Q&A: Adrian Low on how manganese processor OM Holdings plans to ride out a recession
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It feels odd to say a company which made $82 million in NPAT last year, pays out dividends in Aussie dollars and is playing in a market critical to steel, renewable energy and battery making flies under the radar.
But that is certainly the case with dual-listed Singapore based manganese and ferroalloy processor OM Holdings (ASX:OMH).
Despite its $520 million market cap and 290% rise in share price over the past five years, family-run industrial stock OMH remains a peripheral name in the ASX resources space.
Founded by executive chairman and metals trader Low Ngee Tong, the company was known previously for its mining assets including the Bootu Creek mine in the Northern Territory, where production wrapped up at the end of 2021.
It has repositioned itself since 2014 as a downstream producer of ferrosilicone and manganese alloys, with its Samalaju Smelting Complex in Sarawak, Malaysia enjoying the advantage of its access to a long term supply of hydropower.
Prices of manganese ore and alloys have quietened down after surging in the first half of the year due in part to the conflict between Russia and Ukraine.
But OM Holdings general manager Adrian Low says the company believes its power agreement and focus on the emerging steel market on its doorstep in Southeast Asia can help it prosper through the cycle even with global economic fears looming.
Its confidence in the smelter is obvious, given the US$120 million offer it has made to buy out its JV partner Samalaju Industries Sdn Bhd’s quarter-stake in the Sarawak plant to claim full ownership.
Stockhead spoke to Low about the market for manganese alloys, its offtake, exploration and mining plans in Western Australia including its JV with Bryah Resources (ASX:BYH), and the impact of the Russia-Ukraine conflict on the ferroalloy market.
“I think the sort of broader economy and the prices of ferro alloys, specifically ferrosilicone and manganese alloys, tend to be correlated only in very broad ways.
“So there are very micro supply-demand issues that we have to look at, especially today for ferrosilicone and manganese alloys that we produce and trade.
“It’s very much affected by what’s happening in Ukraine and Russia, because Russia is the world’s second largest exporter of ferrosilicone and Ukraine was and still remains the world’s second largest exporter of manganese alloys. So how that resolves is a big factor and that’s a bit distinct from what’s going to happen in the macro economy.
“Having said that with natural gas prices the way they are today in Europe, and just demand coming off globally, that has definitely pushed demand down a bit for ferroalloys.
“It’s really happening around the world, Europe, Southeast Asia, where a lot of these Chinese steel mills have set up shop, we’ve seen demand come off, people reducing production by 10-30% because order books just aren’t full anymore, and that’s had an impact on prices.
“But further out I think it will really depend on what the supply response is and that depends on countries like Russia, Ukraine and China and for manganese alloys, I think, depends on India as well.”
“We’ve had a very exciting first half, I had no idea that the high grade benchmark was going to do what it did. But I guess in hindsight, it was really just a shortage of Australian high grade ore relative to all the other grades, because if you look at the South African 37% index, that didn’t really move, the spread between the 44 and 37 really opened up.
“So I think it’s a very, very local issue, purely down to the fact that South32 at Groote-Eylandt just hasn’t been able to keep up output and that high grade ore commands a premium. It’s really its own sort of demand and supply market.
“In terms of silicomanganese, I think there was the knee-jerk reaction after Russia invaded Ukraine.
“All of a sudden, the European mills were covering for months of silicomanganese demand, the Indian producers sort of moved in, and covered that but not without having a serious impact on prices because now a couple of months out, we’ve seen that the available supply of manganese alloys actually seems to be balanced and Ukraine actually, they’ve got two major plants, the southern one at Zaporazhzhia, I think that’s close to 50% capacity, but the main plant Nikopol is actually still operating close to 80-90%.
“All of a sudden, traders realised that they’ve been wrong-footed in the sense there’s just too much manganese alloy in Europe and prices have come down.
“In a sense it was always going to be the case because if you look at historical silicomanganese price spread versus manganese ore it’s never been this wide and it shouldn’t be, so that spread has to mean revert at some point of time.
