OM Holdings Limited (OMH) Earnings Call Transcript & Summary

[Audio Gap] Consultancy Corporate Storytime. We're delighted to have OM Holdings General Manager, Mr. Adrian Low, with us today to run through investor presentation, which will be followed by a brief Q&A session. [Operator Instructions] OM Holdings Limited is a vertically integrated and ESG-focused ferroalloys company and this week has released financial results for the 6-month period ended 30th of June. The results demonstrate strong profitability and improvements in key financial metrics over the previous corresponding period. So without further ado, I'm pleased to hand over to Adrian, who will present a comprehensive update from the OM Holdings headquarters in Singapore. Adrian, over to you.

Thanks, Nicola. Thanks for the great introduction. Thank you, everyone, for making time this morning. I hope you can see the slides clearly. So without further ado, I'm just going to jump straight into the numbers. And so I think one key thing to note is that we changed our presentation currency from Australian dollars to U.S. dollars with effect 1st of January this year, so that's why all the numbers look a bit lower. But look, this change really is to reflect sort of functionally what's happening at OMH because a lot of our costs and all -- literally all of our revenues are denominated in USD. And so with that out of the way, look, I think we delivered a great set of numbers in the first half of 2022, sort of massive bump up from first half 2021. And if you recall how markets were in '21, that was sort of the nascent recovery post pandemic, and that really went up all the way until September, October last year when things really kind of peaked before sort of trailing down. So in terms of earnings, EBITDA profit to owners effectively double what we did in '21 for EBITDA, and net profit after tax to owners went up multiple times closed at about USD 50 million to sort of 100% consolidated number was USD 60 million, remember correctly. So not only did we do much better than what we did in the first half of 2021. We actually also have improved on what we delivered for the second half of 2021, right? So if you recall, that was when prices peaked and they have sort of come down slowly until, say, middle of the first half and sort of accelerating now as we enter sort of the middle part of the year. So I think we had a lot of questions. I think a lot of shareholders asked, if we'll be able to sort of do better than what we did in the second half of last year. And I think we've demonstrated that. Yes, we have been able to sort of ride this wave and sort of take a lot of profit at that upside, which I think is very, very critical, just given things because commodity cycles come and go. You don't really know when the next boom is coming. But it's always very important to sort of be able to ride your winds and sort of control costs when things are tough. So that's all on the earnings side. I think notably, if you look at cash generation, cash flow from operations, we actually generated $72 million in cash in the first half. And so this is U.S. dollars. And again, if you look at what we did for the full year of 2021, we actually generated more cash in the 6 months compared to what we did in the full year of 2021. So just to provide a bit of context and background, both from the market and production volumes that sort of underpins these results. I've already mentioned sort of the broad trends in pricing and how things have played out. I think in the first half of this year, we benefited greatly from this uncertainty in ferroalloy supply with the outbreak of the conflict in -- between Russia and Ukraine. And obviously, if you heard in my presentations before, this is because Russia and Ukraine are, respectively, the world's second largest exporters of ferrosilicon and manganese alloys, respectively. And so that is to really help pricing. But things sort of reversed. As we all know, we're entering a period of great economic slowdown, just global aggregate demand has decreased a lot. There's a lot of uncertainty in terms of both what the Fed is doing as well as real terminal demand, and a lot of people have started talking about demand destruction. So I think that's all sort of part and parcel of commodity markets. I mean I think there will be a period of sort of unwinding, deleveraging and sort of reduction of inventory before things start picking up again. So I think we're sort of well underway into the next cycle. One thing to note is that a lot of ferroalloy production started falling from about the middle of this year, so around June. So both European producers, Chinese producers, Indian producers, everyone has been slashing production at sort of double-digit rates. So I think some of the reports that we read, we've seen states cut production by close