Update on OM Sarawak

Update on OM Sarawak, in which CMSB has 20% stake.

Source: OM Holdings Ltd 2013 Annual Report

During the year we have made very significant progress with the OM Sarawak project. The project continues to represent an outstanding investment opportunity based on strong demand fundamentals, increasing industry-wide energy costs and the unique cost competitiveness of Sarawak. The project continues to benefit from its competitive advantages of competitively priced and reliable power, proximity to raw materials and customers, tax incentives, lack of import and export duties and existing infrastructure.

OM Sarawak has concluded its project financing with a syndicate of leading international and regional lenders for USD215 million and MYR310 million of project debt and a further MYR126 million credit line. It has successfully executed the EPC contract with Sinohydro Corporation Limited and Sinohydro Corporation (M) Sdn Bhd (“Sinohydro”) as the Project’s lump-sum turn-key EPC contractor and Sinosteel Jilin Electro-Mechanical Equipment Co Ltd (“Sinosteel“) as a nominated sub-contractor responsible for all engineering, manufacture, and installation and commissioning. The EPC contract will allow us to leverage Sinohydro’s project management experience and Sinosteel Jilin’s specialist equipment and control system expertise.

A game-changing 2014 ahead
....
The #1 deliverable of the Group remains the commissioning of the first furnaces at OM Sarawak during the second half year of 2014, while continuing with the commissioning of subsequent furnaces during the year and achieving the full commissioning of the smelting plant by the middle of 2015. We will progress the development of our recently announced quartzite mining joint venture in Perak, Malaysia, with a view of strengthening OM Sarawak’s key raw material security of supply position while further strengthening its cost competitiveness. We remain very clear in our view that successful execution of OM Sarawak will be a game-changer for the Group and this view is now fully shared not only by our Board and management team but also by our key investors, financiers and other stakeholders.

OM Sarawak will not only transform the Group’s production and financial profile but will also become a platform for significant future strategic growth and value creation opportunities in an industry which is ripe for consolidation.

Overview
OM Materials (Sarawak) Sdn Bhd (“OM Sarawak”), an 80:20 joint venture between OMH and Cahya Mata Sarawak Berhad (“CMSB”), a listed industrial conglomerate on the Main Market of the Malaysian Stock Exchange, Bursa Malaysia, is the owner of the Ferro Alloy Smelting Project in Sarawak, Malaysia (the “Project”). OM Sarawak aims to be a low cost ferrosilicon producer, with a cost of production placing it at the lower end of the global industry cost curve of ferrosilicon producers. The Project, which represents a major step in OMH’s development as a potentially world class lowest-quartile cost producer of ferroalloys, notably ferrosilicon and manganese silicon, entails the continued development of a manganese and ferrosilicon alloy smelter with an expected annual production capacity of approximately 600,000 tonnes in the Samalaju Industrial Park, Sarawak, Malaysia.

The Project will be developed in two phases at an approximate total project cost of USD 592 million. This phased execution of the Project is designed to expedite cash flow and allow additional construction and ramp-up flexibility. Phase 1 is expected to fast-track the higher margin ferrosilicon production, while providing additional time for further technical and commercial optimisation of Phase 2.

The Project is located on approximately 500 acres of land with a 60-year lease in the Samalaju Industrial Park, part of the Sarawak Corridor of Renewable Energy initiative of Sarawak, Malaysia.

The Project’s unique competitive advantages include, but are not limited to, access to competitively priced long-term hydroelectric power supply (from the Bakun Hydroelectric Dam), coastal industrial land with direct access to a dedicated future port facility, geographical proximity to both raw materials and Asian steel mills, tax incentives, no import and/or export duties as well as comprehensive purpose built industrial infrastructure.

To-date, OM Sarawak has signed off-take agreements with JFE Shoji Trade Corporation, Hanwa Co., Ltd and Fesil Sales AG, collectively exceeding 60% of the Project's expected Phase 1 production capacity. Notwithstanding this, the Project continues to receive strong interest in its product, which the company is evaluating and actively managing with a view to positioning itself to secure optimal arrangements at the opportune time. The strategic intent is to maintain a mix of long and short term off-take arrangements to optimise returns and flexibility, and it is envisaged that further contracts will be entered into as the Project nears commercial operation.

The market demand for both ferrosilicon and manganese alloys from this smelter is expected to be strong. This will be driven by the long-term growth prospects for steel production in the East Asian region and the smelter's competitive first quartile position on the operating and delivery cost curve thanks to its comparatively cheaper energy costs and its strategic proximity to growing East Asian markets. All this, coupled with the change in industry dynamics, which is largely being driven by rising power prices and labour costs, growing demand from China for ferrosilicon alloys, higher environmental standards affecting older plants, and the Chinese Government's disincentives to export energy intensive products, augurs well for the smelter's future operations.

Plant Construction and Development
Overall schedule performance achieved as of February 2014 was reported as 57%, with the civil and structural work behind schedule by approximately 14%. Despite the delay, the Interim Commercial Operation Date is still expected to be on schedule.

The last mile connection from Samalaju substation to the smelting plant has been completed. To-date, the progress for substation is approximately 92% and installation of communication and metering panels were in progress in the substation. The substation is expected to be ready to draw power from the Sarawak power grid well before the start of commercial operation date.

Sinosteel's fabrication work is progressing well; procurement and fabrication for most of Plant A equipment has been completed and the majority of the critical equipment delivered to site.

At the end of February 2014, the overall Project cumulative earned value progress achieved is 57%. Commercial production at the Sarawak Project will commence on a phased ramp-up basis and the company is preparing for operational readiness. To date, 65% of workers required for Plant A has been recruited and are undergoing a comprehensive training regime in China. Raw materials and certain auxiliary materials are expected are expected to arrive on site in Q2 2014.

Financing
The Facilities Agreement in respect of the project finance facility was successfully executed in March 2013, and together with the committed equity from OM Sarawak's shareholders, Phase 1 of the Project has been fully funded.

The funding commitment were received from a syndicate of leading local and international lenders, namely the Export-Import Bank of Malaysia Berhad, Maybank Investment Bank Berhad, RHB Bank Berhad and Standard Chartered Bank Malaysia Berhad. The project financing comprised limited recourse senior project finance debt facilities totalling USD215 million and MYR310 million for the total capital cost of the Project's Phase 1 ferrosilicon production facility, and another MYR126 million credit line for the purpose of the issuance of performance and payment guarantees to the power provider, Syarikat Sesco Berhad, as part of OM Sarawak's obligations under the Power Purchase Agreement.