“And the Indians are just producing silicomanganese like there’s no tomorrow. They overtook the Ukrainians I think it was last year, maybe two years ago, in becoming the world’s largest exporter of manganese alloys and that has to have an effect (on prices) at some point in time.”
“I keep asking myself the same question. But just to look at the scale of things India and the Ukraine, let’s say in the last two or three years on average, they would be net exporters of manganese alloys at a size of about half a million to a million tonmes of alloys.
“We ourselves produce a quarter million tonnes of alloys. So we’re not small, but neither are we really sizable.
“So we have the sort of flexibility to place things, let’s say in a more diversified basket. Our home market’s really East Asia, Japan, Korea, Taiwan, and increasingly, I think the sort of fastest growing share would be Southeast Asia.
“There have just been so many new Chinese mills come online. Just the plants that we’ve visited ourselves amounts to something like 25 to 30 million tonnes of crude steel and this is all new output, it didn’t exist when we started production in 2014.
“I think being able to respond nimbly and place material around the world, in the US and Europe, but sort of maintain that home base is where the advantage is.
“More importantly, I think the issue is for ferroalloys, you need ferroalloys for steel, right, every tonne of steel requires 10 to 15 kilos of ferroalloys. So it’s got to be produced. But most of the world’s production has been very coal-based.
“And I think what we’re doing in Sarawak, sort of using the hydro energy, we’re actually one of the first plants to set up shop, and having that power price locked in.
“So the power contract is take or pay for 350MW of power and that’s locked in for 20 years, no moving parts. Obviously, there’s this inflation factor. But if you look at natural gas prices in Europe today, then that pales in comparison.
“Having power prices anchored at that very competitive level means that we are able to last through the cycle, and I think, for any alloy producer that’s the key, you can’t be a fly by night producer because no one would actually hedge their material with you.
“I think how our buyers see us is as a hedge against Chinese output, Indian output, you know; Malaysia is a fairly politically neutral country. We’re not really affected by tariffs on India, Russia and China, that sort of thing. And so that’s another major advantage for us but the core of it is really the power contract.”
“Unfortunately the answer’s no high grade. But we’re fairly optimistic about what we’re doing in Western Australia. There’s Bryah where we have this farm-in arrangement. There’s Mile 701 that’s in its infancy stage. But if you look at what Element25 has done I think it’s very reasonable to assume that there are lots of opportunities in Western Australia.
“And the key issue really is it’s not a fantastic grade but how do you unlock value? And it sounds really cliche when I say it that way but the thing about smelting is, it’s not just about the manganese right, you have to have manganese, the right ratio of iron, silica, calcium, alumina, and phos.
“And so what gets presented to the furnace has to be in a sort of preordained mix.
“How you choose to deliver those iron units, silicone units and so forth, will determine ultimately what your margins look like over the long run.
“So I think the way we’re running the plant at Sarawak, we’re really flexible and nimble about things. And so how do we take that ore and find the optimal blend for using that at Sarawak and then replicate that in China if there’s excess material to be sold.
“That’s really our vision for Western Australia or just operations in Australia in general, it’s leveraging on what we’re doing which is downstream processing and that’s, I think, what we know best.”
“That’s right, yeah.”
“Look, I think we won’t say no if the opportunity presents itself. But I wouldn’t say we have ambitions to sort of acquire them or be, say, the largest miner, or that sort of thing. At this point in time we want to be the largest processor in the region and then we’ll see what opportunities come up.”
“It’s probably going to be big in the future. In the short run, looking at what the Chinese are doing, it’s probably going to be oversupplied for the first couple of years, high purity manganese sulphate.
“I think for us it’s really in the manganese and silicon space that we just want to do everything. So on the silicone side, there’s ferrosilicone for steelmaking, there’s silicone for solar, that’s actually what we’re going to do.
“Fingers crossed we’ll commission that in December, and then we can actually be a part of the solar panel value chain. For the manganese, I think there’s absolutely no reason why we shouldn’t look into it.