to 40% to 50%. And so if that gives you indication, gives you a flavor of where we are in the cycle. So that's on the market outlook and sort of pricing side. In terms of production, look, I think if you are with us for the sort of Q2 webinar, the numbers sort of speak for themselves. I think we're on track to achieve about 350,000 tonnes of ferroalloys for this year. A lot of the production, if you look at the chart, has been front loaded. That's by design. I think we already shared that there's this complex map of furnace conversion, maintenance, relining. We've got 16 furnaces [ every year, 6x Q2 ], all the furnaces. And so a lot of production is front loaded by design, and that's a great thing because we capture pricing sort of on the upside before things sort of come down in the second half of the year. Okay. So I'm not going to talk through all the numbers on the slide. I think suffice to say, we did create on sort of the revenue front. First half of 2022, that's down to the prices. And I think 27.7% GP margin is one of the highest that we've recorded. In terms of group EBITDA, again, I think I said this the last time, but increasingly, I think smeltings come to sort of dominate the group earnings and really the other 2 sort of contributions would be trading, which is basically logistics and distribution, that sort of contributes a very, very stable percentage spread of revenue as well as sort of earnings from associates, which is the Tshipi mine. So one thing to note, so mining remains under care and maintenance, and we're really still waiting for the UFP to commission. And so some people have asked what's taking the plant so long. And so today, the answer to that would be that today, if we wanted to turn on the plant, we could. It just wouldn't be as efficient. So sort of pending a few long lead time items, screens, washers and that sort of thing. And I think once that comes in, we'll be able to sort of commission the plant and start processing. So until then, it's going to be in care and maintenance. Okay. So when we look at gearing ratios, again, I think we've come a long way from sort of 3x in 2016, I think we're about 0.5 today. And shareholders and investors will note that we actually repaid USD 36.9 million in first half this year and sort of sizable chunk of this went towards the PF, the project finance facility, with sort of smaller chunk that goes into sort of the rotating facility that we have for raw materials at Sarawak. And so look, I think the idea is that we are in a position where the project has done well for itself. Numbers speak for themselves, and it's time really to sort of exit this very, very restrictive project finance structure, where we don't really -- well, management doesn't really have control over sort of what debt levels we ought to be targeting and lot of the cash has locked them in sort of various mechanisms. So I think in the next 1 or 2 years, we will look to sort of refinance this into sort of more vanilla sort of debt arrangement. And besides that, I think you can see how cash flow movements sort of went in the first half of '22. I think the only difference between what you're seeing now in the last chart is that there were -- I think we are spending a bit more in terms of investing this year, but that's really sort of around the furnace conversion, maintenance plus sort of the base load sustaining CapEx. So again, we had this question the last time, but basically, the 4 furnace conversion projects, 2 manganese, 2 silicon metal. The manganese ones, as I mentioned, we've already delivered it. And so those furnaces are in production. So 4 furnace conversion projects and sort of doing major maintenance for all the furnaces, that's going to cost us about $50 million to $60 million, and so that's already provided for in the cash flow. That's what we're spending this year. And that's it. So this is a very short presentation. I think we'll leave more time for Q&A. But I think I would like to draw your attention to the key ratios, the bottom sort of -- bottom left corner of the page. So as we stand today, trailing 12 months earnings PE ratio is just under 3.5x. So I think that speaks for itself. But I think, more importantly, for our shareholder base and sort of the potential investors, one question we get a lot is sort of always comes back to the dividends. So I think we will be launching an official dividend policy very shortly. So stay tuned. This will come out in the near term. And so the current thinking is that we will aim towards distributing a set of amount from earnings during the growth phase and then sort of post growth phase and sort of steady state, that number will change. So management is working very, very closely with the Board, as we speak. And so stay tuned. And with that, that's the last slide. Happy to open the floor to questions now.

