OM Holdings Limited (OMH) Earnings Call Transcript & Summary

Good morning everyone, and thank you for attending today's OM Holdings Investor Webinar. My name is Nicola Gosatti of Investor Relations Consultancy, Corporate Storytime. OM Holdings Limited is a vertically integrated low-cost manganese ore and ferroalloys producer. And I'm delighted to have OM Holding's Managing Director, Adrian Low with me again today to run through an investor presentation following the release of OM's first half of 2023 production and market update. [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. So thank you, everyone, for dialing in this morning for our half year results. I'm just going to jump straight into the numbers, talk through -- so the ratios -- with a quick market update, and I think we'll leave more time for Q&A and understand from Nicola that there have been a couple of questions that have already been lodged. So in the first half of 2023, I think it's no surprise that revenue has declined largely in line with the market. So with weekly prices provided on website for investors and shareholders who aren't aware, you can find it under the IR section. You can actually see ferrosilicon and silicomanganese prices move almost real time. And so what you're seeing now on screen, the numbers that we delivered in the first half of '23 are more or less in line with that price decline. So in reality, I think the volumes that we created or produced and so haven't really changed all that much. With that decline in revenue, you see sort of a commensurate decrease in EBITDA as well as profit after tax. So EBITDA more or less half in the first half of '23. And profit after tax declined as well. I'll talk more about this in the next couple of slides and sort of try to break down the binding structure. But at this point, I think what's of note, I guess, to shareholders as well is that we actually consumed cash flow for operations in the first half of '23. And so this obviously was a bit different from prior years. Having said that, I think if you sort of strip that down and just look at operating profit, without working capital, can you just sort of remove all the movement in inventory, then you'll see that, that figure is actually more or less not too dissimilar from EBITDA. I think it's just above USD 55 million generated at the operating profit line. So with all this, we generated USD 0.0259 per share. And I think I will just jump straight into the market because I think you have to sort of see those numbers in the context of what's happening in the broader market. So prices declined continuously, I think, for almost 2 years from the peak. So the peak again, for people who have been with us for a while, was in September, October 2021. And from that point in time, we always knew it was going to last and with such a huge run-up in prices, that's caused, obviously, a lot of -- sort of flushed a lot of cash into the system, one; and two, created an incentive to increase production. And I think we've seen both these sort of play out over the last 3 years. And so I think we are at some kind of inflection point. I know that I've said that at some point of time in the past, but [Technical Difficulty] in the last couple of weeks. And I think there are a few things that worth paying attention to. So 1 of sort of elements in the room would be what's happening in China. China steel production to be able to stay sector in China and what the government is trying to do around that. So this is very pertinent for ferrosilicon. And secondly, the power situation in India because that directly impacts the sort of cost structure of our competitors for silicomanganese. And so I think it's also fair remembering that at this point in time, as prices come down, we are constantly consuming raw materials that were purchased earlier and booking in lower revenues. So that decline in selling prices will not be matched by sort of commensurate decline in cost. And this sort of reverses itself or sort of the situations have changes where prices are stable, albeit at a lower level, where there aren't any changes due to time, right? We are sort of literally consuming raw material and selling the output at sort of constant levels. So I think that's something that I think is worth pointing out, and we'll probably see it play out, if not in the second half of this year, then more towards fourth quarter of this year. So this lag effect, I think, is something that we like to emphasize and that I mentioned every now and then to shareholders and analysts. So just as an update, there's a lot of text and information at the bottom half of the slide. I'm not going to talk through the numbers -- sorry, not going to talk through text. But instead, I'll just give a brief update for Q2 first half production for people who missed quarterly. And so I think this year, at the start of the year, we guided towards something like 350,000 tonnes of production. And so 2 things have changed since then. We have been able to bring more of this back on board, #1. And secondly, with the sort of commissioning delay in the metallic silicon furnaces, we have actually converted that to produce ferrosilicon. So just on a tonne basis, first looking at, it's more productive, if you will. And so we have been able to push those numbers now up to, I think, a maximum of 400,000 tonnes. So that's just above a 10% increase on the upper range of our guidance. So the numbers are all on screen. I think I wouldn't talk through them. But it's important that in a low point -- price environment -- sorry, in a low price environment that we're able to sort of squeeze margins and lower our overheads per tonne produced. And so I think what we do - we've done in the first half and we were actually actively managing now for the second half, we are sort of working towards this objective. So I'm just going to talk very briefly through how sort of revenue