OM Holdings Limited (OMH) Earnings Call Transcript & Summary

Welcome, everyone. My name is Nicola Gosatti, and I'm Co-Founder Investor Relations Consultancy, Corporate Storytime. OM Holdings Limited is a vertically integrated low-cost manganese ore and ferroalloys producer. And I am delighted to have OM Holdings Managing Director, Adrian Low, with me again today to run through an investor presentation following the release of OM's March 2023 quarterly production and market update. The presentation will then be followed by a Q&A session. [Operator Instructions] So without any further ado, I'm pleased to hand over to Adrian, who will present his comprehensive update. Adrian, over to you.

Thank you. Thanks, Nicola, and team from Corporate Storytime. Hope you can see my slides okay. Okay. And so thanks for dialing in today morning. I'm just going to talk through some of the key highlights for Q1, starting from the corporate side and then moving down into operations and I think what's sort of top of mind for everyone for today's webinar. So in Q1, we declared a dividend of AUD 0.015 for FY 2022. And after sort of a year-long consultation with investors -- potential investors, we formalized the dividend policy in March this year. So this will be effective from FY 2023. And the idea is to give investors and shareholders some visibility of your cash flow from the investments, and we've committed more or less sort of to distribute 20% of net profit after tax. And this is subject to sort of customary cap free cash flow and other considerations. In Q1, we also repaid USD 7.3 million to our project finance lenders. And I think sort of this shareholders will not be surprised, this is more or less in line with our policy of bringing down debt to a sustainable level. And I think as we approach that level, depending on what the macro environment is in terms of where rates are, to be precise, we'll make a call on what we would do with our sort of capital structure. So that's more or less it on the corporate side. I think what's the key #1 question that we've been receiving from investors through our IR mailbox and sort of feedback form has been the silicon metal furnace. So I think let's just sort of dive into that and address decommissioning issue that we've experienced. So in April, we announced that we have temporarily suspended production at the first metallic silicon furnace. And sort of -- I just want to give investors a sort of a flavor of the issues that we've encountered with that furnace. And the main issue, I think, there's 2 issues actually. So the main issue, I think, is the recovery of silicon. So recovery of silicon is basically how readily SiO2 and quartz reduces into metallic Si that gets touched. So the recoveries have been very low. I think this is not really a new or unexpected issue in the sense that it was very much a similar issue that we faced in 2015 with the various silicon furnaces. And I think shareholders who've have been around the last couple of years would know that, that lasted actually better part of 2015 and even into 2016 before it was fully rectified. So it's really a sort of trial and errors kind of process using new furnace with a completely new batch of raw materials, unfamiliar -- with operators unfamiliar with the furnace plan and so on and so forth. So when that happens, when you have a furnace with recoveries that are low, what tends to happen is a lot of the energy that's fed into the furnace has to go somewhere. You have to dissipate it somewhere. And more often than not, that happens at the surface of the furnace. And what you get in return is a lot of hot air that has to be released in one way or another. And so when there's pent-up energy that's being released in the form of gases, the de-dusting system, the fans have to work over time to dispel and remove that heat. And so I think what we've also seen, and this is the second issue that I have talked about is the off-gas ducting and heat removal system, was not spec-ed to be able to sort of remove that amount of heat. And so I think these problems actually go hand in hand. And obviously, solving one, solving the reactivity will go some way towards solving the hot gases and sort of the cooling system. But what we've decided to do, because this entire conversion project is tied up under EPC contract, it's a turnkey contract, contractors are responsible for delivering not just equipment, but they're also responsible for commissioning. Management and consultation, obviously, with all service providers, have decided to put the trial production to a halt. We are technically still under commissioning. And as a result of the way the contract is structured, rectification works can be done within the frame of the contract. And so that's what we're after in this case. And I think some of the e-mails that have come in, some of the comments that we've received from shareholders and investors are around sort of -- generally revolve around will the company still be looking at silicon metal? Is this an issue sort of strategy? And I think the answer to that is a resounding no, right? Because no one decides on a product stream, no one decides to build a new furnace or modify furnaces for 3 to 6 months kind of earnings. It's always about the long run. It's always about the 5- to 10-year sort of earning profile. And so I think in this case, the fundamentals of silicon metal remain the same. We are still committed on delivering that furnace as well as the second furnace and bring that into production. And so as a result of this sort of temporary stoppage, we have found ourselves in a situation where we have excess manpower. And so I think investors will be pleased to know that we have -- I think, a week or 2 after the announcement, we have redeployed all workers for this furnace into restarting the seventh manganese alloy furnaces -- furnace, sorry. And so that brings, with the exception of the 2 silicon metal furnaces, that's only 1 ferrosilicon and 1 manganese alloy furnace unutilized. And so if you look at the chart on the bottom left corner, I think for Q1 itself, production has more or less gone according to plan. We are on track to achieve what we guided for the full year. And I think if we look at the second bullet point in smelting, there's some upside to production numbers as workers return. And so we've actually accelerated that by redeploying the workforce towards the seventh manganese alloy furnace. So in