Malaysia Smelting Corp -
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.
Publish date: 26/09/13