OM Holdings Limited (OMH) Earnings Call Transcript & Summary

By investor relations consultancy, Corporate Storytime. We're pleased to have an opportunity to run through the investment story for leading ferroalloy producer and dual ASX and Malaysia listed company, OM Holdings. Joining us today is OM Holdings' General Manager, Mr. Adrian Low. OM Holdings is in the process of completing a transaction to acquire the remaining 25% of the Sarawak ferro smelting operations to take OM's interest in this strategic asset to 100%. Adrian will run through investor presentation to provide an overview of the OM Holdings' business. And at the conclusion of this presentation, we will conduct a Q&A session. [Operator Instructions] And without any further ado, I'll hand over to Adrian, who will run through an investor presentation. Thanks, Adrian.

Thanks, Chloe, for the introduction. Thanks, everyone, for joining us today, and good morning to everyone, and good evening to those dialing in from further away. Look, I think we wanted to do this webinar a bit earlier with the release of the quarterly, but a few logistical challenges were on the way, and we'll look forward to sort of doing this every 3 months. So I'm just going to jump straight into what we've done in the last quarter, beginning with operations and ending with what Chloe mentioned, I guess what's top of mind now to most shareholders, the acquisition of 25% shares in OM Sarawak. So I think in Q2 this year, production at OM Sarawak was more less on track. You can see that we did 69,000 tonnes for the first half of ferrosilicon, and 121 tonnes -- 121,000 tonnes, sorry, for manganese alloys at OM Sarawak. And so I think we're more or less on track to achieve 340,000 to 360,000 tonnes this year. And so you all noticed that, I mean, most of this is front loaded by design, and thankfully so given sort of current market circumstances. And what's sort of happening right now as we speak is we are running 6 furnaces on ferrosilicon and 6 furnaces on manganese alloys. And of the 6 manganese alloys, 2 of them, the newly commissioned and just converted furnaces from ferrosilicon, and these were actually commissioned on 27th June and 25th July. So more or less on target as we've guided at the start of the year. There are 2 more furnaces that we'll be producing silicomanganese. Hopefully, by the end of this year, we'll be able to commission them, if not then early next year. So that's more or less it on the stocking front. In terms of what's happening at Bootu, I think that a lot of shareholders will note that we are or we have been rectifying the tailings retreatment plan on the Ultra Fines Plant. And I think we have a fairly good idea of what to do. I think the only issue right now is that a lot of these parts, especially sort of custom-made screens, have a very, very long production lead time. And so I think at the rate the fabrication is going, most likely looking to commission this at some point next year. Okay. So that's on the operation front. Now going back to the acquisition, acquiring 25% minority interest of OM Sarawak. So the conditional SPA was signed on 14th of June in the second quarter. And I think you will see from announcements that CPs are need to be completed by 15th September or otherwise waived, or the parties may agree to delaying that date. But the transaction will close 60 days after the last CP is fulfilled. So I mean these are sort of fairly standard CPs, and you can see the list of conditions on our announcement. But I think there probably will be questions on how we're going to fund this, and we have received a few e-mails from shareholders as well. So I think I'll just address that here at this point. I think in all our announcements, we have said that we will be funding the transaction from a mix of cash, potential increase of debt, and potentially placing out new shares. So I think shareholders will probably be familiar with the sort of price trajectory of our products. And I think it's fair to say that we had a fairly strong first half. And so as a result, I think we will be funding a significant amount of the purchase consideration with cash. And the remaining amount, I think what's -- a lot of the feedback that we've received and, obviously, what's what on our minds as well, is that the share price is trading at a very low level. And I think we are all very keen to avoid needless dilution at this level. And so that's it. We have a few options on the table, be it sort of debt or a combination of various options, and we have some time to decide before we actually push the button. Okay? So that's on the Sarawak acquisition. In the last quarter, 2Q, we also repaid USD 6.5 million through project finance lenders, and we also became Shariah compliant. And so for Australian and international shareholders, just a quick note of explanation what this actually means. So one becomes Shariah compliant when you sort of meet the criteria as set by the Shariah council in Malaysia. And what this means is you have to reach a certain sort of non-Islamic debt ratios. And you can't be in an industry where it's, say, a [ bike ] street or something that is socially irresponsible. So I think we've checked all the boxes and became Shariah compliant based on our FY 2021 numbers. And what's significant about this is it very, very significantly increases the AUM that can then now look at us as a stock, right? Because I think that was the entire sort of motivation for the secondary listing in Malaysia. And especially when it comes to government lending funds, I think this is a very, very important criteria. Okay. So just thought I'd flash the development plan for 2022. So of the 4 furnace conversions, you will see obviously 2 have just been completed as we promised, and 2 more for metallic silicon that will be done at the end of this year. So with -- so although we're running 6 furnaces for manganese alloys at this point in time, with the 8 furnaces, I think the production capacity will be something