terms of regular maintenance and everything else, that's already all sort of fully priced in, if you will, to guidance numbers. So we don't expect any surprises in terms of full year production volumes. Okay. And so then this, what you see on screen, remains the road map. And I think nothing has changed really in terms of what we're looking at in 2023 and beyond. In terms of the actual tonnage contribution, metallic silicon was never going to be a sizable contributor in terms of just raw tonnages, obviously, was going to be a contributor in terms of earnings. But as far as the commissioning and our production plan is concerned, I think it's not actually going to change things significantly for 2023. So as I mentioned in the previous slide, for manganese annoy furnaces, what you see is 5 to 6 furnaces for 2023, but this may average to a higher number by the end of the year. And I think the plan is still, to the extent possible, bring all furnaces to full production with all 16 furnaces running end of this year, if not end of this year, then early next year. For our final expansion project, the 2 new 33 MB furnaces, that is still on track, to be done within the next 2 years. Okay. So I'd just like to take the time to briefly talk through markets. I know that ferrosilicon and manganese alloys can be quite opaque for a lot of investors and shareholders and analysts. So I think the broad trend for this year, as I've said in the previous webinar, is -- the dominant theme is consolidation. And what that means is we have to reckon with the capacity that has been brought online, and that's obviously not ourselves because we've been around for a while now, but a lot of new capacity has been either previously idle, previously producing something else that has been brought online, and these excess capacities have to shed and so I think we're in that phase of the market cycle. And when you look at sort of the recent price trends, I think in Q1, we said that ferrosilicon has been sort of fairly flat and constant, a bit atypical actually. And looking at the data has actually stayed at between 1,600 to 1,700 for 7 months. So that's where we felt was a sort of near-term flow. Since I think, OE or mid-Q1, things have worsened, taken a turn for the worse. If you look at Chinese ferrosilicon production, the gray shaded area, that's actually come down, and we expect that to come down very quickly. Chinese exports have reduced very, very dramatically just given the absence of demand in the ex China market. And as a result, we've actually seen prices itch down to between 1,500 to 1,600. And so that's when you know the sort of active destocking phase of the cycle is in play. So I think that's sort of generally driven by what's happened in China. I think earlier on, a lot of us were counting on some kind of stimulus in China, but that has not come to pass. And instead, we're seeing this excess -- this buildup of inventory, sorry, of booked steel products and alloys in China, and that's slowing on 2 global markets. One silver lining, I think, to the entire situation is, if you recall, second largest export out to China is Russia. And as a result of a lot of domestic issues, some of the various liquid producers have actually converted ferrosilicon furnaces -- their ferrosilicon furnaces to the production of the alloys -- nonsilicon and nonmagnese alloys. And so I think that's something pretty interesting. And we think we'll have -- eventually have a drag on global markets except for ferrosilicon. Moving on to manganese alloys. I think the picture is more or less the same. We are in a sort of destocking and competition phase in the cycle. In the last webinar, I think we talked about there being a sort of recovery in silicon manganese prices. And so while that has happened, it has come down very quickly with oil prices increasing and so what actually happened was there was a brief compression in margins. So if you look at the chart and just as a refresher, the blue line is the price of manganese alloys and the red line is the prices manganese ore. And so you will see that there's a brief compression due to oil prices rising, and this was due to a lot of issues for high-grade ore miners earlier this year, and this had since eased. So I think we will expect oil prices to come down in a more significant way sort of further opening up those margins from manganese alloys smelting. But otherwise, I think the sort of macro picture remains the same. So with that, I think manganese alloy prices have basically more or less returned to where they were in Q4 '22, and we expect that to go sideways for a while now. Again, one silver lining is the change in power prices, I think, from India, which is now today the world's largest exporting country of manganese alloys. And we have not fully confirmed this, but power prices have increased by between $0.02 to $0.03 for large groups of the country's producers. And so the actual impact on prices, obviously, it will take time to sort of trickle through. And whether the government sort of reverses its stand on the policy obviously remains to be seen as well. But that's one silver lining. Okay. And so that brings me to the end of a very, very quick update on Q1. And so I think just to remind our investors and shareholders, again, for us, OM Holdings is a very, very simple story. I think today, we are converting a long-term power contract, very, very competitively priced. It's a product that we know a lot about, and maximizing sort of earnings from that by doing a lot of stuff, a lot of optimization around raw materials, a lot of optimization around how we're selling the product. At the end of the day, we firmly believe that what we're doing is to steelmaking in a region of and doing that with hydropower has benefits that are not current, but hopefully, in the next 2 to 3 years, having a pricing carbon and having a price on carbon footprint will allow us to realize that benefit. But in the meantime, a lot of what we're doing has sort of revolved around creating our carbon footprint, taking part of the life cycle analysis, being able to quantify per tonne of product, what its full life cycle carbon footprint looks like. And this can only benefit customers who are looking to decarbonize and eventually put a number for their own products in terms of the products. So I won't talk through all these points. I think a lot of shareholders are familiar with the story and just move on to Q&A.

