Wednesday, April 11, 2012

Malaysia Smelting Corporation: This is not a hollow tin company!

A Malay proverb - How does a hollow tin can sounds like? Loud but hollow (no substance). Malaysia Smelting Corporation ("MSC"), the 125 year old tin producing company is not one though as it changed its focus few years ago. Since 2009, it has decided to only concentrate on tin both upstream and downstream. It has decided to let go of its other investments in the form of copper, coal and gold mines. Not a wrong move as tin is what MSC does best.

A little bit of background on MSC (since we need to know more)

You can get a lot more from its very well info provided Annual Reports
MSC Group is currently one of the world’s leading integrated producers of tin metal and tin based products and a global leader in custom tin smelting since 1887. In 2011, the Group produced approximately 46,599 tonnes of tin metal thus sustaining its global position as the second largest supplier of tin metal. The Group’s turnover in 2011 was RM3.1 billion. MSC is listed both on the Main Market of Bursa Malaysia since 15 December 1994 and the Main Board of Singapore Exchange (SGX-ST) since 27 January 2011, and is a 54.84% subsidiary of The Straits Trading Company Limited of Singapore. The core business sectors of MSC are:
• International Smelting & Marketing
• Exploration, Mining & Mineral Processing

International Smelting
The first smelting facility was established in Singapore in 1887 and the second facility was built in Butterworth in 1902. Both facilities ran concurrently for many years until the closure of the Singapore unit while the Butterworth unit was rebuilt and restarted in 1955 after it was heavily damaged during the Second World War. In 2002 the Company acquired PT Koba Tin in Indonesia and increased its reverberatory furnaces to four with an expanded smelting capacity of 25,000 tonnes per annum. Together with the Butterworth facility, the Division now has an overall smelting capacity of about 60,000 tonnes in two countries. In the mid 90’s the Group started a tin marketing and trading
arm under the Smelting Division. The downstream unit provides the Group with hedging, pricing and marketing linkages to the KLTM/LME markets as well as the end-user markets worldwide.

The division produced a total of 46,599 tonnes refined tin in 2011 representing almost 13% of the world production. The range of refined tin products currently produced is as follows:-
• Grade A with minimum 99.85% Sn
• 99.9% Sn minimum
• 99.9% Sn minimum with 50 ppm and 100 ppm maximum Pb
• Tin anodes
• Electrolytic tin with 99.99% Sn minimum

The Malaysian (MSC Straits Refined Tin) and Indonesian (Koba) tin brands are LME/KLTM registered.

Tin was the metal which made Peninsular Malaysia as a popular destination back in the 19th century for miners. Since then, as applications for tin reduced due to other types of material being preferred for the food packaging business, this metal lost its glitter over time. So, what are the applications for tin in current times? Electronics industry is the main contributor.

Applications for tin

Tin is used in many alloys, most notably tin/lead soft solders (50% of usage for the industry), typically containing 60% or more of tin. Another large application for tin is corrosion-resistant tin plating of steel. Tin-plated metal is also used for food packaging, giving the name to tin cans, which are made mostly of steel.

There is no doubt MSC being a very experienced integrated tin producer would have an advantage with its network of contacts and experience. How would that translate into an advantage for MSC? Production from the largest tin producer, Yunnan Tin in China steadily reduced over the last 4 years while production from the MSC's portfolio of mines continue to be steady. On the other hand, demand for tin as applications for soldering for the electronics industry continue to improve slowly but steadily.

Going forward there will be greater challenges posed on accessibility of economically mineable tin
deposits located in remote locations and at greater depths. It is therefore crucial that MSC as a Group is able to apply the industry’s best practices and technologies for exploration, mining and processing of the tin resources in order to deliver on long term sustainable performance.

Note that the Top 6 producers controls 65% of the tin production.

Hence from the above what do I like about MSC

  • As a tin production unit from upstream to downstream, MSC seems to be a company that knows best what it does;
  • From the above financial highlight, MSC does make enough return for it to be an attractive company (do not look at the exceptional charges). This is however provided that prices for tin in the London Metal Exchange continue to be strong. Currently tin is priced between $22,000 to $25,000 per ton;
  • Applications for tin for the electronics industry does provide that continuity for MSC. The world's reserve for tin is ever depleting and MSC being an expert in the field would probably be the beneficiary from here;
  • Tin is not an industry large enough where they get stiff competition from the largest miners in the world in the form BHP, Rio Tinto, Vale etc;
  • Valuation for MSC is attractive - currently at RM416 million as at 10 Apr 2012;
  • MSC has a very strong reporting unit as well as Board representation and managers. This is very important for an international company so small (only RM416 million) but yet has so much potential in terms of what it does internationally;
For those who have read this, don't stop here. You may find something interesting in this industry and company where for most investors would have already taken a pass long time ago. We may have found a jewel here.

The writer starts to feel that most politicians are just an "empty tin" - lots of promises but just hollow.

Serious Investing! 

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