Introduction Steel is one in all the sectors that has been vastly littered with the COVID-19 pandemic. In keeping with the World Steel Association, global carried out steel inquire of is expected to decline by 6.4% in 2020 and couldn’t be ready to get higher misplaced ground in 2021. (Source: World Steel Association) Nonetheless, steel costs are in the imply time shut to pre-COVID-19 ranges as sturdy inquire of from China’s infrastructure and property sector is riding inquire of. Nonetheless, analysts deem Chinese steel inquire of might maybe well well originate to taper off rapidly, which would set strain on costs. Taking a survey at alloys and ores, things are already taking a survey defective, excluding for iron ore. (Source: Mint) The phrase “The cure for low costs is low costs” is neatly-liked for commodities, and I deem that companies in the steel sector chain with Tier 1 sources that might maybe well live on the upcoming crawl will likely be poised for principal market share beneficial properties and share appreciation. One such company in my take into legend is Asia-focused constructed-in manganese and silicon community OM Holdings (OTC:OMHLF), and I’m taken aback no one has covered it but on Searching for Alpha.
OM’s key sources I have been holding an survey on the company because of its 13% indirect stake in the Tshipi Borwa manganese mine in South Africa as one in all my holdings, Jupiter Mines (OTC:JMXXF), holds a 49.99% hobby in the the same operation. OM also owns the Bootu Creek manganese ore mine in Australia and also has a advertising and marketing and marketing and procuring and selling arm, which deals in manganese ore, ferrosilicon, silicomanganese, and ferromanganese, amongst others. Nonetheless, its predominant enterprise involves the production of ferrosilicon, silicomanganese, and high-carbon ferromanganese. (Source: OM Holdings) The corporate owns a smelter in southern China, which has a manganese alloy ability of 80ktpa and a sinter ore ability of around 300ktpa. Its flagship undertaking is the $500 million Sarawak smelter advanced in Malaysia, which is a 75: 25 joint undertaking with Malaysian conglomerate Cahya Mata Sarawak (OTCPK:CHYMF). The energy has a ability of 200-210okay mtpa of FeSi and 250-300okay mtpa of manganese alloys with a entire 10 ferrosilicon furnaces and 6 manganese furnaces. It used to be in-constructed 2014 and pivoted into downstream production of Mn/Si merchandise in 2018. (Source: OM Holdings) The cause I’m fascinating on this facility is that the two elements that resolve the success of a smelter are gift – low-tag electricity and location. The Sarawak smelter is situated in the Samalaju Industrial Park, which has a cause-constructed port and is shut to just a few steelmakers. The placement is supreme for prospects who’re unhappy nearly about their reliance on China for the provision of ferroalloys.
(Source: OM Holdings) Taking a survey at electricity provide, smelting is an energy-intensive industry, and usually, electricity costs legend for nearly half of of the price of production. The Samalaju Industrial Park is powered by the Bakun and Murum dams, and in 2012, OM inked a Energy Remove Settlement (PPA) for a 20-year interval with a mounted annual tag escalation price. In 2011, Malaysia’s Prime Minister stated that the developer of the two dams sold energy at 6.25 sen ($0.006) per kW, with a 1.25% annual broaden, to Sarawak Vitality, which then distributes it to customers. This puts the Sarawak smelter into the first quartile of the worldwide production tag curve and makes it more aggressive than Chinese smelters. (Source: OM Holdings) We construct no longer have the right costs from Sarawak, and the company offers figures for its entire smelting division. Nonetheless, it is likely you’ll perchance well well maybe behold from the adjusted EBITDA graph of OM that the division can generate EBITDA of around A$140 million ($102 million) in the path of sturdy years love 2018. Valuation and first dangers While steel costs are aloof high, ferrosilicon and manganese ore ought to now not faring effectively, and this has set strain on the funds of many miners and smelters.
