OM Holdings Limited (OMH) Earnings Call Transcript & Summary

[Audio Gap] are with us today to run the corporate investor presentation, which will be followed by a brief Q&A session. If you have any questions you would like to have answered which has not been forwarded in advance, please use the Q&A function at the bottom of your screen. OM Holdings is a company which is [indiscernible] with significant transformation over the recent years to become a leading, vertically integrated, global producer of ferroalloys. I'm pleased to welcome Adrian, who will present a comprehensive update from the OM Holdings corporate headquarters in Singapore. Over to you, Adrian.

Thanks, Chloe. So let me just share my screen. Right. I hope that's clear. So thanks, everyone, for taking time on a Friday morning. If you've heard this before, please bear with me. But I think for shareholders who have been following the story for the last 2 years, we have just been trying different formats. And if this sticks, let's -- we will try to do 1 every quarter, and then definitely after half year and full year financial results. Okay. So I see most people are familiar with the company. I won't sort of talk in detail, but leave more time for Q&A. Again, OM Holdings is a silicon and manganese smelting company. By virtue of our history, we have exposure in mining and trading. So that's upstream and downstream. And today, the key asset that we have really is our smelting plant in Sarawak, Malaysia. And obviously, we chose the site, that industrial park, for its sustainable hydropower. So listed on both ASX and Bursa Malaysia for about half a year now, I think we really offer unique exposure to the smelting industry. And if you look at the list of top 10 smelting plants, most of them are in places like China, Russia and Ukraine. So sort of very few plants in this part of the world. Okay. Moving on. I won't sort of talk through the numbers. I think they're pretty self-explanatory. The only thing I'll touch on is that the total borrowings, we always get questions on that. And again, just to remind everyone, that's mainly in the form of project finance that was undertaken to build the plant in Sarawak. And there's also a sizable chunk that is in the form of a revolving facility for working capital, raw materials and the like. And we have been paying that down year-on-year, every year, balanced again to a sustainable dividend, obviously, when cash flow commits. For our Malaysian audience, I think it's important to note that because we are primarily listed on the ASX, so we are not releasing financials quarterly. So if you look at the bottom left-hand corner, earnings and key ratios, I'm pleased to note that trailing 12 months here means second half of 2020 and first half of 2021. And so that -- these numbers are relatively outdated and ignores the entire sort of material change in commodity markets which obviously happened in the second half of last year. Having said that, our financial, sort of full year financials 2021, will be released, I think, in about a week's time. So stay tuned. We look forward to updating the slide then. Okay. Key assets, key operations in a nutshell. So obviously, I think, again, this needs no introductions. Sarawak is the key asset that OM Holdings as a group has now, that is supported in a sense by a small asset in China, in Qinzhou. That -- this one is much smaller, and it was sort of office for just smelting some, I think, 15 years ago. In the bottom left-hand corner, we have upstream exploration and mining. So I think the notable change, and shareholders may be familiar with this, is that we stopped mining in December 2021. So 2 months ago, as we have been sharing with shareholders over the last 12 months, our mine in Bootu Creek finally reached its end of mine life. So we've closed that as promised. And there are various sort of exploration projects ongoing in Western Australia. Besides Australia, we have a 13% stake in Tshipi Borwa mine. So this is one of the largest mines, manganese ore mines in the world JV, and also consistently one of the largest exporters of manganese out of South Africa. And for shareholders in Australia, if you're familiar with Jupiter Mines, this is the same asset that JMS is holding. So over to the bottom right-hand corner, again, it's -- this is really a sort of procurement, sourcing and distribution business that supports the 3 legs -- the 2 other legs of the business. Okay. Our products. I think this probably needs no introduction. We mine manganese ore and we produce ferroalloys. So obviously, manganese alloys is produced for manganese ore, but silicon alloys has another family of products that we produce and that comes from quartz. And so again, I think reminder, the products that we produce are irreplaceable. There are no known substitutes at this point in time. And even if a producing steel through a EAF process, you still need to add ferroalloys into the process. So if you look around you, all the steel that you can see, that's probably some combination of silicon and manganese inside. That's coming from some combination of alloys that we're producing. Okay. I won't go into details. This is just more information on our 2 smelting assets. So Sarawak, obviously, had 16 furnaces, and Qinzhou plant has 2 furnaces. So one is much larger than the other. This is where our furnace is in Southeast Asia. It's the red dot. And again, we chose the location because it's supported by hydropower. So 3.3 gigawatts of hydropower from the -- that's combined capacity of the Bakun and Murum