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.

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.