SAPPHIRE CORP produces a product that no other Singapore-listed company does – vanadium pentoxide - which Singapore-based investors are largely unfamiliar with.
Sapphire owns stakes in four companies in China which have something or other to do with vanadium.
One of them (China VTM) owns iron ore mines in a region (Panzhihua) where the iron ore is rich in vanadium. Another company (Wei Yuan) uses iron ore to produce steel, a by-product being vanadium slag.
The slag is processed by another company (Special Steel) to yield vanadium pentoxide, which is used for strengthening steel for the construction, aerospace and many other industries.
Such is the unique business of Sapphire, as described by its director for China investments, Robert Lim, during a presentation to investors at CIMB on Tuesday. (More of that in the video below)
At the end of the day, the vanadium is valuable in China to produce special steel that is lightweight, high-tensile and corrosion resistant – qualities which have become more recognized since the 2008 Sichuan earthquake, said Mr Lim.
In China’s infrastructure boom, where steel production is forecast to rise 60% between 2010 and 2020, the government has mandated increased use of vanadium-enhanced steel following the earthquake.
Mr Lim pointed out that Sapphire is fortunate in that its steel and vanadium production is located in Neijiang, which is close to fast-growing regions. Nearby are the rapidly-expanding cities of Chengdu and Chongqing.
Steel products are typically not economical if they have to be transported over long distances.
With steel in high demand in China, the price of vanadium has been on the rise, from RMB 75,000 per tonne in 2009 to RMB85,000 currently – a trend that is expected to continue over the long term, said Mr Lim.
Now, vanadium being the vital ingredient that it is, it also brings in a good profit margin for Sapphire. Its sale of vanadium pentoxide flakes - which accounted for 50% of its revenue last year - fetches a gross profit margin of about 30%, compared to 9% for its manufacture of rebars and hot rolled coils.
Target: Top 3 vanadium producer in China
Sapphire aims to be one of the top three vanadium producers in China by 2013. It is currently just outside the league.
The key to this goal is an increased supply of vanadium slag from Wei Yuan with which it has a 15-year agreement (now it in its third year).
Wei Yuan's production of vanadium slag is forecast to jump from 40,000 tonnes a year to 142,000 tonnes from 2013 when its iron ore processing plants are expanded.
Mr Lim highlighted Sapphire's perspective on dividends. (Sapphire paid a 1-cent per share dividend for FY2010).
"It's not about the quantum. It's very important to pay something, as we want to show there is money in our China subsidiaries and we can take the money out. This is not your problematic S-chip."
Here are some of the questions asked at the CIMB event, and Mr Lim's answers:
Q What is your shareholder base like?
Mr Lim: We have a varied shareholder base. Key shareholders include the management of Sichuan Chuanwei, the parent company of Special Steel – the chairman and his son together own 24% of Sapphire. About 50% is Singapore-owned - quite a number of retail investors and big investors such as Nippon Paint, which owns 3%. The board is largely controlled by Singaporeans.
Q: Who are your customers?
Mr Lim: For vanadium products, it’s steel plants – they take our vanadium pentoxide for onward processing to produce high-grade steel. They are all in China - in Sichuan province - we don’t export as the domestic demand is high enough to soak up everything.
Q: What’s your capacity utilization rate for producing vanadium pentoxide?
Mr Lim: It’s almost full capacity.
Q: Who are your competitors?
One of them is Panngang (629 CH) and Chengde (709 CH). They also have sources of vanadium, like us. They are bigger than Sapphire. Other players who don’t have sources find it hard to play this game. If the iron ore doesn’t have vanadium, there’s nothing to extract.
Q: Can you tell us more about the trading business? Is this going to be a big thing?
Trading is a challenging business. We have been working on a few raw materials, such as iron ore. Recently, we did a shipment of nickel. Trading won’t be a key contributor to our revenue but it’s complementary business.
And now watch a 6-minute video where Robert Lim explains what vanadium is, its uses and, more importantly, why it is a sexy growth story for Sapphire. (You need to up the volume a bit......)
Recent story on NextInsight's visit to Sapphire's subsidiaries in China: Strong growth to come from 2013 on jump in vanadium production