openbriefing.com
OM Holdings Limited (ASX: OMH) has announced the discontinuation of its Hong Kong Stock Exchange listing plans even though the Federal Court has yet to deliver its decision relating to the objections by Stratford Sun Ltd (a wholly-owned subsidiary of Consolidated Minerals) to the AGM resolutions relating to the listing. You have also announced a review of a potential de-merger of your smelting and marketing business from your mining operations. What bearing will the court outcome have on these plans?

CEO Peter Toth
While the court process must obviously be allowed to run its course, we will not continue with the Hong Kong dual listing process irrespective of the outcome of the court proceedings. When we look at the situation today the global economy has come under further stress, Hong Kong markets have softened, lower manganese prices have weakened market sentiment and our share price has come under pressure. Putting all these factors together the discontinuation of the Hong Kong listing process is now clearly in the best interests of the Company.

The rationale behind a Hong Kong dual listing was primarily to provide OMH with access to capital to develop our Malaysian smelting project together with broadening our shareholder base. Our core strategy of becoming a leading manganese producer, developing key growth projects and pursuing suitable M&A opportunities hasn’t changed. We’re now evaluating alternative strategies to access the capital required for the projects and at the same time unlock significant shareholder value through potentially de-merging our mining and smelting assets. This will assist us to align the strategies and assets of these businesses with the preference and expectations of their respective shareholder base, while attracting new strategic investors and joint venture partners. This strategic review process will also continue regardless of the outcome of the court case.

openbriefing.com
Given OMH has historically pursued a vertical integration strategy, how do you expect a de-merger of your smelting and marketing businesses to add value for shareholders and what is the expected impact on the development of your key projects?

CEO Peter Toth
While we continue to see the logic for vertical integration, it has become apparent that our investors won’t readily support a large, complex and geographically diverse downstream strategy. As a mid-tier pure play manganese producer pursuing an aggressive growth strategy across the entire value chain we differ from the large multi commodity international mining conglomerates. This is especially so for an industry like manganese which is relatively small, complex and cyclical, and is continuously compared to iron ore and met coal.

Our ‘core’ strategy to add shareholder value is focused on relentlessly ‘sweating’ our operating assets while developing the world class Tshipi Project (OMH 13%) in South Africa and establishing a large low cost world class smelting operation in Malaysia. While the proposed Hong Kong listing, together with the cash flow from our underlying businesses, would have provided us with the capital required to develop these projects, it’s not the only available avenue to achieve our goals.

As an alternative strategy to execute our key projects and unlock significant shareholder value, spinning out the smelting and trading businesses in Singapore can achieve the outcome we were seeking from the Hong Kong listing, and maybe more. It will realise the underlying value of the two separate businesses (so that 1+1>2) while positioning them for future growth. We believe the separated businesses will provide more attractive and focused investment vehicles, allowing us to retain the support of many of our existing investors and attract new investors.

The strong performance of our underlying operating businesses provides us with a solid platform to successfully implement these initiatives.

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The Hong Kong listing was expected to raise around A$400 million. How would the de-merged companies be positioned to fund growth and reduce debt?

CEO Peter Toth
Looking at the capex requirements for developing the US$200 million Tshipi Project, our contribution is a relatively small US$26 million. This amount is being funded predominantly from our cash flow. The same applies to the smaller Johor based Malaysian logistics hub, smelter and sinter plant project.

The larger more complex Malaysian Sarawak smelter project has an estimated capex requirement of US$450 million. Access to project financing and the introduction of joint venture partners will reduce our cash requirement to complete the project.

Make no mistake, the Sarawak Malaysia project has the potential to become one of the largest and lowest cost smelting centers in the world, sitting in the middle of both the ore supply route and the Asian steel industry, on the back of some unique competitive advantages – power, land, location, logistics, tax incentives, lack of duties, and excellent infrastructure. But as with all opportunities like this you need to be quick, you blink and it’s gone. This is where a nimble and entrepreneurial approach works well and where we have quickly and successfully established for ourselves a great platform on which to execute the project.

Attracting new investors, strategic and off-take partners who understand and are supportive of this business will allow us to raise the required funds over the two to three year time frame needed to execute the project.

We’re also examining the potential divestment of some of our investment holdings which would further streamline our strategic focus, strengthen our balance sheet and potentially make us debt free.

openbriefing.com
Why are you considering combining the trading and marketing part of the business with the smelting assets and what will this mean for existing shareholders?

