Welcome, everyone. My name is Nicola Gosatti. I'm co-founder investor relations consultancy Corporate Storytime. OM Holdings Limited is a vertically integrated, low-cost manganese ore and ferroalloys producer, and I am delighted to have OM Holdings Managing Director Adrian Low with me again today to run through an investor presentation following the release of OM's March 23 quarterly production and market update. The presentation will then be followed by a Q&A session. If you would like to submit a question during the webinar, please use the Q&A function at the bottom of your screen. Without any further ado, I am pleased to hand over to Adrian, who will present his comprehensive update. Adrian, over to you.
Thank you. Thanks, Nicola and team from Corporate Storytime. Hope you can see my slides okay. You know, thanks for dialing in today morning. I'm just, you know, going to talk through some of the key highlights for Q1, starting from the corporate side and then, you know, moving down into operations and I think what's sort of top of mind for everyone for today's webinar. In Q1, we declared a dividend of AUD 0.015 for FY 2022. You know, after sort of a year-long consultation with investors, potential investors, we formalized a dividend policy in March this year. This will be effective from FY 2023.
The idea is to give investors and shareholders some visibility of cash flow from the investments. You know, we're committed more or less to sort of distribute 20% of net profit after tax. This is subject to certain customary caps on free cash flow and other considerations. In Q1, we also repaid $7.3 million to our project finance lenders. I think, so this, you know, shareholders are not surprised. This is more or less in line with, you know, our policy of bringing down debt to a sustainable level.
I think, you know, as we approach that level, depending on what the, you know, sort of macro environment is, in terms of rates, where rates are, to be precise, we'll make a call on what we'll do with our, our sort of, capital structure. That's, that's more or less it, you know, on the corporate side. You know, I think what's the key number one question that we've been receiving from investors, you know, through our IR mailbox and sort of feedback form, has been the silicon metal furnace. I think, let's just sort of dive into that and address the commissioning issue that we've experienced.
In April, we announced that we have temporarily suspended production at the first Metallic silicon furnace. Sort of, you know, just wanna give our investors a sort of a flavor of the issues that we've encountered with that furnace. The main issue I think. There's two issues actually. The main issue I think is the recovery of silicon. The recovery of silicon is basically how readily SiO2 in quartz reduces into Metallic Si, and that gets tapped out of the furnace. The recoveries have been very low. I think this is not really a new or unexpected issue in the sense that it was very much a similar issue that we faced in 2015 with the various silicon furnaces.
You know, I think, you know, shareholders who've been around the last couple of years would know that that lasted actually better part of 2015 and, you know, even into 2016 before it was fully rectified. It's really a sort of trial and error kind of process, you know, using new furnace with a completely new batch of raw materials, you know, unfamiliar with operators, unfamiliar with the furnace blend and so on and so forth. When that happens, when you have a furnace with recoveries that are low, what tends to happen is a lot of the energy that's fed into the furnace has to go somewhere. You have to, you know, dissipate it somewhere.
More often than not, that happens at the surface of the furnace. What you get in return is a lot of hot air that has to be released in one way or another. When there's pent-up energy that's being released in the form of off gases, the dedusting system, the fans have to work overtime to dispel and remove that heat. I think what we've also seen, and this is the second issue that, you know, sort of talked about, is the off-gas ducting and heat removal system was not specced to be able to sort of remove that amount of heat.
I think these problems, actually sort of go hand in hand and, you know, obviously solving one, solving the reactivity will go some way to solving the hot gases and sort of the cooling system. What we've decided to do, because this entire conversion project is tied up under EPC contract, it's a turnkey contract. Contractors are responsible for delivering not just equipment, but they're also responsible for commissioning. You know, management and consultation, obviously, with all service providers, have decided to put the trial production to a halt. We are technically still under commissioning. As a result of, you know, the way the contract is structured, rectification works can be done, you know, within the frame of contract.
That's, that's what we're after in this case. I think, you know, some of the emails that have come in, some of the comments that we've received from shareholders and investors are around, sort of, you know, generally revolve around, you know, will the company still be looking at silicon metal? You know, is this an issue for the strategy? I think the answer to that is a resounding no, right? Because no one decides on a product stream, no one decides to build a new furnace or modify furnaces, you know, for three to six months kind of earnings. It's always about the long run. It's always about the 5 to 10 year sort of earning profile.
