KUCHING: Press Metal Bhd’s upstream aluminium capacity is expected to reach 420,000 tonnes per annum (tpa) when its Samalaju plant in Bintulu and re-commissioned Mukah plant reach their full productions early next year from the 300,000 tpa projected for this year.
The Samalaju aluminium smelter, which is 2.66 times bigger than the Mukah smelter, is expected to attain full capacity of 320,000 tpa in Feb-March 2014.
“We gather from (Press Metal) management that its Samalaju smelter finally reached full commissioning in October, excluding the seven smelter pots that were damaged during the statewide power blackout previously,” said RHB Research Institute in a report yesterday.
Press Metal chief executive officer Datuk Paul Koon was at the research house’s corporate digest lunch which was attended by fund managers last week.
RHB Research said although ongoing repairs at the company’s Mukah smelter was still a concern, Koon had said that 30% of the pots were now back in operation, and that the re-commissioned plant was expected to achieve optimum capacity of 120,000 tpa by end-Feb 2014.
“This is about two months behind our initial projection as the insurance company took longer to assess the damage claim — the first of its kind in the country.
“Its 80%-owned subsidiary Press Metal Sarawak (PMS) has submitted a preliminary claim to its insurers on the cost of the reconstruction works and repairs but has yet to reach an agreement on the amount to be claimed,” added RHB Research.
To recap, the Mukah smelter was shut down after its production facilities were damaged in the statewide power outage in late June.
According to RHB Research, Press Metal is expected to operate at a combined 440,000 tpa capacity for the Samalaju and Mukah plants from 2015 onwards instead of 2014 as it had earlier projected.
“Given that smelting business is a volume game, every additional tonnage will add to the company’s bottomline.”
Press Metal management, according to the research house, remained concern over the depressed aluminium prices — averaging US$1,782 per tonne in third quarter-2013 (-2% quarter-on-quarter).
“The London Metal Exchange’s (LME) new warehouse policy may exert more pressure on already distressed aluminium prices but we believe Press Metal can better withstand any sharp price drop vis-a-vis its high-cost peers.
“The price fall may also help remove excess capacity and improve long-term industry dynamics. We are revising down our aluminium price assumption to a long-term price of US$2,200 plus a physical premium of US$150 a tonne. This accordingly lowers our FY13/FY14 earnings estimates (for Press Metal) by 2.3%/20.1% respectively,” said RHB Research.
Since 2012, there were concerns of the lengthy queues during certain quarters at LME’s warehouses which were linked to high premium charges for physical delivery of the commodity.
However, the LME, according to the research house, made some modifications in its warehousing policy on Nov 7, requiring a higher load-out vis-a-vis load-in rate at an affected warehouse to help ease the queues.
Spot aluminium prices slipped below US$1,700 per tonne after the announcement before rebounding near to US$1,750 per tonne recently. The average spot aluminium price in 2012 was US$2,022 per tonne.
“While we are unable to say with certainty that aluminium prices will not drop further, we are not overly concerned with any price decline although this may compound Press Metal’s short-term profitability and cash flow.
“We view it as a “short-term pain, long-term gain” given the group’s better-than-expected 3Q13 results vs its peers who were largely in the red.
“Any sharp plunge in aluminium prices may actually help expedite the closure of high-cost smelters. This will in turn improve the supply and demand dynamics within the industry and hence, prices,” said RHB Research.
It said Press Metal enjoyed cost advantages, such as competitive power tariffs and lower overheads, adding that its 25-year power purchase agreement with Sarawak Energy Bhd at attractive tariffs would ensure the long-term profitability of its smelting plants.
Commenting on Press Metal’s conditional sales and purchase agreement with Sumitomo Corporation’s subsidiary Summit Global Manaement XII B.V. for the proposed disposal of 20% stake in Press Metal Bintulu Sdn Bhd (PMB), RHB Research said the deal would pare down Press Metal’s gearing to 1x from 1.74x and give rise to RM336.4mil disposal gain.
The closing conditions of the agreement include:
l PMB to undertake the capitalisation of the amount it owed to Press Metal and its subsidiaries of at least RM409mil via the issuance of at least 409 million new ordinary shares of RM1 in PMB,which will raise its paid-up capital to at least RM459mil;
·Construct at least 300 aluminium smelting pots, of which at least 290 pots are fully operational;
·Achieve a mean average daily production capacity of not less than 852 tonnes in the rolling 30-day period, and
·Maintain electrical power consumption with a mean average of below 14,000 kilowatt hour/tonne in the rolling 30-day period.
Press Metal expects the proposed deal to be completed by the second quarter-2014.
“We are projecting for Press Metal to report core earnings of RM87mil for FY13 and RM212mil for FY14,or a year-on-year growth of 36.2% and 143.6% respectively.
“The earning will mark another profit milestone of RM275mil in FY15 (+29.8% y-o-y) after its reaches its first full year of full operation for both smelters in Sarawak, plus a US$100/tonne improvement in aluminium selling price,” said RHB Research, which maintains a “Buy” recommendation on Press Metal, with a slightly lower fair value of RM3.79 from RM3.82 previously.
Press Metal currently trades below the RM2.30 level.