This article first appeared in The Edge Malaysia Weekly on March 19, 2018 - March 25, 2018
ON the back of supply shortages and a weaker US dollar, the price of tin — as that of other metals such as copper, aluminium, nickel and zinc — has been on an upward trend this year.
Tin hit a four-year high of US$22,104 per tonne (spot price) on the London Metal Exchange at the end of January but as at last Tuesday, it had slipped to US$21,215 per tonne. However, this was still nearly 6% higher that its price of US$20,030 per tonne a year ago.
Rising tin prices are a boon to miners of the metal, such as Malaysia Smelting Corp Bhd, but for manufacturers, such as tinplate producer Perusahaan Sadur Timah Malaysia (Perstima) Bhd and tin producer Johore Tin Bhd, which sources its local supply of tinplate from Perstima, it spells higher costs.
Fluctuations in tin prices have a big impact on integrated tin producer MSC, whose core operations are its international smelting and tin-mining divisions. According to its CEO Datuk Dr Patrick Yong, rising prices augur well for the group’s tin-mining subsidiaries Rahman Hydraulic Tin Sdn Bhd (RHT) and SL Tin Sdn Bhd.
RHT operates Malaysia’s largest open-pit hard rock tin mine.
“In our financial year ended Dec 31, 2017 (FY2017), our tin-mining division’s net profit grew 20% year on year to RM34.9 million. This was in tandem with the increase in average tin prices in 2017, which [according to Kuala Lumpur tin market prices] rose to US$20,036 per tonne from US$17,867 per tonne in 2016,” he tells The Edge.
MSC is the world’s second largest supplier of tin metal, after China’s Yunnan Tin Co Ltd. Last year alone, the company produced 27,172 tonnes of refined tin compared with 26,802 tonnes in 2016.
Fluctuating prices have less effect on the group’s smelting business. Its more than 100-year-old smelter in Butterworth, Penang, converts primary, secondary and complex tin bearing ores into high-purity tin metal for industrial application.
However, notes Yong, the division’s performance has been adversely affected by the old equipment’s inefficiency, leading to lower recovery of tin.
“The group is addressing this by relocating from Butterworth to our new production facility in Pulau Indah, Klang, whose equipment uses state-of-the-art extractive technology. [We] aim to develop this facility into one of the most modern tin smelters in the region, not only operating with higher efficiency but also reducing its carbon footprint,” he says.
“The relocation of the smelting operation is in progress and the new facility is expected to be fully operational in the medium term, pending approval from the authorities.”
Yong adds that with the upgrade of the group’s smelting technology to the top submerged lance (TSL) furnace, annual production capacity can be upgraded 50% to 60,000 tonnes of refined tin from the current 40,000 tonnes, using oxygen-enrichment of the fuel.
“This upgrade will be done when demands on the smelting capacity challenge the original installation. The TSL furnace follows a more comprehensive single-stage continuous smelting process, enabling a much faster feed and process rate.”
As for its mining division, the group intends to start operations at its Sungai Lembing mines in Pahang, held via 80%-owned subsidiary SL Tin.
“The group has carried out initial exploration works in the Sungai Lembing mines and will proceed with small-scale mining this year,” says Yong.
At its close of RM3.03 last Wednesday, MSC’s share price had declined close to 29% from May 22 last year. The company is valued at a historical price-earnings ratio of 14.71 times. By comparison, regional peers Yunnan Tin of China and PT Timah Tbk of Indonesia are valued at 31 times and 17.5 times respectively.
A bane for manufacturers
Rising tin prices pose a challenge for Perstima, which supplies tinplate to both the domestic and export markets. Already, its margins have been squeezed, as evidenced by its latest financial results. In its nine months ended Dec 31, 2017 (9MFY2018), net profit plunged 75% year on year to RM9.75 million — its lowest since 2001. However, revenue rose 16% to RM705.73 million.
In a Feb 2 note, AllianceDBS Research says the sharp fall in Perstima’s earnings was mainly due to a steep decline in its gross margin, which crumbled to 3.4% in 9MFY2018 from 10.2% in the previous corresponding period as the group was not able to fully pass on production cost hikes to maintain its competitiveness with imports from China.
“The group expects the operating environment to remain challenging and competitive due to the higher presence of imports and we don’t expect the situation to ease in the near term unless the government imposes higher anti-dumping duties,” the research firm says.
Alliance also notes that the group did not declare any dividend in its last quarter.
“Typically, the announcement of dividend is made in 2Q and 4Q of the financial year but for FY2018, the group has yet to announce any dividend payout. By comparison, a total of 40 sen was announced in FY2017. We do, however, believe the group will declare a dividend in 4QFY2018, albeit at a lower rate, as it is in a net cash position of 90 sen per share.”
Alliance has a “fully valued” call on Perstima with a target price of RM3.25 pegged to 13 times its FY2018 price earnings.
Perstima surged to its highest level in 20 years when it touched RM7.85 at the end of July last year but as much as 55% or RM429.17 million of its market capitalisation has been erased since then. The stock closed at RM3.53 last Tuesday.
Higher raw material costs have eaten into the earnings of Johore Tin Bhd, which is involved in tin manufacturing for the local market. The company caters mainly for the biscuit, paint and chemical, as well as food-processing industries. However, its biggest revenue contributor is its food and beverage segment, which produces dairy products such as condensed milk.
In its financial year ended Dec 31, 2017, Johore Tin’s net profit fell 25.2% year on year to RM26.64 million on the back of a 7.8% increase in revenue to RM475.49 million.
In a Feb 28 note, TA Securities says Johore Tin’s management has guided that it is wary of the upward trend in global tinplate prices, which could weigh down profit margins in the manufacturing segment.
“However, some of the cost of tinplates may be passed on to clients, thus retaining profit margin at (the) 10% level for FY2018,” says the research house.
It has a “buy” call on Johore Tin with a target price of RM1.48. As at its close of RM1.04 last Tuesday, the stock had declined 13% year to date.
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