Thanks, Adrian. Thanks for the update, Adrian. That was fantastic. So we'll move on to the Q&A section of our webinar today. Our first question is, there seems to be a large deferred tax expense in the recent reported financials for the first half of 2022 of USD 22 million. In the cash flow overview, there appears to be an amount of approximately USD 4 million having been paid with the remainder of approximately $18 million seemingly to be deferred tax, and it is noted that this relates to OM Sarawak. What event should we give this tax expense? And how should we think about both income tax and cash income tax going forward in relation to the Sarawak operations?

Right. So that's a very specific question. Look, I think -- so I don't have all the information in front of me, but I'll just address that $18 million because that's pretty sizable. So that relates to sort of OM Sarawak's pioneer status tax incentive, I think in between years now. So I think the last time I mentioned, it's a 10-year sort of tax incentive. It's 5 plus 5. The first 5 years has just lapsed. We are assuming during the renewal process, which sort of is underway right now, that the next 5 years will not start until they tell us to test. So we have sort of provided for that for the year 2022. And just to remind everyone, the sort of second 5 years, we will -- 30% of Sarawak's income will be taxable at the Malaysian tax rate of 24%. So that $18 million is just sort of been provided until we know with certainty when the next 5 years starts, whether it's '22 or '23.

Thanks, Adrian. Our next question is, can you guide towards an estimate for CapEx spend in the second half of 2022 and in the first half of 2023?

Yes. Look, I think for the full year of 2022, it's going to be $50 million to $60 million, like I shared, and that's probably not going to deviate too much. For 2023, I think a lot of the potential spending is very contingent on funding. So the next major project would be the expansion of manganese alloy smelting. And Sarawak 2-year furnaces, that's about $90 million. So that's contingent funding. Besides that, I think if you look at sustaining CapEx, it's between $10 million and $15 million as well as the other sort of smaller projects, exploration in Western Australia and the UFP rectification with the screen that's $1 million to $2 million. So it's not really sizable or material in the scheme of things.

Thanks, Adrian. Our next question, would you consider the minority interest in the shipping Manganese Mine as core? Or would you consider monetizing this to fund investments in the smelting JV and/or furnaces?

Right. Look, I think that is core to answer it in a very simple way. And the thing about manganese ore mine is, if you want something that's sizable and sort of sits at the bottom of the cost curve, there aren't many new ones. And so you're just going to hold on to the ones that you already have, I think. And the thing is, obviously, there's always a price for everything, but I think it should be, at this point in time, delivers great value, both from a financial investment perspective as well as from a strategic perspective when it comes to the ore flow. And we're also doing distribution of the GP ore in China that sort of complements our existing business. So I think I would say it's core at this point. That's not something we're going to monetize.

Fantastic. Our next question for today is how do you plan to fund the acquisition of the 25% of the Sarawak operations which you don't already own?

Yes. Right. So look, I mean, this question comes up a lot, and I think it's going to be asked a lot more as we approach the end of the year. But look, we generated $70 million in cash in the first half of the year. So I think we've demonstrated that cash generation is pretty significant. Obviously, these sort of comes to argument to that. We actually repaid a lot of that to the lenders. But you have to keep in mind that a lot of that sort of nonattributable amount of that was actually paid down to the sort of working capital facility that can be sort of freed up again. So that's a very complicated answer to say that there's still cash there. Besides that, we've actually worked -- we're actually working on 3 different options at this point in time for sort of bridging debt facilities and various forms and flavors and costs. So I think we have all the presentations -- sorry, we have all the proposals we need on the table, and it's really a matter of just deciding which options to take and just number one, create optionality. We've got 2 to 3 years' time to decide whether to sort of pay that down, roll that over or sort of raise, freeze equity. And number two, most importantly, I think for shareholders, we should not be in a position at this point in time with the current share price to sort of dilute shareholders, and I think that's the last thing we want.

Fantastic. Next question. Can you provide ballpark estimates for the approximate cost for producing 1 tonne of ferrosilicon, 1 tonne of silicon manganese and 1 tonne of ferromanganese?

Right. Okay. So for ferrosilicon, I think we have guided last year that historical costs around say, plus/minus $1,000 with the increase in sort of freight, with increase in raw material prices, I think probably closer to $1,300 to $1,400 today. But that number is actually trending down as a lot of these costs come down. So I would say that's probably where we are now. It's probably going to go down. And so keep in mind that at sort of this cost, I think the Chinese producers are not -- will not be able to export. So this is -- we're in a very different position if you look at sort of where we were in 2016, right? I think we were in a much more sort of unfavorable cost position. I think tables returned today. So that's for ferrosilicon. For silicon manganese, I think I shared the last time that we were around $1,000. But historically, I think the cost of silicon manganese has been between $800 to $900. And I think that's where we're going to return to very soon with manganese ore prices sort of coming down very, very sharply, if you look at the benchmarks across markets, [ footfall ] index. So that's for silicon manganese. High ferromanganese is, historically, I think vast majority of the time, it has been cheaper to produce than silicon manganese. So I think you can just refer to the cost of silicon manganese.

