There is an ongoing dispute between Cahya Mata Sarawak Bhd’s (CMSB’s) 80.18%-owned Cahya Mata Phosphates Industries Sdn Bhd and Sarawak Energy Bhd’s utility arm Syarikat SESCO Bhd, regarding a power purchase agreement (PPA) that was inked on Jan 15, 2019. This had to do with the commercialisation milestone that was set in the PPA. The management informed Kenanga Investment the plant’s progress suffered delays due to the Covid-19 pandemic but SESCO is adamant in charging Cahya Mata Phosphates a higher tiered tariff, which does not reflect the plant’s current status. The dispute is now in
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While the phosphate plant in Samalaju has been fully commissioned with all four furnaces fired up in Dec-22, it has yet to commence commercialisation as Cahya Mata Phosphates are still awaiting approvals for necessary licenses for it to begin selling. Management guided that it was stated clearly in the PPA that the higher tariff would only kick in upon commercialisation, which is when it starts selling products, which has yet to happen to date. It currently has about 10,000 drums of phosphorus in its inventory which cannot be sold yet unless it acquires all the required licenses. SESCO billed CMSB RM266m for cumulative electricity consumption shortfall and payment security shortfall as of 31 December 2022.
SESCO had also issued a default notice that the PPA with Cahya Mata Phosphates was deemed terminated and that it would terminate the electricity supply to its plant, a decision which was then reversed though SESCO maintained that the PPA was terminated. CMSB’s management maintained that the PPA is still on foot. Kenanga notes that it is still business as usual at the phosphate plant with no issues with the electricity supply.
The dispute has since been in arbitration since Nov-22 when Cahya Mata Phosphates commenced the proceedings against SESCO with the Asian International Arbitration Centre (AIAC). There is however, a delay in the process due to the delay of the appointment of the AIAC director. The position was vacant for three months Dec-22 until the new director was appointed in Mar-23. CMSB reaffirmed its dedication to protecting its rights and will continue to pursue possible ways to resolve the matter amicably. An arbitration will usually take about 18 to 24 months.
CMSB has recognised a contingent liability of RM266m in its FY22 financial statements, arising from the PPA dispute, which is the amount billed by SESCO. The group said the termination of the PPA and electricity supply could have a possible impact on the Phosphates business operations and Cahya Mata Group’s financial performance, through legal advice it has obtained said Cahya Mata Phosphates is not liable to pay the amount billed by SESCO on the basis that it has yet to achieve commercialisation during the financial year.
Despite this setback, the investment house maintains its projections pending further developments of the dispute and maintains its positive outlook for CMSB. Kenanga said it remain optimistic that Cahya would be able to be resolved amicably, for the betterment of Sarawak’s economy. The group’s integrated phosphate complex in Samalaju is the only one of its kind in Malaysia whereas in the region, there has been no new entrant at least over the past decade in a market dominated by Vietnam and Kazakhstan producers.
CMSB’s plant has an annual capacity of 57,600 metric tonnes or 288,000 drums. Management’s initial target for commercialisation was mid2023, though the house does not discount the possibility of delays due to the ongoing dispute. On another note, Kenanga said it remains sanguine on CMSB’s earnings outlook in FY23, as the expected improvement in construction job flows would benefit the group in terms of cement supply, construction projects and road maintenance jobs.