hydroelectric projects. Okay. So I'll just stop here briefly. Smelting, at the core of it, it's all about the power. And if you look at the cost curves, these were done sort of pre-COVID. But it's abundantly clear that the orange bit that's power share of the total cost is significant and sizeable. So for us, nothing has really changed because we have a 20-year fixed price power contract. So what that means is it's escalating at a fixed rate, and we literally know what the prices from year 1 all the way to year '20. Having said that, I think the same is this not true, it can't be said for our competitors. So if you look at the right-hand side of the chart, I think notably in China and Continental Europe, power prices actually have changed quite significantly. So a lot of the smelters in China and in Continental Europe, when you're sort of taking power at spot prices off the grid, I think you're probably not in a good position right now. And I think if you look at output from, say, Europe in the last 6 months, a lot of producers have consistently been sort of shedding output. And in China, while I think the overall production output has not changed, what has sort of moved -- these producers have around. So different provinces are actually producing different mixes of alloys. And overall, I think that sort of orange bar has probably increased. So again, the power that we have, 350 megawatts competitively priced, fully locked in. And I think that's really the key asset, one of the key assets of the company today. Southeast Asia, I won't sort of belabor the point. But really a home. In Southeast Asia today, that is one of the fastest-growing regions for us. I think we have good reason to believe that Southeast Asia really is one of the last few regions in the world to experience double-digit growth in steel. And there's a new project that's actually slated to come online in a few years' time right on our doorstep. Okay. So I think this is the exciting bit. So this is a chart of the ferrosilicon prices, that's the line in blue. If you have been following us, and when I've had sharing sessions in Q4 last year, you would know that we never believed that $4,000 was going to be the new normal for ferrosilicon prices. And that I also said that it would sort of renormalize at a different flow. I think that has largely come to pass, and prices have remained at the sort of -- if you look at the chart, at the $2,000 level in the last 2.5 months or so. So briefly, overshot that and to correct it back to the $2,000 levels. And so I think what's changed is probably quite clear. It's China's very deliberate attempt to reprice power domestically, as well as coal, right? So because these are very, very difficult, we're interlinked, and by virtue of that, sort of disrupt or alter the landscape of the entire ferroalloy industry in China. So while China remains a sort of ferrosilicon exporter now, I think it's not unreasonable to say that over the course of the next 5 to 10 years, they may even switch to becoming a net importer at the rate that -- with country's policies are going. So for now, I think the foreseeable future, we'll see prices sort of stable at this level, both the sort of Chinese future prices and sort of current spot transacted prices support this notion. And sort of barring massive changes in China's domestic policy, supply and demand, obviously, outside of China, I think this will remain the same at least for months to come. Moving on to manganese. So I think manganese sort of paints a pretty similar picture, with the sort of exception that for manganese production is not centralized in China, it's spread. In this part of the world, I think was supplied by producers in India, obviously, they're supplied in Tasmania. Korea, Japan are also producers of manganese alloys. And the historical producers in Europe are still around. And so these sort of run-up in prices, and that's the blue box, has not been as dramatic as ferrosilicon. And similarly, sort of that retreatment has not been as dramatic as ferrosilicon. So you will note, however, that historically, given the sort of correlation between the blue line and the red line, that's manganese ore, which is one of the key inputs. That correlation has obviously remained, sort of, broken since January 2021, if you will. And I think sort of what goes up must come down. So at some point in time, mean reversion will catch up. But how these 2 lines will meet, I think it's really anybody's guess. I will say that there are obviously other cost components that can sort of explain this change. And one of the sort of key changes, I think, is the increase in the price of metallurgical coke. So that obviously has affected all producers of manganese alloys. Okay. Next slide. Right. So I think we always get a lot of questions on the furnace configurations, and it can be quite confusing. So we've expanded on the slide we had last time. And so this is a sort of complete road map of where we are and where we are heading towards. So pre-COVID, we were running 16 furnaces, about -- combined output 470,000 tonnes. 