CAHYA MATA SARAWAK ANNUAL REPORT 2016

A N N U A L R E P O R T 2 0 1 6 Section 03 P E R F O RMA N C E 2 0 1 6 27 Cahya Mata Sarawak Berhad MANAGement DISCUSSION AND ANALYSIS STRATEGIC INVESTMENTS – UNLISTED ASSOCIATES FERROSILICON AND MANGANESE ALLOYS SMELTING PLANT CMS has a 25% equity stake in OM Materials Sarawak and OM Materials Samalaju for the development of a ferrosilicon and manganese alloys smelter in the SIP, while the remainder 75% is owned by OM Holdings Ltd, an Australian-listed vertically-integrated miner, smelter and trader of manganese and other ores and alloys. The Project involves the development of a production facility with a 192,000 MT ferrosilicon alloys capacity and a 200,000 MT - 300,000 MT manganese alloys capacity (silicomanganese and high carbon ferromanganese) at an approximate total project cost of USD458.00 million. While physical construction of Phase 1 of the ferrosilicon production facility was completed in FY 2015, excessive production and inventory of ferroalloys led to a substantial slowdown in the ferroalloys market. This persisted until the global supply corrected in FY 2016, falling behind demand. As a result, the Company shut down two furnaces in 2015 and proceeded to undertake a reconfiguration of the product-mix, adding manganese alloys to its production capability. This among other measures, enabled OM Materials Sarawak to realign its business and diversify its product offerings. The business was able to reduce reliance on the weakened ferrosilicon market in FY 2015 and position itself to benefit from the stronger market that began to emerge in FY 2016. It also enabled the Company to fill the regional manganese alloy supply gap. Against the backdrop of Sarawak’s lower-than-market power pricing and its logistical advantages, the reconfiguration of the product-mix allows the Company to package different types and grades of alloys to end-users and distributors in markets such as Japan, Taiwan and Southeast Asia. By the end of 2016, seven ferrosilicon furnaces and one manganese alloy furnace were in operation. The year saw ferrosilicon production output achieve and exceed the nameplate daily production capacity of 55 MT, with a total production of 126,261 MT for the whole year. The sole manganese alloy furnace in operation commenced production in December 2016, leveraging on in-house furnace engineering and production expertise. This enabled the Company to achieve a production volume of 876 MT of silicomanganese within a short period of time. In FY 2016, OM Materials Sarawak recorded a loss primarily due to a substantial loss on the discontinuation of its foreign currency hedge, the depressed commodity markets, and the delay in its ramp-up schedule. However, given that the hedge has now been unwound, and that the price of ferrosilicon has begun improving since 2016, management is confident of returning to profitability by continuously optimising the production and sales- mix to meet market requirements. This is in turn backed by strong technical teams with a good execution track record.