Friday, September 27, 2013

Malaysia Smelting Corp - Chapter On PT Koba Tin Ends

Malaysia Smelting Corp -
Price Target:2.35
Last Price:2.79
Chapter On PT Koba Tin Ends

We see the end of PT Koba Tin’s contract of work (CoW) as a letdown, despite its minimal financial impact. 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  investment  in  KM Resources.  We  exclude  MYR0.50  per  share  from  our  1.0x  FY14F  P/BV valuation. Maintain SELL and MYR2.35 FV.

- PT  Koba  Tin  to  close  down.  Yesterday,  SMELT  told  Bursa  Malaysia that the company was finally informed by Indonesia’s Ministry of Energy and  Mineral  Resources  that  PT Koba Tin’s CoW in Bangka Island, Indonesia,  has  been  terminated,  effective  retrospectively  from  31  Aug 2013.  SMELT’s board does not expect  this  development  to  have  any material  financial  impact  for  FY13  as  it  had  made  a  MYR128.4m impairment and provision  on this 75%-owned subsidiary in the previous financial  year.  Meanwhile,  it  plans  to  appeal  against  the  decision although  we  believe  the  likelihood  of  a  re-instatement  is  low. We  deem
this formal termination a negative for investors.

- Other  potential  impairment  risks.  After  a  series  of  impairment  since 2009, SMELT made another MYR3.7m impairment on its investments in Asian  Mineral  Resources  (ASC  CN,  NR)  and  Alphamin  Resources Corporation  (AFM  CN,  NR)  in  2QFY13  following  a  prolonged  drop  in their share prices. Thus, we maintain watchful on SMELT’s investment in KM  Resources  (KMR),  whose  limited  proven  mine  reserves  amid  lower gold and copper prices also suggest the potential of impairment risk.

- Reiterate  SELL.  Although  tin  prices  have  recovered  to  around USD23,000  per  tonne  since  early  this  month,  this  may  only  benefit SMELT’s  local  mining  operation,  which  produces  a  mere  200  tonnes  of tin ore a month. The group is unable to tap further into this positive trend, especially  now  that  its  CoW  via  PT  Koba  Tin  is  history.  Furthermore, Indonesia’s restrictions  on  exports  of  tin  ore  below  99.9%  purity  had resulted  in  lower  smelting  volume  at  its  Butterworth,  Penang-based plant.  All  in,  we  continue  to  exclude  MYR0.50  per  share  from  our  1.0x FY14 P/BV valuation, after factoring in the potential impairment in KMR.
We maintain our MYR2.35 FV and SELL recommendation.

Source: RHB

Publish date: 27/09/13

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