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Group Chief Executive Officer/Executive Director’s Report (cont’d)<br />
The tin deposits are also at deeper levels requiring significant<br />
volume of overburden waste removal. As PT Koba Tin practices<br />
sustainable management on community development, safety<br />
and environmental rehabilitation the remaining short life of the<br />
mine means significantly higher provisions and costs for these<br />
obligations.<br />
The surge in tin prices in the final quarter of 2010 and into<br />
the first eight months of 2011 to above USD25,000 level<br />
prompted PT Koba Tin to enter, develop and mine lower<br />
grade areas as part of its mine optimization programme. At<br />
tin prices above USD30,000 level, selective mining enabled PT<br />
Koba Tin to mine, using out-sourced contractors, lower grade<br />
deposits at an average cost of around USD26,000 per tonne<br />
and still earned sufficient margin. The practice of employing<br />
contractors saves PT Koba Tin from having to incur significant<br />
capital and development expenditure and cash flows. However<br />
the rapid plunge downwards in tin prices from September<br />
2011 onwards, reaching a low of USD18,000<br />
exposed the contractors and PT Koba Tin to<br />
significant losses and negative cash flows.<br />
Contractors slowed down their mine<br />
developments and operations<br />
resulting in a further<br />
fall in production.<br />
The adverse<br />
situation<br />
28<br />
Building on Success: Developing Resources for the Future<br />
was aggravated by the moratorium on tin export imposed<br />
by the Indonesian Tin Association. PT Koba Tin immediately<br />
undertook the necessary rationalization of operations and<br />
costs. However, the impact of these aggressive rationalization<br />
activities could only be expected to be seen after about six<br />
months as revision in mine planning, interim financing and<br />
implementation require some realistic lead time.<br />
As a result of the foregoing adverse developments PT Koba<br />
Tin incurred an overall loss in 2011 despite being able to<br />
maintain its production at approximately the same level as in<br />
the previous year.<br />
2011 2010<br />
Production of tin metal (tonnes) 6,332 6,644<br />
Profit / (loss) before tax (USD million) (5.47) 8.08<br />
Going forward, in addition to its ongoing rationalization<br />
programme, it is crucial that PT Koba Tin initiates steps to<br />
increase its production volume to a level where it could reduce<br />
its average cost of production to below USD20,000 per tonne.<br />
A number of strategic options are being considered. These<br />
include reviving its small scale production with the approval of<br />
relevant Indonesian Authorities and expansion of tin smelting<br />
volume under tolling arrangements with third parties.<br />
In March 2012, MSC announced a strategic alliance<br />
agreement with an Indonesian party that would enable the<br />
latter to subscribe up to 23% equity interest in MSC’s 100%<br />
subsidiary, Bemban Corporation Ltd (Bemban) which<br />
currently holds 75% interest in PT Koba Tin giving<br />
the Indonesian party an effective interest of<br />
17.25 % interest in PT Koba Tin. Apart<br />
from facilitating greater local<br />
Indonesian participation in PT<br />
Koba Tin the proposed<br />
strategic alliance<br />
is expected<br />
“PT Koba Tin believes that its ongoing exploration<br />
and drilling activities would lead to the discovery of<br />
additional resources that would justify the extension<br />
of its mining concession in the CoW area for a<br />
further ten years beyond 2013.”