I think in this case, fundamentals of silicon metal remain the same. You know, we are still committed on delivering that furnace, as well as the second furnace, and bringing that into production. You know, as a result of this sort of temporary stoppage, we have found ourselves in a situation where we have excess manpower. I think, you know, investors will be pleased to know that we have, you know, I think a week or 2 after the announcement, we have redeployed all workers for this furnace into restarting the seventh manganese alloy furnaces. Furnace, sorry.
That brings, you know, with the exception of the two silicon metal furnaces, that's only one ferrosilicon and one manganese alloy furnace unutilized. If you look at the chart, on the bottom left corner, I think, for Q1 itself, you know, production has more or less gone according to plan. We are on track to achieve what we guided for the full year. I think, you know, if you look at the second bullet point in smelting, there's some upside to production numbers as workers return. We've actually accelerated that by redeploying the workforce towards the seventh manganese alloy furnace.
In terms of, you know, regular maintenance and everything else, that's already all sort of, fully priced in, if you will, into guidance numbers. We don't expect any surprises in terms of full year production volumes. You know, this, what you see on screen remains the roadmap, and I think nothing has changed really in terms of what we're looking at in 2023 and beyond. In terms of the actual tonnage contribution, you know, metallic silicon was never going to be a sizable contributor in terms of just raw tonnages.
Obviously, was going to be a contributor in terms of earnings, but as far as the commissioning and production plan is concerned, I think it's not actually going to change things significantly for 2023. As I mentioned in the previous slide, for manganese alloy furnaces, you know, what you see is 5-6 furnaces for 2023, but this may average to a higher number by the end of the year. I think the plan is still to the extent possible, bring all furnaces to full production, you know, with all 16 furnaces running end of this year. If not end of this year, then early next year.
For our final expansion project, the two new, 33 MV furnaces, that is still on track to be done within the next two years. Okay. You know, I'd just like to take the time, you know, to briefly talk through markets. I know that, you know, ferrosilicon and manganese alloys can be quite opaque for a lot of investors and shareholders and analysts. I think, you know, the broad trend for this year, as I've said in the previous webinar, the dominant theme is consolidation.
What that means is, we have to reckon, you know, with the capacity that has been brought online, and that's obviously not ourselves because we've been around for a while now, but a lot of new capacity has been either previously idle, previously producing something else that has been brought online. These excess capacities have to shed. I think we're in that phase of the market cycle. When you look at sort of the recent price trends, I think in Q1 we said that ferrosilicon has been sort of fairly flat and constant, a bit atypical actually. Looking at the data, has actually stayed at between 1,600-1,700 for 7 months.
That's where we felt was a sort of near-term floor. You know, since I think early or mid Q1, things have worsened, taken a turn for the worse. If you look at Chinese ferrosilicon production, the gray shaded area, that's actually come down, and we expect that to come down very quickly. Chinese exports have reduced very, very dramatically, you know, just given the absence of demand in the ex-China market. As a result, we've actually seen prices itch down to between AUD 1,500-AUD 1,600. That's, that's when you know, you know, the sort of active destocking phase of the cycle is in play. I think, you know, that's sort of generally driven by what's happened in China.
I think early on, a lot of us were counting on some kind of stimulus in China, but that has not come to pass. Instead, you know, we're seeing this excess, this buildup of inventory, sorry, of steel products and alloys in China, and that's spilling on to global markets. One silver lining, I think, to the entire situation is, you know, if you recall, second largest exporter after China is Russia. You know, as a result of a lot of domestic issues, some of the ferrosilicon producers have actually converted ferrosilicon furnace, their ferrosilicon furnaces to the production of other alloys, non-ferro, non-silicon and non-manganese alloys. I think that that's something pretty interesting.
You know, we think we'll have, eventually have a drag on global markets, for ferrosilicon. Moving on to manganese alloys, I think, you know, the picture is more or less the same. You know, we are in a sort of de-stocking, and competition phase, cycle. In the last webinar, I think we talked about, there being a big sort of recovery, in silicomanganese prices. So while that has happened, it has come down very quickly, you know, with oil prices sort of increasing. So what actually happened was that there was a brief compression in margins.
