Bought Malaysia Smelting Corporation

Update on this company - it hasn't changed after my initial post more than a year ago.

Start with the tin price - it was stable in 2023: lower than 1H 2022, higher than 2H 2022:

The company has 2 segments, Tin Mining and Tin Smelting:

Smelting profits should be more stable, but were impacted by Covid in 2022 and the closing of an old smelting facility in 2023.  Its hard to tell which of the 4Q23 costs are one-offs or which are normal operating costs (either recurring or randomly occurring ones).  They have moved to a new smelter in P. Indah, which started operating in 2021.  They will start dismantling the old Butterworth smelter in 2024. 

The biggest risk seems to be that smelting profits/losses are inconsistent (especially Q423's loss), and we don't know how long this will continue.

Mining profits tend to follow the tin price, with variable revenue and fixed costs:

Don't overthink it.  Its a company that primarily makes money from Tin Mining - the profits and share price follow the tin price.

The company has adopted a dividend policy paying out at least 30% profits.  The 7 sen dividend is 34% of 2022 profits.  2023 earnings look "normal" - not too peak-ish.  At RM 2.10, it would be trading at 10 times 2023 earnings.

I bought MSC this week on the KLSE, making up 5% of my portfolio.

MetalsX (ASX)

My last piece on Tin.  There's 3 listed tin producers.  The third one produces in the DRC which is un-investible.  This one is in Australia, which is safer.

Business

A 50% JV in the Renison Tin mine, a hundred year old mine in Tasmania which is still producing.  Mine life is projected until 2030, with scope for further extension.

They also own 50% of Rentails: tailings dams from historical mining operations containing around 100,000 tonnes of tin.  Significant capex is required to bring this into production.  A new DFS should be completed this year to make a decision in 2023.

They used to own copper and nickel interests but these lost lots of money.  They sold them off and are now purely focused on tin.

Balance Sheet

All numbers are from their June 2022 Annual Report.

They has a windfall from FY2022's high tin prices.  They used it to pay down their debt, and now have 110m in net cash.   Held  as AUD.

Quick side note: They have 28m of convertible notes receivables.  After selling their Copper/Nickel operations, they lent money to develop them, and should be paid back in (MetalX's choice of) cash or shares in March 2025.  New mining operations are dodgy, especially in a recession, so let's wait to see if they get paid back.

Despite the 2022 windfall, they have not paid dividends.  I think they need the money for capex.

Capex

Sustaining capex is 8-10m per year (p10).

In addition, to continue production at Renison until 2030 (Area 5), they need 50-55m capex (p5).

Both the above can be covered by their 2022 windfall.

In 2023 they should make a decision on rentails.  An old 2017 estimate is 205m (or around half of this for MLX's share - p14).  Lets say 100m in 2017 dollars, which might be 150-200m today.  Can be funded from their cashflows if we get another tin spike in the coming years, but don't expect MetalsX to pay dividends anytime soon.

Earning, Cashflows and Breakeven

Our starting point is always the tin price:

Its hard to look at their long term profitability because past tin results are overshadowed by their money losing copper/nickel operations.  Their 2021 AR was the first time they stripped these out. My breakdown of their profits from 2020 onwards, important lines in blue:

As expected, the biggest factor affecting profits is revenue (ASP).  This company is highly cyclical.

I estimate their cash breakeven tin price at around AUD 17-22k/ton.  At that price their Cashflows from Ops would be zero.  If we also cover sustaining capex of 10m per year, we get a required tin price of AUD 19-25K (or 11.8 to 15.5K USD today).   The company estimated their AISC at AUD 17K/ton (p3), which I guess is too low.  Estimates in AUD are tricky because the AUD is so volatile.

Don't think they've been hedging the tin price, there was no mention of commodities derivatives.

Reserves

Excluding Rentails:

Misc

Information is quite skimpy.  I could not find any quarterly results on their website or ASX.  Nor any transcripts of shareholder meetings.

Yunnan Tin is the logical acquirer of this company (their 50% partner in the JV).  Unlikely to happen now since everyone hates the CCP.

Don't buy right now:

Malaysian Smelting Corporation (KLSE)

MSC is a Malaysian tin miner and smelter.  Most profits are from mining and are highly cyclical.  It will benefit from any future tin bubble

Its listed on the KLSE (not accessible from Interactive Brokers).  Illiquid enough that only retail players can buy it.  A secondary listing on SGX (accessible from IB) is too illiquid even for retail - some days only a few thousand shares trade.

