Low Ngee Tong, the executive chairman of ASX-listed OM Holdings, dishes out food for his guests during lunch at a restaurant at the Chinese Swimming Club, and talks about his plans for a Lunar New Year dinner at his home. “We will be having steamboat,” he says. “I’ll need chicken bones and six packs of ribs to make the soup base. I want to slice the abalone myself.”

On the first day of the Lunar New Year, the market learnt that Low had cooked up more than a sumptuous meal at home. OM Holdings, which produces manganese, announced a placement of 75 million new shares, 50 million of them to SGX-listed Boustead Singapore, to raise some A$26 million (RM84.5 million) that will be used to finance a ferroalloy smelter in Sarawak. Boustead will own 8.6% of the enlarged OM Holdings. And, as develop­ment of OM Holdings’ smelter gets underway, indivi­duals familiar with the company say it will seek a secondary listing in Malaysia or Singapore.

A Chinese language-educated mechanical engineer with a gap-toothed smile, Low, 56, started out in the manganese business as a trader in the 1980s, working for Intraco, where he dealt mainly with Chinese customers. Later, he worked in Hong Kong for C Itoh, now known as Itochu. In 1992, he set up Oriental Minerals in Hong Kong with a former colleague from ­C Itoh. Two years later, the partners went their separate ways. Low says this was because he wanted to move upstream into production and mining, while his partner wanted to remain focused on trading.

Indeed, Oriental Minerals went on to own manganese smelters, first in northern China and then in Qinzhou, a port in Guangxi pro­vince. In 1998, it became OM Holdings and listed on ASX as a manganese trading and smelting company. It then expanded further upstream into exploration and mining. In 2001, it discovered the Bootu Creek Mine in Austra­lia’s Northern Territory, 100km away from the nearest human settlement. The Bootu Creek Mine is now the third largest manganese mine in Australia. In 2010, OM Holdings broadened its upstream business, acquiring an indirect 13% stake in the Tshipi Borwa mine in South Africa, which is scheduled to begin production in 2HFY12.

Manganese is used in iron and steel production as well as an alloying agent in aluminium and in batteries. “This is a good fundamental business because steel can be recycled but not ferroalloys,” Low says. “Applications of manganese are getting wider. It is now used in stainless steel as well.”

Now, Low is making an audacious bid for a larger slice of the manganese sector by spearheading the construction of a major manganese smelting plant in Sarawak, taking advantage of the plentiful and cheap electricity in the east Malaysian state that has been made possible by the controversial Bakun hydroelectric power project. Ferroalloys typically come from countries where the raw minerals are found or where power is subsidised, such as South Africa, China, Russia and Ukraine, Low says, but power tariffs are rising in these  countries, driving up downstream production costs. Electricity accounts for 40% to 60% of the cost of producing ferroalloys. With a highly cost-competitive smelting plant in Sarawak, Low reckons OM Holdings will be able to steal a march on its competitors.

“Sarawak is the best place in the world for a smelter, in terms of power and location. It’s near Bootu Creek, so the synergy is huge,” Low tells The Edge Singapore. Moreover, some 65% of global steel production is concentrated in Asia, and many steelmakers are growing uncomfortable over their reliance on China for the supply of ferroalloys, he adds. That puts OM Holdings in a good position to emerge as a major supplier of ferroalloys to regional steel producers such as South Korea’s Pos­co and Japan’s JFE Steel Corp, which are already its customers.

OM Holdings counts itself among the top six or seven integrated manganese producers in the world. By 2014, when the Sarawak smelter is due to begin production, and the Tshipi Borwa mine is in full swing, OM Holdings will climb to third or fourth spot, Low says.

Yet, achieving all this is easier said than done. For one thing, the smelter that Low wants to build in Sarawak calls for an investment of some US$502 million (RM1.5 billion), almost 2½ times OM Holdings’ market capitalisation of A$191 million. Worse, OM Holdings’ market value has actually been shrinking over the last three years, because of the more cautious market tone, weakened manganese prices, as well as operational hiccups at Bootu Creek Mine. OM Holdings is forecast to report a loss of A$12 million in 2011 as a result of falling manganese ore prices and the strong Australian dollar.

Is Low attempting a leap too far? How will he marshal the massive financing to get the smelter project off the ground? Will the risk pay off?

Lure of Sarawak
OM Holdings is building the Sarawak smelter under an 80:20 joint venture with Samalaju Industries, a unit of Bursa Malaysia-listed Cahya Mata Sarawak, a company linked to the family of the state’s long-time chief minister Tan Sri Abdul Taib Mahmud. The project is expected to be 70% funded with debt. Hence, OM Holdings’ share of the equity investment would come up to US$120.5 million. Even after raising A$26 million from the placement of new shares, OM Holdings will still have to find a further A$87 million.

OM Holdings says it is targeting completion of its current fundraising for the Sarawak project by end-April, with a focus on minimising dilution for existing shareholders. Individuals familiar with the company say the options include a rights issue or a convertible bond issue.

In the meantime, Low has been working to lower the project’s risk. Last month, JFE Steel signed a binding term sheet to take up 100,000 tonnes of ferrosilicon produced by one of three plants that will make up the Sarawak smelter complex. Through its unit, JFE Shoji Trade Corp, the Japanese steelmaker will also invest between US$30 million and US$40 million for a 30% to 40% stake in the plant, which will be its exclusive supplier. The entire project will produce 600,000 tonnes of ferrosilicon and silicomanganese. OM Holdings currently produces 70,000 tonnes of high-carbon ferro-manganese.

