Episode 3: Malaysia Smelting Corporation Berhad (MSC) [PART 1]
Malaysia Smelting Corp (MSC) is the world's third-largest refined tin maker. It is currently dual listed on Bursa Malaysia and Singapore Exchange. MSC is 54.8% owned by Singapore oldest companies - The Straits Trading Co Ltd.Today we will be discussing MSC's future growth prospect. Note that there are not many analysis (on MSC) covered by any famous blogger or fund manager / investment bank that I knew of but I think this company will be the one of the stock worth investing, either from a value investing perspective or growth investing perspective. Let's find out why.
1. What is MSC's business model?
The revenue of the company can be categorised into 3 segments:
i) tin mining;
ii) tin smelting; and
iii) sales of refined tin metal and by-products.
Tin smelting involves smelting of tin concentrates and tin bearing materials and the production of various grades of refined tin metal. However, note that less than 10% of the smelter's inputs are from MSC's own mines. The remaining 90% of tin ore (raw materials) are sourced from locally and outside of Malaysia.
The process of tin smelting starts from the tin mines. Tin ores will be extracted from the mines and then processed into tin-in concentrates. Tin-in concentrates are then converted into refined tin metal products through the tin smelting process using the smelter.
2. What is the usage of tin and how is the demand? Isn't tin mining a sunset industry?
Tin is used in various products ranging from food packaging to smartphones, electric vehicles and solar cells.
While there is a rapid growth of solders due to wide application of tin and the rise of semiconductor industry today, there will be further usage of tin especially in the emerging lithium-ion batteries for electric vehicles. Tin metal which is recommended to be used in the batteries for electric vehicles (for example, Tesla battery pack) is mainly due to the potential increase in energy storage capacity which will then improve the charging rate of the battery.
The increase in energy storage capability of tin leads to other areas of growth such as renewable energy generation and storage, as well as advanced computing and robotics.
The Group CEO, Mr. Patrick Yong predicted that the future demand is expected to come from new applications in energy-storage technologies. In particular, the demand will be coming from the rise of tin usage in lithium-ion batteries as more automotive manufacturers push for electric vehicles.
According to International Tin Association (ITA), tin is called the ‘spice element’ because a little of it is present everywhere in ways that are essential to our quality of life. Tin use in vehicles is a good example.
Below are the tin prices extracted from LME (London Metal Exchange) from 2015 to today:
The average tin prices are as follows (extracted from KLTM Kuala Lumpur Tin Market):
2015 - USD16,068/tonnes
2016 - USD17,867/tonnes (11% y-o-y)
2017 - USD20,036/tonnes (12% y-o-y)
2018 - USD20,067/tonnes (0.15% y-o-y)
2019 - USD18,616/tonnes (-7% y-o-y)
More recently tin demand has been significantly impacted by macroeconomic shocks, first the US-China trade war and now the covid-19. According to ITA, it will take some time to recover inevitably, although there are good reasons to expect a strong rebound.
Having said that, Mr. Patrick Yong said that the cost of mining will prevent tin price from falling below the global average mining cost, which he believed is around USD15,000/tonnes, for hard rock mining. In fact, ITA has predicted the upper range to be around USD25,000/tonnes. Therefore, it is not difficult to guess where the betting man is putting his money given the near-to-all-time-low tin prices.
The longer-term future looks very promising, with very significant opportunities in new electronics technologies and in energy opening up for tin towards 2025-2030.
3. Other than the demand of tin, is there any other growth prospects for MSC?Since year 1902, MSC has been using outdated reverbatory furnaces for tin smelting operations. The smelting plant is located at Butterworth, Penang and is now more than 100 years old. The old smelting furnaces involves a multi-stage procedures which is not operationally efficient.
In mid 2016, MSC has acquired an existing production facility in Pulau Indah, Klang for RM50 million. The purpose for this is to relocate its smelting operations from Butterworth to Pulau Indah. Not only that, the management aimed to retrofit the smelting plant in Klang to be one of the most modern tin smelter which equipped with ISASMELT TSL (top submerged lance) technology. To be exact, when MSC bought over, it is said that they have found this brownfield opportunity whereby the plant that is being acquired is itself in the form of LEAD smelter, already installed with the latest TSL technology furnace. (As such, lower time cost needed to complete the new facility in Pulau Indah)
This is where things get a little bit interesting.
With the cutting edged TSL technology, MSC aimed to be one of the lowest-cost smelting facilities company in the world. The ISASMELT process is a energy-efficient smelting process. The furnace uses natural gas as fuel and involves only single stage melting. With the commissioning of the new smelting facility which is expected to be on track and operational in the near term (2020), this will definitely improve the smelting process efficiencies and the operational costs will be significantly reduced.
According to Group CEO Mr. Patrick Yong, the new smelter will boost extraction yields and the annual production capacity will increase from 40,000 tonnes per year to 80,000 tonnes per year with an increment over 50%, WITHOUT incurring any additional capital expenditure going forward.
Not only that, the new furnace will be utilising renewable energy with rooftop solar panels and tapping heat from the furnaces, recycling energy from operating thermal wastage. This will significantly reduce the carbon footprint. With that, MSC will gain goodwill advantage especially dealing with European customers.
The plant in Butterworth will still be in service to ensure problem-free production. MSC expects full migration of smelting activities to the new plant to be completed by 2020. Having said that, labour costs will be significantly reduced. Reduction in manpower has resulting in laying off workers with VSS amounting to RM15 million given to 550 employees.
In addition, the location of the new smelter is very strategic as Pulau Indah is located beside the most busiest shipping route in the world, the Straits of Malacca. Pulau Indah is the industrial hub for many companies include Tadmax, Scientex, Kawan Food, MISC, IKEA distribution centre. The strategic location will benefit MSC as the LME (London Market Exchange) warehouse is also located at Port Klang.
However, given that the plant in Butterworth will still operate as usual before new smelter is fully operational, the management expect overheads to increase as they run two smelting plants at the same time.
Once the move is completed, the management expects to be operationally efficient. At the same time, the land located in Butterworth can be either developed or sell off and make a handsome gain which will improve the group's cash flow and potentially a special dividend will be paid.
As a summary:
i) operational cost will reduce
ii) annual production capacity will increase by 50%
iii) labour cost will reduce
iv) carbon footprint will improve
v) Overheads will increase before new smelter become fully operational
vi) the land in Butterworth can either be developed or sell at a gain
With that, where do you think this company will be heading to over the next 5 years?
In the next episode, more information will be shared such as what are the external factors which could significantly affect MSC, how does the company performed throughout the years, what are the risks involved and how does management react to mitigate the risks?
Management leadership, global tin prices, forex risks, mining licenses, dividend payout, competitor analysis, valuation of MSC etc will be shared in the next article.
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Lastly, for those who like to know more about TSL furnace, here is a sample video to explain what is it about:
All information provided here should be treated for informational purposes only. It is solely reflecting author's personal views and the author should not be held liable for any actions taken in reliance on information contained herein.
No buy call. No sell call. No bullshit. Only content.
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