Red problem: Extraction activities have left towns and village roads coated in red dust due to the influx of lorries transporting bauxite to ports in Kuantan and Kemaman.
Miners say the activity creates jobs but experts are concerned about the pollution effect
OVER the last two years, the surge in bauxite mining activities in Pahang has resulted in big-money business for prospectors, miners and residents alike.
This year, bauxite production is seeing exponential growth due to strong demand from China, which is Malaysia’s largest export destination for the mineral.
However, it seems to have come with environmental concerns due to unscrupulous practices by some contractors, prompting the Pahang government to revoke the mining licences of 34 contractors in July, leaving only 11 operators.
“Bauxite deposits are located just a few meters underground and is typically extracted via open-cast mining. This explains the large profit margins that can be derived as the extraction process does not require technologically advanced equipment,” says an analyst of a bank-backed research house.
According to China’s customs data on bauxite imports from Malaysia, the monthly production growth in Malaysia has been nothing short of staggering this year.
China imported a record 3.72 million tonnes of bauxite from Malaysia for the month of September, a tenfold increase from just 343,000 tonnes in January.
Malaysia is on track to produce 20 million tonnes of bauxite this year. Between May and August, the country’s total bauxite exports have averaged around 2 million tonnes a month, according to data by the World Bureau of Metal Statistics.
Lorries lining up to transport bauxite to the Kuantan Port.
In comparison, total production last year was a mere 963,000 tonnes, while only 208,770 tonnes of bauxite were extracted in 2013, according to data by the Minerals and Geoscience Department.
The bauxite mining activity is primarily concentrated at several locations in Pahang, such as Bukit Goh and Sungai Karang in Kuantan.
A look at the revenue contribution from bauxite mining towards several public listed companies show that the business offers market beating margins.
Among the companies listed on Bursa Malaysia currently involved in bauxite mining are Tanah Makmur Bhd, WZ Satu Bhd and Asdion Bhd.
Another firm, Spring Energy Resources Bhd, is seeking to list on Bursa Malaysia to raise funds among others to expand its bauxite mining activities, according to the company’s prospectus.
Tanah Makmur began its venture into bauxite in mid-2014 following its discovery of some 1.2 million tonnes of bauxite deposits on its KotaSAS township landbank, which was earmarked for property development.
Tanah Makmur’s bauxite exports market is about 3% of the total expected 20 million tonnes of bauxite production this year.
The company reported in its latest quarterly earnings filing that its bauxite extraction activity contributed revenue and pre-tax profits of RM20.92mil and RM8.17mil respectively, translating to a pre-tax margin of 39%.
According to industry experts, a company like Tanah Makmur, which owns the bauxite reserves outright, could reap as high as 50% in profit margins from bauxite extractions.
Kenanga Research analyst Voon Yee Ping says that since mid-2014, Tanah Makmur has been extracting about one million tonnes of bauxite on mining rates of between 130,000 and 150,000 tonnes per quarter.
“Currently, the business contributes about 20% to 25% of Tanah Makmur’s revenue,” she tells StarBizWeek.
It has been reported that the price of bauxite skyrocketed late last year to over US$75 per tonne after Indonesia halted the export of bauxite.
This year, the average price of bauxite is US$45 per tonne, which is higher than the historical average price of US$30 per tonne, says an analyst.
The China factor
Bauxite is the raw material that is converted into aluminium metals.
The first stage in the production chain is the conversion of bauxite into aluminium oxide, or alumina. Aluminium is then extracted from alumina via a smelting process.
With more and more production facilities being built in China, the country’s alumina production capacity has grown in tandem with smelter capacity in recent years.
This means that instead of buying alumina from overseas markets, importing bauxite is cheaper and more preferable for China since the country has its own refineries and smelters to produce aluminium.
Recently, Malaysia has emerged as a key export partner to China due to several favourable factors.
The first is cheap freight costs given the relative short distance between the two countries. This puts Malaysia in an advantageous position over Australia, which is currently the biggest exporter of bauxite to China.
