This article first appeared in The Edge Malaysia Weekly, on December 20, 2021 - December 26, 2021.

 

MINING and ferroalloy smelting group OM Holdings Ltd (OMH) has benefited from a surge in global ferrosilicon (FeSi) prices this year. But prices are likely to have peaked, its executive chairman and CEO Low Ngee Tong says, and the group is counting on stable rather than sudden spikes in prices to carry it forward.

 

Prices have surged this year mainly because of a global power crisis, which added further pressure on current supply constraints for ferroalloys.

 

FeSi prices, which hit an unprecedented high of US$4,150 a tonne at end-September, have since fallen, says Low, citing data from price reporting agency S&P Global Platts.

 

Prices were trading in the range of US$2,000 to US$3,000 a tonne in November, and have since stabilised at the lower end of that range.

 

“It’s worth noting that this new-found equilibrium price is still higher than the last recorded historical high (between 2017 and 2018). It is, therefore, safe to say that prices have peaked, but we are hopeful that the new normal will further strengthen the fundamentals of smelting in Sarawak,” Low tells The Edge in an interview.

 

OMH is dual-listed on the Australian Securities Exchange (ASX) and Bursa Malaysia. It made its debut on the Main Market of Bursa on June 22.

 

Its share price jumped 79.1% over a span of three weeks from Sept 21 — the period during which FeSi prices were steadily rising to their record high — to reach RM3.94 on Oct 11. The stock has since moved downward as FeSi prices stabilised. It closed at RM2.64 last Thursday, giving it a market capitalisation of RM1.95 billion.

 

“People were very focused on [us] when [FeSi] prices were running high. It’s important for them to know that the value of the company is not in the short-term price spike [but] in stable prices over the long run and a healthy volume,” says Adrian Low, general manager of OM Materials (S) Pte Ltd. Adrian is Low’s son.  

 

OMH has a 75% stake in OM Materials, with the remaining 25% stake held by its joint venture partner Cahya Mata Sarawak Bhd.

 

The smelter plant, at the Samalaju Industrial Park in Bintulu, currently operates 12 out of 16 furnaces — six of which are FeSi furnaces and six, silicomanganese (SiMn). FeSi is used to deoxidise molten steel and has a particular application in electrical steels.

 

Low says OMH expects a drop in production volumes this year, owing to the temporary five-week suspension of the plant since end-May brought about by the Covid-19 pandemic, coupled with the fact that the group is now running on 12 furnaces compared with 16 at the start of 2020.

 

For the first nine months of this year, production volumes for FeSi fell 29% year-on-year to 94,925 tonnes whereas, for manganese alloys, they were down 7% y-o-y to 154,134 tonnes.

 

“The drop in production volume, however, should not affect earnings for the full financial year [ending Dec 31, 2021],” says Low, pointing out that the reduced output would be mitigated by the lofty prices this year.

 

Foreign labour woes

 

A shortage of foreign labour could also weigh on production next year. “Owing to the ongoing manpower constraints and challenges in getting foreign skilled workers to our plant in Sarawak, we expect that our production volumes may decrease early next year before gradually ramping up back to 12 furnaces towards the second half of 2022 — subject, of course, to constraints that the company is unable to control (that is, the ability to employ foreign skilled labour to return the plant to full production),” says Low.

 

“We also have plans to carry out major maintenance in 2022 for furnaces that have been due for refractory re-lining, which have been deferred because of constraints on skilled foreign contractors and manpower.”

 

Asked whether he expects better earnings prospects for OMH next year, Low says: “If the new equilibrium price levels of FeSi and SiMn remain stable into 2022, we would be happy with earnings prospects next year.”

 

The group has two distinct expansion plans for the Sarawak plant that will be carried out progressively from next year. The first is a venture into silicon metal, which would represent a diversification of its product offerings.

 

“This project involves converting two currently idled FeSi furnaces for the production of silicon metal. Silicon metal, which is a higher value-added product of strategic interest to many industries, has a purity level of 98% to 99% and is classified for use in different industries, depending on the level of contaminants,” Low says.

 

“With a planned capital expenditure (capex) of about A$30 million (RM93 million), the conversion will enable us to diversify our end-customer base away from the steelmaking industry, and into sectors such as aluminium, chemicals (for the production of silicones) and, ultimately, into the renewable energy industry (production of solar panels). The aim is to produce the highest grade we possibly can.”

 

OMH also plans to expand its manganese alloy production capacity by building two new 33MVA (mega-volt ampere) furnaces, with a capex of about A$120 million. This will help yield an additional 150,000 tonnes of SiMn — the most common type of manganese alloy — a year, he says.

 

The group’s current manganese alloy design capacity stands at 250,000 to 300,000 tonnes a year.

 

Last year, OMH’s net profit fell 90% y-o-y to A$5.4 million even as revenue fell 24% to A$784.6 million. Of the revenue, A$529.1 million was contributed by the Malaysian operations.

 

“We foresee that the contributions from Malaysia for the group will continue to increase as mining activities [in Australia] cease this year, and with the expansion plans for our Sarawak smelter plant,” Low says.

 

UOB Kay Hian Research, which tracks the stock, notes that despite disruption from the movement restrictions as a result of the pandemic, OMH reported strong core earnings of RM80 million in 1HFY2021, an increase of 7.6% y-o-y. It has a “buy” call and a target price of RM4.21 on the stock.

 

“As the world’s lowest-cost quartile manganese smelter, OMH is set to achieve strong three-year earnings compound annual growth rate of 192% for 2020-2023 as it benefits from the strong ferroalloy prices, low-cost hydropower and production recovery,” it said in an Oct 27 report.