The mining industry is a hugely risky business where the risk-versus-reward calculation involves a high element of chance and lots of digging. Profitability is also not assured given volatile commodity prices and costly operational overheads. This means that fortunes can quickly be made or reversed depending on what you dig up from the ground.
That is the case with Southern Alliance Mining which can now look forward to a better FY2023 ending July 2023 now that it has discovered more iron resources at its Chaah mine in Johor despite reporting lower earnings for its most recent FY2022.
“Unlike the plantation industry where you can make better estimations by counting the number of trees and seeing the fruits, for us [in the iron ore industry], we will have to conduct investigative work to discover those results,” says executive director and COO Lim Wei Hung of the Malaysia-based iron miner in an interview with The Edge Singapore.
In FY2022, Southern Alliance reported earnings of RM16.3 million ($54.2 million), down 89.0% over FY2021’s RM148.1 million. Revenue also fell 53.9% y-o-y to RM178.7 million. This was because higher costs were incurred from “overburden” removal activities to further extend the mineable areas around the existing iron ore body at Chaah. Overburden refers to the waste rocks, earth and soil that overlay the iron ore body. This layer has to be removed before Southern Alliance can reach the iron ore and mine it.
However, the good news is that following continual exploration and drilling activities, the company discovered an over 150m extension to the main ore zone. As reported in the company’s FY2022 results statement, its iron ore resources at the Chaah mine are expected therefore to more than double to 15.7 million tonnes as at July 31, compared to 6.3 million tonnes in the same period a year ago.
In short, the Chaah mine which Southern Alliance sits on is worth potentially a lot more than when mining explorations began. And as further exploration activities are being carried out, the mine could increase in value if more iron deposits are found, barring unforeseen circumstances.
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Lim says “the more you find during the exploration phase, the higher your confidence on how long the mines can last and the potential production volume”. This then has a direct bearing on the company’s future profits.
Still, due to the risky nature of the mining business, he warns that it is common for miners to underperform financially in some years compared to others as mining operations may encounter downtime during the exploration stage and due to overburden removal activities.
In addition, a lot of money is still required for the acquisition of machinery and the construction of plants in the production phase. Lim also says that the mine has to be in production for a reasonable duration or else there is no point moving on to the production phase.
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“If the mine lasts about three to five years, the cost needed to enter into production may not be worth it. The profits may not be able to cover the cost of the exploration phase and the setting up of the production phase. This means we will have to abort the project and write off the exploration costs to minimise our losses,” says Lim, who was very recently promoted from his previous role as CFO.
Productivity boost needed
In addition to higher costs of digging out the iron ore, the Chaah mine will require greater operational efficiency and higher economies of scale to make mining economically viable, adds Lim.
Currently, the extracted iron ore is sent to various crushing plants before it is transported to the ball mill to produce the final iron ore concentrate. This involves a constant stream of trucks and diggers moving between individual crushing plants and the ball mill.
In 1QFY2022, Southern Alliance started construction of a new 550–600 tonne per hour (TPH) crushing plant. The new crushing plant is currently in the commissioning stage and will centralise all crushing, grinding and processing activities by directly being linked with the ball mill.
Once fully commissioned, the centralised crushing facility is expected to free up capital needed for trucks and diggers and help Southern Alliance reach higher economies of scale and efficiency. It will also help the company consolidate its labour. “We invested around RM10 million into this new plant. Once it’s completed, the larger capacity will allow us to achieve economies of scale,” says Lim.
In addition, Lim says the new plant will be powered by electricity from the national grid compared to its current reliance on gensets (generator sets) that require diesel fuel. This means not only will its operations be environmentally friendlier, they will also be more reliable as gensets suffer from the occasional breakdown.
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Southern Alliance also owns three other parcels of land in Malaysia but due to the recent discovery, it has decided to focus the bulk of its resources on the Chaah mine. As the three land parcels are still in the early stages of the exploration, Lim says it is more prudent to focus on the Chaah mine while the three other parcels wait their turn.
Shiny new venture
Looking further ahead, Southern Alliance wants to be known more as more than a miner of iron. Last July, it announced plans to diversify into other base metals including gold. Specifically, the company plans to do so via a joint venture with the Sultan of Johor, with a shareholding split at 85% and 15% for the royals.
The diversification is meant to be an “insulation” against the price movement of a single commodity, which is susceptible to market cycles. For example, the industry would remember 2013 and 2014 as “bad years” with iron prices at all-time lows, adds Lim.
In January, the company, with the approval from the authorities from Johor, has been carrying out exploration work at the Tenggaroh mine. Since then, it has made “significant advancements” in its sampling, mapping and exploration activities that have narrowed down the key mineable areas.
With the data in hand, the company has put together a more extensive exploration programme, paving the way, hopefully, for eventual commercial production. “The diversification into gold and other base metals is a step forward towards improving the sustainability of our earnings and the company will continue to be on the lookout for such opportunities going forward,” said Southern Alliance in the announcement.
“Gold is more challenging than iron. The exploration process is more complicated and will take a longer time coupled with higher cost,” says Lim, when asked for updates. “We have already started to zoom in on certain areas, but with about 43,905 acres to cover, we have used an appropriate exploration technique to stay focused and zoom in on our areas of focus.” Nevertheless, Lim believes this is a “higher risk, higher reward” effort, given how gold enjoys high and steady prices.
Currently, Southern Alliance produces two types of iron ore. It sells iron ore concentrate that has a low level of impurities with total Fe (the symbol for the element of iron) content of between 62% and 65% to steel mills and trading companies mainly located in Malaysia and China. It also sells pipe coating materials that are made from crushed iron ore which has a higher density and is suitable for subsea pipes.
However, Lim admits that business in China has not been great as strict zero-Covid measures are still in place, which has caused a fall in the demand for iron. Nonetheless, he sees reasons for optimism as there is still unmet demand for what the company digs up. For one, Malaysia remains a net importer of iron ore, with 5 million produced in 2021 versus imports of 22 million tonnes. “So, the whole industry is still insufficient to meet the country’s demand,” says Lim, who shares that the company’s clients for its iron ore concentrate are mostly based in Malaysia. On the other hand, its crushed iron ore segment sees its clients come from Indonesia.
Listed in June 2020, Southern Alliance does not have a formal dividend policy although it indicated in its listing prospectus that it wants to pay out 15% of the first-year profits after listing, and 20% and 25% in the second and third years respectively.
Shares in Southern Alliance have more than doubled from its IPO price of 27 cents to trade at 57 cents on Oct 19. However, this is still below its high of $1.20 back on May 7, 2021. The company has no analyst coverage.
Photo: Southern Alliance Mining
