A Bernama report quoting the English daily, The Jakarta Post, stated that the Indonesian Energy and Mineral Resources' mineral and coal director-general, Thamrin Sihite, has indicated that the Indonesian government may not extend Malaysia Smelting Corp's (MSC) 75%-owned PT Koba Tin's Contract of Works (CoW) next year. We note that this was also reported last week by an Indonesian local news provider. Meanwhile, MSC clarified in Bursa Malaysia on 13 July 2012 that the company has to date not received any official notification from the Ministry concerning the status of its application.

Staying calm. Indeed, this piece of news has raised investor concerns that MSC might lose its mining operation in Indonesia, which will impact on its bottomline as well as the company's valuation. Having said that, we urge investors to stay calm as the official letter on the application status has yet to be issued. In fact, we had earlier incorporated the worst-case scenario that PT Koba Tin may not get the extension of its Contract of Work (CoW) in Bangka Island, and potentially write down RM34.1m. Therefore, even if the outcome is really disappointing, we do not think that it will have any major impact on our valuation.

Necessary measures have been taken. As we stated in our company update report on 12 July 2012, MSC had taken the necessary steps to pursue the 10-year extension on PT Koba Tin's CoW, which is expiring in March 2013. On 9 March 2012, MSC had entered into a Strategic Alliance Agreement (SAA) with a local partner, Optimus Synergy Resources Limited (OSRL) to assist in the application. And on 4 July 2012, the company announced that an addendum was made in the SAA such that both parties had agreed that upon successful extension of the CoW, OSRL will subscribe for a 60% equity stake (previously 50%) in Bemban Corp Ltd (BCL), which will then effectively own a 45% equity stake (previously 37.5%) in PT Koba Tin. Apart from getting an influential partner to pursue the extension, such an agreement is also in line with the Indonesian government's policy and national aspirations for greater local participation and value-added in the tin mining industry. Therefore, we are still hopeful that MSC stands a fair chance in securing the CoW extension.

Expansion in tin-rich territories elsewhere. Negative speculation aside, MSC has made significant progress in two areas in the past six months, which are: (i) extension of Rahman Hydraulic Tin's (RHT) concession for another 11 years until 2030, and (ii) successfully establishing a physical presence in Democratic Republic of Congo's (DRC) tin smelting sector. Moving forward, we believe that MSC will continue to search for other tin-rich deposits in Malaysia as well as overseas to strengthen its position in the tin industry. As such, we still think that MSC's prospects look promising in the long term.

Maintain BUY. We think MSC still justifies our BUY recommendation, with its FV remaining unchanged at RM5.50, based on: (i) its sound and solid fundamentals, with the right strategies taken to strengthen its position, (ii) relatively cheap valuation compared to its closest peers, (iii) our conservative valuation applies a 11.6% DCF discount rate (which is double the company's WACC), and (iv) we have incorporated the worst-case scenario of PT Koba Tin not getting the extension on its CoW.

Source: OSK