Perwaja's earnings set to surge: OSK

Manufacturer of primary steel producer, Perwaja Holdings Bhd, is likely to bid for and secure several parcels of mining land concession to be awarded by the Pahang and Terengganu states soon.

This is highly possible given the fact that Perwaja had recently made known its intention to venture into iron ore mining, a raw material which could be used in the new iron ore pelletization plant in Kemaman, Terengganu, expected to be operational in the first half of next year.

"It (the concession) may result in a surge in Perwaja''s earnings," said OSK Research.

In the first quarter ended March 31, 2011, Perwaja registered a pre-tax loss of RM24.282 million compared with a pre-tax profit of RM22.66 million chalked up previously, while revenue dropped to RM426 million, from RM373.7 million, registered earlier.

The mining concession follows Prime Minister Datuk Seri Najib Tun Razak''s pledge to encouraging states with iron ore and coal reserves to allocate more land for steel manufacturers to undertake commercial mining to enhance their operations.

"We understand from our market intelligence that there are a few parcels of mining land in Pahang and Terengganu which are set to be awarded by the respective state governments anytime soon," said OSK, adding that there was a strong possibility Perwaja would grab at least one of the new mining plots, especially in Terengganu.

Perwaja''s plant, strategically located in Kemaman and its new pelletization plant in Kemaman, is set to enhance the value of bare iron ore fine, which could be used as feed material for its direct reduced iron plant.

The fact that Perwaja was originally a national project also raised the possibility of the company securing any upcoming iron ore mining concession in Terengganu or Pahang, said OSK.

OSK recapped that Terengganu Menteri Besar Datuk Ahmad Said had recently said the state''s Minerals and Geoscience Department was conducting a six-month study on the viability of reopening the iron mine in Bukit Besi.

"If there is any mining to be done there, the state government itself will do it by forming a joint venture with private companies," he said.

Bukit Besi''s mines are generally served by good network of public roads.

OSK also said in the event Perwaja secured an iron ore mining licence or concession, its immediate savings would be a hefty US$100 (RM300) a tonne as the cost of mining was less than US$50 (RM150) per tonne.

Besides, the potential margin from palletizing should benefit the company as transportation costs would be below US$10 (RM30) per tone compared with the current capesize bulker freight of more than US$10 and US$20 per tonne from Australia and Brazil, respectively.

OSK said in the event Perwaja secured an iron ore concession and, based on the assumption that the iron ore mine would start operations in January 2012, a production cost of US$50 per tonne and tax free mining should result in Perwaja utilising its RM1.6 billion tax credit on unabsorbed tax losses.

"Our back-of-envelope discounted cash flow computation shows that the iron ore mining concession is worth a mouth-watering RM4.15 per share," it said.

This analysis is based on the assumption Perwaja manages to secure a 400 hectare iron ore mine in Bukit Besi with an initial capital outlay of US$10 million, produces 500,000 tonnes of iron ore in 2012, one million tonnes in 2013 and up to two million from 2014 onwards to 2031, production cost remained at US$50 per tonne throughout the concession tenure and with iron ore selling prices averaging about US$120 per tonne in 2012.

Meanwhile, Perwaja shares perked three sen to close at 91 sen on Bursa Malaysia today. -- Bernama