like 330,000 tonnes to 400,000 tonnes per annum. And if you look at the sort of global traded volume of manganese alloys in general, I think that stands at about between 3 million to 4 million tonnes. So the amount of output, considering that we're probably going to explore 100% or close to 10% of what we produce, is more or less somewhere between 10% to 15% of the world traded market. And so this brings us, I think, to a completely different level in terms of our scale relative to world trade. Okay. So this year, we also just released our sustainability statement. And I think because we received quite a few questions on this, especially from our institutional shareholders or potential institutional investors, I thought I'd just lay out the key targets for 2022. I think in a heavy industry like ours, obviously, what's on top of everyone's mind is compliance with all the necessary standards. So suffice it to say, we're really compliance with all standards and with a very, very decent sort of margin of error. So if you look at, for example, air quality guideline, all the emissions that are coming out of our furnaces, once it's gone through the scrubber, the de-dusting system -- that is actually monitored live by the Department of Environment and so any sort of deviation is just picked up immediately. Water parameters, manganese content of water, all these things are tested very, very quickly as well. So I think as far as sort of environmental concerns go, I think we'll be taking all of these things very, very seriously. I think -- so besides the other targets that are on the screen, I won't go through all of them, I think it's very important to note that our operations at Sarawak, again, it's predominantly powered by hydropower. So our scope 2 greenhouse gas emission is actually 75% lower compared to conventional smelters. And so these conventional smelters are typically running on some kind of also fossil-based power. And if you look at the chart, the greenhouse gas emission intensity, they have been fairly stable over the years. I think we're in the process of actually coming up with a realistic road map of where we can take these emissions. But that probably will need some work, and we'll share that with shareholders when we're ready. Okay. So yes, just a quick update on where markets are going. I think it's no surprise that global markets are very weak at the moment with just fall in supply, I guess, and also a lot of uncertainty in Europe around power security. And so when we look at ferroalloys, broadly speaking, I think demand has really come off. When we look at ferrosilicon, obviously, on the supply side, China factors in the largest. And so what's happening in China now with its sort of the steel production woes is affecting ferrosilicon market. But that being the case, I think shareholders and investors would have seen from our latest quarterly that prices have come off, but not without an impact on the China supply side. So actually, month-to-month, Chinese producers cut about -- something like close to 20% of the output. So I think at a price -- also not forgetting that this is at an exchange rate of USD 6.7 to RMB, so I think this is really sort of the pivot point. And for a lot of these new producers that came online in the last 12 months to make a quick buck, I think this is the point where the exit, and obviously, at OM Sarawak, we are still profitable. So I think this is a completely different scenario from how things were actually 4 years ago. So this is on the ferrosilicon trend. In terms of manganese alloys, it's a very similar picture in terms of the general demand. And I think when you look at the scale -- sorry, look at the chart, the price of manganese are the ones lined in red, and the price of the silicon manganese is the line in blue. It was not -- the scale wasn't really calibrated or chosen any particular way, but it just happens that the lines have now crossed. And I think we're seeing a very similar sort of supply reaction in terms of global producers. So producers, for example, in India and Europe have been cutting manganese alloy output. And I think, obviously, a sort of very critical aspect of manganese alloy production is what's happening in Ukraine. And because just to sort of remind shareholders and investors that Ukraine and India have always been the 2 largest exporters to manganese alloys. And although production has come down as a result of what's happening in Ukraine, I think that is more than offset by the sort of fall in demand in Europe as well as the sort of inventory overhang in general. So I think that's sort of a nutshell -- in a nutshell, that's what's happening in both of these markets. And it will take a few months let the market digest inventory. People think it should normalize again. But that is -- I think these are numbers that we probably see come in at the end of Q3 before we actually register that in our financials. And so we'd just like to, again, remind shareholders that we've had a very, very strong first half, and that will obviously show in our numbers. So that's it. I think, again, I'd just like to repeat the sort of key takeaway for OM Holdings. Now again, a much simpler story. It really is about volumes and margins. And I think we have proven that we are still delivering everything that we promised in terms of what we're going to produce and when we're going to do all the conversions, what the future growth plan looks like for Sarawak. And in terms of margins, I think that's fairly evident. We are at the point in the pricing cycle where everyone is now shutting output and is still profitable. So hang in there, and I think, again -- and the -- a lot of phases are about what point you are in the cycle, but really sort of what the long-term average margins will look like. And that, again, is sort of -- we're benefiting from 20-year power contracts, and that's a fixed price. So that's it. Thank you for dialing in. I think we can probably open the floor for questions.