has changed margins and as well as the EBITDA structure. So again, like I mentioned in the first slide, a lot of the decline in revenue is purely due to prices. So in fact, if you look at the tonnage traded, I think we're looking at a 1% decrease between first half 2022 and first half '23. And so the earnings compression, again, sort of going back to the point I was making earlier is largely due to costs sort of not falling as quickly as selling prices. But just given the sort of cyclical nature of just the markets we're in or even the broader commodity markets, input prices and output prices are highly correlated. And so I think this is something that we'll just have to watch through the system. So if you look at the EBITDA structure, I think nothing has really changed between the first half and the second half besides the fact that it's actually lower. But smelting still accounts for the vast majority of what we make, I think with some contribution from obviously trading associates and associates here would be [indiscernible]. And I think it's probably worth nothing that the 37% semi-carbonate ore, the South African origin has been under pressure for the better part of this year. And so I think that's something that has to digest up -- sort of digest itself, sorry, through time, right? And this is largely done through the Chinese market. So I think -- the last thing I'd just like to sort of talk about in the slide is, although it looks like a huge decline in the first half of '22 to first half of '23. I think what's probably better sort of frame of reference would be what we did in the second half of 2022. And this is because with the highlights for the full year '22, in reality, a lot of that, more than 70% of that was actually made in the first half of '22. So if you look at a 2H '22 versus 1H '23 comparison, it's actually just a marginal decline. So I think what we're doing -- what we've achieved in the first half is more or less reflecting sort of 2 points. One is that the market has just been in a continuous decline. And two, we've sort of managed to stay resilient, if you will, by making a lot of adjustments to production, to the product type and to how we're managing our raw material. Obviously, during the COVID period, and FY '22 towards the second half, we were still digesting material that raw material that we had purchased in the first half of '22. And likewise, first half of '23, we have been digesting raw material purchased in the second half of '22. And so a lot of that higher inventory cost has been consumed now. And so we look forward to seeing how things will go in the second half of this year. So a short point to note, I think this is the first time in a few years that we've seen an uptick in total debt and the gearing ratio. So I think this is something that we should probably explain to shareholders and investors. And -- so what has happened between '22 and '23 is, we have first of all, continued paying down the project finance debt. We repaid $18.6 million in the first half of this year. So that's a sort of long-term PI facility. At the same time, because of a very significant acquisition we made, at the end of last year, we have had to sort of top up cash balances through the utilization of sort of short-term revolving credit facilities. And so this is something that's ongoing. It's not a long-term debt has to be repaid regularly at fixed intervals through the year and that -- the utilization of that has actually brought up gearing ratios to 0.71 from the 0.6 levels in the last 2 years. So I think when you look at sort of cash flow changes in the bottom left hand corner, you will see more or less what I've just described. And so I think that brings us to the end of the presentation. I'll leave you with a company snapshot. You can see all the ratios updated based on trading 12 months with our latest first half results. And I think it's again worth remembering that the commodity markets are very volatile and ferroalloy markets are volatile. I think it's incredible. It's incredibly important to be able to sort of withstand these cycles. And so shareholders that have been with us, I think, for more than say, the last 5, 6 years, who have seen that what we're doing right now, given market conditions relative to historical performance is actually a lot better. And I think that's due to 2 points. One, I think we are a lot more familiar with managing inventory and managing our product mix in a very sort of almost real-time fashion. And we're much more in sync with the Southeast Asian markets that has grown tremendously over the last 5 years. 5 years ago is not what it is today. Secondly, I think our power prices have become even more entrenched in the sense that structurally even -- just given how bad the Chinese economy is today, when you look at power prices in the north, when you look at power prices and the most competitive ferroalloy producing regions in China, they are still not cheaper and more competitive than what we're paying. This is vastly different from how it was a couple of years ago. So I think this resilience given where we are in the cycle, it actually speaks a lot to how the company has evolved and changed over the last 5 years, partly growth on our side and partly just due to changes in the Chinese power policy as well as the structural change in coal prices. So I think I'll end on that note. I just have this 1 last slide, sorry, on the development plan and road map. And again, this is sort of the same thing that we keep repeating to shareholders, and that is to look towards sort of what the final configuration of Sarawak is, and that is I'll put it between 600,000 to 700,000 tonnes. And beyond that, we start doing a lot of optimization around emissions, lowering our per tonne CO2 and working towards sort of optimizing costs from there. So that's the end of the presentation. Happy to take questions at this point.