Business

Most of their mining is from their RHT mine in Perak, the largest hard-rock open-pit tin mine in the country, operating for over 100 years.  Their lease expires in 2034.  They also have some mining at their 80%-owned subsidiary SL Tin in Pahang (Sungei Lembing), currently producing ~1% of their production, it may ramp up to 40+% in the next few years.

For smelting, they are the world's third largest refined tin producer.  "Over 10% of MSC’s smelting input is supplied by RHT, while the remaining intake comes from local artisanal tin miners and third-party tin mines outside of Malaysia, such as Australia and Africa."

I'm concentrating on mining, as its the most profitable segment and where I expect the next bubble.  Tin smelting is easy - its been done for thousands of years and you can do it in your back yard.

Resources

MSC gives "Resources", not "Reserves".  Resources infer how much of the resource exists in the ground, while "Reserves" are those "Resources" that can be economically extracted.  This is the first commodity company I came across that does not give "Reserves".   I've heard that for tin, the volume and grade of ore inside the ground is unimportant, what matters is the ore type and grain size (paid link).

Most of their exploration is around their existing mine, which is the best place to look for new tin.  It still took years of drilling and false starts to find a new ore body:

2021 tin production was 2408 tonnes, so they have 10 years of extraction remaining (assuming half of the resources can be economically extracted).

Balance Sheet

Quite clean.  As of June 22, borrowings and lease liabilities were under RM 500m, cash was RM 185m, while 6 month profit-before-tax was ~ RM100m (albeit in a boom period).  So they could pay off their debt in a couple of years in a boom.

No new shares have been issued since at least 2012.  A stock-split and bonus issue quadrupled the number of shares in 2018 (without issuing new equity).

Profitability

Profitability follows the tin price:

And the stock price has also followed the tin price:

Since 2021 was an outstanding year, they paid out 25% of 2021's net profit.  I found no dividend policy.  The shares are too illiquid for buybacks.  I like that they paid some profit as dividends to reward shareholders - too many tightly controlled Asian companies become value traps.

MSC is 52% Owned by Singapore company Straits Trading.  Might be good, as it prevents any hostile takeover (....except by Straits Trading).  I want the shares to stay listed to participate in the bubble.

Conclusion

Safe business, with highly cyclical profits, operationally levered to tin prices.  Could be a great tin play in the next bull market.  As a micro cap, it may not move till late in the cycle.

Don't buy now as we're still in a bear market heading into a recession.

Tin

Tin is a tiny market, not covered by any analysts.  Needed for electronics and renewable energy.  It can fly in the next bull market.

May 2022 Tin Panel with Adrian Godas and Piet VanRusselt.  The presentation is disjointed and slides blurry, so I try to provide a summary here.  Timestamps in (brackets).

(1:30) Demand

History of Tin:

• Tin can be bent but doesn't break
• 3300 to 1000 BC, bronze (Cu + tin)
• Cornwall: was producing from 2000BC to 1989, they may be restarting now.

Past price cycles:

• 1960 : 5K/ton.  1956: first tin council, tried to control the market, export quota.  Up to 20K in 1980.  Producers (outside the council grew from 10% to 30%).
• 1980: M'sia tried to corner the market with Marc Rich (of Glencore), they lowered exports.    The tin council saw it happening, they limited backwardation, the price dripped in 1 year back to 15K.  In 1985, tin council went bankrupt, buying buffer stock (120K tones, when the market was 200K tons per year).  Market went back to 5K.   
• (6:25)  1990s: Start of computers.  Big ramp up in price.
• 2008 price back to 5K in a few months.  Few years later back to 33K.
• Last month (April 2022) from $50K to $35K in a month, common in such a small market. Market size is 350-380kt per year, so a small 10-20kt change makes a big difference.
• (7:20) Conflict free tin (in 2010), sourcing of big suppliers agreed to responsible tin sourcing.  Alphamin.  Artisanal mine: taken over by them to make it an official (conflict free) mine.

Lead free tin:

• (13:53) Previously used 60:40 tin:lead mix in EU, but banned in 2006
• (8:15) Lead free tin.  Lead used to be a big part of solder.  Now in solder: 89% tin, 3-8% silver.  A small amount of lead: 0.1%.