Thanks for the update, Adrian. I'll just get you to stop showing the screen, so we can move on to Q&A.

Okay.

Okay. So our first question is in 3 parts. So I will ask the first part to this question. And it's how long does it take to carry out major refurbishments and maintenance to each ferrosilicon furnace? And does it take a similar time to maintain/refurbish the manganese alloy furnace?

Yes. So I think in general, it takes between a month to 3 months. And it's really not so much dependent on what it's producing. It's more dependent on whether we're going to rely the entire furnace, so that the furnace basically, as a shell, has sort of heat-proofed material on the inside. Think of it like bricks, sorry. That's essentially what it is. And if you have to remove that structure, then it's going to take 3 months. If not, then about a month, all suffice.

Our next question is, what is the approximate cost of performing this maintenance and refurbishment per furnace?

Right. Okay. So I don't actually have that number for this year. But I think probably what I can refer to is that shareholders would probably be familiar with our CapEx this year, which was USD 60 million. That is for maintenance for all of the furnaces, 12 furnaces and conversion of 2 ferrosilicon to manganese and 2 ferrosilicon to silicon metals. So everything inclusive is -- that gives us about USD 60 million. So I think the actual major maintenance isn't really significant.

Okay. When does the company envisage that all 16 furnaces are back in full operation?

Yes, as soon as possible, really. But look, I think with the sort of major maintenance taking between 1 to 3 months, and I guess everyone can see sort of where we're guiding in terms of the second half, it will probably take us another half a year to get that all done. So I would say somewhere in the second half of 2023.

Okay. Our next question is, moving forward, could the management disclose a cash balance in future quarterly market updates?

Right. So we don't have any plans to do that at the moment. I think we sort of following ASX listing regulations. And for now, it's going to be hard really.

Our next question is, what is the company's dividend policy in light of capital demands for the acquisition of the remaining 25% of OM Sarawak?

Yes. No, that's a great question. Look, I think typically what we've guided in the past is we will try to take 20% of profit after tax if -- once we've provided for all sort of CapEx the following year. And I guess this is -- this year is an exceptional year with the acquisition of the remaining 25%. So that's -- it will be discussed at the Board meeting and it will be the Board's decision. But I think there are a lot of factors against sort of disposing cash at the moment when it could go towards a better use.

Our next question is, do you see weaknesses in demand for your products from Sarawak due to the current global economic slowdown?

Yes. No, look, I think we're absolutely seeing a decrease in demand. Having said that, what we produce are sort of very commoditized, so there's always a price at which the material will move. But having said that, we speak very often to purchasing offices and procurement teams. And from them, what they've shared is I think regionally, you were looking at a fall of between 10% to 20% in terms of just capacity utilization at steel mills, and consequently, in demand. And I think it's sort of worth remembering that it's not the actual fall in utilization that affects demand so much as what people believe that they need to keep in store as sort of safety stock. So if someone's keeping 3 months of inventory and running that down to 1, then that's 2 months of demand gone from the market. So I think it's sort of 2 factors in play here.

Our next question is what is happening in the metallic silicon market currently? Is the company working towards offtake for metallic silicon?

Yes. Okay. So that's a great question. So I think the metallic silicon market really spent a wide variety of applications on the lower grade and, say, sort of 553 sort of foundry or metallurgical grade. That's actually fairly liquid. We can sell it to most people on sort of a nonstrategic basis. But once you reach sort of the high-end specs, then absolutely, I think some kind of -- it doesn't have to be an offtake, but some kind of longer MOU or contract or some kind of understanding with a key end user then becomes necessary. So we are working on that.

And our final question is, how will the winding down of sales of material from the Bootu Creek operations affect corporate profits for OM Holdings?

Yes. Right. Look, I think we have shipped the last parcel that we still realistically can ship, everything else remaining at site will not fit a single vessel. And I guess we can sort of take those questions into 2 fronts. On the Sarawak side, is it going to affect what's happening at Sarawak? The answer is no. Does it actually affect the sort of core economics of how OM Sarawak is designed to perform? On the Bootu side, I think it's going to remove that revenue stream from the business. And then that's really sort of the long and short of it. I think that will only come back in when we get the TRP or the Ultra Fines Plant going, probably sometime next year.

All right. Well, that seems to cover the majority of questions from our audience today. We wish to thank Adrian and the OM Holdings team for updating the audience today on the OM Holdings business, and the progress on the move towards completing ownership of OM Sarawak. We will be making a recording of this webinar available by OM Holdings and Corporate Storytime's digital media accounts after some editing. If you have any further questions to Adrian, please forward them to [email protected]. Thanks, everyone, for your attendance. And thanks, Adrian.

Thank you. Thanks, everyone. Thanks, Chloe.