So if you look at the chart, and just to-- as a refresher, the blue line is the price of manganese alloys, and the red line is the price of manganese ore. You will see that, there was a brief compression, due to oil prices rising, and this was due to a lot of issues, for high grade ore miners, you know, earlier this year. These have since eased. I think, you know, we will expect oil prices to come down, in a more significant way to further opening up, those margins, for manganese alloys melting. Otherwise, I think, you know, the sort of, macro picture, remains the same.
With that, I think, you know, manganese alloy prices have basically more or less returned to where they were in Q4 2022, and we expect that to go sideways for a while now. Again, you know, one silver lining, is the change in power prices I think, from India, which is now today the world's largest exporting country of manganese alloys. We have not fully confirmed this, but power prices have increased by between AUD 0.02 and AUD 0.03, for, you know, large groups of the country's producers. The actual impact on prices, obviously will take time to sort of trickle through and, you know, whether the government sort of reverses its stand on the policy, obviously remains to be seen as well.
That's, that's one silver lining. Okay. That brings me to the end of, you know, a very, very quick update, Q1. You know, I think, just to remind, you know, investors and shareholders again, for us, you know, OM Holdings is a very, very simple story. I think today, we are converting a long-term power contract, very, very competitively priced, into a product that we know a lot about. You know, maximizing, sort of earnings from that by doing a lot of stuff, a lot of optimization around raw materials, a lot of optimization around how we're selling the product.
At the end of the day, we firmly believe that, you know, what we're doing is helpful to steel making in the region. You know, doing that with hydropower has benefits that are not currently priced on. You know, hopefully in the next 2 to 3 years, you know, having a price on carbon and having a price on carbon footprint will allow us to realize that benefit. In the meantime, a lot of what we're doing has sort of revolved around tracing our carbon footprints, taking part in life- cycle analysis, being able to, you know, quantify per ton of product what its full life- cycle carbon footprint looks like.
You know, this can only benefit customers who are looking to decarbonize and eventually put a number, you know, for their own products in terms of finishing products. I won't talk through all these points. I think a lot of shareholders are familiar with, you know, the story and just move on to Q&A.
Thank you, Adrian. That was a great update. We have had a few questions. We'll jump straight into it. Our first question, has any thought been given to ferrosilicon requirements once Latrobe Magnesium builds a magnesium plant in Sarawak? Will OM Holdings consider more ferrosilicon furnaces rather than more manganese furnaces?
Yeah. Yeah. Okay, that's a very, very recent development. For, you know, people on the call who are not familiar with Latrobe Magnesium, the thesis behind Latrobe, making magnesium from fly ash or from any sort of waste, that has sort of magnesium levels higher than dolomite. The key production process behind magnesium is the Pidgeon process, where, you know, you take 1 ton of... The reductant for magnesium is ferrosilicon, basically, and it consumes 1 ton of ferrosilicon to produce 1 ton of magnesium. This has been a dominant factor in China. When you're looking at Chinese numbers, when you're looking at Chinese consumption of ferrosilicon, you have to subtract the magnesium numbers, but it's not generally the case itself.
For Latrobe, they have announced their plans to build a 100,000 ton or 110, I think, planning plant in Sarawak. If you look at the numbers, that consumes almost 100% of what we're producing right now, although some sort of modifications will have to be made in terms of product sizing and so on for that process. I think the answer is yes. You know, if they really went through with the plan, the power contract and set up shop in Sarawak, then that's something that we cannot ignore.
I think that's something that will have a lot of synergies with what we're doing, especially with how we're positioning ourselves as a non-Chinese source of ferrosilicon for the world. Likewise for Latrobe being a non-Chinese source of magnesium. They would like to have a non-Chinese source of ferrosilicon. I think that is absolutely something that we will have to take into consideration and potentially then go backwards and modify some of the manganese alloy furnaces towards ferrosilicon, if, you know, the economics work out. That obviously has to be seen in conjunction with the two new manganese alloy furnaces coming in. You know, the product mix, I think, will have to be rebalanced.