Secondly, Indonesia, which was previously the third largest exporter of the mineral to China, had instituted a ban on bauxite exports in January 2014 in order to spur domestic production of aluminium.
Malaysia has swiftly plugged the shortfall in supply, as evidenced by the tremendous growth in its own bauxite production and exports since early last year.
A mining executive says most of the bauxite players are private companies and the majority of bauxite extracted is shipped to China from Kuantan, resulting in port congestion.
“Every day there are many lorries carrying bauxite lining up at the port,” he says.
Kuantan Port is 62% owned by IJM Corp Bhd. The conglomerate’s infrastructure division reported an increase in revenue to RM301.34mil for the quarter ended Sept 30 from RM175.83mil a year ago, partly on the strength of greater cargo earnings from the port.
Environmental worries
The aggressive bauxite mining has created environmental concerns.
Extraction activities have left towns and village roads coated in red dust due to the influx of lorries transporting bauxite to ports in Kuantan and Kemaman in Terengganu.
Another concern is the risk of water contamination, given the mining sites’ proximity to several major rivers running through the state.
Experts warn that the cleared areas could increase risks of mudslides and landslides, particularly with the current rainy season in the east coast.
On the other hand, proponents of mining activities say the bauxite boom has resulted in wealth and job creation for many in the state.
Felda Bukit Goh Bauxite Issues Committee chairman Datuk Dr Abd Wahid Manap says some 200 settlers in the area are set to receive monetary compensation from contractors seeking mining rights on their respective plots of land.
At present, contractors are promising to pay settlers a huge sum of money to mine bauxite on their land, he says.
“The payments will help the settlers cope as it will take time for palm oil to generate yields again. The cleared land will be replanted with oil palm trees, but it takes up to three years until the owners can start harvesting again to generate returns,” he adds.
According to Wahid, contractors in the area need to comply with a standard operating procedure to ensure that mining activities are done responsibly and without threatening the environment.
“We are confident the state government will resolve this issue soon,” he adds.
TANAH MAKMUR BHD
Pahang-based plantation player Tanah Makmur Bhd is expected to sustain its earnings from its bauxite-mining activity despite lower crude palm oil prices expected in the near term.
Tanah Makmur, which is also involved in the property development business, found 1.2 million tonnes of dry bauxite on its 607.04ha KotaSAS township landbank in January 2014.
The company commenced the mining of bauxite in the middle of its financial year 2014 (FY14) at Bukit Goh Land, Pahang, after awarding the contract to SE Satu Sdn Bhd through its 60%-owned subsidiary Kreatif Selaras Mining Sdn Bhd.
According to a report by Kenanga Research analyst Voon Yee Ping, Tanah Makmur’s mining operations are expected to contribute RM65mil to RM92mil to its FY15-to-FY16 revenue.
She notes that Tanah Makmur’s plantation business contributed about 50% or RM194mil to the company’s FY14 revenue and its property segment contributed the remaining 50% or RM195mil.
“Under its plantation segment, Tanah Makmur owns a landbank of 17,969ha, of which 17,057ha is planted as of FY14, with an average tree age of 9½ years. Under its property segment, the company also mines bauxite on its property, which contributed RM86mil or 22% of FY14 revenue,” she says.
“Based on the current reserve of an additional 0.8 million tonnes of bauxite, Tanah Makmur would be able to garner extra revenue from mining until 2017,” she tells StarBizWeek.
“Furthermore, management has mentioned that preliminary studies indicate that there are a further 0.8 million tonnes of bauxite reserves, which we estimate could contribute RM140mil in additional revenue in FY16-FY17 estimates, if confirmed,” Voon says.
WZ SATU BHD
WZ Satu Bhd, formerly known as WZ Steel Bhd, ventured into the mining business in August 2013 with the emergence of a new substantial shareholder, Tengku Uzir Tengku Ubaidillah.
The ailing steel company received an exclusive mining bauxite contract in January 2014 from Kreatif Selaras Mining Sdn Bhd through its 49%-owned subsidiary SE Satu Sdn Bhd.
