WZSATU’s share price has dampened by the bauxite mining ban since Jan 2016. With the uplifting of bauxite mining and export ban, we see potential of WZSATU writing back its RM14.4m one-off impairment of mining assets and reboot its mining operations, eventually translating to higher earnings in the upcoming quarters. Besides, we expect the recovery seen in other business units (O&G and Construction) under WZSATU. Should there be a breakout above RM0.345, next target will be at RM0.37-0.40, followed by RM0.50. Support will be anchored around RM0.295-0.30, with a cut loss set below RM0.28. We do not rule out a possibility of WZSATU hitting the upper limit on the back of this positive headline of bauxite mining ban.

Company profile. WZSATU is involved in civil engineering and construction, oil & gas, manufacturing and bauxite mining. Currently, its construction arm has an order book of RM731m, which could keep them busy for the next two years. Meanwhile, the bauxite mining has seen tapering in earnings over the years due to the ban in bauxite mining since January 2016.

Moratorium on the mining and export of bauxite since 2016. The bauxite mining has been banned since Jan 15, 2016, after unregulated mining and transportation caused many areas in the Kuantan district to be polluted and covered by red dust.

Statistics prior to mining ban. China imported a record 3.72m tonnes of bauxite from Malaysia for the month of September 2015, a tenfold increase from just 343,000 tonnes in January 2015.

Huge untapped bauxite to be unlocked. Pahang Mining Operators Association vice president Yap Soon Huat said Malaysia was losing out with the continued ban, adding that China now is importing up to 75% of its bauxite from Africa and Indonesia following the relaxation of Indonesia’s ore export ban in January 2017. Also, he mentioned there was still 50-60m tonnes of bauxite left untapped in Kuantan. Should there be a revival following the uplift of bauxite mining in the future, it could reignite Kuantan’s economy moving forward.

Bauxite prices ranging from US$38-52. Based on Metal Bulletin in Mar-18, Brazilian and Guinean bauxite is priced at USD37.5-38 per tonne. While in Indonesia, consumers and import traders pegged Indonesian bauxite quotations around a steady USD46-52 per tonne, exporting to China since the ban was lifted. Hence, should the mining operators able to capture it efficiently, it may translate to more than RM7.5bn (assuming USD/MYR stood at RM4.00) worth of untapped opportunities.

Facts on bauxite usage. For the uninitiated, bauxite is a raw material for producing alumina and alumina is a raw material of producing aluminium. With the rising usage of aluminium in transportation (41%), battery packaging (20%), construction (14%), electrical devices (8%), consumer durables (7%), machinery (7%) and others (3%), we believe the demand in aluminium will continue to rise at an annual growth rate of 2.0% in the short to medium term, reaching 67m tonnes in 2023, the growth is supported by strengthening residential and infrastructure construction, power and transport initiatives.

Global production growth seen increasing. In response to the increased aluminium and alumina productions, global bauxite producers also accelerated their production. Australian production rose 5.2% in 2017, to 88m tonnes, In Guinea, bauxite production increased 34%, to 40m tonnes. Overall, it has contributed 7.3% increase in global bauxite production to 292m tonnes in 2017.

Putrajaya lifts moratorium on bauxite mining in Pahang. Water, Land and Natural Resources Minister Dr Xavier Jayakumar said that the mining and export of bauxite from Pahang (which ends on 31-Mar) would not be extended. Hence, we believe with the uplifting of the bauxite mining ban, we may anticipate the bauxite operators like WZSATU could warrant a strong upsurge in trading interest, setting a potential limit up opportunities. To recap, in FY15, the mining segment garnered RM18.5m of profit after tax. In 4Q18, WZSATU has written off its mining assets amounted to RM14.4m and company management mentioned that it would write-back these impairments should there be an uplifting of the bauxite mining moratorium and export ban.

WZSATU hovering above SMA200. Following a strong surge from RM0.22 to RM0.325 on 14th Jan, share prices have stabilised around SMA200, consolidating slightly above the RM0.30 over the past two weeks without significant volumes; suggesting it could be taking a breather before another potential rally. The ADX indicator is suggesting that the positive momentum is intact. Hence, should there be any breakout above RM0.32-0.345 immediate resistance zone, trading interest could pick up, targeting the RM0.37-0.40, followed by RM0.50. Support will be located around RM0.295-0.30, with a cut loss level around RM0.28. We also do not rule out with the positive relief of the uplifting of the bauxite mining ban, WZSATU may have a potential to limit up in share price to RM0.62.

Source: Hong Leong Investment Bank Research - 19 Feb 2019