Perwaja plagued by continuing weak demand

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GOOD STEEL DEAL: The iron ore mining business in Malaysia remains lucrative as production cost is likely to be below US$50 a tonne, as compared with the current international selling price of above US$140.

KUCHING: Perwaja Holdings Bhd’s (Perwaja) Murabahah Medium Term Notes downgrades bay the Malaysian Rating Corporation Bhd (MARC) came as no surprise following its recent poor performance.

“Given Perwaja’s reported losses for two consecutive years plus the poor nine months financial year 2012 results thus far, the downgrade came as no surprise,” said OSK Research Sdn Bhd (OSK  Research) in its research report.

The report highlighted that the rating action affected RM160 million of outstanding debt notes under the programme while the outlook on the rating was negative.

OSK Research noted that the basic fundamentals underlying steel mills in Malaysia remained weak, but various ‘mega projects’ under the Economic Transformation Programme (ETP) might spur long steel demand despite execution risks.

“While the industry’s poor outlook will persist, Perwaja is building an iron pelletising plant that is expected to boost the profitability of its direct reduction plant,” the report said, adding that this would allow it to met its own iron ore pellet needs, which were currently procured at a hefty premium to iron ore fine.

The new iron processing plant is expected to produce 400,000 tonnes of iron ore pellets in financial year 2012 and achieve a total savings of US$50 per tonne from the procurement of local iron ore, logistical benefits, in house value-adding activities and utilisation of tax credits on accumulated losses.

The research house maintained that iron ore mining in Malaysia was lucrative as production cost was likely to be below US$50 a tonne, as compared to the current international selling price of above US$140.

OSK Research opined that the Terengganu Chief Minister had reiterated in December 2011 that the state government had allocated an area in Bukit Besi in response to Perwaja’s request to mine iron ore in Bukit Besi.

While the remarks suggested that an official award was imminent, no agreement had been sealed at this juncture.

“Aside from ongoing transformation, Perwaja is in the midst of completing its proposed redeemable convertible unsecured loan stocks (RCULS) with free detachable warrants,” the report noted.

Following some delay, the research house believed the next key date for the entitlement might be fixed in the next few weeks as the warrants were scheduled to start trading by the end of this month. This was believed to be able to reward minority shareholders, prompting OSK Research to view the move positively.

It went on to peg a fair value of RM1.65 per share for Perwaja, remaining upbeat on the company despite the latest rating downgrade by MARC.