Eight Things You Should Know about SCC!

1. THE EARLY STAGES

Semirara Mining Company (SCC) is a publicly traded company in the Philippine Stock Exchange (PSE). Last July 11, 1977, the Philippine government awarded a thirty five year coal operations to a consortium (association of two or more individuals, companies, organizations and governments with the objective of participating in a common activity  for achieving a common goal)  formed by three private companies. 1977 plus 35 years equals 2012. Thus, on July 11, 2012, the right to operate a coal mining operations will cease. The Department of Energy (DOE) however stated that SCC has the right to renew the contract one year before the expiry date. Since the expiry date is July 11, 2012, I assumed that SCC is now actively filing a truckload of papers to DOE for the extension of the right to mine coals in Semirara (located in the province of Antique, municipality of Caluya.) By the way, SCC has extended its right to mine coal until 2027.

In 1983, the contract was amended between the government and SCC. The government is entitled to receive 30% of the gross revenue less allowable deductions or a minimum of 3% of gross revenue whichever is higher. In 1987 the Company completed the coal mining and started delivering the coals. This coal is different from the uling that we uses in our house whenever Meralco runs out of electricity or whenever a storm or typhoon ravages our country although the purpose is the same which is to produce heat and eventually becomes a fuel source. This coal is undergoing through a process before it can be sold to large scale clients and industries.

The coal prices are lower than anticipated in the early stages and the peso is performing poorly against the dollar making it hard for SCC to pay its creditors and financiers. The European bank who lent money to SCC eventually converted its loan into shares acquiring 40% of the Company’s outstanding shares.

2. DMC TO THE RESCUE

In 1997, DMC purchased the 40% shares of the European creditor and started to hire a new management team for its operations. They also hired expats who are experts in the coal processing industry. DMC eventually increased its shares in SCC to 94% at one point in time. In February 4, 2004, SCC has successfully launched an international public offering. They sold more than 30% of their shares to foreign investors and the company’s ticker in PSE became SCC. SCC was able to pay its maturing debts to creditors and royalties to DOE because of the international public offering.  Moreover, it enabled SCC to buy modern mining equipments after decades of using shovel in extracting coal mines.

3. BIGGEST CUSTOMER IS OWNED BY SCC ITSELF

In December 2009, DMC won the bid for the coal fired thermal plant in Calaca, Batangas previously owned by the Philippine Government.  This power plant uses coal to generate electricity. This acquisition is both a defensive and an opportunistic investment for SCC. It is defensive because the power plant will use the coal of SCC on a long-term basis. Thus, SCC is secured by a long-term contract with its subsidiary.  It is an opportunity also to add additional earnings in the coffers of SCC.

4. THE GREAT POWER PLANTS

The nine months ending Sep 2010 results for the power generation is encouraging. The gross profit of the power plants is 2.2 billion pesos. In just its first year of operations it has generated substantial resources in the vault of SCC. The power plants bought by SCC are not yet operating at full capacity. One power plant is undergoing rehabilitation and is expected to be fully operational next year. This will bring a big upside on the revenues of SCC. Moreover, the company has negotiated for favorable supply contracts from its clients. The contracted electricity is 322 MW which represents 62% of the total capacity of the two power plants. These contracts also include the cost of coal which SCC is selling to its subsidiary. Another power plant is being constructed with a capacity of 600MW. The power plant is expected to be completed on 2^nd half of June 2012. Once all of the power plants become operational and grinding at full capacity, SCCs net income will dramatically go up.

5. GLOBAL SCENES

SCC has clients around the world. In fact, almost half of its coal products are being exported. Thus, any changes in the global scene will affect the coal export. Coal is the major fuel for worldwide generation of electricity. Nearly 40% of the worlds’ electricity is being produced by using coal. In India, US, Australia and Europe, coal is the dominant fuel source of electricity. Experts say that 71% of China’s energy will come from coal. Although a lot of countries are giving emphasis on green energy but this may take a while. In the next two decades, coal will still be the dominant fuel source of electricity in the world.  Recently, the Japanese battled an earthquake and tsunami that devastated the country and its nuclear energy. That disaster took out nearly 9.7GW of thermal capacity. The disastrous effect of nuclear meltdown is scary to people living near the nuclear power plant. Countries dealing with Japan have scrutinized the products coming from them because of fear on nuclear contamination. In effect, Japan’s economy slows down further and its stock market plummeted drastically. People are now questioning the role of nuclear energy and this nuclear issue is giving coal a big boost. In fact, global prices of coal are 33% higher than last year. Since the financial crisis that hits US last 2008, countries are steadily growing and bouncing from a deep low. Consumers spending are rising and infrastructures are sprouting like anything. The rebuilding efforts in Japan will require more energy than ever before. Infrastructures need steel and cement, and production of steel and cement needs coal as fuel source. The bottom line is as energy demand increases and infrastructure projects continue to be created, demand for coal is set to rise and so is SCC.

6. RECENT DOWNWARD MOVEMENT

Recently, when Duetsche Bank lowered the SCC rating from BUY to HOLD, the SCC price plummeted. Duetsche Bank dumped 600M pesos of SCC shares since April 1, 2011. They are one of the biggest holders of SCC shares among the stockbrokers. On the upside, UBS Securities and Citiseconline bought 340M pesos worth of SCC shares. These guys are making the SCC price steady and with their BUY rating, we only hope for the upward movement of SCC because I am hoping Duetsche Bank has already sold all of his SCC shares and are now in the hands of stockbrokers with a BUY rating. I am optimistic that SCC will go up.

March 24 , 2011 - Share price is DOWN at 216.20/share, 1.5 M shares traded, CLSA dumped 400k shares while UBS dumped 360K shares, Citisec on the other hand bought 200k shares.

April 13, 2011 -  Share price is DOWN at 218/share, 2.5M shares traded, 1.2 M shares were sold by Duetsche Bank because of on hold rating.

Apr 19, 2011 - Share price is UP at 213.80/share, 1M shares traded, 450k shares dumped again by Duetsche Bank but Citiseconline bought 290k shares. First Resources and SB Securites bought 300k shares

7. STRONG DIVIDEND POLICY

On May 24, 2011, SCC will pay a 10/share dividend. At its current price of 212/share, your money will earn a 5% yield. SCC also paid dividends in Year 2009 at 6/share. The management has committed in providing strong dividend yield to shareholders and SCC did not disappoint.

FinanceAsia magazine sponsors a yearly poll to determine the best managed companies in each country in Asia.  Each year, the magazine asks investors and analysts wide range of questions about their views on companies' corporate governance, investor relations, dividend policies and corporate social responsibility.  To ensure that each market is represented honestly, the magazine targets regional investors to participate in the poll. On 8 July 2010, Semirara Mining Corporation was among the awardees for "Most Committed to a Strong Dividend Policy."  Since its domestic and international shares offering in 2005, the Company has been consistently paying out cash dividends which is more than the adopted dividend policy of 20% of Net Income After Tax.

8. CONCLUSION

SCC is a defensive company and is not vulnerable from cyclical downturns. It is a great company with competent management. The power plant business is slowly gaining momentum and will realize its full

potential in a couple of years. Global demand for coal is soaring coal prices are skyrocketing. Being the only large scale coal producing company in the Philippines, it is well established to capitalize on global energy demand and a rising Philippines expected to gobble up more electricity. As one of the large companies giving a large dividend pay-out, it’s worth including SCC shares in your portfolio. BUY IT.