A Trip to Samalaju Industrial Park - Big Winners in a global energy crisis

$PMETAL / 8869 (PRESS METAL ALUMINIUM HOLDINGS BERHAD) $PMBTECH / 7172 (PMB TECHNOLOGY BERHAD) $OMH / 5298 (OM HOLDINGS LIMITED) $CMSB / 2852 (CAHYA MATA SARAWAK BERHAD) $BIPORT / 5032 (BINTULU PORT HOLDINGS BERHAD)

Recently I made a trip East to Bintulu, and to the Samalaju Industrial Park. I'd say that players who had set up shop here holds massive advantage over their global peers - especially when it comes to being the lowest cost producer of their finished products. They are winners in a global energy crisis. In addition, with long term trend focusing on "clean / green / low carbon" supply chain, players here may also hold an upper hand.

In summary, players who managed to set up shop here have got tremendous advantage in:

a) Green and Clean energy.
Energy from the grid here is derived mainly from hydropower from nearby Bakun Dam. This energy can be classified as green or clean or “low carbon”.

b) Stable and (cheap) Prices
The hydro energy from Bakun goes through the grid of Sarawak Energy Berhad (SESCO) who sells this to operators in the industrial park at an agreed tariff rate over long term contracts. As the energy is not derived from commodity, it's fixed & hence relatively stable. Some may even say 'cheap' especially in the context of the current market.

c) Strategic proximity to the port
Bintulu Port subsidiary - Samalaju Port - is within 5-10 minutes' drive from the corners of the industrial park. Logistic costs of importation of raw materials and exportation of finished goods are low. Some companies have even set up or plan to set up conveyor belt to transport raw materials directly from
Ship into the manufacturing plant

d) Still plenty of land
For future expansion purposes.

e) Local labor
Many companies are able to hire local Sarawakian workers.

Some risks / challenges apparent to the industrial park would be:
- Port congestion as more players such as steelmakers are coming in
- Extension of power contract agreement & power supply from SESCO
- Stability of the grid and power cuts if too many players are coming

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*Visit 1: OMH - A cheaper way into the promising silicon metal business*

The first visit of the trip was to OM Sarawak. I had the privilege to tour around the 2 plants, going into one of the workshops and see in real life how ferrosilicon is being 'cooked' in the blast furnace and how the 'lava' is being casted into the mould. Also had the opportunity to touch the finished products of both ferrosilicon and silicomanganese. We saw some raw materials (reductants) - quartz imported from China as well as pet coke, the power station, as well as the workshop of which OM is converting 2 of the blast furnaces to produce silicon metal which should start commissioning slowly by December.

During my conversation with OMH staff, we got to learn about the ratio to produce all 3 finished goods (the ingredients), the power factor and other logistical costs to formulate back of napkin costs per tonne of all 3 finished goods. Suffice to say, that OMH's margin across fesi/simn and metallic silicon is healthy even at current ASP.

We also got to understand that power can be in the form of inventory and OM has got some heat recovery system which all in all can be utilized for their immediate expansion plans. The near-term challenge for OMH is to get the best raw mat (purest quartz and coke) from around the world to use to cook and produce the highest possible grade of silicon metal and to commission their 30k tonne per annum target in the most efficient manner.

- I urge everyone to watch 2 youtube videos of Stockbit's briefing with management as well as reading @tapdance's PMBTECH thread to understand more about the current business as well as potential of silicon metal business -

Overall, came out feeling positive about the business. OMH recently bought out their 25% stake from CMS and is currently trading at really attractive valuations of below 5x earnings multiples. One to seriously take a long look to invest.


*Visit 2: CMS / CAHYA MATA SARAWAK - MPAS division - A bright spot for the group*

CMS typically operates its core business in cement, construction, road maintenance and property development across Sarawak. It also has some strategic investment and MPAS is its latest darling.