Thank you, Adrian. That was a great update. We have had a few questions, so we'll jump straight into it. Our first question, has any thought been given to ferrosilicon requirements once Latrobe Magnesium builds a magnesium plant in Sarawak? And will OM Holdings consider more ferrosilicon furnaces rather than more manganese furnaces?

Yes, yes. So okay. So that's a very recent development. So for people on the call who are not familiar with Latrobe Magnesium, the thesis behind Latrobe Magnesium from fly ash or from any sort of waste that has sort of magnesium levels higher than dolomite. And the key production process behind magnesium is the [indiscernible] process where you take 1 tonne of -- the reduction from magnesium is ferrosilicon basically. And it consumes 1 tonne of ferrosilicon to produce 1 tonne magnesium. And so this has been a dominant factor in China. So when you're looking at Chinese numbers, when you are looking at Chinese consumption of ferrosilicon, you have to subtract the magnesium numbers, but it's not generally the case for ferrosilicon. For Latrobe, we have announced the plans to build a 100,000 tonne -- 110,000, I think, plan in plan in Sarawak. So that -- if you look at the numbers, that consumes 100% -- almost 100% of what we're producing right now, although some sort of modifications will have to be made in terms of product sizing and so on for that process. And I think the answer is yes. If they really went through with the plan on contract shop in Sarawak, that's something that we cannot ignore. And that's something that will have a lot of synergies with what we're doing, especially with how we're positioning ourselves as a non-Chinese source of ferrosilicon for the world and likewise for Latrobe being a non-Chinese source of magnesium, they would like to have a non-Chinese source of ferrosilicon. So I think that is absolutely something that we will have to take into consideration and potentially then go backwards and quantify some of the manganese alloy furnaces towards ferrosilicon if the economics work out. And that obviously has to be seen in conjunction with the 2 new manganese alloy furnaces coming in. So the product mix, I think, will have to be rebalanced. And I think we probably will have the next 2 years to sort of sort that out and decide on what most optimal cost of action should be.

