CAHYA MATA SARAWAK ANNUAL REPORT 2016

www.cmsb .com.my Section 03 P E R F O RMAN C E 2 0 1 6 Cahya Mata Sarawak Berhad 28 In the long-run, we anticipate that market demand for both ferrosilicon and manganese alloys from the smelter will improve due to the long-term growth prospects for steel production in the region. The smelter is also expected to reap the benefits of competitive energy costs in addition to the weakening Ringgit, a 10-year tax holiday with no import and or export duties, and its strategic proximity to growing Southeast Asian markets. In addition, the binding market price-linked offtake arrangements with leading industry players for over 60% of production, changes in industry dynamics – largely driven by rising power prices and labour costs, growing Asian demand for non-China sourced ferrosilicon, higher environmental standards affecting older plants, and the Chinese Government’s disincentives to export energy- intensive products, all augur well for the smelter’s future growth. INTEGRATED PHOSPHATE COMPLEX In2013,CMS joined forceswith several parties to construct Southeast Asia’s first Integrated Phosphate Complex in Samalaju at a projected cost of approximately RM2.20 billion. At the time, CMS’ wholly-owned subsidiary, Samalaju Industries Sdn Bhd (SISB) entered into a Shareholders’ Agreement with Malaysian Phosphate Ventures Sdn Bhd (MPV) and Arif Enigma Sdn Bhd (AESB) to form a joint venture (JV) company called Malaysian Phosphate Additives (Sarawak) Sdn Bhd (MPAS). Under the shareholders’ agreement, SISB and MPV have a 40% equity stake each in MPAS with the remaining 20% held by AESB. Today, MPAS is focusing its efforts on the development, construction and commissioning of an integrated phosphate complex that will have an annual production capacity (by 2020) of approximately 500,000 MT of food, feed and fertiliser phosphate additives, 100,000 MT of ammonia and 900,000 MT of coke. The Project, that will see nine integrated plants built on 350 acres of land near the Samalajudeep-water port,will tap into the competitive power rates from Sarawak’s hydro-power dams. It will employ nearly 1,200 skilled workers and employees and will be funded via a mixture of shareholders’ equity and long-term bank funded debt. February2016,sawtheformalisationof thePowerPurchase Agreement between Sarawak Energy Berhad and MPAS for the supply of 150 MW of power to Southeast Asia’s first Integrated Phosphate Complex in Samalaju. This was followed by the signing of the Engineering, Procurement and Construction Agreement in May 2016. Negotiations for project financing contracts are currently underway and MPAS has obtained a Public-Private Partnership UKAS grant incentive from the Malaysian Government because of its significant GNI contribution and its role in strengthening the nation’s food security. The Project is important for a number of reasons. It is the first high-impact industrial project within the SIP by a 100% Malaysian-owned company. It involves direct domestic investment of up to approximately RM2.20 billion and promotes the development of local intellectual property and the sharing of technology through a mutually-beneficial JV. As the first non-metal or alloy-based plant in SCORE’s SIP, it propels SCORE and CMS into a dynamic new industrial sector that offers long-term sustainable growth. It also offers opportunities for investment in downstream manufacturing in the animal feed, fertiliser, cleaning and detergent sectors. It is envisioned that businesses in these sectors will be drawn to the SIP themselves so they can locate adjacent to their feedstock supplier. The Project is also set to thrust Malaysia forward as a leader in the production of halal-certified animal feed for poultry, fisheries, cattle and other ruminant livestock as it eliminates the use of meat and bone meal (ex-bones of pigs and cattle) in all animal feed. Phosphorus is an essential base nutrient for animal and plant growth with no substitute and is widely used in food, feed and fertiliser products. Demand continues to grow on the back of population growth, changing dietary preferences and the increased use of fertilisers. As the first large scale producer of soluble phosphates in Malaysia, the Project will also contribute significantly towards theGovernment’s effort to increase food security and the palm oil industry’s competitiveness. SACOFA SDN BHD Our Information & Communication Technology (ICT) Division, continues to make good progress in its efforts to grow our ICT-related businesses which currently involve looking after our interests in our associate company, SACOFASdn Bhd, inwhichwe have a 50%non-controlling equity stake. This Sarawak-based telecommunications infrastructure and services provider was accorded a 20-year exclusive right (back in March 2002) to build, manage, lease and maintain telecommunication towers in Sarawak. SACOFA was also granted “deemed native status” allowing the Company to acquire native lands in the State for the construction of telecommunication facilities. SACOFA’s asset portfolio continues to expand and it now operates more than 1,000 telecommunication towers throughout Sarawak. Our investment in SACOFA ties in with the Group’s strategy of supporting the State as an ally in infrastructure development, in this instance, via a private-public partnershiparrangement.We see this as anextensionof our core infrastructure capabilities and are honoured to help the State strengthen its telecommunications infrastructure. Within the scopeof responsibility andoperatingpower that SACOFA has been granted, CMS aims to make Sarawak a regional hub for telecommunications-related activities and to help strengthen its economy. MANAGement DISCUSSION AND ANALYSIS