On Feb 2, OM Holdings also locked in a long-term energy supply deal for the smelting plant, by signing a 500mw power purchase agreement for 20 years with Sarawak Energy. Officials at OM Holdings declined to divulge the tariffs the company will pay under the agreement, but it is believed to be half of what it pays for electricity in China. Malaysia’s Prime Minister Datuk Seri Najib Razak said last year that Sarawak Hidro, the developer and manager of the Bakun hydroelectric power project, sold power at 6.25 sen per kW, with a 1.25% annual increase, to Sarawak Energy, which in turn distributes it to consumers.

Todd Scott, an analyst at RBS, says in a Nov 10 research note that OM Holdings’ management is estimating an investment return rate of 30%, with a net present value (NPV) of US$667 million based on a project cost of US$502 million. Even so, obtaining the financing for such a large project could be a tall order for OM Holdings, he adds. “In light of the current tight credit availability in international markets, we believe achieving a 70:30 debt-equity split will prove challenging.”

Does OM Holdings have the heft to finance the investment in the face of tougher credit conditions? Or, will the company end up becoming an acquisition target amid the ongoing consolidation in the commodities sector?

Hostile takeover
Low has received more than one offer for OM Holdings over the years. At the height of the commodities mania, before the global credit crunch, he was approached by Australian mining giant BHP Billiton, but he rejected the overtures. Then, in 2008, he faced the prospect of a hostile takeover from Consolidated Minerals (Consmin), which acquired 11.35% of OM Holdings, driving the stock up to an all-time high of A$2.81 in July of that year. “We had no idea what was going on,” Low says. “Suddenly, in November, we received a letter from Consmin saying ‘We are an 11.35% shareholder’.”

Consmin, which is the second-largest miner of manganese in Australia, had itself fallen under the grip of Ukrainian billionaire Gennadiy Bogolyubov in January 2008. A co-founder of the Privat Group, one of the most powerful corporate empires in Ukraine, Bogolyubov was trying to consolidate his hold on the world’s supply of manganese, acquiring ferroalloy plants on Privat’s home turf before going after mining assets in Africa and Australia. His plan was to merge Consmin with OM Holdings, Low says, which would have given him significant control over Australia’s manganese output.

As it happened, things began to unravel for Bogolyubov shortly after, as the financial crisis struck and commodity prices went into a tailspin, knocking down shares in OM Holdings. While Bogolyubov’s plans to merge the two companies were aborted, he has remained a thorn in Low’s side ever since. For one thing, he blocked plans by OM Holdings for a dual listing in Hong Kong last year, seeing it as an attempt to dilute his interest in the company. In April, Consmin took out several half-page advertisements in Singapore newspapers to seek shareholders’ support for his action. This was followed in August with an attempt to remove Low and independent director Tan Peng Chin.

For his part, Low says he wanted the dual listing in order to gain access to a capital market closer to OM Holdings’ customers in China, Japan and South Korea. Consmin did not respond to The Edge Singapore’s request for comment.

Whatever the case, Bogolyubov’s attempt to dislodge Low from OM Holdings failed, with 74% of the votes cast in the latter’s favour. Low and his wife collectively own 19% of the company. That strong showing might deter Bogolyubov from interfering again, some individuals familiar with OM Holdings say. Indeed, during a trip to Australia last September, the low-key Ukrainian, who lives in London, reportedly said he might divest his stake in OM Holdings if the company did not improve its corporate governance.

Tough sell to investors
So far, no objections have emerged from Cons­min about OM Holdings’ placement of shares to Boustead Singapore and other investors. The sale of new shares to Boustead Singapore is technically an interested-party transaction that needs approval from shareholders of OM Holdings. That’s because Boustead Singapore’s chairman and CEO Wong Fong Fui was a member of OM Holdings’ board until December.

It also remains to be seen how Consmin reacts if OM Holdings attempts a rights issue to raise more cash for its investment in the Sarawak smelter. Will it take up its entitlement to the rights shares? Or, allow its stake to be diluted? And, will it seek to block any moves by OM Holdings to seek a dual listing in Malaysia or Singapore, which market watchers say is in the works? “OM Holdings is investing US$502 million in the region. It makes sense for Low to seek a dual listing in Singapore or Malaysia to reach out to investors here,” a source familiar with the company says.

Low says he is more focused on ensuring that OM Holdings performs well enough to attract investors than worrying about what Consmin and Bogolyubov might do in the event of a capital-raising exercise or dual listing plan that hasn’t even been officially mooted. “The next six months, I am going to focus on project financing and on bringing Tshipi into production,” he says.

He could face an uphill battle in drawing investors back to the stock, though. Scott of RBS says in a Jan 19 research note that OM Holdings faces headwinds on multiple fronts. Production at Bootu Creek Mine declined for the second straight quarter recently, a court case is pending regarding the damage of a sacred Aboriginal site and manganese prices fell for January delivery.

The way Scott sees it, OM Holdings’ revised mining strategy for 2012 of focusing only on high-grade pre-stripped areas will offer only temporary relief to its profitability. Ultimately, operational costs will rise again, and the company’s margins will be squeezed, unless manganese prices recover. “We maintain our “sell” recommendation, based on a revised NPV-based price target of 36 Australian cents,” Scott says in his report. Shares in OM Holdings are down 75% in the past year, to 38 Australian cents currently.

Low insists that OM Holdings is on the right track, though. In his view, it is only a matter of time before manganese prices recover, as electricity costs are rising in China. And, he has been in the manganese business long enough to have confidence in his strategy. “I tell people I don’t enjoy being served a good dish,” says Low, who claims to make the best prawn mee in Singapore. “I like to do things myself. I like to be the chef.” — The Edge Singapore