SINGAPORE (Feb 5): Malaysia-based Anchor Resources, which was listed in March 2016 as a gold miner, has changed its business model in the hope of stemming its losses. At the same time, with an eye on the slew of upcoming infrastructure projects in Malaysia, the company, whose assets are all in Terengganu, has diversified into granite production.
On Aug 21, it completed the acquisition of a granite company called GGT Manufacturing for $103 million. The acquisition was paid by issuing 712.2 million new Anchor Resources shares at 14.5 cents each. The deal was first announced in June 2016, when the company’s shares were trading close to that level. Since then, the shares have tumbled to just 4.5 cents.
Following the acquisition, Anchor Resources has more than one billion shares outstanding, up from just 310 million previously. Its market capitalisation is now $46.7 million — less than half the value at which it acquired GGT.
GGT holds two granite mining sites: one spanning 300 acres and another spanning 500 acres. According to the independent financial adviser’s report sent out as part of the circular to shareholders, GGT has a revalued net asset value of $112.3 million. For the year ended Dec 31, 2016, GGT made a loss of RM4.4 million on revenue of RM4.9 million.
Lim Chiau Woei, managing director of Anchor Resources, who controlled GGT, says he decided to inject the granite mines into the listed company to provide them with access to more sources of capital. “We have a huge potential to tap,” he tells The Edge Singapore. With the injection of GGT into Anchor Resources, Lim now has a 40.6% stake in the listed company, up from 22.4% previously.
Demand for granite
Lim says Anchor Resources has budgeted RM6 million ($2 million) to set up a processing plant for the newly acquired granite business. The processing work is currently outsourced. Key equipment such as diamond cutters is needed so that the stone can be cut into the sizes required by customers. The first batch of machinery will be installed and ready for use before Chinese New Year.
GGT sells granite in various forms. Some of it is sold in blocks of at least one cubic metre each in volume. Such blocks can be sold at prices ranging from RM1,200 to RM1,800 per cu m. Some of the granite is sold in the form of slabs, for use as wall tiles, floor tiles or table tops.
Lim says there is also demand for granite fragments, which are used in the construction of roads and laying of railway tracks. Such granite, easier to produce, is often sold at RM20 to RM30 a tonne. Depending on a variety of factors, the gross margins of the granite business can range between 30% and 50%.
Lim is optimistic that Anchor Resources’ granite business will see healthy demand over the long term, thanks to a slew of major infrastructure projects that the Malaysian government has planned. They include MRT and LRT lines, which will have dozens of stations. Then, there is the East Coast Rail Link, which is planned to run some 600km down from Kota Baru in Kelantan and cut across the peninsula to end in Port Klang.
The ECRL project raised eyebrows when announced, not merely for the supposed bene-fits of bypassing Singapore, but also for its very high price tag of a reported RM55 billion ($18.5 billion). “The more expensive, the better for us,” Lim quips.
He says Anchor Resources’ granite business has a natural advantage when it comes to these infrastructure projects, because government contracts typically require the contractors to source for local materials before turning to overseas sources. He adds that granite from the same sources as GGT’s have previously been used for landmark projects such as Kuala Lumpur International Airport and Putrajaya.
Digging for gold
Besides branching out into the granite business, Lim has spent the past year restructuring the existing gold mining business. On Sept 7, the company announced that one of the gold mining concessions, located in Bukit Panji in Terengganu, had been terminated, as the land had been rezoned into a “palace security zone”. Lim explains that no work has started on this concession yet, and that its value is not reflected in Anchor Resources’ books. He is now negotiating with the authorities to obtain another concession as a substitute.
In the meantime, Anchor Resources is focused on exploiting its existing mine in Lubuk Mandi. This mine was previously owned by the Terengganu state government. The open pit mine is already 50m deep, and about two tonnes of gold has been recovered. To extract more gold from the mine, the pit has to be both widened and deepened, which will be more costly.
“We’ve already taken the easy ones, you come take the difficult ones,” says Lim, recalling what the state government officials told him. According to the Independent Qualified Person’s Report included in the company’s 2016 annual report, some 108,000 troy ounces of gold have already been dug from the 50m depth. From the tailing and in-situ hardrock of up to 150m, an additional 30,200 ounces and 76,400 ounces of gold can be extracted. Studies beyond 150m have not been done yet. “With a similar ore condition and mineralisation, we can expect a certain grade of ore if we go deeper,” he adds.
To keep a lid on costs at its gold mining business, Anchor Resources has found two buyers — Beijing Fuhaihua Import & Export Corp and Tianjin Universal-Link Enterprise (Overseas) — for semi-processed gold concentrated ore with purity of 20g to 30g a tonne instead. They have each committed to buying 3,600 tonnes a year and Anchor Resources has obtained the required export permit too.
By selling semi-processed ore, Anchor Resources will be spared from having to bear the costs of running its processing plant. Part of the proceeds from its IPO were used to build the processing plant, to refine the ore into pure gold for sale to a Malaysian jewellery retailer.
Lim explains that the new customers are eager to take the semi-processed gold concentrate instead of pure gold, as they have their own processing capacity. Under this arrangement, the new customers have the flexibility to extract other valuable metals besides gold from the ore that Anchor Resources ships to them. Lim says this deal with the new customers is not exclusive. Anchor Resources has the flexibility to sell them more or to sell to other customers.
To further contain its costs, Anchor Resources has appointed a contractor to undertake all its gold mining operations. The contractor will receive 65% of the sales from the business. Lim says this puts a floor under the total costs the company has to incur. “This entire business model is more workable and economical for us to move on,” he says.
For the six months ended June 30, the company’s earnings did not look pretty at all. Reve-nue for the period was just RM721,000, down 25.63% y-o-y from RM966,000. Losses for the same period came in at RM8.8 million, down 53.8% y-o-y from losses of RM19.1 million.
With the first shipment of gold concentrate starting already, Lim says he is looking forward to a better year. While he declines to confirm whether Anchor Resources will actually report positive earnings, he says sales will be better. “Judging from the projected sales, we may have good cash flow this entire year,” he adds.