Thank you, Adrian, for that presentation. We'll now move on to our Q&A section. Our first question, does OM have a dedicated department to liaise with institutional investors?

Yes. So the answer to that is yes. You can contact IR department Jenny and Ritchie at e-mail addresses and every single announcement, I think you look at the media releases there as well. Failing that, drop us a note on the website to the form, this drop-down form you can select IR and then yes, drop us an email.

Fantastic. Second question, has the dividend policy been impacted due to lower pretax profit for the first half of 2023.

Right. So the answer is no. I think when we -- when the Board approved the dividend policy and then when that was sort of delivered, it was designed to be robust. The idea is to have something in place that will pay something rain or shine. Obviously subject to cash flow. But I think that's something that will not change. So the dividend policy remains in place.

Our next question, the buyer for OMQ are planning -- are they planning to reopen the smelter and use the furnaces? .

Yes. So that's a very astute question. I think first, I'm receiving this one. So the answer is, we can't really share at this point what the plans are. I think maybe speaking to our own plans, 12 to 18 months ago, at some point in time, I have this question. And I think I said that there were a couple of options available. One, negotiate something with the government to the extent that's possible and try to reopen the furnace by some kind of reconfiguration, but basically tick the market risk. Two, use the land as is. It's prime real estate. It's 5 kilometers away from the port. And 3, keep the furnace, but sort of use that as sort of a sideline, if you will, that's sort of generating cash. But sort of focus on the logistics aspect of being next to the port. So I think these options are all open to the new buyer. We are in the process of doing a due diligence with them. And I think we expect that to sort of play out in the next 6 months or so. As far as I'm aware, they are from the industry. So I would hazard to guess that they would still like to do something that has to do with smelting. So that's probably how we can share at this point.

And the second part of that question was, why doesn't OM Holdings move to OMQ furnaces to Sarawak .

Yes. So, sorry, I'm just thinking where to start. Just a couple of years ago, there was this company Gulf Manganese that tried to move 2 furnaces from South Africa to Indonesia. And I think that wasn't very successful. And the thing is, at this point in time today, the cost structure of the furnace, I mean let's just sort of strip it down, right? It's the building itself, it's the civil engineering, that's actually a huge cost component to building a furnace, right? It has to be solid foundations able to take a lot of weight, built to a certain height. The furnaces itself, the shell, the sort of refractory bricks that line the shelf is to insulate the furnace from the hot metal inside and then sort of what goes above, right? So control systems, raw material feed, electrode suspension system. I think these are all sort of costs that aren't -- you can't easily say the cost just moving the shelf, right? And technology has changed so much that what -- so what we had -- what we have in Sarawak, the electrode suspension system plus the Electrical Engineering wiring, is actually the first, forget the name, but I think it's laterally compensated system in the world, that's running ferrosilicon. So if you just move what we have in OMQ and [ Qinzhou ] you're not going to get #1, you're not going to get a lot of the cost savings. And then #2, you're just going to sort of retrofit a very, very old technology, shove it into a new shelf. So I think that's actually not that helpful, just given things you're not going to save a lot. And you might even end up with sort of production parameters, efficiencies still lower than what we are already achieving in Sarawak. So yes, I hope that answers the question.