(Source: OM Holdings) While FY18 used to be a truly noble year for OM, it is likely you’ll perchance well well maybe behold from the above graph that it used to be an anomaly and can’t be taken as a execrable case. Within the first half of of FY20, the company aloof managed to generate adjusted EBITDA of A$53.1 million ($38.7 million) no topic the detrimental outcomes of COVID-19 on its operations. The TTM EBITDA stands at A$98.6 million ($71.8 million). The online debt is A$410.4 million ($298.9 million), and most of it is connected with undertaking financing for Sarawak, which design they’re in Malaysian ringgit. With a market cap A$240.1 million ($174.9 million), the undertaking price stands at A$650.5 million ($473.7 million), and the TTM EV/EBITDA ratio is 6.6 instances. Taking a survey on the profit outdated to tax by segments, it is likely you’ll perchance well leer that most of OM’s profit in the imply time comes from its smelting and procuring and selling agencies. (Source: OM Holdings) Let’s be conservative in our valuation and be harsh. The mining enterprise entails the 0.8Mtpa Bootu Creek manganese ore mine, which is riddled with security concerns, and I’m taken aback it used to be allowed to reopen at all. The C1 unit cash working tag of the mine for the quarter ended June 2020 used to be $3.06/dmtu, which design that right here is now not any longer a low-tag operation and will battle when manganese ore costs are low. On this environment, there would now not appear to be principal price in Bootu Creek. The stake in Tshipi is accounted for as share of outcomes of mates, and I deem we can use the valuation of Jupiter Mines as a starting level. The latter’s undertaking price with out counting the attributable cash location at Tshipi stands at A$491.3 million in the imply time, which design OM’s stake in Tshipi might maybe well well be valued at around A$127.8 million ($93 million). Nonetheless, Jupiter is also getting prepared an IPO for its mothballed iron ore sources (I’ve covered that right here), which design the sum ought to aloof be rather decrease than that.
Taking a survey on the smelting and procuring and selling agencies, shall we place them a just a few of 10 instances pre-tax profit and have shut H1 2020 as a execrable case. This might occasionally price the two agencies at A$706.9 million ($514.8 million), which is across the amount of funding to fabricate Sarawak by myself. Nonetheless, combining the valuations of all of OM’s agencies minus its win debt is equal to $308.9 million, which presents an upside of over 75% for the company’s shares. Sarawak is a immense operation and is producing principal cash float even in these timorous instances. The principle likelihood I behold for the bull thesis is a truly prolonged interval of low manganese ore and ferroalloy costs and a sturdy Malaysian ringgit. The faded might maybe well well changed into a actuality if steel inquire of fails to get higher fleet, and the latter might maybe well well be a principal headache as OM’s debt is in ringgit, and its electricity costs at Sarawak are also in this forex. If operations changed into unprofitable and money owed can’t be repaid, the in all likelihood action is a capital broaden, which would vastly dilute investors. Conclusion Steel and iron ore costs are high however ought to now not likely to place, and the ferroalloy and manganese ore markets are already in inconvenience. With share costs of many smelters and miners at sorrowful ranges, right here is a noble time to put money into companies with Tier 1 sources as they’re in all likelihood to outlive and are attach of abode to learn vastly when the market turns. Commodity markets on a frequent foundation switch between feast and famine, so right here is now not any longer a peaceful intention. I deem OM Holdings has a truly noble smelting operation in Sarawak, which is ready to generate profits even in this mighty market. The corporate has a rather high debt stage, and I deem it’d be a noble suggestion to sell the stake in the Tshipi mine to repay some of it. One other prudent part to fabricate would be to survey at a forex hedge. In any case, OM Holdings seems love a compelling funding replacement for the lengthy bustle. Retain in tips that the predominant itemizing of the company is on the ASX.
Disclosure: I’m/we’re lengthy JMXXF. I wrote this text myself, and it expresses my possess opinions. I’m no longer receiving compensation for it (rather than from Searching for Alpha). I haven’t any enterprise relationship with any company whose stock is talked about in this text.
Additional disclosure: I’m no longer a financial adviser. All articles are my opinion – they don’t appear to be solutions to make a choice or sell any securities. Produce your possess due diligence and consult a financial skilled outdated to procuring and selling.