2021, we ended the year with 12 furnaces. So 6 on ferrosilicon and 6 on manganese, and the output for 2021 is roughly 360,000 tonnes. So sort of on a sort of tonnage realized basis, that's about a 75% to 76% operating rate. And I think the main surprise here was that we have been guiding the market to expect a production reduction at the end of Q4 last year. Fortunately, we were able to sort of defer delay or, if you will, prevent that through a combination of HR policies, incentives for smelting workers and just giving them flexibility for home leave at a later stage. So very, very pleased to say that we ended the year with 12 furnaces and not 10 or less. And for this year, 2022, I think it really is a year of sort of consolidation. What we want to do is really get going on maintenance because that's been deferred for year , if not more for certain furnaces. And this year, I think we just want to take the opportunity to sort of retool, recalibrate, get the conversion projects going. And at the same time, have sort of home leave coincide with those plants. And so I think if you look at the combined output for 2022, we are looking at 340,000 to 360,000 tonnes. So again, it's around 75% of output. And where that lost time is going is if you look at the arrows and on the slide, you will see that 2 furnaces, obviously, are going from silicon to manganese, and 2 furnaces are going to metallic silicon. One change that we're announcing -- sort of we announced for the first time this year is that we will be prioritizing the conversion to metallic silicon for a couple of reasons, and I'll talk about that at the end, I think, when we get to the growth slide. But suffice to say, after everything is done with the 2 new manganese alloy furnaces, we will be looking at a combined capacity of 600,000 to 640,000 tonnes per annum. And obviously, this has been done to sort of optimize the product mix. Okay. So I won't talk through the numbers for mining. Mining's sort of done and dusted in FY 2021. The Ultra Fines Plant is pending to the final testing, and we will sort of relaunch that in its new format once that's done. For smelting. You can see the numbers for FY 2021 and our guidance for '22 below. These numbers actually correspond with the numbers in the previous slide. And again, we're just very pleased that the full year 2021 exceeded what we thought was originally possible, at least sort of we ended the year with high prices and sort of sustained output. Next slide. So right. Okay. So I think for OM Holdings as a company, it's important to remain sort of balanced in a way. So we still see opportunity in raw material developments in Australia. So of the 3 elements, Element 25, obviously, is an optic partner, and we have prior resources and semis around manganese and these are sort of exploration joint venture projects where we have a farm-in arrangement. And CapEx spending is minimal. It just takes a bit of time for us to sort of hopefully develop these projects into mineable assets. But really, I think the key is Sarawak, right? So what are we doing in Sarawak? For the conversion project, like I shared earlier, we are prioritizing the conversion to metallic silicon. And I think the reason for that is there has just been a lot of attention in renewables, and one of the plants right within Samalaju Industrial Park, OCI. That's a Korean company, produces polysilicon, pre-caster material for solar panels. Actually, consumes metallic silicon as a sort of raw material for their production. And they've been in touch with us. And we've also been talking to a lot of sort of larger companies in both the solar and chemical sector. And I think, increasingly, silicon metal is becoming a very sort of strategic product. Most of the walled silicon metal still comes from China, and most of China's silicon metals comes out of Qinzhou. So that is a sensitive for reasons we all know. And I think there is value in pursuing a strategic high value-added product ahead of capacity expansion. Moving on to capacity expansion. That's still in the pipeline. I think we're planning that for 2023 now. And again, through the cost of commodity price cycles, we've done this many, many times, it's still a belief that producing manganese alloys generates the highest return per unit of power that we have because that's the real bottleneck of the plan. And there is no best time to sort of blend these projects. So funding permitting, we will launch that entering 2023, if we can. And so yes, just on the last slide, I think OM Holdings historically has been a very complex story. We have -- we were originally sort of trading company that went into the mining, and we had this sort of 5 to 10 years when we were really trying to do this pivot away from mining to smelting. So I think with the closure of Bootu, we really are a sort of fully-fledged smelting company now. And so I'd just like to offer this slide as a way of simplifying what really drives earnings at OM Holdings. It's literally just stable long-term margins times volume, right? It doesn't get simpler than that. And then so what underpins margins is the fact that we are taking a 20-year fixed price power contract. That's hydro, sustainable and renewable. And if you compare that against, say, what people are paying for power in China, say, in the north, right, because that's where's the cheapest, that literally gives you the moat, if you will. And as power scarcity continues to be a theme to the extent that, that will remain true as we undergo this transition to renewables, OM Sarawak will remain a beneficiary of this transition. On the volumes, I think that's relatively simple. We've just been doing projects ourselves since 1998, and we've delivered on this plan. We've got all the growth plans you saw in the previous slide. So I think we will deliver on that as well. And that's it. I think it really is a very, very simple story now if you strip away all the other bits. And so with that, thank you very much for listening to the presentation. I will leave more time for Q&A now.

