 2016, we had modified 6 of the furnaces to manganese alloys. So what we call Plant A now. And those sort of commissioned in sequence in 2017. So that was the first bulk of sort of conversion works. And post that, I think we then did another tranche of sort of conversions, right? And so 2 of the 10 ferrosilicon that were left, we decided that optimal balance should be 6 ferrosilicon furnaces. And so 2 of them were switched to ferrosilicon and 2 of them will switch to manganese alloys, right? And this took place in the last couple of years. And part of that was delayed because of COVID. But as of last year, the manganese alloys furnaces, obviously, were commissioned very, very smoothly. So bread and butter. It's also not a very complex product, not a complex sort of conversion process. But the conversion to metallic silicon, again, as most shareholders will know, it took a while. The conversion itself was not that drawn out, but the sort of commissioning and the switch of production to ferrosilicon and then decommissioning last year took a bit of time. So I think that's really -- that really boils down to the technical differences of metallic silicon and ferrosilicon. And ferrosilicon, in a sense, is an easier product to produce. It's only 75% SI, 25% is iron melts. Very, very low to project. It's very easy to operate the furnace whereas metallic silicon is much trickier to operate because it's 99% SI, it has much lower tolerances for error, and you don't have the benefit of the circulating iron to improve furnace conditions.

That being said, maybe I'd just sort of share the economics of metallic silicon. I think right now, China obviously has built a surplus in terms of silicon capacity. And that's all the way upstream from metallic silicon production to all the way downstream down to solar. So I think this is in a sense, the economics of metallic silicon will depend very much on the geopolitics. And I think needless to say, all of us in the company as well as most shareholders, I would imagine, would be focusing on the tariffs and sort of the tip -- duties that will be emerging in the days and months to come. And so perhaps there's a place, right, for non-Chinese metallic silicon, but right now, it's a very, very small niche. And I think it's much more profitable and much more economical to be producing ferrosilicon right now. So that's -- I think that's the first part of the question, Jenny. Sorry, what was the second, if you could just remind.

[Jenny Voon, executive]

So the second part revolves around the major maintenance part. So this question says that what is the industry standard for maintenance? And what does it seem to take almost 0.5 year per furnace?

[Ngee Tong Low, executive]

Okay. So I think the industry standard is pretty close to what we're achieving, which is about 2 months per furnace. So I think it's never been 0.5 year. I think we did most of the furnaces over 12 to 18 months period. So I think if you look back at the announcements, it should be between 2 to 3 months per furnace.

[Jenny Voon, executive]

Right. And actually, the third question was on UFP, but I think you have already addressed it in your first question on the screening fee distribution part and where we need some optimization works going on.

All right. We'll jump to the last question. This one relates to the valuation of the company. So I think we have received very similar questions around, and it's on the valuation of the company. How does OM Holdings actually plan to turn around this valuation?

[Ngee Tong Low, executive]

Yes, right. So we -- yes, obviously, we have received similar questions over various periods of time. And I think the broad direction really has not changed, right? What management is focused on doing is developing our assets, generating cash from assets. Since COVID, we have generated over $400 million in operating cash flow. These have been very redeployed. I mean, the most significant one was the acquisition of the minority interest in OM Sarawak. I think around 2021 and 2022. We have spent a lot of effort in terms of sustainability as well as the optimal product basket as well as sales market kind of distribution. So that's what management has been focusing on.

And I should also mention kind of what we're doing with the debt, on the debt front, right, which I mentioned earlier. So I think we have delivered on that, and we've proved to be resilient even during depressed market conditions. So we're relatively nimble and while at the same time, operating in a very, very kind of thumb and city manner. So while that is all true, I think I would not deny that there's an issue with the valuation, right, obviously.

And just really -- I think we spent the last 2 years speaking to a lot of investors, a lot of buy-side funds, a lot of brokers, and I think our conclusion is that this largely really stems from the fact that liquidity is low. So like a lot of the shareholders that might be on this call, I think the vast majority of shareholders looking at the register have gone through quite a few cycles with us. And they, like yourselves, do understand that the company is undervalued. To what extent is really not our place to share. But I think the result is that like many of our shareholders that may be dialing in, they are not inclined to sell. So over time, ironically, this decreases the free float. And I think we've seen that since we listed on Bursa because actually, the free float has decreased since then because there are other sort of commit the shareholders that have come in. And so very ironically and strangely, the situation actually reflects conviction in the company, but you don't see that reflected in the valuation because the free float is declining. So I think what really needs to be done is beyond things like the dividend policy and improving kind of the news flow, or I think what needs to be done is a kind of a structural rethink of what the sort of corporate structure should look like. And I think this will be a priority for the management as well as the Board engaging with the Board in 2025 and 2026. So rest assured, this is really top of mind for us. And we hope that we will be able to deliver some sort of a of a plan in 2025 and 2026, so these 2 years. So unfortunately, I think that's probably all I can share at this point and look forward to sharing more once we arrive at some kind of concept.

[Jenny Voon, executive]

All right. Thank you for sharing that, Adrian. Now that appears to cover the majority of the questions from our audience today. If you do have any further questions, please forward them to [email protected]. We will be making a recording of this webinar available via our LinkedIn profile in the coming days.

This concludes our webinar for today. Thank you, everyone, for attending, and thank you, Adrian, for the comprehensive update.

[Ngee Tong Low, executive]

Thank you, everyone, for dialing in. Have a good day.