Magnesium alloy company Magontec (ASX:MGL) CEO Nicholas Andrews discusses the size of the magnesium alloy and anode markets, FY16 results and the new Qinghai facility.
Well, Magontec’s a company that’s been around for 65 years, founded in Germany in 1953. It’s a company that manufactures magnesium alloys, magnesium anodes. Our businesses are principally in China, Germany and in Romania. The company came out of Norsk Hydro (OTCMKTS:NHYDY) back in 2007 and it's been listed here on the Australian Stock Exchange for about the last seven years.
The size of the market for Magontec products varies. There are two products. We make magnesium alloys, and the business size there globally is around about $1 billion. And we make magnesium anodes, and the anode market is around about $100 million.
So our main customers are all over the world, but in the magnesium alloy industry, the principal customers are in the automotive sector. So we sell our product, magnesium alloy ingots, to companies like Volkswagen (OTCMKTS:VLKAY) and Audi (ETR/FRA:NSU), and all the companies who supply those automotive companies. They’re tier one producers.
So we’re selling to tier one and to OEMs in the mag alloy business, and in the magnesium anode business, we’re selling to the hot water industry. So every steel tank all over the world has an anode of some description in it. Most of them are made of magnesium.
We’re different to our competitors in a number of respects. In the magnesium alloy business, we’re the only global magnesium alloy company in the volume mag alloy business. So we have businesses in China, Germany and Romania. We also have distribution in Japan and in North America. None of our competitors have that sort of spread. They’re either Chinese companies making a product, or they’re agents who are selling the product all over the world.
We also invest a lot of time and effort and money in research and development. And that’s been very productive for us in the last few years, so R&D’s a big issue too. Perhaps the biggest thing that sets us apart is going to be our new project at Qinghai. That project will have a significant impact on world magnesium markets, and we expect that to come on-stream in the next few months.
So the Qinghai business and the Qinghai cast house has been under construction for the last three years. And it’s, if you like, the end product of an enormous industrial investment made by the Qinghai Salt Lake Magnesium Company (QSLM). They’ve invested around $10 billion in this project. We invested around $10 million in forecasting lines, which will manufacture mag alloy ingots at Qinghai, about 60,000 tonnes of production every year.
Many advantages to this particular factory, but if I could single out a couple - it takes liquid pure magnesium, so no melting costs. It’s highly automated, so considerably fewer labour inputs, if you like. And environmentally, it’s going to probably be the most environmentally sound project in the magnesium industry. 85% of our power comes from renewable energy, and we’re also using, if I can be a little technical, a cover gas which has a very very low environmental impact.
In the last couple of years, we’ve invested a lot of money in improving the mag alloy business. It’s a recycling business. We’ve improved the processes, we’ve introduced automation and we’ve built our marketing and our distribution capabilities as well. Today Magontec is the largest mag alloy recycler in Europe, and that’s a position that we’ve gained through being extremely competitive in that environment. In the magnesium anode business, where we were really struggling with competitiveness only two years ago, again we’ve invested in new machinery, in automation. We’ve moved that production site from Germany to Romania. And we’ve taken advantage of a number of automation initiatives, which have allowed us to become very, very competitive in the last year or so.
Our cash position is pretty strong at the moment. We have around about $3 million on the balance sheet in terms of cash. We’re generating around about $4 million to $5 million of free cash every year. The cash generally goes into working capital, because we’ve got a very strong requirement for that. Net debt to equity is around 21%, which is a strong improvement on previous periods. And our net profit after tax, our underlying net profit after tax, of about $1.3 million, is a strong improvement on the same period last year. And finally, gross profit margins have improved significantly: last year to the end of September, around about 9.1%; this year to the end of September, about 11.4%. So we’re seeing strong underlying growth, improvement in margins and a balance sheet which is considerably more stable than it has been in years past.
Well, forecast for FY17 is an extraordinarily difficult thing for me to do, because we have this huge project coming on next year. We’re not certain of the start date; there are a number of unknowns and unknowables in our next 12-month period. So I’ve not put out a forecast for 2017 and I won’t be putting out a forecast for 2017 -- except to say that if production starts in the first quarter of 2017 at Qinghai, as we expect, then our results for the financial year should be considerably better than they will be for the end of 2016.
Well, 12 months from now I’d like to see the company producing at full capacity at the Qinghai facility. It will make a significant difference to profitability and to our cash flow, and it will afford us the opportunity to go and look at a whole variety of different corporate activities, to build on the strengths that we have and potentially to look at other opportunities as well. And of course, in the event that we’re as successful as we expect in Qinghai, we’ll be in a position to consider a dividend.