Thank you, Adrian, for the very important summary of the OM Holdings story. And we will now move on to some of audience questions. The first one that came through is, are there any capital projects the company is considering? And will any of these projects provide [indiscernible] to new ferroalloy markets?

Right. So I think, obviously, the 2 main projects were on the second last slide, and that's metallic silicon. We are targeting to spend a CapEx of about, say, AUD 20 million, AUD 30 million this year. That will give us access to the silicon metal market, which, while not a ferroalloy is relatively close cousin to ferroalloys. And what that would do is diversify our customer base away from the steel industry, which is sort of 99% of our products now and are feeding the steel industry. So yes, I would say the silicon metal project, and that actually is quite diverse. So I think I mentioned like solar and chemicals as a sort of potential downstream customer base as -- we can also supply to the aluminum industry. And so that's completely different from steel. Having said that, with the expansion of manganese alloys, I think we will also be looking at sort of different products. It doesn't pay to just produce commodity-grade products while sort of expanding capacity by 30%. So we will be looking at sort of refined products sort of higher end bespoke manganese alloy products.

Perfect. The next question that came through is what is the Board's current attitude towards the payment of dividend?

Right. So we get this question every year. We -- I think we've always said that we want to pay a sustainable dividend. It's -- we want to reward shareholders and not just pay interest to shareholders. So it is the Board's position to continue paying dividends as long as cash flow commits. And while we do not have an official dividend policy, I think, historically, we've paid about 20% of profit after tax as dividends. So I think that's sort of a reasonable level to target.

Okay. The next question is, does OM Holdings consider there's still some future revenue and earnings from the Bootu Creek assets? And what sort of liabilities are involved with winding up these operations?

Right. Yes. Yes. So I'll touch on the liability front first. So obviously, there's sort of demobilization costs involved with the stoppage of mining. That's not material in the scheme of things. What's most material is rehab, so rehabilitation. And so that actually is -- obviously, the existing rehab bonds with the Northern Territory government. And so I think all the costs that we can see that are associated with getting the mine back in original state has been provided for. Now obviously, there's this lingering [ port ] case that has been postponed. And to really just address that directly, I think the advice from professionals from auditors and lawyers has been that it's actually not material at the group level. And I think we've also made an announcement to a similar effect last year. In terms of future revenue streams, I think it is our view that retreating the tailings will generate 7 years of scalable products. So we do believe it means that there's great value [Audio Gap] that remains to be [ nice ] and uncovered, and that's actually what we're doing right now.

What are the plans for the Chinese ferroalloy operations in [ Qinzhou ]?

So for our plan in Qinzhou, it's 2 furnaces. We are, in a sense, dependent on the Chinese power policy. But what Qinzhou loses, Sarawak gains multiple [ streams ], right? But look, I think there are many, many sort of opportunities for OMQ because it's actually sitting on prime land. We were one of the first people who signed up for that -- the [ port ] industrial part. It's again its next to the [ port ]. So there's a lot of opportunities there. There are plants that have sort of moved on to provide logistic services. There are plants that moved on to different industries, manganese sulfate. But I think we're really in early days. Anything could happen. And I guess, we'll look at all options.