I think, we probably will have the next two years to sort of, sort that out and decide on what the, you know, most optimal course of action should be.
Thanks, Adrian. You have covered the rectification of the silicon metal furnace in the early part of your presentation. We have received some questions associated with this.
Mm-hmm.
The first of those questions are, what sort of costs are likely to be associated with the rectification metal furnace where production has been suspended?
Right. Yeah. I think, maybe I'll just talk briefly about where rectification could go into. It could go into the way the furnace is wired. It's one. Could go into the way, very likely will go into the way gas is currently being removed from the furnace, as well as the cooling system that's associated with that. What is not clear actually is, you know, the share of cost that the company will be responsible for. That's actually, you know, why we have put a stop to commissioning at this point, because, you know, at the end of the day, technically we have achieved a 553 product and, you know, that is qualifying product that can be sold.
With the low yields and with what's happening with the dedusting system, we thought it, you know, wise to sort of put an end to production. If we had completed commissioning, if we had technically accepted the furnaces as, you know, functioning, then 100% of that cost will be on the company's account. That is not the case today. I think right now what we're waiting for is expert opinion on, you know, exactly has happened, document that down and then proceed to claim for rectification. You know, I think we will release that information and share that with investors as and when that is available.
At this point, you know, our understanding is, that will be minimal, for the company.
Thanks, Adrian. Our second question in relation to the furnace. Have the issues with the first silicon metal furnace affected the enthusiasm for entering this market? Will the company be proceeding with the investment to convert a second furnace to silicon metal production?
Yeah. It has not dampened the enthusiasm. I think, look, the sort of major themes for silicon metal. 1, renewable energy, you know, goes into the solar sector. 2, all the sort of parts for the solar panel making industry are bits and pieces are found in Sarawak. You know, Malaysia is surprisingly one of the world's largest assembly plants for solar panels. There's a polysilicon maker just 5 minutes away from the doorstep. 3, earnings potential, you know, way above ferrosilicon. 4, sort of political, geopolitical risks. I think those themes remain relevant. The company's objective is still to produce silicon metal.
As for the second silicon metal furnace, you know, we have converted the furnace, so you know, there's nothing actually left to be done for that furnace. It's really just to push a button and go. From that point of view, you know, all costs that have been incurred, there isn't actually anything to do to the extent that we don't need to, you know, do any rectification for the second furnace. If rectification works are needed for the dedusting system, we do both at the same time.
I think, you know, in, you know, looking back, when we decided to commission these furnaces in series and not in parallel, you know, that turned out to be the right decision because we knew how difficult, you know, silicon metal production would be. Not in terms of it being difficult once you stabilize, but it is tricky until you get to the stable point. Yeah, I hope that answers the question.
Thanks, Adrian. This appears to be our last question for today. How would you describe labor availability at Sarawak? Are labor issues currently affecting operational productivity?
Yeah. As I was showing earlier, you know, besides the 2 silicon metal furnaces, there's 1 idle ferrosilicon and 1 idle manganese alloy furnace. I think, we are now in a situation where there aren't any sort of hard rules around restriction of foreign labor. I think, we are progressively, you know, hiring more as well as training more local staff, you know, through the university collaboration that we shared last year. That's all ongoing. I think, it's no longer really a bottleneck in the sense that, you know, in a hard sense, right? It's just competing with market forces at this point, because there are a lot of, excuse me, there are a lot of steel mills. It's a happy problem to have.
There are a lot of steel mills commissioning production in Southeast Asia and sort of offshoring production from China. That actually becomes competition for the same pool of workers. You know, I think we are optimistic that we will be able to find the workers to sort of bring everything to full production, you know, this year.
Thank you, Adrian. That appears to cover the majority of our questions today. If you do have any further questions, please forward them to info@corporatestorytime.com. We will make a recording of this webinar available via OM Holdings and Corporate Storytime social media accounts in the coming days. This does conclude our webinar, and thanks to everyone for attending. Thank you, Adrian, and your OM Holdings team for the update. Thanks, Adrian.
Thanks, everyone. Thanks, Nicola. Thank you.