OMH : a wonderful/fair company selling at a wonderful price. One of my greatest mistakes in investment. Still made about 150% from this company in 8 years.

 OMH is one of my failures, I had everything invested into this company. My saving grace is that I bought it at about 15 cents aud. Today it's trading at 40 cents aud. Over the 7 years I have held it. It's been a roller coaster. Going all the way up to 1.70+ aud, 12 times what I paid for it. Management is oblivious, and the company is heavily mismanaged. Today it is at 40 cents, still an undervalued company. 

It's a sad story for my portfolio. I would have made at least RM5million or more had I sold above Aud 1 and went into some of the other ideas I've had over the years. I've had more than half a dozen great ideas. Many of them went up several times, but I persevered and believed in this stupid company and its incompetent management.

Why is OMH a wonderful company? Well, it has access to cheap electricity. In the range of about RM0.15 per kwh of electricity. It is extremely well positioned to produce alloys which require high electricity to produce. Like the 6 foot man in a 5 foot deep river. When markets are good, they make supernormal profits, and when markets are bad. The competitors die off and they take market share by expanding their furnaces.

Sadly, management has never managed to grasp this concept. They do not understand that it is not the smelting know how that makes the company good. It is the cheap electricity. 

I would just list the extraordinary list of extremely bad decisions management has made since 2020.

1) In 2020, they decided to shut down 25% of the furnaces(12 out of 16 furnaces operating), which are low cost furnaces. They also decided to continue production in a medium cost mine at the end of its life. The smelters were breaking even, so there was no need to shut them off. The medium cost mine was losing money hand over fist. There was no reason for the mine to continue operating as it only had 1 years reserve left. The mine lost 40million AUD(if my memory serves me correctly) in the last year of its life and the furnaces were not able to be restarted in the ensuing electricity shortage. One would wonder why they had not simply shut the mine off early rather than lose such an astronomical amount. 

2) When the covid lockdowns loosened, the market for ferroalloys rose stratospherically. There was a shortage in electricity that OMH would have been able to take advantage of. As most electricity around the world was generated by coal. OMH with their power purchase agreement from SESCO would benefit as it is HYDRO POWER. Which has a much lower operating cost and no raw materials. When the electricity shortage reverberated across the globe. OMH was not able to capitalize because they had sent back 25% of the labor required to operate the smelters. In addition to that, the incompetent traders had locked in prices at half the price of the peak of the parabolic rise in ferroalloy prices. Thereby sealing the company's fate of having mediocre profit in a period of supernormal profits. Locking in low prices and shutting down a quarter of their furnaces.

3) The bad decisions continued the next year in 2021. As ferroalloy prices went up and up. Management decided to convert 4 furnaces of ferrosilicon into silicomanganese and silicon metal. One wonders why they had not built another 4 furnaces(The project was originally much larger than its current setup). They had prepaid electricity as the company was paying electricity for when the furnaces were not in use. The figures would make sense. Shutting off 4 ferrosilicon furnaces would take off about 120k tonnes per annum from overall production. This is not a major number in normal market conditions. However at the period, ferrosilicon was trading at a high price of USD2k per tonne for almost a year. Production costs per tonne is about USD1k. There would be operating leverage from the period, which would cost almost USD120million in profit. Really this figure could be half of that and it still wouldn't make sense to do the conversion. As they had to take the furnaces offline.

4) The next year management decided to do major maintenance for the furnaces. I don't understand what is going on in the operations in OMH, but the major maintenance took down 25% of the furnaces for 2022 and 2023. The market finally went into a down turn in the latter part of 2023. 

5) The management then made the decision to postpone the major maintenance for the remaining 2 smelters to 2025. However prices of the ferroalloys are now at 4 year lows and the furnaces are now barely able to eke out a profit. Why wouldn't they do the major maintenance right now? It is a mystery what is going on in management's mind. But it has truly cemented into my conscience. That management is truly incompetent and I should have sold off my position years ago. The bottom is likely 2024 as China's real estate market has likely bottomed in September 2024 as major stimulus has come from what is really an artificial downturn in the real estate market in China with the 3 red lines coming in to remove systemic risk from the system.

6) The 4 years from 2020-2023 were the high points for the ferroalloy market. However in these 4 years, OMH has only operated at 75% capacity. This is a phenomenal feat. I dont understand how it took FOUR YEARS to do whatever it is they needed to do. Foregoing at least 250million to 300million AUD in profits. The figure is likely much higher, but the point here being it is an astronomical amount of profits that were foregone for no good reason.

From here on it is just the operational issues.

7) In 2019, OMH announced that they would install a Tailings Retreatment Plant (TRP), in order to process waste ore from Bootu's mining, using low quality waste ore to produce a higher grade that they would be able to use. Early indications were that it would produce 250k tonnes for 7 to 8 years. However, it is now 2024. The TRP has been postponed and investment in it has increased for FIVE YEARS. It has yet to see commercial production. As per the update by management, it should be operational on the 4th quarter of 2024. We shall see, I don't have high hopes. If the project was viable, why did it take 5 years? Is management sleeping on this?

8) There were talks to install a heat exchanger, however this has not materialized. Management has stated that they want the heat exchanger installed after they use up their prepaid electricity. I don't understand why they would do this. As the heat is free, the heat exchanger should have been installed early to reap early benefits. Excess electricity can be stored(apparently through the PPA). Another question mark for management.

9) OMH has a 5+5 year tax break where they do not need to pay corporate tax. However the 2nd 5 year tax break requires certain milestones to be met. These milestones have not been met. I have tried querying management on what these milestones are. However the IR department has gone silent on this. So what these milestones are is unclear. Repeated prodding's by the investors have yielded nothing. It has been 3 years into the 5 year tax breaks. Despite repeated queries, management is mum on the milestones. I suspect they may not be met in time. Not because it is unable to be met, but merely because management is not on the ball. They are not handling queries, and for some reason are intentionally opaque on how the company is operating.

I am tearing my hair out over this company. It has a great low cost moat and is persistently trading at undervalued prices, however management has a penchant for not being on the ball.