Thanks, Adrian. You have covered the rectification of the silicon metal furnace in the early part of your presentation. However, we have received some questions associated with this. The first of those questions are, what sort of costs are likely to be associated with the rectification of metal furnace where production has been suspended?

Right. Yes. So I think maybe I'll just talk briefly about where rectification could go into. So it could go into the way the furnace is wired, that one. it could go into the way -- very likely we will go into the way gas is currently being removed from the furnace as well as the cooling system that's associated with that. What is not clear actually is the share of cost that the company will be responsible for. And that's actually the slide we have put a stop to commissioning at this point because at the end of the day, technically, we have achieved a 553 product, and that is qualifying product that can be sold. But with the low yields and with what's happening with the de-dusting system, we thought it wise to sort of put an end to production. If we had completed commissioning, if we had technically accepted the furnaces as functioning, then 100% of that cost will be on the company to come, but that is not the case today. So I think right now, what we're waiting for is expert opinion on what exactly has happened, document that down and then proceed to claim for rectification. So I think we will release that information and share that with investors as and when that is available. But at this point, our understanding is that would be minimal for the company.

Thanks, Adrian. Our second question in relation to the furnace. Have the issues with the ferrosilicon metal furnace affected the enthusiasm for entering this market? And will the company be proceeding with the investment to convert a second furnace to silicon metal production?

Yes. So it has not dampened the enthusiasm. I think, look, right, sort of major theme for silicon metal. One, renewable energy goes into solar sector; two, all the sort of parts for the solar panel making industry. Bits and pieces are found in Sarawak. Malaysia is surprisingly one of the world's largest assembly plants for solar panels, and there's a polysilicon maker just 5 minutes away from a dose. Three, earnings potential way above ferrosilicon. And four, sort of political -- geopolitical risks. So I think those themes remain relevant, and the company's objective is still to produce silicon metal. As for the second silicon metal furnace, we have converted the furnace. So there's nothing actually left to be done for that furnace. It's really just to push a button and go. So from that point of view, all costs have been incurred. And so there isn't actually anything to do to the extent that we don't need to sort of do any rectification. But the second, if rectification works are needed for the de-dusting system, then we do both at the same time. And so I think looking back when we decided to commission these furnaces sort of in series and not in parallel, that turned out to be the right decision because we knew how difficult silicon metal production would be not in terms of it being difficult once you stabilize, but it is tricky until you get to the stable point. So yes, I hope that answers the question.

Thanks, Adrian. This appears to be our last question for today. How would you describe labor availability at Sarawak? Are labor issues currently affecting operational productivity?

Yes. So as I was sharing earlier, besides the 2 silicon metal furnaces, there's 1 idle ferrosilicon and 1 idle manganese alloy furnace. And so I think we are now in a situation where there aren't any sort of hard rules around restriction of foreign labor. And so we are progressively hiring more as well as training more local staff through the university collaboration that we shared last year. So that's all ongoing. I think it's no longer really a bottleneck in the sense that -- in a hard sense, right? It's just competing with market forces at this point because there are a lot of -- there are a lot of steel mills. It's a happy problem to have. There are a lot of steel mills commissioning production in Southeast Asia and sort of offshoring production from China. And so then that actually becomes a competition book for the same pool of workers. But I think we are optimistic that we will be able to find the workers to sort of bring everything to full production this year.

Thank you, Adrian. And that appears to cover the majority of our questions today. If you do have any further questions, please forward them to [email protected]. We will make a recording of this webinar available via OM Holdings and Corporate Storytime social media accounts in the coming days. This does conclude our webinar, and thanks to everyone for attending, and thank you, Adrian, and your OM Holdings team for the update. Thanks, Adrian.

Thanks, everyone. Thanks, Nicola. Thank you.