That was a good, thorough answer to the question. Our next question, does OM Holdings have a ESG policy? And can you make sustainable alloy metal .

Right. So okay. So that's -- there are 2 parts to that question. I think -- yes, we do have ESG policies, we have filed, I think, for the second year running our sustainability report or sustainability statement. So this year, I think we have managed to get assurance on CO2 emissions on scope 1 and scope 2. We are working towards Scope 3. It is sort of tough not to crack. There is a lot to do. But I think for our industry, Scope 3 is just minuscule compared to what we are maintaining for Scope 1 and Scope 2. A lot of the targets, a lot of the policies that we have in place are disclosed in the ESG sustainability statement. And we do have a slide and sort of a standard presentation deck on sort of the key targets for every year. So I think that the sort of key focus areas for us on the environmental side as well as the social side. I think being listed since 1998 on the governance side. I wouldn't say that's not our area of focus, but that's something that we've always done. On the environmental side, we're focusing on emissions into the air, on the ground, solid waste as well as what sort of pollution levels, right? And so these are all addressed in detail in the sustainability report. And on the social side, I think we're trying to do a lot of integration into Sarawak. When we invested in Sarawak, we had maybe 80% foreign workforce and that sort of flipped around to become maybe 20% to 30% foreign. And so that's something that upscaling, developing a sort of long pipeline for talent in the region is something we're focusing on. The second part of the question was on sustainable alloys. Was it Nicola? Yes. So on that front, I think it's difficult to sort of put a label to ferroalloys that we're producing, call it sustainable because that's not an area of focus for our customers at this point. A lot of them are asking for just standard Scope 1 and Scope 2 reporting, especially steel mills in the U.S. and Europe. And this is something that we'll have to change, I think, in the next 1 or 2 years with CBAM in Europe, I think we'll have to report -- sorry, our customers will have to report the CO2 footprint for the alloys very, very soon. And so I think until such time that sort of monetary value becomes attached to the carbon footprint of alloys, it's difficult to -- put it another way, it's not as meaningful to call alloy sustainable until there's some kind of monetary gain to be had from that. But otherwise, I think we are in a position to attach CO2 emissions to every tonne of product that we sell, actually, and that's something that we will work towards doing in the next 1 to 2 years' time.

Our next question is, what is the company's short- and medium-term outlook for the Chinese steel market, given OM Holdings products prices are determined by these market forces.

Right. So I would say ferrosilicon prices are very much affected by the Chinese steel industry and then sort of by extension, the real estate industry. So in the short term, it's surprisingly robust. I think if you look at sort of future prices for the last 5 to 7 days, there has been significant uptick in iron ore beaches as well as met coal, coking coal and metallurgical coke prices. And so that's all reflecting a lot of news that has been put out by the Chinese government. I think a lot of new laws or sort of policy is around real estate, around mortgages were released in the last 5 days. And I was just in China a couple of days ago and I sort of saw this sort of play out in real time. And I think there is real excitement on the ground. So that's probably the reason why we're seeing this short-term euphoria, I guess, in the commodity markets. That said, it hasn't really translated into alloy prices. And again, this speaks to the sort of disjoint between demand and supply, right? In the last 2 years or so, I think it is largely sort of demand-led price increase. And right now, what we're seeing is just a supply side-driven barriers to ferroalloy prices. And the reason for that is just there is no shortage of ferroalloy producers in China at this point in time. The idle capacity is there. It can be switched on. It just have a stock, they are not as competitive and find that. It's more meaningful to turn that off. But you can see that sort of reflected in future prices. For manganese alloys, I think it's not as relevant to look at China. We should probably look at countries like Ukraine, India as well as other sort of manganese alloy producing countries.

That does appear to cover the majority of the questions from our audience today. And if we have missed your question, we will attempt to answer it after our webinar. If you do have any further questions, please follow 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 concludes our webinar for today. So thanks, everyone, for attending. And thank you once again to the OM Holdings team and Adrian for the update. Thanks, Adrian.

Thank you. Thanks, everyone, for dialing in. Bye.