Company Overview

Southern Alliance Mining (SAM) is a Malaysia-based, producer of high-grade iron ore products, principally involved in the exploration, mining and processing of iron ore for subsequent sale. SAM sells iron ore concentrate of low level of impurities with Fe grade 62% to 65% to steel mills and trading companies in Malaysia and China, pipe coating materials that are crushed iron ore for subsea pipes, and iron ore tailings. SAM has also been granted the right to carry out exploration and mining operations at 5 potential iron ore mines located in Johor, Malaysia, and its primary mining asset, the Chaah Mine, is an open mine pit consisting of 2 mining leases and covers an aggregate area of 225.7 hectares.

1. Describe Southern Alliance Mining’s (SAM) Main Business.

• SAM is a high-grade iron ore producer in Malaysia with over a 14-year track record in the exploration of minerals, and is principally involved in the exploration, mining, processing and sale of iron ore minerals. The Group has an approximate monthly production capacity of 60,000 tonnes of iron ore concentrates (not including pipe coating materials). In recent years, the Group has enacted strategic initiatives such as joint ventures and the signing of memorandums of understanding (MOUs) to venture into Gold and critical minerals such as Rare Earth Elements (REEs) exploration, to diversify its operations.

2. Tell Us More About Rare Earth Elements (REEs) – What Are They and Why Are They Important?

• REEs are a group of 17 elements that are vital for many modern technologies. They are used in the production of high-performance magnets, batteries, and other critical components for green technologies like wind turbines and electric vehicles.

• Due to their unique magnetic, luminescent, and electrochemical properties, REEs are critical to technological advancements and sustainable energy solutions. REEs can be found in smartphones, TVs, ceramics and glasses. As the world moves towards sustainable practices, the demand for REEs has risen sharply, signalling a lucrative market that SAM is poised to enter and expand into.

3. What Is the Current Market Dynamics for REEs and How Does SAM Plan to Penetrate This Industry?

• China is at the forefront of the REEs market, accounting for 60% of production and 90% of processing activities globally. However, new projects and deposits, such as those in Malaysia, coupled with supportive government policies, are contributing to a geographical diversification of the market.

• According to Malaysia’s Prime Minister Anwar Ibrahim, the country’s rare earth industry is expected to contribute RM9.5 billion (US$2.03 billion) to the country’s gross domestic product in 2025 and generate 7,000 jobs. This growth prospect is underpinned by a fragmented market with various players, including Lynas Rare Earths Ltd. Malaysia is also enhancing its REEs mining and production capabilities, underscored by only allowing the export of rare-earth raw materials that have been processed in Malaysia.

• With two acquisitions scheduled to complete in 2H2024, management believes that SAM is well-positioned to foray into the rare earths industry, focusing on the mining method in-situ leaching known for its minimal environmental impact to extract REEs. The two target companies – MCRE Resources Sdn Bhd (MCRE) and Paramount Synergy Sdn Bhd (Paramount) – also have substantial deposits of REEs, and MCRE is also a pioneer in implementing advanced Chinese mining methods.

4. Can you elaborate more on the advanced mining methods and how does it make the mining process more environmentally friendly?

• The mining method mentioned here refers to the employment of In-Situ Leaching (ISL), a minimally invasive method that injects a leaching solution into the ore body to dissolve the REEs, allowing for extraction with minimal surface disturbances.

• This method is particularly favoured for deposits where traditional mining methods would cause significant ecological impact. The environmental benefits brought about by this method would reduce surface disruption, minimising the need for deforestation and soil removal, thereby preserving ecosystems. Furthermore, as ISL uses a closed-loop system to recirculate the leaching solution, it significantly reduces water consumption and pollution.

5. What Are Some Market Opportunities and How Is SAM Leveraging on Them to Strengthen Operations?

• Critical Minerals (e.g. REEs): The REEs market is experiencing a significant surge, projected to expand from US$11.0 billion in 2023 to US$34.3 billion by 2032, growing at a CAGR of 13.1%. These elements, particularly Neodymium and Dysprosium, are indispensable in manufacturing high-performance magnets for wind turbine generators, electric vehicle motors, and consumer electronics such as headphones and smartphones. This demand is closely tied to the global transition towards greener technologies and the increasing production of electric vehicles.

• Gold: Prices have seen a steady climb since 4Q2023, with prices trading close to US$2,200 per ounce in March 2024. While gold is expected to maintain its upward trajectory, market analysts predict significant volatility, suggesting that we may see prices oscillate at historically high levels.

• Iron Ore: The global outlook for the high-grade iron ore market is mixed. Bearish analysts have observed that the anticipated demand surge, driven by China’s economic recovery, has yet to materialise. Coupled with new iron ore supply entering the market from Guinea and current inventories remaining ample, iron ore prices tumbled from a January 2024 high of US$140 per tonne to US$107.20 per tonne in March 2024. Conversely, bullish analysts draw attention to strong financial performances by key industry players, as well as China’s iron ore imports, which have increased 8.1% year-on-year in the first two months of 2024, signalling that the market may see brighter days ahead.