“That’s definitely what we’re doing right now, just at a very high level a bit of a pre-feasibility stage. But I think we’ll have to go in with eyes wide open, because I think it very well may be oversupplied in the first couple of years and it’s not clear to us yet, you know, how one does this efficiently.
“I know lot of companies have come out and claimed that they’re really efficient at producing HPMSN and saying high grade ores or other ores are good. We haven’t really studied that yet. I think we know traditional smelting really well, and the efficiencies and recoveries of that. HPMSN, not so much but I would absolutely say that’s something we will be looking at.”
“I think I’d be lying if I said I wasn’t surprised. We are surprised by the lack of attention. But from the last couple of sessions that we did while we were still travelling, I think a lot of the focus was on how Bootu was going to cope when it was still there, and people didn’t really seem to understand or appreciate the smelting story, the downstream processing.
“The focus was always very much on OM as a manganese ore miner and I think that has completely changed.
“So I think what has happened starting from September last year with coal prices the way they were and natural gas prices, that has really burst the bubble in a sense, and is showing people how vulnerable these energy supply chains can be.
“And that’s actually where we come in, because Sarawak is sort of a locked in country that has a lot of energy and you can’t export that energy. The next best way of exporting energy is in the form of ferroalloys. So I think we’re a bit surprised, but we just have to continue telling the story and educating the market.”
“We don’t typically provide guidance on financials. In terms of operations, what we’re most likely going to achieve is 75% utilisation, more or less what we did last year.
“In terms of P&L I think last year was obviously a fantastic year because we were very lucky, helped by strong prices. I think a fair bit of that is going to spill into this year, just because a lot of the Q4 contracts that were priced in Q4 were actually delivered in Q1 this year.
“So we’re very optimistic about the full year, but we’ll say that the first half is definitely going to be much stronger than the second half, just based on the fact that it looks like some kind of recession is coming.”
“Sell, sell and sell more (light laughter). I think one is to sort of identify where the strong markets are at this point in time.
“Even though the US is sort of the epicenter with the Fed doing what it’s doing the US remains a very strong market.
“Markets like Japan, I think, the Japanese mills are doing relatively well in terms of placing material ahead of time to people who are willing to take that, as well as not forgetting the supply side in terms of raw materials.
“I think supply chains have proven to be very fragile and so securing our raw material at the right time. Actually what we’re doing is stockpiling material in China, and sort of having that in stock import and not risk some kind of incident like the last couple of months where we saw truck drivers in China doing PCR tests, sort of bogging down the entire logistics supply chain in China. We’re just doing a lot of small practical steps to secure those supply chains.”
“Going back to what I said about presenting the full chemistry of materials to the smelter it’s always a balancing act. Too much iron, then I need some something high grade, like GEMCO to balance it.
“If I have too much GEMCO then I need some silica, do I get it in the form of quartz? Do I get it from Element25? So those sorts of conversations are happening every week with production.
“Historically, I would say the ore from Bootu probably accounted for something like 20-30% of what we use in Sarawak. It’s not small but it’s not really big either and we will just continue balancing buying ore from suppliers. We get from South32, Eramet, Element25 and sometimes from Tshipi as well, so I think we’ve really probably bought ore from all of the major miners at this point.”
“So depending on who you speak to that’s surprising or not surprising, but I think the consensus is that China has reached peak steel production at this point and a lot of the private enterprises, those that are competitive, are actually relocating production into Southeast Asia.
“That’s a new customer base, but I think if you look at regions like India, Southeast Asia, per capita steel consumption is still far, far behind China.
“Even smaller provinces in China probably have higher steel consumption than in Southeast Asia as a whole. There’s a lot of catching up to do and I think if you look at the year to date steel production this year from World Steel India is really the only light in all the chaos.
“We see a temporary cut back to production in markets like Europe and places like that, but that was not and will never be our home market. So I think India and Southeast Asia are closer to home, and probably realistically one of the few regions in the world that have the potential to achieve double digit growth in steel, if not production, then definitely consumption in the next decade or more.”
At Stockhead, we tell it like it is. While Bryah Resources is a Stockhead advertiser, it did not sponsor this article.