MSC- the most exciting mining stock in Malaysia

Background

Malaysia Smelting Corp Bhd (‘MSC’) is one of the largest, fully-integrated producers of tin metal in the world. In addition, it is now diversifying into gold, coal, nickel and base metal mining activities. This makes MSC the most promising mining stock presently listed on our exchange.

Amongst its overseas operations are:

1. Its Indonesian tin smelting operation, which is undertaken by its subsidiary, PT Koba Tin, has been suspended on and off due to unresolved issues between the provincial and federal governments over control of mining rights and operations.
2. MSC proposed to invest US$18.9 million (about RM59.5 million) for a 30% stake in a copper, gold, zinc and silver mining project in Rapu Rapu Island, south of Manila.
3. MSC proposed to take a 18.9% interest in Australia's Beaconsfield Gold NL for A$19.6 million (about RM57.6 million) on March 3 this year. This company is expected to be profitable this year.
   
4. MSC proposed to acquire a 12.8% stake for C$20 million (about RM62.2 million) in Asian Mineral Resources Ltd, which has a 90% stake in a nickel mining business in North Vietnam.
5. MSC also proposed to take a 40% stake in a joint-venture company, which will set up a smelting plant in Linqui, Guangxi. This plant will have a targeted annual production capacity of 10,000 tonnes of refined tin and tin-based products, including tin chemicals. MSC's share in this investment will amount to RMB60 million (about RM27 million).

The local operation presently contributes about 47-49% of total pre-tax profit while accounting for 84-92% of total turnover. The Indonesian tin smelting operation contributes more than 50% of its pre-tax profit while accounting for 9-17% of total turnover.

Tin price movement

For the past two & half years, tin price has been rising steadily from USD6000 per tonne to USD25000 per tonne. Unlike the prices of zinc or nickel, the uptrend in tin price shows no sign of abating.

Chart: Tin daily price chart as at May 12, 2008 (source: London Metal Exchange)

Recent Financial Results

MSC has just announced its results for 1Q2008 ended 31/3/2008. Its net profit dropped by 66.2% q-o-q to RM15.3 million on the back of a 22.1% decline in turnover to RM573 million during the same period. When compared to the same quarter last year, MSC's net profit has increased by 135% while turnover has gained 60%. The drop in MSC's performance for 1Q2008 when compared to the preceding quarter was attributable to the suspension of sub-contractors' small scale production of tin ore, which had adversed affected in the smelting operation of PT Koba tin for the period from January 29th to March 14th.



Valuation

Based on MSC's FY2007 EPS of 90 sen, the stock(which closed at RM8.70 as at May 12th) is now trading at a trailing PE of 9.7 times. MSC's future earning is hard to forecast. Would the price of tin continue to inch up or maintain at the present level or drop off? Would the Indonesian authorities interrupt the subcontractor's mining operation? These uncertainties would mean that investors would be reluctant to pay a high multiple for this stock.

Technical Outlook

The weekly chart shows that MSC share price has been trending upward in a channel. MSC share price is approaching the upper boundary of that channel (located at RM9.30-50). Thus, the upside of this stock could be limited in the near term, unless there is a bullish breakout of that channel. In the event of weakness, the stock may drift down and test the lower boundary of the channel at about RM7.50. That could be a good entry to this stock.


Chart: MSC's weekly chart as at May 12, 2008 (courtesy of Quickcharts)

Conclusion

MSC is the most promising mining stock, listed on our exchange. While its exposure is confined to the tin sector, it has begun to diversify into other metals & other geographical locations. Its 120-year history may put the company in a good position to benefit from the current commodity boom. It is presently trading at a reasonable of PE of 9.7 times. A good entry to this stock would be at RM7.50-8.00.