Moving up the mining value chain is what commodities trader and mining stock Abterra is now working towards for sustainable future growth, now that the dust is slowly settling on the economic crisis over the past year, says its executive director Mahesh Mehta.

This company aims to grow through securing upstream mining assets in key regional markets and becoming a fully integrated player in the natural resources business. Its immediate plans are to expand its international trading capabilities by leveraging on its existing strengths in the Chinese market while sussing out quality upstream opportunities in the region.

Abterra’s current main business is primarily importing iron ore into China from Australia, India and Indonesia for sales to steel mills as well as importing coking coal and exporting metallurgical coke, which makes up about 100% of its revenues thus far.

The group is on the cusp of its next phase of growth and looking forward to a different revenue mix once its new investments & acquisitions start to make contributions come 2010 and beyond.

From its beginnings not that far back in 2002 when it was first listed on the mainboard of the Singapore Exchange as Hua Kok International, Abterra found its way into its current business in Oct 2005 when Hong Kong-based Prosperity Steel acquired 70% stake in the company. After a buyout in 2006, Abterra is now 40% owned by General Nice Resources (Hong Kong) – a major player in the imports and exports of coke processed from coking coal and used in steel-production.

Banking on infrastructural demand

This relatively young company is hoping to ride the wave of growing demand for steel in key markets especially China, which are expected to strengthen together with potential recovery in the global economy in the future.

"Abterra has only been in the market for about three to four years, and to have developed into one of the major players in this sector has not been easy. We are fortunate to have been helped by the group, such that now we are able to move out into new markets", said Mr Mehta, who counts India and Indonesia as two other very large target markets for Abterra, in addition to tapping on China as its primary engine of growth, especially as economies in the world pick up this year onwards.

The move towards securing mining operations was a natural one according to the company.

"It was a jumpstart or piggyback onto a bigger growth to get our product base settled. Once we had a good grasp of trading, we decided to embark into other areas such as investing into more mines to enlarge our supply base for minerals", said Mr Mehta.

"We have already established concrete network infrastructures with many steel mills across China, which gives us a competitive edge and we are also working to establish such networks in India and Indonesia", he said.

Beyond securing upstream assets to strengthen its trading business, Abterra aims to emerge as a strong vertically integrated supply chain manager of minerals and resources in the region.

A vertically integrated business model would lower profit margin volatility while urbanization in densely populated countries like China, India and Indonesia has propelled an infrastructure boom would boost the demand for steel, which in turn would increase the demand for the raw materials for steel-coking coal & iron ore, said Mr Mehta.

Limited supply of raw materials coupled by growing demand is also expected to push prices further upwards, he added.

Come 2010 and 2011, Abterra expects to see the fruits of its investment forays as echoed by Lau Yu, Abterra's CEO who has said in presentations to investors: "Building on our successes so far, we have set ambitious targets and have the resources to deliver. We want to continue to make strategic acquisitions of coking coal mines to increase our product capacity to 5 million metric tonnes per annum in the next 2 to 3 years".

The prices of commodities is another reason why things are looking up. According to Mr Mehta, coking coal prices have run up from US$130/ton to about US$180-190/ton. The outlook for demand and prices is good based on the view that infrastructure projects will maintain strong growth as economies recover in the surrounding markets.

China’s steel industry fortunes on which Abterra's current and future growth are pegged, are on an uptrend, with coking coal and iron ore are the chief raw material inputs used in making steel.

Its strategic investments and recent acquisitions in mines, are definitely putting things in the right place for the group.

New acquisitions

Earlier this May, Abterra paid about S$36.8 million for a 49% stake in Shanxi Taixing Jiaozhong Coal Industry Co in Shanxi, China, which produces semi-hard coking coal for steel production. With an annual capacity of 150,000 metric tonnes already, this is set to increase production by six-fold to some 900,000 metric tones by end next year, upping expected coal reserves to some 10.23 million metric tonnes and provide a much needed boost to group revenues when in full gear. This mine as well as the Zuoquan Yongxing Coal Company in which Abter¬ra acquired a 15% stake in 2007 are expected to be the shot in the arm for the group.

The surge in production will enable Abterra to tap on the current uptrend in Chinese steel-making industry infrastructure & industry projects, which have been partly funded by the Chinese government's massive 4.5 trillion yuan economic stimulus package.

It is also expecting completion of a deal to take a 22.8% stake in Zuoquan Xinrui, which will give it access to iron ore production of about 400,000 metric tonnes, will give it a reserve of 37.9 million metric tonnes down the road.

The company also does not rule out raising more funds in the future for working capital or further strategic acquisitions, but will focus on getting its house in order first. The company last in 2006/7 raised capital through convertible notes and rights issues of about S$186 million, which were mostly ploughed into investments in the mines.

For the half year ended June 2009, Abterra’s revenues fell 37% to S$110 million from S$175 million, and net profit a whopping 81% from S$1.73 million from S$9 million year-on-year. Last financial period for the company from July-Dec 2008 according to its annual report, saw revenues at $215.3 million and net losses of $15.6 million.

For Q12009, Abterra's revenues grew to S$65.8 million from S$44.3 million which was attributed to the trading of coke and coal, which increased three-fold from S$22.1 million to S$64.9 million year-on-year. While the demand for iron ore and other non-ferrous metals has dropped significantly from the onset of the financial crisis, the demand for coke and coal still persist.

Then it will depend on ones foresight to select the better penny stock.

If you can buy and hold starcrus$US 0.22-0.23 = fair buy :)

I expect this stock to be around $0.50 next year

iPunter      ( Date: 27-Oct-2009 21:52) Posted: There are quite a few pennies trading at floor level...  Picking one of these and holding out will most probably reap big gains in time to come...

why would i park my money for 12 months betting on quite a risky business ?

30% Black

70% Red

The Competition level is too high in China. Also have you consider this if the mines are profitable in the first place they should acquire more mines themselves instead of selling it to abterra...

Anyway there's more than meet the eyes.