“It’s harder to do business now with Trump back as president,” Pek, co-founder and managing director of Malaysia-based Southern Alliance Mining (SAM), told The Edge Singapore on the sidelines of a recent business event in the city-state. “Business sentiment across industries is fragile. There is cause for concern.”
Pek’s reaction echoes that of many business and political leaders worldwide as they mull the ramifications of Trump’s sweeping tariffs. These tariffs are stoking fears that hyperinflation will return and that the global economy will grind to a halt.
Beijing has already responded with its own tariffs on US goods entering China. In typical Trump style, the US president has threatened to impose additional import taxes on China if it does not withdraw its tariffs on US goods.
The showdown is fuelling the prospect of an all-out trade war between the world’s two largest economies and fanning concerns that the rest of the globe would be collateral damage.
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On its part, Malaysia was slapped with a 24% tariff on its exports to the US. Prime Minister Anwar Ibrahim has said the country’s GDP growth forecast of 4.5%–5.5% for this year will need to be revised but stopped short of calling recession the worst-case scenario for Malaysia.
Under these circumstances, Pek is convinced that diversification has become all the more important for SAM, which has been mining iron ore from its flagship Chaah mine in Johor since 2008. Pek, who owns nearly two-thirds of SAM, has more than two decades of experience in mining and exploring for iron ore, tin and limestone.
SAM sells iron ore concentrates to steel mills and trading companies in China and Malaysia. These concentrates are refined iron ore with higher iron content and fewer impurities. They are a key ingredient for making steel.
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SAM enjoyed several years of heady profits during China’s property market boom, which propelled demand for iron ore as steel mills went into overdrive to meet orders from developers and construction companies.
The iron ore producer’s earnings more than doubled to RM148 million ($45 million) for the financial year ended July 31, 2021, from RM62 million for the previous year. China’s housing market upturn peaked between late 2020 and early 2021.
All that unravelled shortly thereafter as China started reining in runaway property prices. Developers, many of which had borrowed heavily to buy land to build homes, found themselves struggling to service their loans and sell their projects as banks tightened credit, even to potential homebuyers.
Iron ore prices, in turn, plummeted and have stayed weak ever since. While demand from China fell, supply from major iron ore producers like Rio Tinto and BHP continued going up as their low production costs enabled them to remain profitable. This, however, kept overall selling prices low, eroding margins for smaller producers like SAM.
Catalist-quoted SAM incurred an RM10.3 million loss for the six months ended Jan 31 as revenue tumbled 24%. During that period, it produced more iron ore for sale but had no pricing power. It was also in the red for the last two financial years.
While SAM sought to diversify beyond iron ore in 2021, progress has been limited. That year, it formed a joint venture with the Sultan of Johor to explore for gold across 178 sq km of adjoining land in the state.
“This is a very large gold mine. We won’t be able to focus on it if we want to continue running other mining projects as exploration will be very time-consuming,” said Pek. By comparison, SAM’s iron ore Chaah mine spans 2.3 sq km. “We will hold off exploration at the gold mine for now.”
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Rare earths
However, SAM is going full steam ahead with the mining and production of rare earth elements. It announced on April 3 that it would acquire a 40% stake in MCRE Resources for RM242.4 million.
Headquartered in Kuantan, the capital of Pahang state, MCRE is licensed to find and extract ion adsorption clay rare earth minerals from a 21.6 sq km mine in Perak. Such minerals contain heavy rare earth elements that are essential for clean energy, defence technology and electronics, among other things.
MCRE started mining and processing in 2022 and exported its first batch of rare earth carbonates in February the following year. It has since sold about 16,105 tons of such carbonates. It has an offtake agreement with China Rare Earth Group, an entity formed a few years ago from the merger of several Chinese state-owned enterprises.
MCRE has about 84.9 million tons of rare earth reserves, according to data certified by the JORC Code, an international rulebook that helps mining companies report how much metal or minerals they have in the ground.
MCRE relies on in-situ leaching, which dissolves valuable minerals in the ground into a solution and pumps it to the surface for collection and processing. This technique ensures minimal surface disturbance, costs less than conventional mining, and is safer for workers.
The rare earth miner generated an after-tax profit of RM32.5 million for the 12 months ended July 31, 2023. This rose to RM36.6 million the following year. For the half-year ended Jan 31, 2025, it made a profit of RM52.9 million and had RM53.3 million in cash.
SAM will issue nearly 148 million new shares at 44.71 cents each to fund the bulk of the RM242.4 million acquisition. The shares represent nearly a quarter of the company’s enlarged share capital. The remaining RM23.4 million will be funded using cash, to be paid over four years.
The price tag of RM242.4 million is about 23.3% less than the RM316.2 million independent valuation accorded for 40% of MCRE by SRK Consulting, a mining consultancy founded in Johannesburg, South Africa, in 1974.
The acquisition is an interested person transaction as Pek and several SAM executives are among MCRE’s eight shareholders. Pek is the second-largest owner, with a stake of 17.3%. The largest shareholder is Qingdao Joyful Investment, which owns 36% of MCRE.
The acquisition requires the approval of SAM’s shareholders, who will cast their votes at an EGM to be convened soon. SAM will appoint an independent financial adviser to assess the deal, which comes as China has imposed new export controls on several rare earth elements in response to Trump’s steep tariffs.
The export curbs by China, the world’s largest supplier of rare earth elements, are likely to hit US companies that make defence and communication equipment and advanced technologies.
An aerial view of MCRE Resources’ mine in Perak / Photo: SAM
Inorganic growth, other minerals
Given MCRE’s profitability, will SAM avoid a third straight year of loss with this acquisition?
On a pro forma basis, SAM would have generated earnings of RM0.016 per share if it had completed the acquisition on Aug 1, 2023, versus a loss per share of RM0.0091 without the deal. It incurred a loss of RM0.021 per share for the first half of its current financial year ending July 31.
More acquisitions could be in the works as the company wants to fast-track its return to profitability, according to Lim Wei Hung, SAM’s chief operating officer and a shareholder of MCRE.
“We will have to explore inorganic growth. These (targets) will be beyond Johor but within Peninsula Malaysia,” Lim said. “We are considering various other minerals. These are projects that do not require us to do intensive exploration work. Exploration will take time and burn cash.”
For this reason, SAM will postpone the proposed acquisition of all of Paramount Synergy, a firm majority-owned by Pek that is exploring rare earth minerals at an 18.6 sq km mine in Johor.
SAM first announced the proposed purchase of Paramount Synergy in April 2023. Earlier this month, it said it would not proceed with the deal for now as a lot more money and work is needed to get the greenfield project compliant with the JORC Code.
Besides rare earths, other minerals SAM is considering include bauxite and silica, Lim said. “It’s not only rare earths but also other mineralisation that we can convert into cash quickly.”
Bauxite is the main raw material used in the production of aluminium. Silica is highly versatile and can be found in glass, electronics, solar panels, rubber, and water filtration systems.
Fortunately for SAM, its balance sheet is still strong despite the downturn in its core iron ore business. This should help it bankroll its acquisition-driven expansion plans. As at Jan 31, the company had net cash of about RM102 million and retained earnings of RM277 million.
While it presses on with plans to diversify into other commodities, SAM is expected to keep ramping up iron ore production to drive revenue higher and generate cash flows, even if selling prices continue to stagnate.
The company has started underground mining at the Chaah mine after years of open-pit mining. Going deeper underground is expected to yield better-quality iron ore than surface mining.
“Iron ore production will continue to increase and ore grades should be higher,” said Pek.
