TKC Metals Corp., with the listed trading symbol of the letter “T,” received a directive from the Philippine Stock Exchange (PSE), dated July 6, 2018, “to submit a plan to bring its stockholders’ equity from negative to positive.”
The directive specifically required a detailed plan that includes a matching timetable on how the company will accomplish the task. TKC Metals slowly stopped local operation for the last two years.
TKC was the offshoot of listed company SQL Wizard, Inc. as a result of the approval by the Securities and Exchange Commission (SEC) of the latter’s change in primary purpose to a holding company on Feb. 28, 2007. In this connection, the company also changed name to TKC Steel Corp.
The company, once again, changed corporate name to the present one as approved by the SEC on Oct. 26, 2015.
TKC is engaged in the business of manufacturing and distributing steel products through its two subsidiaries namely Treasure Steelworks Corporation (TSC), and Zhangzhou Stronghold Steel Works Co. Ltd (ZZS).
Through TSC, the company produces steel billets, the raw materials of downstream steel products such as bars, wire rods and sections.
Unlike other local plants capable of producing billets by the use of scrap metal, TSC uses ore-based inputs with a blast furnace, the only one of its kind in the country up to the present.
It is also the largest billet plant in the country in terms of installed rated capacity. It has a production capacity of 300,000 metric tons per annum.
TSC mainly ceased operations when the Power Sector Assets and Liabilities Management Corp. (PSALM) could not assure uninterrupted power supply requirements of the company as a result of the widespread power shortage problem in Mindanao.
TKC is the majority owner of ZZ Stronghold Steel Works Co. (ZZC), which manufactures and distributes various types of steel pipe products in China and other export markets. It is strategically based in the special economic zone in Zhang Zhou, Xiamen, China.
ZZC was the first steel pipe producer in the Fujian Province of Southern China. It manufactured Electric Resistance Welded (ERW) and spiral welded pipes for general construction and water transmission, and prospectively, seamless pipes for the oil and gas development industry.
ZZC has an annual production of 40,000 tons of PE-coated spiral welded pipes and ERW pipes. These steel pipes are used in coal gas, liquid transport and structural applications such as ports, shipyards, roads and bridges.
Equity restructuring and operating plan
On Aug. 17, 2018, the company submitted its plan of action to the PSE to turn the company’s stockholders’ equity position from negative to positive.
This was set into motion immediately. The board of directors met on Sept. 3, 2018 to approve, among other things, the proposal to increase TKC’s authorized capital stock (ACS) from P1 billion to P3 billion. This was presented and subsequently adopted at the company’s annual stockholders’ meeting (ASM) held on Oct. 25, 2018.
The financial plan was simple: Current capital deficit will be wiped out by the conversion of advances to equity.
TSC has received advances from shareholders in the amount of P2,609,543,308.00 to finance its operation. The shareholders will assign their receivables to TKC. In turn, this will be used as payment for their subscription to additional shares in TKC at the proposed negotiated price of P2.00 per share.
This conversion will result in the following changes in TKC’s capital structure: (See Table 1)
Needless to say, the financial plan will turn TKC’s negative equity of P898 million to a positive equity of P1.711 billion, which should give more room to attract new sources of funds.
To summarize, there will be additional shares of 1,304,771,634 after the conversion. In turn, the additional paid-in capital (APIC) will increase by as much in amount. The company’s public float of 272,999,391 shares will also be reduced by 58.1 percent to 12.16 percent from 29.04 percent.
The operating plan was simple too. TKC was to operationalize its plant to produce billets and at the same time make use of its capacity to diversify into the production and sale of nickel concentrates.
One thing good about the present market situation is that export prices for nickel concentrates have remained ‘good’ while the outlook on worldwide demand has never been that ‘better’.
From lessons learned in the past, TKC will use from now on a more consistent ore grade feed to efficiently produce billets. It will also put into action its basic oxygen furnace (BOF) that should “significantly improve its production margins.”
The BOF requires minimal power. It will reduce electrical consumption from 45 MWPH to about 12-15 MWPH.
At the other end, ZZC’s volume of production in 2017 increased by 46 percent from 10mt to 15mt. Sales also increased by 60 percent from 8mt to 13mt. Nominal sales value also increased by 34 percent to 363 million from P271 million while cost of sales increased only by four percent.
This is good news. ZZC is starting to become productive and profitable despite very competitive market conditions and weak steel demand in China as a result of its slowing economy.
Bottom line spin
As of 2017, TKC’s financial condition remained fundamentally sound. Total assets remained steady at P4.688 billion, down by only 11 percent from its original value of P5.244 billion.
Consolidated value of property, plant and equipment still amounted to P3.404 billion, which by all measure is equivalent to 73 percent of total assets.
New money is expected to come in within the next quarter. This will pave the way for the full completion of TSC’s blast furnace facilities, beneficiation and steel-making plants.
When this happens, TKC will finally realize its dream to become the first integrated steel plant in the country.
Together with the small but promising leads, ZZC is now making in China. No less than TKC’s chairman and chief engineer, Ben Tiu, sees that overall operating and financial performance will be improving radically in the next 18 months.
Den Somera is a licensed stockbroker and a current director of TKC Metals Corporation. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is firstname.lastname@example.org