Malaysia Smelting Corporation

Malaysia Smelting Corporation (MSC, 5916)

Background
Founded in 1887. Currently Malaysia Smelting Corporation is one of the world’s leading integrated producers of tin metal and tin related products. In 2009, MSC produced about 44 thousand tonnes of tin metal, position as the world’s third largest supplier of tin metal.

MSC operates in three main geographical areas:

A. Malaysia:

Tin smelting facility in Butterworth is a highly efficient smelting plant with production capacity of approximately 35 thousand tonnes of refined tin a year. Currently it is running at 70% capacity and is the main cash cow for the group.

The group also expanded into the downstream business through its 40% owned Redring Solder (M) S/B, whose principal activities are the manufacture and sales of tin solder product for EE industries.

MSC acquired Rahman Hydraulic Tin Sdn Bhd in 2004, the largest operating open-pit tin mine in Malaysia. However, it mine production is only 2 tonnes a year in 2009. Recently, Perak’s Mentri Besar Datuk Seri Dr. Zambry said that a study was underway to determine the amount of tin deposits in the state. The tin mining industry may make a comeback in Perak in view of the escalating price and low global production.

B. Indonesia:

The 75% owned PT Koba Tin in Indonesia, operates onshore mining with and area of 41,680 hectares and has its own smelter with a production capacity of 25 thousand tonnes of refined tin a year. The group’s Indonesian production, used to be the group’s second largest cash cow, reduced sharply from 21 thousand tonnes in 2006 to 7 thousand tonnes in 2009 as a result of the closure of small scale mining operations, some related to government shutdown of possibly illegal production sites.

The 40% owned PT Tenaga Anugerah, operates offshore tin mining around Banka Island. The group expects to generate positive results from these operations in 2010.

C. Others:

MSC diversified into other commodity business included 77% stake in the Australia Oriental Mineral (AOM) which principal activities are tin mining areas exploration and development; 30% stake in the Rapu-rapu polymetalic mine (KM Resources) in the Philippines which produces copper, zinc, gold and silver; 18.2% stake in Asian Mineral Resources (AMR) which offer massive sulphide nickel in Vietnam to be developed; 22% stake in BCD Resources (BCD) which is a mid tier gold producer operating in Australia;

Valuation

MSC was adversely affected by the diversification strategy in 2007 intended to transform the group from a single commodity business focused on tin to a organisation in metals and mineral resources sector. The disastrous for last two years mainly hefty provision and write-downs, included RM35 million from Asian Mineral Resources, RM28 million from Australia Oriental Mineral, RM41 million from BCD Resources and RM7 million relates to Guilin in China.

In 2009, MSC group decided to reposition itself back to focus on its original core business of tin and plan to divest its non-tin investments to be implemented in 2010 and 2011. Therefore, a simplex valuation is to calculate its intrinsic value via its tin-related business and its non-tin business.



With MSC’s core expertise of over a century of smelting excellence, it is quite conservative to forecast the group to produce 40,000 tonnes of refined tin per year. LME tin prince for first seven month in 2010 is traded in a range between USD16k to USD21k per tonnes, at average tin price of USD18k per tonnes, MSC’s tin-related business is value at RM570 million.



In July 2010, MSC has entered into an agreement to sell a 10.67% stake in BCD, valuing at RM14.63 million. Group chief executive officer Datuk Seri Dr Mohd Ajib Anuar said the group was looking at divesting, among others, its gold business in Australia, nickel in Vietnam, coal in Indonesia as well as copper and zinc operations in the Philippines. On an extremely conservative approach, MSC’s non-tin related investment is value at RM45 million.



Combining MSC’s tin-related business and non-tin investment, MSC is value at RM615 million, or RM8.19 per share. Intrinsic value of MSC is significantly undervalue to its current share price of RM3.90. Margin of safety is about 48%.