Okay. Another question. What does OM Holdings plan to do with OM Qinzhou now that operations there have been wound down. Will the property be sold? And will the furnaces and transformers be moved to Sarawak?

I don't think we're going to do something as drastic as that. I actually haven't seen anyone so successfully move furnaces and then sort of save money doing that. I think, look, Qinzhou to date -- so let me answer the question this way. There are still furnaces in operation in the Guangxi province. And the key thing is just a high degree of uncertainty in terms of the cost of power. So I think there will be ways of sort of utilizing furnaces to sort of ad hoc basis. But the broader picture is what are we going to do with that asset, that land, that sort of sitting, prime real estate right in front of the port. And I think the 2 things that I've said are, one, sort of looking at different industries. So it has been a lot of sort of high purity manganese sulphate producers sort of comping up in the south to take part of the sort of battery supply chain. I think understanding that sort of the cost efficiency and sort of how the levers for that business works would be instrumental in us deciding whether to sort of pursue that track. And I mean the sort of EV space, EV supply chain is very talked about in these days. So that's one. Two, something more boring, but stable would be able to contribute to earnings would be sort of repurposing that into some kind of logistics space. And so we actually have received approvals to use the land -- to use our warehouses as bonded warehouse. So doing some activities around that. But look, I think it's not been decided or sort of set in stone now. I think we can afford the time to sort of wait and see what the best decision will be. And until then, we have the option to sort of utilize those furnaces.

Thanks, Adrian. With Bootu Creek in care and maintenance status, can shareholders assume that the mining division is unlikely to contribute greatly to revenue and earnings going forward? And would you consider divesting Bootu Creek?

So let me answer the first question first. So I think we -- the mining division is unlikely to contribute to revenue in, say, the next 1 to 2 years, so say, 12 to 18 months. And that's keeping in mind that we have a few projects underway in Western Australia and us sharing that with someone earlier where we are with Bryah now. I think we'll most likely actually be able to release some kind of -- get to a resource statement at some point in time. And then the decision would be should we sort of start mining at Bryah? And do we sort of string all these resources together to build a bigger mine in Western Australia. And I think we have demonstrated that we're able to sort of place [indiscernible] and to -- and we have done trials to consume the ore ourselves. So that's all part of the bigger mining strategy. And I think that will only sort of materialize after the next 12 to 18 months. As for Bootu Creek itself, I think, look, there's always a price for everything, but I think at this point in time, we think we'll be able to sort of deliver value from what remains in Bootu Creek by basically treating the tailings and taking that material to Sarawak to Qinzhou. But yes, I mean that's a surprise for everything. I wouldn't say that's -- we wouldn't rule that out.

Okay. And our final question for today is, how are current shipping rates influencing operating costs for OM's core businesses?

Yes. Look, I think on the alloy side, in terms of the alloy export, so free to say East Asia, Southeast Asia, something between -- something like $30 to $50. So that's not really significant in the scheme of things, right, because ferroalloy prices are $1,600. So what's really affecting the core business, I think, is the cost of shipping raw material. And so these are sort of low value items and we ship in bulk from China, from India, and so that's what's really affecting sort of raw material -- the costs that we're paying at the smelter gate. I think that that's come down quite a bit. So if you look at sort of freight rates, shipping manganese, that's come down quite significantly. And so I think we are expecting both sort of bulk rates and sort of container freight rates to come down in the next 6 months.

Well, Adrian, that appears to cover the majority of questions from our audience today. And if you do have any further questions for Adrian, please feel free to forward them to [email protected]. And we'll make a recording of this webinar available via OM Holdings and Corporate Storytime social media accounts in the coming days. That concludes our webinar for today. So I wish to say thank you to Adrian and our OM team for the update, and thanks, everyone, for attending. Thanks, Adrian.

Thank you. Thanks, Nicola. Thanks, everyone, for attending.