We visited MPAS (Malaysian Phosphate Additives Sarawak), a 60% JV of CMS, and its new darling. If all is well, this division looks to deliver around RM50-75m to the group in the future. (Back of napkin: 48k tonne of YP x USD5000 per tonne x RM5 USDMYR x 10% margin x 60% ownership).

MPAS plans to have 2 finished products. Yellow phosphate as well as phosphoric acid. These 2 are ingredients to various downstream products from detergent / soaps to animal feed to metal polishing to fertiliser to lately - lithium iron phosphate battery market. These 2 products are projected to grow at a 4% CAGR to 2028.

MPAS is the first ever phosphate company in Malaysia and the first phosphate company in the world using hydro as its main source of energy (low carbon). It's main cost components to create its products are 1) electricity and 2) raw materials (rock phosphate, met coke and silica). Due to their set up in Samalaju, they're operating at the lowest cost quartile vs their peers in Vietnam and Kazakhstan (both have advantage as they have plenty of rock phosphate reserves).

Currently MPAS have got 1 phase and 1/4 furnaces had been commissioned. Q1 2023 they're looking to be fully commissioned and only 30% of its 350 acres of land is currently utilized. There's more to come in the long future.

All in all, MPAS is not too bad. Current ASP and market demand supply dynamics seems to suggest ASP can be sustained at high level which makes this business venture profitable. However, as we can't directly invest in MPAS - consideration has to be done at the group level.. which is far more complicated..


*Visit 3: Bintulu Port - Samalaju Port offers some excitement

We visited Samalaju Port. On the day, there were ships (Handymax or Handysize) and activities happening - transportation of aluminum billets amongst others to keep us entertained.

The port business is one that is very stable but can also easily be deemed as lack of growth and deflationary in real terms as the tariff tends to remain constant whilst cost keeps going up, causing margin compression. This seems to be the case with Bintulu Port.

Fortunately, Samalaju Port feels more dynamic. For a start, they're the dedicated port for the industrial park. There are more activities going in the Samalaju Industrial Park. Press Metal is expanding their capacity, so is PMB Silicon, OM Sarawak and some other existing non-listed operators. MPAS should be fully commissioning their 4 furnaces in no time and there are some new Chinese steelmakers (Wenan Steel) coming into the park in the next 2-3 years. There will be more input and output to flow into Samalaju soon; not to mention that MPAS is looking to build their own conveyor belt from the port directly into their own plant.

The company pays stable dividend albeit below the current inflation rate.


*Visit 4: PMB Silicon - Compact*

We visited PMBTECH's site. As we had no appointment, the best we could muster was to stand and observe from a far. We saw the power station, saw the 3 workshops running, we saw quartz, coke and wood chips inventory and packed silicon metal being sent out on a truck.

PMBTECH's area is not big, but feels very compact and efficient. Also we note that PMB Silicon facilities is outside of the guardhouse entrance into the Samalaju Industrial Park.


*Observation 5: Press Metal - Spectacular*

Lastly, you can't tour Samalaju Industrial Park without noticing Press Metal's grand existence. The entire park felt like it was set up for the company. Despite being one of the earliest tenants, their plant looks like the most well maintained. There's a massive and long conveyor belt which connects Press Metal's factory to the ships in Samalaju Port. Apparently, this belt used to transport alumina directly as the ship docked at the port. Press Metal's cost for this arrangement is at RM23 per tonne. They would've paid 20-30% more if they use conventional transportation methods.

The company is planning for its new phase, and they will just keep growing. Biggest beneficiary of all the goodies in Samalaju Industrial Park!


*Verdict*

OMH, PMBTECH and PMETAL are seriously worth studying and placed in watchlist. When the world is facing global energy crisis, their positioning and set up means they will win vs their peers.

More importantly for long term investment... as the lowest cost produce of their products - some of which are important materials for long term global trend, as well as the fact they would be considered as low carbon producer in the supply chain, means these companies could be set as long term compounders!

Hope this has been helpful. Do comment if you have any queries & questions!