Notably, Tanah Makmur has a 60% stake in Kreatif Selaras.
It has been reported that the transformation of WZ Satu into a mining player from a steel manufacturer took place after it bought the stake in SE Satu in December 2013 for RM490,000. The remaining 51% in SE Satu is held by Spring Energy Sdn Bhd.
The contract includes mining, extracting and producing bauxite ore from eight hills measuring 66ha in Kuantan, Pahang, for a period of 36 months with conservative reserves of 1.2 million tonnes.
According to filings with Bursa Malaysia, Tengku Uzir holds about 23% in WZ Satu and about 7% in Tanah Makmur.
It has been reported that WZ Satu’s mining division will contribute between 35% and 50% of its FY14-to-FY16 earnings.
WZ Satu’s revenue remained relatively flat from RM93.24mil in FY08 to RM87mil in FY13. In FY14, for the 16-month period ended Aug 31, 2014, the company reported a net profit of RM20.31mil on the back of RM351.4mil in revenue.
The company said that its mining division contributed about RM18.5mil in FY14.
After Tengku Uzir came aboard, aside from mining, the company has ventured into construction as well as oil and gas.
ASDION BHD
Asdion Bhd, an information technology and logistics firm, gained traction after it announced plans to supply bauxite to commodities trader Hong Kong International Mining Exchange Ltd (HKIM).
The company clinched a contract in June this year worth US$112mil (RM414mil), which saw its share price soar to its highest level ever of RM1.59. The stock was at the 60-sen level in late January. Yesterday, shares in Asdion closed at 53 sen.
Under the agreement, Asdion’s subsidiary will provide logistics-related services to HKIM for the delivery of a total of four million dry tonnes of bauxite at a base price of US$28 per dry tonne.
Asdion bought a 51% stake in logistics company TAZ Logistics Sdn Bhd earlier this year for RM6mil, whose business activities are focused at the Kuantan Port.
It has been reported that TAZ is among the three active licensed logistics companies mandated by Kuantan Port to handle cargo coming through the port.
Asdion, whose biggest shareholder is Datuk Tey Por Yee, recently announced that Kuantan Port Consortium Sdn Bhd had renewed the cargo-handling licence for one year effective Dec 10, 2015.
The company has targeted for its venture into the commodity trading business to contribute more than 25% of net profit moving forward.
The loss-making firm returned to profitability after having posted a net profit of RM3.86mil for the first six months of its financial year ending March 31, 2016 from a net loss of RM1.09mil in the same period last year. The company attributed the increase to its diversification into the commodity trading business.
SPRING ENERGY RESOURCES BHD
Riding on the booming bauxite mining sector, Spring Energy Resources Bhd, a company specialising in quarry mining, is gunning for an initial public offering (IPO) on the Main Market of Bursa Malaysia.
According to the company’s draft prospectus, it marked its foray into the bauxite-mining business in January 2014. It was appointed by Kreatif Selaras from its 51% stake in SE Satu for bauxite mining works in January 2014 in Bukit Goh Land.
The company says the contract value is RM80.44mil. Under the contract, Kreatif Selaras is paying SE Satu a fixed rate of US$13.75 a tonne with a minimum performance tonnage per month of 50,000.
SE Satu is entitled to an additional payment of US$0.30 for every US$1 excess over the selling price (FOB basis) of more than US$40 a tonne. On the downside, SE Satu shall see a reduction in the payment of 30 US cents for every US$1 shortfall if the actual selling price falls below US$30 a tonne.
Spring Energy says its bauxite-mining division contributed about RM61.27mil or 20% of the company’s revenue in FY14.
From its IPO exercise, the company is planning to utilise its proceeds to partly finance the expansion of its quarry and bauxite operations. It is looking at a capital expenditure of about RM23mil for its bauxite operation expansion, according to its draft prospectus.
It says that its venture into bauxite mining is currently in its second year and the mining works agreement is valid for a period of three years.
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