The Star reported on Saturday that the Indonesian government has imposed a 20% tax on some raw  metal  ore exports, and will prohibit shipments of raw materials unless miners submit plans to build smelters. The export ban will definitely affect mining companies, especially for those having long-term agreements with external parties. The rules are  a precursor to a total ban on raw material exports by 2014. According to the report, tin ore is among the metals in the export ban list and Malaysia Smelting Corporation (MSC) operates its tin mining activities in Indonesia via  its subsidiary,  PT Koba Tin.

Not a concern to MSC.We believe PT Koba Tin's tin mining operations in Indonesia will not be affected by the Indonesian Government's latest move. The export tax is only applicable to unprocessed and non-value added raw metal ore. Since MSC has its own tin smelting plant in Bangka Island and produces concentrated tin metal ingots which are considered value-added products, the ruling does not affect MSC in any way. In fact, the ban on raw tin ore  exports was already implemented by the Indonesian government a few years back. Therefore, we think it would be appropriate for us to maintain the status quo for MSC and not change any of our assumptions. 

Weaker start, but lookout for 2H. As stated in our initiation report, MSC's Indonesian operations are currently  undergoing  a  restructuring exercise. As such, we anticipate some gestation  activities to take place at PT Koba Tin and thus, it is expected to post negative results in 1HFY12. Based on the movement of LME tin prices, we note that the price of tin is averaging at USD23,000 a tone in 1QFY12 which is below our  assumption of USD24,000 a tonne for FY12  and thus, we  expect lower contributions from another MSC subsidiary,  Rahman Hydraulic Tin SB, which has tin mining operations in Perak, Malaysia. We have already factored in a weaker start to FY12 but remain positive on PT Koba Tin's ability to  turnaround in 2HFY12. Moreover, tin prices may surge in  the medium term as  the  reinstallation and refurbishment of electrical and electronic production facilities, which were devastated by the massive earthquake in Japan and severe floods in Thailand, will lead to a surge in demand for solder and hence, tin.

Reiterate BUY, unfazed  by potential weaker start.While there  are still no new developments on  the extension of  PT Koba Tin's  Contract of Work (CoW) or mining concession which will  expire in March 2013 and  potential award of new mining concessions in the Democratic Republic of Congo, we choose to maintain the status quo for MSC as per our initiation report. Although we are anticipating a weaker 1HFY12, we still think that MSC justifies our BUY recommendation with its FV remained unchanged RM5.60, given that: (i) it is trading way below its peers on the basis of both book value and earnings multiple, (ii) the discount rate used in our DCF  valuation is very conservative, which is twice the group's actual WACC, and (iii) the potential turnaround of PT Koba Tin in 2HFY12, which could boost the performance of MSC moving forward.

Source: OSK188