6. Given the presence of big players like Lynas already operating in Malaysia, what are some of MCRE or Paramount’s competitive advantages that sets them apart?

• The REEs found in the mines of SAM’s target companies are Ion-Adsorption Clay REEs, of which the host of the REEs is granite, which differ from normal rare earth ores. The extraction method for the former is more costeffective and incorporates a simplified processing approach, resulting in products with higher market value.

• Environmentally, the current technique adopted by MCRE, and the nature of the ore, offer substantial benefits such as minimal habitat disruption, reduced waste generation, and lower energy consumption. This eco-friendly approach aligns with global sustainability goals and presents a competitive edge over peers, who may face challenges due to higher investment and energy costs, complex processing, significant ecological disruption, and intensive energy demands associated with conventional mining practices.

7. Could you share more about SAM’s target companies – MCRE and Paramount? Are they operational, and will they immediately start contributing to SAM’s financials after the completion of the acquisitions?

• MCRE holds a special place as the first Malaysian company to utilise an advanced mining method in Malaysia, marking a significant step forward in the local mining industry. It is headquartered in Kuantan, Malaysia, with its primary mining operations based in the State of Perak, focusing on the exploration, mining, processing, and sale of lanthanide minerals and non-radioactive REEs. MCRE boasts a substantial mining area of 2,161 hectares with an estimated 33,000 tonnes of rare earth oxide in its explored mine area. MCRE is an operational mine and once the acquisition is finalised, SAM will be able to start recognising 40% of its economic interest in the mining, processing, and sale of REEs.
   
• Paramount owns a 100% interest in a substantial area of identified mineralised zones, amounting to 1,863 hectares in Johor. Paramount is principally engaged in the exploration, mining, processing and sale of ion adsoption clay rare earth minerals in Malaysia. It is currently in the exploration phase of its activities and approximately 1,200 holes have been drilled to date. The acquisition is not expected to contribute to SAM’s financials in the immediate term. Upon the finalisation of the acquisition, SAM will commit the requisite resources (financial and manpower) to develop the mine into an economically viable project that contributes positively to SAM’s revenues and earnings.

• These two target companies, combined, represent a significant potential for growth in the REEs industry, positioning SAM as a notable player in the sector.

8. For SAM’s joint venture in gold exploration, could you share the rationale behind entering this market? What is the status of the project?

• SAM's strategic decision to venture into gold aligns with the industry trends of robust demand and sustained price increases. As the global economic landscape grapples with volatility, the safe-haven asset has seen prices reach new heights. SAM's entry into gold represents a diversification of its minerals portfolio, which could provide a hedge against the cyclical nature of commodity markets and contribute to a more stable revenue base and earnings. SAM will soon provide updates on the progress of its gold exploration project at its Tenggaroh Mine, Mersing, which consists of 6 prospecting licenses covering an area of 17,767.8 hectares. Due to the vast area of the project, the exploration activities are focused on the known mineralisation areas. The Group is currently implementing a 20-drill hole programme on the back of significant gold mineralisation results from the sample obtained.

9. Can You Elaborate More About SAM’s Recent Financial Performance?

• Given that SAM’s main operations are still the mining, processing and sale of iron ore, the Group’s financials will be significantly tied to the price of iron ore. Iron ore prices soared during 2020-2021, leading to strong revenues and earnings. However, due to the weakness in the Chinese economy from 2022-2023, prices of iron ore have declined significantly and remained volatile. Management of SAM remains optimistic that the worst might be over, despite volatile iron ore prices due to the uneven recovery of the Chinese economy. SAM recorded RM92.2 million in revenue for 1H2024, a 76.6% increase compared to 1H2023. If prices of iron ore remain stable or even surprise on the upside as some analysts have projected, management expects SAM to return to the black.

• In addition, the higher stripping ratio due to overburden removal in FY2022 and FY2023 posed significant challenges to SAM’s financial results. Consequently, SAM has recently switched to the underground mining method from the open mining method, which will enable us to minimise massive waste removal works. Currently, SAM is still in the transitional period, and underground infrastructure and development works are ongoing according to the planned phases (with some ores extracted). Once these works are completed for the respective phases, mining works will commence.

10. What Are the Mid- to Long-term Catalysts for SAM?

• SAM will be providing quarterly updates on its gold exploration project. Additionally, the expected closing of its acquisitions of the REEs companies in 2H2024 will further diversify and fortify the Group’s future revenues and earnings. Although a foray into these markets is not expected to significantly contribute to SAM’s financials in the immediate term, leveraging on gold and REEs will enable SAM to diversify beyond iron ore, reducing risks and stabilising income sources. Additionally, following the MOUs and the expected closing of the acquisitions of the two target REE companies in 2H2024, SAM will represent the first company listed in Singapore with REE exposure. A gradual recovery in iron ore prices will also enable SAM to achieve a more robust financial performance.