KUCHING: Integrax’s 80 per cent owned Lekir Bulk Terminal Sdn Bhd (LBTSB), which entered into a conditional transhipment services agreement with Brazil-based Vale Int SA (Vale) to provide transhipment services for iron ore cargo, will be embarking on a RM200 million expansion of its Lekir Bulk Terminal (LBT) in Manjung, Perak.
According to OSK Research Sdn Bhd (OSK Research) in a research report yesterday, LBT will be undergoing transformation to allow import and re-export of all nature of dry bulk cargo in economic quantities during its agreement tenure of 10 years with Vale.
It added that the agreement between Vale and LBTSB that was reached in December 2009, required LBTSB to ensure that the transhipment facility be made available to Vale within 24 months from the date of execution.
In June 2009, Vale, the world’s second largest diversified metals and mining company, bought a 165.5 hectares piece of land in Teluk Rubiah from property developer KYM Holdings Bhd (KYM), which is a small district of Manjung in Perak.
Vale has an option to buy another 305.95 hectares, bringing the total acreage available to Vale at 471.46 hectares in the district. The land approved for resort development, currently comprises an 18-hole golf club known as Teluk Rubiah Country Club.
It also had a 54-room chalet development named Teluk Rubiah Resort and 142 bungalow lots, the research firm pointed out.
The sale of the land and options was through KYM’s 54 per cent subsidiary, Harta Makmur Sdn Bhd. The land comprised of 29 parcels with 81 years remaining on the lease. KYM proposed to sell the 165.5 hectares for RM101.9 million in cash and the 305.95 hectares for RM93.8 million in cash.
Vale is a global company headquartered in Rio de Janeiro, Brazil and the largest publicly traded company in Latin America by market capitalisation of circa US$150 billion.
The group has a global presence and is the world’s largest producer of iron ore and pellets, the key raw materials for the steel industry as well as one of the largest producers of nickel.
OSK Research said that that the agreement with LBTSB was to facilitate Vale’s plan to station its distribution centre, possibly with a 9 million tonnes per year (tpy) iron ore palletising plant, in Malaysia.
A quick search on Vale’s website revealed that the company’s proposal entailed building a maritime terminal with enough depth to receive 400,000 dead weight tonnage ore carriers and a stockyard capable of handling up to 30 million tonnes of iron ore in an initial phase.
There was potential to expand it up to 90 million tonnes in the future. The capital expenditure for this first phase was US$900 million, with disbursements of US$98 million for 2010.
The plan, the research firm stated was to start the project in the first half of 2013 but it was still subject to approval by the company’s board. Vale was also studying the construction on the same site of a pellet plant with a capacity of 9 million tonnes per year (tpy) of direct reduction and blast furnace pellets
As the agreement signed with LBT required the company to ensure that the transshipment facility will be ready within 24 months, it was expected be on time to capture the South-East Asia (SEA) market since at least a few of the blast furnace projects within the region would be just about to commission their furnaces.
Although the volume of transshipment was not announced at this juncture, LBT was only capable of handling 10 million tonnes per year of shipments for Vale without significant expansion of the existing port after fulfilling its existing commitments to TNB Janamanjung Sdn Bhd, a wholly owned subsidiary of Tenaga National Bhd, under a 25-year Jetty Terminal Usage Agreement.
It was disclosed that the entire Vale project was still subject to board approval but with the transshipment arrangement only subject to financial close by Integrax, no major hurdles were foreseen to its go-ahead.
Vale’s proposed distribution centre and palletising plant needed to first get the green light from various government agencies such as the International Trade and Industry Ministry (MITI) and Malaysian Industrial Development Authority (MIDA), amongst others.
An Environmental Impact Assessment (EIA) study wass also required and thus it was expected to take at least a year before construction began, the research firm revealed.
Among the port’s catering to dry bulk shipments in the Southeast Asia, LBT is the only natural deepwater port that offered the deepest depth in the region, with a water depth of 20 metres without the need for dredging maintenance.
OSK explained that this enabled it to berth a fully laden Capesize vessel with a maximum 180,000 dead weight tonnage. While it noted that Vietnam was in the midst of constructing SEA’s biggest deep-sea port in Son Duong to a depth of 24 metres to accommodate capsize vessels of up to 400,000 dead weight tonnage, without dredging it deeper, the port only offered an average water depth of 10 metres to 12 metres.
Based on recent checks, the average water depth in Manjung could easily accommodate vessels as big as VLCCs shipping crude oil (400,00dwt) without any dredging. This distinctive feature has created strong interests from several consortiums over the past decade to build a smelting and petrochemical hub given the ease in berthing large carriers.
The provision of transhipment services entailed significant additions to the port’s handling equipment as well as an additional storage yard space to accommodate the increase in volume handled.
Management was allocating a sum in excess of RM200 million, which would likely be funded by bond borrowings. OSK Research felt that the funding would not be a key issue for Integrax given its solid balance sheet, having improved to a net cash position of RM22 million from a net gearing of 1.6 per cent.
While the holding company had net cash, both LBT and LMT also exhibit much-improved net gearings of 18 per cent and 9 per cent respectively as of year ended December for the financial year 2008.
OSK Research said that KYM may benefit from the agreement as well. Upon completion of the land disposal to Vale (Phase 1& 2 of the disposal), KYM would still have some 100 acres left in Teluk Rubiah.
KYM was currently in financial difficulty, mainly as a result of the burden in financing the said land in Teluk Rubiah since many years ago. However, post disposal of the land and financial restructuring, KYM would likely be in a much better shape to develop the remaining 100 acres or so in the area to tap any positive spillover from Vale’s investment in the region.
Although the research firm observed that Vale’s project may have a small financial impact on Malaysian steel millers and may take a while to materialise, this project had certainly received the affirmation from local steel mills.
As the market was searching for “recovery plays”, steel counters would certainly be in the limelight given that the stimulus packages worldwide would eventually translate into physical steel demand.
The surge in raw material costs had currently resulted in small steel prices increasing on a cost-push basis, which was expected to eventually lead to improved buying sentiment after the Chinese New Year celebrations in February. This would in turn push demand and lead to a further price upside.