Friday, September 27, 2013

Malaysia Smelting Corp - Bogged Down By Impairments

Malaysia Smelting Corp -
Last Price:2.86
Price Target:2.35
Bogged Down By Impairments

Contrary to news reports, the state of subsidiary PT Koba Tin’s CoW extension remains uncertain. The recent spike in tin prices also brings little  cheer,  as  SMELT  is  unable  to  fully  capitalise  on  it.  We  are  also mindful  of  a  potential  impairment  on  its  KM  Resources  (KMR) investment. Thus, we set aside MYR0.50 per share from our 1.0x FY14F P/BV valuation and maintain our SELL call and MYR2.35 FV.

- Decision  on  PT  Koba  Tin  pending.  SMELT  informed  Bursa  Malaysia  on  4  Sept  that  it  has  yet  to  receive  further  notification  from  the Indonesian government on its application to extend the contract of work (CoW) of its 75.0%-owned subsidiary PT Koba Tin, after the latter’s third interim  contract  extension  ended  on  30  Aug.  This  came  amidst Indonesian  media  reports  saying  that  PT  Koba Tin’s CoW had been terminated  and  that  management  of  the  mining  area  had  been temporarily  handed  over  to  state-owned  PT  Timah  Persero  (TINS  IJ, Under  Review).  While  SMELT  has  prepared  for  the  worst,  with  a MYR128.4m  impairment  and  provision  made  in  FY12,  a  formal termination is deemed a negative for investors.

- More impairment risks. In 2Q13, SMELT made a MYR3.7m impairment on  its  investments  in  Asian  Mineral  Resources  (ASC  CN,  NR)  and Alphamin Resources Corp (AFM CN, NR) following a prolonged decline in  their  share  prices,  which  we  deem  exceptional.  We  also  remain watchful  on  SMELT’s investment  in  KMR,  whose  limited  proven  mine reserves, coupled with lower gold and copper prices, hints of a potential impairment risk.

- Maintain  SELL.  Tin  prices  may  have  recovered  to  around  USD23,000 per tonne since early this month, but this may only benefit SMELT’s local mining  operation,  which  produces  a  mere  200  tonnes  of  tin  ore  per month.  The  group  is  unable  to  tap  further into this  positive  trend  as  the operations at PT Koba Tin have been kept to a minimum since the end of  last  year.  Export  restrictions  on  tin  ore  below  99.9% purity  have  also limited  smelting  volume  at  its  Butterworth,  Penang-based  plant. Meanwhile,  we  set  aside  MYR0.50  per share  from  our  1.0x  FY14  P/BV valuation after factoring in the potential impairment in KMR, and maintain our MYR2.35 FV. With uncertainties shrouding SMELT, reiterate SELL.

Source: RHB

Publish date: 26/09/13

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