Summary

• We attended the post results analyst briefing and came away feeling re-assured on Malaysia Smelting Corporation Bhd (MSC) outlook in subsequent quarters. 1Q22 estimated tin ore production fell -9.6% QoQ to 596 tonnes with production of 9.5 tonnes/day of tin ore. The decline is mainly due to halt in site works over 9 working days due to the Covid-19 outbreak.

• Moving forward, production has returned to the norm in 2Q22 and the move will likely to boost production beyond 600 tonnes for the quarter. Consequently, we expect MSC to deliver 12.0 tonnes/day of tin ore towards the end of FY22f (current production is approximately 11.0 tonnes/day).

• We gather that Pulau Indah smelting plant is operating at around 75.0% during the quarter. Moving forward, we expect the aforementioned smelting plant to hit full capacity by either end-FY22f or early-FY23f. At the same time, the Butterworth plant operations will be de-commissioned with smelting operations to be solely focused at Pulau Indah in coming years.

• We note that the Pulau Indah plant is equipped with a state of art technology using Top Submerged Lance (TSL), which is a single-stage smelting process that will be able to enhance extraction yields. Apart from the improvement in production efficiency and lower manpower cost, TSL furnace will also reduce carbon footprint through the use of natural gas, solar panels & waste heat recovery.

• Although tin prices have softened in recent months, we reckon that tin prices to remain above the pre-pandemic levels on the back of (i) robust demand in industrial usage such as electric vehicles (EV), solar panels and electronic devices, (ii) supply chain disruptions due to port congestions and (iii) persistently high inflationary pressure in commodity prices due to unresolved Russia-Ukraine tension. We re affirmed our expectations that tin prices to remain above USD30,000/MT over the foreseeable future.

• In bid to achieve net zero carbon emission on the Rahman Hydraulic Tin (RHT) mine operations, MSC is undertaking the upgrade of mini hydro plant from 0.75-MW to 5.0-MW. Also, MSC is currently installing 1.25-MWp solar PV panels on rooftops and will be installing a waste heat recovery system. These moves will subsequently boost MSC’s ESG profile, which is one of the important metrics for investment decision.

Valuation & Recommendation

• We made no changes to our earnings forecast given that current tin prices are within our expectations to average at around USD30,000/MT, while tin mining production recovery is largely on track. We retained our BUY recommendation on MSC with an unchanged target price of RM5.36. Our target price is based on the assigned target PER of 13.0x to its FY23f EPS of 41.2 sen.

• We continue to favor MSC position as one of the largest tin producers in the world that is supported by the world’s largest custom toll smelter.

• Risks to our recommendation include the volatility in the tin prices which affect average selling prices and margins. Foreign exchange fluctuation risk; given that the tin prices are traded in USD and MSC purchased most of their raw material from other miners.

Source: Mplus Research - 25 May 2022