OM Holdings Limited (OMH) Earnings Call Transcript & Summary

A very good morning, everyone. Thank you for attending OM Holdings webinar this morning. My name is Jenny from the IR Department of OM Holdings, and together with me is [ Richie ] and Adrian and we will be hosting a webinar together. OM Holdings is a magnesium silicon smelting company with vertical exposure in mining and trading and we have just released our June 2024 quarterly production and market update on Tuesday. I am delighted to have OMS Managing Director, Adrian Low, with me today. He will run through the key points followed by a Q&A session. [Operator Instructions] Without any further ado, I'm pleased to hand over to Adrian for the presentation. Adrian, over to you.

Thanks, Jenny. Thank you, everyone, for dialing in to our second quarter presentation for 2024. So I think we'll just jump straight into the details, but the last slide on manganese pricing is perhaps the most interesting for this particular webinar. So in the last 3 months, OM Holdings was listed or ranked in the inaugural Fortune 500 Southeast Asia list that was just launched a few months ago. And I think this is really a great validation to the strategy of pivoting into non-China smelting which is what we're doing today. So I just had this conversation with some colleagues a couple of days ago. And really what we're doing today, the assets that we have, the trade flows that we're doing are vastly different from how the company was 10 years ago, right? We have different assets, we've cleaned up the portfolio of production assets. And although we're doing the same thing with the same products, we're doing that in different places with different strengths and different competencies. So that's a great validation for us. In the last quarter, we also repaid project finance lenders total of $12.3 million on schedule. And so you'll see this -- while you've seen this for a couple of quarters now and you see for the next couple of quarters as well. And we also spoke about starting the commissioning of the silicon metal furnace or the preparation for that last quarter. So that has begun exactly a month ago. And I think we expect that this will take a few months, but the preliminary assessment of output efficiencies and so on, look promising. I think everything is going as schedule and as per plan. Having said that, I think the decision to do a full commercial ramp-up with 2 silicon metal furnaces. They're still contingent on a strategic review and really that will take into consideration market prices, selling prices, raw material prices and our view of demand and where we might place the material. And ultimately, I think, because the furnace has been designed to produce silicon metal and ferrosilicon, we have to compare the unit efficiency of running a furnace on silicon metal per day versus ferrosilicon per day. And given the sort of different -- differing power intensities that calculation and planning has to be very robust. Having said that, I think, besides the silicon metal furnace commissioning, everything else is running as phenomenal. I think all the furnaces are in operation as they were at the start of -- sorry, at the end of Q1. And you will see that full year guidance for ferrosilicon and manganese alloys hasn't changed. I think if you look at these numbers, you will notice that we are aiming to go for the highest production volume in the last 5 years. And obviously, that comes with a lot of benefits in terms of efficiencies as well as cost reduction overall. On the exploration and mining front, really, I think, we are now focusing on restarting the UFP or the TRP as some of the older shareholders might know it. And to remind everyone, again, this is processing all the tailings that we have left at Bootu Creek and then sort of recycling that into a useful product that can be smelted or can be sold. So that's in terms of operational production, again sort of key updates. I'll just spend the next 2 slides talking through the markets and perhaps more time on the last one. But starting with ferrosilicon, I think, prices have been fairly range-bound. And as we said a few months ago, that's really due to the floor -- price floor kind of set in place given the Chinese cost of production. I think you can notice it from the chart as well, in spite of a very, very stable -- relatively stable price with the blue line, you see these very, very violent -- almost violent sort of zigzag patterns in Chinese ferrosilicon production and oscillating plus or minus 50,000 to 70,000 tonnes per month. And so that's really a response to their cost. And I think where we are today, again, compared to where we were pre-COVID is very, very different because our cost structure has not really changed materially pre and post-COVID. Obviously, in the years '21, '22 and maybe first half of '23, that cost might have been higher because of higher raw material prices. But today, I think, we're more or less in the same environment as were pre-COVID. But obviously, that floor in prices has been raised much higher. In the last couple of weeks as well, I think, ferrosilicon prices have started inching upwards due to a Chinese Customs crackdown on tax evasion. So as I understand it, this is a fairly robust process. And I think the authorities are actually trying to reach back and claw back to transgressions made before this activity, before this crackdown started. So off the back of that, the amount of supply, the amount of offers in the market has started to dry up. And just in the last 2 to 3 weeks' time, I think, we've seen prices flip from below $1,300 to above $1,500. So that's all kind of near-term action. I think further out, really, the elephant in the room is the absence of Russian ferrosilicon, especially in this part of the world, I think the nationalization of that asset. The key ferrosilicon production asset in Russia will and must eventually capitalize some kind of price recovery because the reduction in volume from those exports is fairly substantial in this part of the world. So that's it for ferrosilicon. I'll just move on now to the manganese space. And I think this is where we've seen a lot of volatility, a lot of uncertainty in the last couple of months. And shareholders and analysts will note, this all started around March when South32 announced force majeure to Australian operations. and that led to the high-grade benchmark price really surging all the way, I think, close to $9. So I think we are more or less at the 10-year high, not so dissimilar from the end of 2016. What's different this time compared to the last is that if you look at the shaded yellow area -- orange, yellow area in the background, that's the amount of manganese in stock in China? And so the trigger point for December 2016 was really absence of inventory in China. And so we saw a rise in manganese prices across the board, right, from low grade, medium grade, high iron, you name it, all the way through to high grade, which reached $9. Today, it's actually a fairly different scenario where this price increase has really led to -- was really caused by, sorry, a single mine disruption. And so all the shortage has only occurred on high-grade ores. And so when you look at the chart, what we're not showing is all the other prices of brands of manganese ore and notably what some people call the medium grade or what we like to call the semicarbonate South African ore price has actually diverged. And so historically, when you look at the chart, we've never put the semicarbonate price on this chart because it's historically being at a spread of between $0.40 to say, $0.60. But today, the high-grade ore price is almost double that of the semicarbonate price. And so -- what does that mean? I think a lot of alloy producers, and I'm sure our shareholders are also wondering what the path here on out looks like. And I think just looking at the spread in pricing offers a glimpse at what the solution might be. So we're always trying to optimize our costs and balance what we're bringing into plant because the alchemy of smelting, if you will, is such that as long as you present the right elements through the furnace, you'll be able to make the product. So we're not wedded to any sort of formula where we have to use, say, 40% high-grade ore, but that's something that's being dynamically changed and optimized sort of on a monthly basis. And so I think that's what we're trying to do, faced with very, very high and elevated high-grade ore prices. And obviously, the reason why I'm saying all of this is when you look at the blue line, the selling price of silicon manganese, the benchmark alloy, if you will, for this part of the world that tracked the increase in manganese ore for the better part of a month to say, 5 to 6 weeks before really sharply diverging. And so I think this is a situation where all the shortages on the mine site, the bottleneck is there and there is no shortage of smelting capacity, right? This is very, very different from what happened in 2021, where there was a bottleneck on smelting capacity because of power limitation, coal prices and so on. But there was no bottleneck in mining. And so the blue line remained above the red line for a substantial period of time. That being said, I'd also like to share -- offer this to shareholders that these prices must converge as they will, that as a sort of a mean reverting nature to the relationship between ore and alloy price. Because ultimately, you need the ore to produce the alloy and that's just how this market functions. And so I think looking at the blip in alloy prices, most of that -- most of those sales would have been booked in June, July, I think a bit into August. And looking at actual pricing, I think, we report that the Indices S&P Platts has printed 1165 at the end of June. And I think today, it's probably closer to the high 900s. So not so far away from where we started before all of this happened, just slightly better. And so I think, all in all, while the 6 months 2024 average is still minus 10% compared to '23, we are seeing that trend reverse slowly and gradually. So with that, I will end the presentation and just leave time for questions. Thank you.

