The Edge Daily
21 Apr 2008:
By Doreen Leong
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Tecity Group, the investment vehicle of the late Tan Sri Tan Chin Tuan's family, which last month succeeded in its protracted takeover of Straits Trading Ltd (STC), may have more reasons to celebrate.
Malaysia Smelting Corp Bhd (MSC), which the Tan family controls via STC, has been aggressively expanding its presence in the mining business. From being merely a smelter of tin ore, MSC is taking shape as one of the world's largest, fully-integrated producers of tin metal. Apart from tin, it is widening its global foothold by diversifying into gold, coal, nickel and base metal mining activities.
Tecity holds about 89% in STC, which it took control in an exercise costing S$2 billion (about RM4.6 billion). STC in turn holds a 70% stake in MSC.
Little can go wrong for the 120-year-old mining company, which is focused and profitable. The tightly held MSC is also favoured for its generous dividend payouts. This partly explains why the new controlling shareholder of STC not only intends to keep its tin smelting and mining business but also to grow it.
Last Thursday, MSC proposed to invest US$18.9 million (about RM59.5 million) for a 30% stake in a copper, gold, zinc and silver mining project in Rapu Rapu Island , south of Manila . The latest investment will be MSC's fourth overseas venture after making inroads into China , Vietnam and Australia over the past one year.
Philco Resources Ltd, a company registered in Labuan, is currently undertaking the restructuring and rehabilitation of Lafayette ( Philippines ) Inc (LPI), which holds the mining and production sharing agreements, the polymetallic deposit and the base metal processing plant in Rapu Rapu Island .
Philco, which holds a 26% stake in LPI, is a JV company with LG International Corp holding 60% and Korea Resources Corp the remainder. Lafayette Mining Ltd (LAF) of Australia , which is in financial distress and does not have the funds to continue with the mining operations, holds the remaining equity in LPI.
A special purpose vehicle will be set up to take over LAF's stake. Under the proposal, MSC will hold 30% in the SPV, while the remainder will be held by Philco. The investment to complete the restructuring and rehabilitation of LPI is expected to cost about US$63 million. The project in Rapu Rapu Island , which was initiated in 2004, carries debts of more than US$270 million. This was due to losses on forward metal contracts and operational difficulties caused by lack of funds.
MSC is confident that the project can be profitable if the debts are restructured and there are sufficient funds to restart the project.
"Rapu Rapu project is an attractive investment in the base and precious metal sector (copper, zinc, gold and silver) following the debt restructuring. It is increasingly difficult to acquire projects, which have undemanding valuation under the current robust metal prices," it stated in its announcement last week.
That said, will MSC face similar problems in the project that encountered a series of operational and cash flow problems? Also, MSC's investment in the Rapu Rapu project could escalate due to the long gestation nature of mining activities.
The MSC group's operational cash flow in FY2007 is substantially lower at RM8.9 million compared with RM93.8 million the previous year. Cash and cash equivalents were also down to RM51.9 million as at Dec 31, 2007, from RM99.9 million a year ago.
That is expected as its aggressive acquisitions in the past one year would drain its cash holdings and increase borrowings. As at Dec 31, 2007, its total borrowings rose to RM342.9 million from RM283.3 million a year ago. Most of its borrowings are short term in the form of trade financing. This debt level is still manageable considering its total equity stood at RM395.5 million.
MSC's operations in Indonesia were already facing myriad problems last year. The small-scale mining operations of its subsidiary, PT Koba Tin, are still suspended following unresolved issues between the provincial and federal governments over control of mining rights and operations.
Nevertheless, MSC's other investments are starting to take off after some setbacks. For instance, its 18.9% interest in a gold mining company in Australia is expected to be profitable and its results expected to reflect in its accounts this year. MSC acquired the stake in Australia 's Beaconsfield Gold NL for A$19.6 million (about RM57.6 million) on March 3 this year.
In December last year, it bought a 12.8% stake for C$20 million (about RM62.2 million) in Asian Mineral Resources Ltd, which has a 90% stake in a nickel mining business in North Vietnam. After obtaining a mining licence there last December, it is now in full swing to develop the mine and start production by early next year.
MSC's smelting plant in China is expected to start production in 2Q2008. The company formed a joint-venture company there with a 40% stake for RMB60 million (about RM27 million). The smelting plant is located in Linqui, Guangxi, and will have a targeted annual production capacity of 10,000 tonnes of refined tin and tin-based products, including tin chemicals.
Despite setbacks in Indonesia , MSC has shown tenacity in expanding its mining business outside Malaysian shores. With its ultimate shareholders known to be more aggressive, perhaps there is more to come for the company in future.
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