Tin Market Size:

• (9:10) Tin is a niche market: 10-15bn dollars a year.  1/10th of the copper market, 1/20th of the gold market.   No analysts following it.
• Market size is 350-380kt per year

Market Demand and Catalysts:

• (10:00) Demand catalysts:  50% solder, driven by renewable energy. Solar power in 2015 used 5kt, today its using 18-20kt, expect in 5 years will be 30kt.    
• (10:45) 5G: we have 30-40% more chips in phone.
• (11:15) EV content is 800g to 1.5kg, ICE vehicle is 400g.
• A challenge for tin demand: miniaturisation of chips: need less chips so less solder.
• The slide flashed at (13:54) shows tin demand for renewable energy:

• (14:00) Only 1g of tin in a smartphone.  Tin price can rise 10X without affecting the smartphone.

(13:43) Supply.  The demand story is great, the supply story is better.

This presentation is for tin concentrate.  It does not cover smeltering and refining into final tin product.  

(15:18) Breakdown by countries.  Slide blurry.  The numbers on the bottom right are probably from here:

One third production in China.  A quarter from Indonesia.  10% from Peru, and another 10% from Burma (which may as well be China).

(15:41) @Respulator 's numbers:

(16:08) China.  Flat supply for 20 years.  Mostly from mature mines in Yunan.  A few new ones in Inner Mongolia.  

• Example: Geiju: big mine, world class asset.  They say they cant increase production.  This article provides some color on Geiju's demise: it looks like a dying cowboy town.

(17:14) Indonesia.  PT Timah controls all smelting, majority of production is from sea ("artisanal mining") which fucks the environment.

• Supply varies, depends on Monsoons.
• Thinks that rising costs create a new tin price floor at $30K

(18:46) Burma.  

• Only started producing in 2011.
• A wildcard.  Maybe hard to produce as mines need to produce underground, in war zones in the middle of the jungle in the country's interior.  But they may keep finding new resources.

(20:01) Africa.  5 mines listed.

(21:20) South America: All from Boliva, Brazil and Peru.

(22:12) Australia.  Had a lot of past production, but only one producing mine (MetalsX - 8K per year).  A lot of potential mines (Ardlethan, Cleveland, Granville, Heemskirk) - but he thinks they have bad metallurgy, with too much sulfites.  Maybe Toronga can come online in future,

(23:08) Europe.  Hopeful that South Crofty (Cornwall - 3K) and Tellehauser (Germany - 3K) can come on line in a few years.

(24:19) Other:

• Syrymbet: Potential 6.5K in Kazakstan.  Complex metalurgy/ore, many by-products.  Has had a decade of feasibility studies with nothing built.  
• Russia: Silligdar: want to expand 2K.

(25:18) Supply conclusion:

• Production to fall to 250K by 2030
• Only 2 new projects.  B2 tailings in Preu, Mpana in Congo
• Big mining companies cannot invest, its too small.  They could buy the whole sector many times over.

(26:05) Evaluation of new projects:

He things real supply growth in 5 years is 34kt per year.  Will not fufill new demand.

(28:35) Estimated final balance:

Got a feeling this will be important later:

(30:20) Questions

(30:31) Recycling?  He can't find any info.  Tin market too small.

• Because its always used in small quantities (iPhone is 5 or 6c, and they can recover only half of it).
• Electronics is easier.  
• Chemicals is impossible.  10X more costly that new tin.
• (32:23) Some efforts to substitute tin in solar.  Probably go back to lead.  They have tried to use resins, but not conductive enough, adds complexity to assembly process.
• Substitute (in PVC?), use thin (calcium?), but worse performance.
• Silver is too sensitive to heat to use as solder.
• Third recycling source is tinplate is now 10-12% demand, going down 1% every year.

(37:00) Can big miners return?  He thinks its too small.  Alphamin is only worth 1bn, don't even bother with due diligence.  The selling point for Alphamin is supply security, not profits.

(40:42) How would you play the expected increase in tin price.  Alphamin will probably be taken over, MetalsX is the only remaining producer.  They do not bother with explorers.

41:81: Not looking at explorers, the producers are cheap enough.

41:50: Scale of PT Timah and their ability to scale.  Trying to predict artisanal miners output is impossible.  Other sectors (fishing, tourism) are complaining because the tine miners are destroying environment.  Vietnam, SEA or African artisanal miners may be able to increase production.  This is a risk to the bull thesis because a small increase of even 10kt may change the market.