Unlisted & Unlimited: The Mining Renaissance

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ONCE a significant contributor to the country’s economy,  the mining industry suffered a decline after the global tin market collapsed in 1985. While the government seems to have written it off as a sunset industry, local players believe the discovery of new deposits and more advanced extraction technologies are giving mining a renaissance of sorts.

According to data from the Malaysian Chamber of Mines (MCOM), production levels of iron ore and raw gold have strengthened since 2006 and 2008 respectively (see table). The production of tin increased to 3,664 tonnes in 2012, up 9.7% from 3,340 tonnes in 2011.

Overall, the total value of major minerals produced in Malaysia increased 9.76% to RM6.86 billion in 2012 from RM6.25 billion the year before. Yet, there is a lack of mining companies on Bursa Malaysia today, as these companies are finding it hard to expand locally.

There were 20 or so mining stocks on the then Kuala Lumpur Stock Exchange before the tin market crashed. But today, only one counter remains under Bursa’s mining sector — Kuchai Development Bhd. However, it is currently involved in investment holding and property rental.

“When a mining company goes for listing based on just one operating mining asset, the cash flow is more or less fixed and earnings per share is thus predictable,” says Malaco Mining Sdn Bhd managing director Datuk Sia Hok Kiang.

“However, there is no upside to this unless the company has room for growth, which means it should have land holdings with mineral potential in order to expand. It is also important that the mineral potential in those land holdings is in line with the company’s mining business.

“For example, an alluvial tin miner may not be able to realise the full potential of a copper deposit because it has to raise the extra capital expenditure to set up totally different mining equipment,” he explains. “A good project listing would have a stable source of income plus room for expansion for potential equity gain.”

Malaco currently mines copper in Queensland, Australia, and iron ore in Mengapur, Pahang. Since 2010, the company has produced RM174.1 million worth of mineral products, and production levels are rising each year. It saw revenues of RM66.7 million from mining activities last year, up from RM55 million in 2012, RM50.8 million in 2011 and RM1.6 million in 2010.

Land is a state affair in Malaysia, so companies need to apply for mining rights with the state government. The issue however, says Zaidi Harun, vice-president of business development at Canada-based Monument Mining Ltd, is that state governments don’t usually relinquish sufficient land for mining exploration works.

“Before the tin market collapsed, the government was more supportive of the mining industry because it was needed to support the economy. There was also less competition for land use,” he adds. “Today, we are less reliant on mining and have diversified earnings from other industries, so governments only give up land sizes of just a few hundred acres.”

A decent size for exploration works should be 1,000 acres or more, says Zaidi. “You won’t know exactly where the metals are, so you will explore a larger piece of land before zooming in on the deposits and planning your development work around it. I don’t think the government understands the process, so they apportion land for other economic reasons, such as property development and plantations.”

Monument operates gold mines in Selinsing, Pahang. It is also developing a copper mine in Mengapur (also in Pahang) and carrying out gold exploration in Western Australia. For its fiscal year 2013, the company saw an increase in production capacity at its Selinsing mine, from 400,000 to one million tonnes, and 19% growth in production at its South Australian mine to 52,982 ounces. This contributed to the company’s overall revenue of US$91.3 million (RM299.3 million) for the year, up 48% from FY2012.

Furthermore, says Sia, small parcels of land only provide for short-term, small-scale mining activities without any room for long-term growth. “This is unlikely to be beneficial to the country’s mining industry, as the constraint will always be on the size of mining rights.”

State governments also face political constraints when apportioning land. Of the three mining belts in Peninsular Malaysia, the western tin belt stretches across the more urbanised states of Kedah, Perak and Selangor, where land is typically put aside for property and urban development.

However, land allocation gets more flexible across the central gold belt in Kelantan, Pahang and Johor, and the eastern tin belt that stretches over the peninsula’s east coast.

Recreating the foundation

Besides government regulations, a gap in mining knowledge and technology is hindering the industry’s progress. According to Sia, mining came to a standstill in Malaysia after the tin market collapsed. Local investors and regulators today face a nearly 30-year lag in mining expertise despite the revival of international interest in mining.

“No mining activities meant there were no career opportunities either. Universities may provide courses in mining, but most graduates end up in the engineering or oil and gas industries. There is a lack of continuation in terms of mining knowledge,” Sia says.