CEO Peter Toth
The marketing and trading business is well aligned with our existing and future smelting operations in terms of expertise, geography, end-user relationships and logistics, so these businesses would combine nicely around these synergies to form an independently listed entity.

I also envisage a strong on-going arm’s length agency relationship between the mining and marketing businesses after a de-merger. This works nicely for Glencore and Noble, and it will work very nicely for us as well considering OM Materials’ unique industry experience, product knowledge, logistics capability and market access, particularly with respect to Asian markets.

By separating these businesses out, it becomes easier for both businesses to raise the required capital to execute their respective growth projects while creating more focussed, streamlined and attractive investment vehicles. We can unlock the inherent strategic value of these businesses for shareholders while retaining their independent and combined competitive advantages.

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If OMH’s mining assets were to remain listed on the ASX as proposed, what would the investor proposition be?

CEO Peter Toth
The new look listed Australian entity would be a smaller, manganese focused miner operating a 10 to 15 year mine life, high grade, low cost asset in Bootu Creek with significant exploration potential and an ability to raise further capital. It would provide a platform for substantial growth through the development of the world class Tshipi manganese project in South Africa and the identification and capture of further Australian, South African and global exploration and mining opportunities. As a nimble and streamlined mining company focused on manganese it should be more attractive to Australian and global mining focused investors who have a good understanding of Company and the industry. We believe there is a strong appetite for a robust mid-tier pure manganese play in the Australian market focused on mining with an ambitious growth strategy and an appetite for consolidation, focusing on world class manganese ore mining assets and opportunities.

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You’ve indicated that Bootu Creek has achieved record production in the June quarter. Is this production level sustainable? What is the outlook for manganese prices?

CEO Peter Toth
Bootu Creek is operating exceptionally well. I’ve previously indicated my strong conviction that the mine has the capacity to consistently produce 1 million tonnes a year at a cash cost below A$4.00/dmtu (dry metric tonne unit) fob (free on board). Our second quarter and first half results have demonstrated that. In April and May we achieved record production of 100,243 tonnes and 98,818 tonnes respectively at cash costs of A$3.16/dmtu and A$3.48/dmtu respectively. June is also going to be a strong month with record second quarter production above 265,000 tonnes and cash costs below A$4.00/dmtu. Our half yearly production result will be close to 450,000 tonnes, another record. The mine will ship close to 500,000 tonnes for the first half, yet another record. These results are the culmination of our work over the last couple of years restructuring and optimising the mine together with re-designing our marketing strategy around end users, distribution systems and China “retail” sales.

The Quinzhou smelter will produce more than 20,000 tonnes of alloy for the June quarter. It’s running well in excess of its nameplate capacity and budget expectations for the year. The sinter plant is running at close to 65,000 tonnes for the quarter, providing us with a very strong production performance.

Overall, we’re producing well, generating a positive cash flow and producing a profit, despite subdued manganese prices and the Australian dollar at record highs during the period. H1 2011 earnings are not going to match H1 2010 but we have our head well above water and we are confident of an improving manganese market and generally stronger H2 2011.

Irrespective of the manganese price softness and supply side pressures there’s still very strong demand for our product in the Chinese end user market. The current pressure on the spot market price is due to supply side pressures manifesting itself in a large stock overhang in China of approximately 3.5 million tonnes, representing about three months’ worth of import supply. Nevertheless current and future demand for high grade imported product is and will remain very strong and once the existing stockpile is worked out of the system we expect prices to recover. We are very well positioned to benefit from that recovery.

openbriefing.com
What is your expected timetable for announcing the outcome of the strategic review and potentially completing a de-merger your smelting and marketing assets?

CEO Peter Toth
The strategic review is underway and we expect to communicate further to the market on this during the September quarter. The completion of the Bankable Feasibility Study (BFS) of the Sarawak Malaysian smelter will be a major milestone in this regard and it is due to be completed in the fourth quarter of calendar 2011.

If we decide to proceed with a de-merger option, then it should be completed by no later than the first half of calendar year 2012. Exciting times lie ahead.

openbriefing.com
Thank you, Peter.

For more information on OM Holdings, visit www.omholdingsltd.com or call Peter Toth on +65 6346 5515

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