Thank you, Adrian, for the presentation. We will now move on to the Q&A session. The first question relates to profit projection. Is that on target for this year?

So I think as a policy, the company doesn't share or provide any sort of earnings guidance, but I would just point to a few factors. So first of all, as I shared earlier, I think, this year will be the highest volume that we will look to achieve in the last 5 years. And so that will bring down costs and also increase earnings. Secondly, I think, if you look at prices, if you look at the volatility and how we've been trying to manage that. I think there are opportunities there that we have managed to seize in a couple of months. Obviously, that's not going to be all in the first half or the second half but sort of spread out across, say, June, July, August. And so I think there are bright spots there, right? So overall, 2024 from just the overall market environment, is looking a lot better than '23. Because in 2023, we saw a net destocking of all products, both in the silicon space and in the manganese space, although we also recorded a couple of one-off gains in 2023. So perhaps I'll answer it this way.

Right. Thank you, Adrian. The second question and also actually the last question. What are OMH doing to raise the profile of the business. Trading volume is minimal and the dual listing that was supposed to bring value to market cap has not had the desired effect?

Yes. That's a recurring question. Thanks, Jenny. And thanks whoever -- who's asked the question. Look, I think the dual listing, secondary listing was supposed to increase share liquidity and increase interest. And I think from all the sort of investor engagements and analyst engagement sessions we've done. We have seen those interests come in, right? I think the issue perhaps is that it's in a sense that you are in a situation where liquidity is a hurdle for liquidity, if you can put it that way. And as always, what we've been continuing to do is to reach out to more investors, reach out to more analysts and really educate people about smelting, about manganese, about silicon because this is a very niche industry. I think in this part of the world, I think, we're probably the only listed company that's operating in this space. So I think it will take time. And so thank you for bearing with us. And we'll continue to work on unlocking buckets of liquidity and we are confident that once that starts, that will trigger a virtuous cycle instead of the situation we are stuck in to date. I think sort of silver lining to the situation, though, is that we have a lot of shareholders who have been very loyal, and I think, have stuck around for, say, the last 5 to 10 years and in our engagement sessions as and when we are in places where we meet them. We're always very comforted by the fact that they really see value in the company and they see the cash generating potential of the company. And I think if you look at how we've been managing our debt situation and how we've pared down debt, even with the furnace conversion projects, CapEx spend, even with the acquisition of the minority interest from Cahya Mata Sarawak. We have been managing all of that. So all of that is cash generation and that must go somewhere eventually. So yes, I hope that's a satisfactory answer for the question.

Thank you, Adrian. Yes, I think you wrapped it all up very well. Actually, that appears to cover all the questions from our audience today. But 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 LinkedIn page in the coming days. And this concludes our webinar for today. Thank you, everyone, for attending, and thank you, Adrian, for the comprehensive update.

Thank you. Thanks, everyone.