THE BUZZ  A  StarBiz  report  today  said  that  Perwaja  has finally  secured  a concession  to  mine  iron ore at a 243 ha mine in Bukit Besi, from the state government of Terengganu. A source close  to  the  group  said  the  mining  lease  would  be  subject  for  renewal  every  10  years, and may last up to 42 years.
 
OUR TAKE  
Positive  but  not  new.  While  we  certainly  welcome  this  development  though  are  not entirely surprised, as this is not new news. Our results review note on 30 August 2012 noted the detail after Perwaja's  board  projected  its  potential  iron  ore  mining  income  in the  coming  quarters.  Meanwhile,  the  mining  area  of  243ha  is  similar  to    the  600-acre mining land allocated to Perwaja in the past records.  Currently, we are only assuming a concession period of 20 years, not the 42-year period mentioned in the newspaper.

Profitable, despite the lower iron ore prices. Iron ore spot prices have dropped below USD100 per tonne recently. The last reported price was at USD90.75 per tonne for the Platts 62% Fe IODEX, a small gain of USD0.25 in the week. We expect the ore price will likely rebound as Chinese mills may prefer to import at this price level, as it is cheaper than  the  production  costs  of  their  own  mines  in  Mainland  China.  We  think  this concession  will  remain  a  lucrative  one,  as  the  mining  cost  for  an  open  pit  mine  in Malaysia may only be about USD50 per tonne..

Greater  assurance  for  feed  supply.  Mining  operations  aside,  this  development  also give  improves  the  assurance  of  feed  supply for the company's ongoing  construction  of its iron ore concentration and pelletisation plant. Although we are  disappointed with the delay  of  its  commissioning,  the  first  shipment  of  concentration  machines  have  already arrived  at  its  Kemaman  plant  and  the  other  parcel  is  en  route  to  Malaysia.  We  also understand that its financier for the new plant just issued the company a Letter of Credit (LC),  which  means  that  construction  works  can  begin  immediately  after  the commissioning, by end-2012. To be prudent, we also project some anticipated technical hiccups during the start-up stages of the new plant.

A reasonable assumption in our earnings model. Meanwhile, the new income stream from mining may take a few months to reach its optimum level; we conservatively expect that  only  100k  tonnes  of  iron  ore  will  be  sold  in  FY12,  followed  by  a  gradual improvement in volume of up to 1.2m tonnes from 2016 onwards, as seen in Figure 1. With  more  defined  development  now,  we  have  incorporated  the  value  enhancement from Perwaja's concentration plant in our projection, as  iron  ore  fine  can  be  sold  at
better  margins  of  USD25  per  tonne  in  FY13  compared  to  FY12.  Further  margin increases of USD3 per tonne p.a. can be expected, until it  hits USD35 per tonne. The margin  for  pellet  processing  is  also  conservative,  at  USD10  a  tonne  and  may  slowly increase to USD25 a tonne in FY16, as shipment cost savings may already be inching to USD20 a tonne. Based on the recently-revised assumption, we arrived at a new DCF for the combined iron ore mine and ore-processing plant of RM1.75 a share based on 10% WACC.

Reiterate  TRADING  BUY.  This  latest  development  which  may  bring  cheer  to  investors,  after  over  a  year's wait since OSK first mentioned the prospect. This will be a timely boost to Perwaja's earnings, as cheaper in-house iron ore will be further enhanced by its in-house processing. Nonetheless, we are cautious on the steel industry's outlook, as weaker economic conditions may dent the company's existing steelmaking business. As we  have  incorporated  a  reasonable  assumption  for  the  iron  ore  mining  and  new  concentration  cum pelletisation  plant  in  our  earnings  model,  we  make  no  change  to  our  earnings  estimates.  We  keep  our TRADING  BUY  rating  on  the  stock,  with  a  FV  of  RM1.12  derived  from  a  0.5x  FY12  BV  or  -1  standard deviation  of  its  historical  trading  range,  plus  adding  30%  of  the  DCF  value  of  its  iron  ore  and  new  ore processing plant in the light of the company's further developments.

Source: OSK