Perfect. The next question is, how many years are left on the 25-year power contracts?

Right. I will have to check because there has been sort of deferred power that's being taken into inventory. So the net actually realizable power is not the exact on the contract. But I would say, considering that we started in 2014 and really only started producing at full output a few years later, I would say, give or take, 15 years or so. Obviously, that's very, very dependent on the capacity expansion and how we sort of consume the power inventory.

Okay. Just a final question. Have you been able to source sufficient skilled labor for the Sarawak operations in light of COVID-related copper restrictions affecting availability of foreign labor?

Yes. So this has been very, very topical. And we actually just announced our partnership with UNIMAS some time ago. And so I think it's really a two-prong approach. We will have to continue bringing in skilled labor from places like China, while at the same time, sort of pushing up the skill level of local operators and promoting them up the ranks and giving time -- giving them time really to understand the smelting process and have that deep know-how and -- because at the end of the day, smelting is a high-risk industry. It's very, very important that our workers and staff are well trained, especially at sort of superintended managerial levels. So it's going to be a long process, but we're doing it from both ends. And I think the hope really is to have a sort of a fully localized team in the years to come.

Okay. We've actually just had 2 more questions just come through. Adrian, to facilitate the capacity expansion of Sarawak, will you require additional electricity supply commitments to your contracts?

Yes. Okay. So a couple of years ago, I think we announced that there was a potential way to recover waste energies. So the smelter obviously outputs hot gas. Obviously, the emissions are scrubbed very thoroughly. But the temperature is still very hot. So there is a way of recovering waste heat. And I think just from pre pre-feasibility studies, I think we're looking at tens of megawatts from that. So if you add that to what we have, 350 megawatts that we already have, and the power inventory that's been sort of taken in, I think a sort of a case can be made for not actually requiring additional power from the state power company, and we will be able to sort of power new furnaces. Obviously, that's subject to changes. That's still many, many years of into the future. And so I think we'll look at seeing what the most optimal solution is and whether or not actually this will be the final configuration of Sarawak or there will be even more sort of capacity expansion down the road. So our choice really will depend on these factors probably in about 2 to 3 years' time.

Perfect. And now for our final question. Are there any ferroalloy production ex China which is potentially under threat in the current environment? I noticed the Ukraine region has underproduced recently.

Right. Yes. I think Ukraine has had a lot of issues recently. And I think, historically, Ukraine's power contracts and the way those companies are structured is incredibly opaque. So they have really not produced that capacity for really long time now. Obviously, the smelters in Continental Europe, I think, are under threat. Production -- they've been reducing production even with just these very, very high ferroalloy prices in the last 6 months or so. The Scandinavian producers are doing fine. They are largely based -- running their furnaces from hydro and geothermal power sources. So those are really sort of locked in long-term contracts as well as I understand. The -- if we look closer to home, South32 obviously disposed off its smelter in Tasmania. They seem to be doing fine, given just the high alloy prices that we have in the region and the U.S. In India, I think India is really a mix bag because there isn't really a large sort of [indiscernible] that you can look at. But it's a combination of people taking power from the grid and also people with sort of equity-owned power production, and some of that's hydro. So it's difficult to say who will stay and who will be sort of eliminated. But I think India is a region that just has so much growth potential that it's really hard to say. So I would say those are the plants under threat. And obviously, in South America and South Africa, where historically, there has been a lot of alloy production, production volumes have just declined very, very sharply in the last 2 to 3 years. So it remains to be seen what's going to happen in the future, but it's incessant to say the least.

Perfect. Well, thank you, Adrian, for answering our audience's questions today, and for the great presentation. And for those questions that we haven't got time for, please e-mail us at [email protected], and we'll get back to you as soon as possible. The Corporate Storytime team is thrilled to be working alongside an ESG-focused company producing essential value-added materials for the steel sector. Today's webinar has been recorded, and we will make the recording available via OM Holding social media platforms in the coming days. So this concludes our webinar event for today. Thank you all for attending, and we hope you have found this presentation informative. Thanks, Adrian.

Thanks, everyone. Thanks, Chloe.