ABTERRA: In the red but worth a look?

Abterra is a volume player, and has strong relations with China’s top steel manufacturers, such as Shougang, Baogang and Angang, says Abterra CEO, Jaffe Lau. Photo by Sim Kih

COAL & IRON ore trader Abterra, at 4 cents (yesterday close) and fairly liquid, is one highly leveraged bet.

What’s the math behind this?  Simply, since the minimum bid quoted on SGX is half a cent, any minimal price movement on stocks trading at 5 cents or less amounts to volatility of at least 10% (0.5 divided by 5).

Those who caught the stock at its historic low of 1.5 cents a share earlier this year are now sitting on a multi-bagger.

The stock was SGX-ST's top volume stock with over 200 million shares changing hands at 4 to 5.5 cents during this morning's trading session.

It opened unchanged from yesterday's close at 4 cents but shot up immediately after a married deal was reported at 9:30 am this morning. Transacted at 2 cents each for 50 million shares, the bloc trade amounted to $1 million.

Given the bullish market sentiment of late, more than a few punters may think of diving into this stock in the days leading up to its 1Q09 results to be announced next Fri (15 May).

For those not familiar with its interesting background story:

Coal and iron ore are sexy commodities in boom times as they are basic raw materials for the production of steel - for building marine transportation vessels, production lines in factories, automobiles and rail infrastructure.

The type of coal that Abterra deals in is for steel production, namely, coking coal, and metallurgical coke that is processed from the former.

Swimming upstream to mining

While Abterra's turnover was a good S$215 million for the 6-month period ended 31 Dec 2008, its trading business faces razor-thin margins (gross margins of 4% to 5%).

Abterra's ambitious plan is to integrate upstream into mine operations.

This is highly unusual as very few privately-owned firms in China own mines. Natural resources are usually held under state-owned enterprises like Shenhua Energy.

Thanks to the political clout wielded by Abterra’s major shareholder, General Nice Resources, our SGX-listed trading company is able to acquire stakes in operators of coal and iron mines.

General Nice owns 40% of Abterra and was founded by Abterra’s executive chairman, Mr Cai Suixin.

The General Nice group of companies is one of China’s largest producers of metallurgical coke and China is the world's largest steel producer with a 38.5%-global market share last year.

World Steel Association statistic: Global production of crude steel was 1.3 billion tons in 2008, of which China produced 500 million tons.

Executive chairman Cai Suixin has worked with coal mines since the early 1990s.

Mr Cai, a Teochew businessman from Guangzhou, is the son of a Communist Party Korean war veteran.

General Nice's political clout comes from the senior Mr Cai’s influence in provincial matters in Guangdong, said Abterra’s CEO Jaffe Lau in a recent interview with NextInsight.

After General Nice Resources became Abterra’s controlling shareholder in 2006, the coal and iron ore trader acquired 15% of Zuoquan Yongxing, which operates a coal mine with estimated reserves of 97 million metric tons.

This investment has proven to be a huge success - Yongxing was highly profitable, generating net earnings of Rmb 29 million in 2008.

There are now plans to upgrade its annual capacity allowance of 300,000 metric tons to 900,000 tons.

That may be why Abterra is going ahead with its strategy to integrate upstream.

It is in the process of acquiring stakes in other two mining companies – 22.8% in Zuoquan Xinrui, which produces iron ore, as well as 49% in Taixing Jiaozhong, which owns another coal mine.

Even for major players like the General Nice group of companies, the acquisition process for a coal mine in China is ponderous as the resource is classified as critical in the country's national defense strategy.

Furthermore, a spate of mining accidents has resulted in government action to limit the issue of mining licenses to 300 (from about 2,000 mine operators currently), with one major player for each region.

But the good news is: Xinrui and Jiaozhong will share rights to mining resources with less competition.

Jaffe expects the acquisition of 49% in Jiaozhong to be completed by July 2009 and the 22.8% in Xinrui to be completed by year-end.

Not everything is rosy, though.  Like other commodity traders large and small, Abterra has been hit by the global economic slowdown.

It incurred a net consolidated loss of S$15.6 million for the 6-month period ended 31 Dec 2008.

The loss was mainly due to an impairment loss of S$10 million plus another S$10 million in allowance for doubtful debts.

The impairment loss arose from Abterra’s investment of 45% in a logistics company, Tianjin Lant, in Feb 2008.

Metallurgical coke (above) and iron ore are used to make steel.