“Malaysians think of a palong (sluicing of tin ore by gravel pumps) when you mention mining, but that’s long gone. Today, we use computer programmes to design mines, based on ore body models that are produced by analysing drillhole data.”

It is little wonder then that Malaysian analysts and regulators are strangers to the industry. This makes it harder for a mining company to list, opines Zaidi, as it would need a whole range of expertise to support the market, from the financial services sector to brokers and bankers.

“[Adding to the complication is] every mining venture is unique due to the nature of the minerals. There are so many different ways they could exist, so the geological characteristics and engineering requirements of each mine are unique,” he explains.

“Because mining activities are more complicated than plantations, for example, it is difficult for non-technical people to understand a project, its risks and opportunities. The financial market will also have difficulties in making proper assessments of the potential issuer. Once regulators understand the industry, it will be easier for them to raise awareness among the investment public.”

This is a cyclical problem. Exploration activities incur high capital, so companies need funding for bigger projects that would make the investment worth their while. Obtaining funding, however, is challenging without a proven track record and a supportive environment.

“To define an economically [viable] hard rock gold deposit, for example, you would need to drill at least 50,000 metres. Each metre costs on average RM1,000, translating into RM50 million in exploration capital,” Zaidi says. “Equally intensive is capital required for [a mine’s] development, starting from RM150 million to establish a modern, state-of-the-art processing facility.”

Like all due diligence procedures for listing purposes, mining companies are required to establish good standards of reporting on their mineral resources and reserves. Countries with mature mining industries have internationally recognised reporting standards, such as Canada’s National Instrument (NI) 43-101, the South African Code for the Reporting of Mineral Resources and Mineral Reserves (SAMREC), and the Australasian Joint Ore Reserves Committee (JORC) Code established in Australia.

Industry players say Malaysian mining companies lack standards of reporting at the moment. Few understand the necessity of testing the ground, doing proper exploration and fulfilling the standards on reporting of minerals.

“Those are the fundamentals that will support them in their listing,” says Zaidi. “Good disclosure and accountability of reporting include samplings and their quality control. If you can’t have that, it is difficult to build confidence in your investors.”

While technical expertise and cutting edge technology can determine the amount of minerals underground, the accuracy of the results depends on the competency of the geologist and honesty of the proprietor, which Sia says can be hard to measure.

“For this, JORC requires a professional company to act as a competent, third party observer instead of just having a miner claim it has a certain amount of gold. This is what international mining companies are subject to.”

While Malaco intends to list on Bursa in the future, Monument is listed on the TSX Venture Exchange in Canada and the Frankfurt Stock Exchange in Germany. It will be much harder to list in Malaysia than in countries such as Singapore or Hong Kong, as regulators in Asian financial hubs have easier access to specialists and consultants who are able to determine whether a mining company has potential. This doesn’t deter Sia, who wants to be the first mover in the mining sector’s return to Bursa.

“I believe our projects are mature and strong enough to gain investor confidence, as reflected in our dividend or equity gains, so I want to present Malaco as a benchmark example. This can only be achieved if you have a strong asset base, as opposed to just being a speculative counter.”

The shape of things to come

Perhaps the largest obstacle to boosting the mining industry is the stigma it carries for being environmentally destructive. Activists have good reasons for being against it, but industry players argue that our lifestyle needs and development hinge on minerals.

“The fact is, minerals are a human need. People need to understand that everything we use relies on mineral support. We need it to live our lives, from cars and phones to the electricity we use. What doesn’t have a mineral component in it?” says Zaidi, adding that even the controversial rare earth is needed to support the development of high technology industries.

“Furthermore, producing minerals can have the biggest multiplying impact on the economy. Base or industrial metals, such as copper, nickel, steel and iron, are strategic for the local industry, because having cheaper metals [by producing them locally instead of importing them] means you can be more competitive. It is strategic for the nation to produce its own source of minerals to support its growth.”

To break the cyclical problems of the mining sector, Sia says the authorities should make the first move. “They can earmark certain zones of geological and mining potential to encourage companies to take up and explore. The biggest catalyst to boost the local mining industry should come from the state governments.”

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This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on November 10 - 16, 2014.