Timminco Merges Magnesium Assets With China’s Winca

If you can’t beat them — join them. That was the rationale behind Timminco’s (TIM-T, TIMNF-O) decision to merge its remaining magnesium extrusion assets with a private Chinese enterprise called Winca Tech.

“It’s very difficult to compete with the cost structure that they are able to bring from China,” says Robert Dietrich, Timminco’s executive vice-president finance and chief financial officer.

“We made it up to a certain degree with technology, but in the long run you’d expect the Chinese would eventually get better and better at extruding metals so over time they would probably learn how to do these more intricate exclusions.”

In the end, Dietrich says, the company felt it was “better to have a percentage interest in the Chinese market rather than to fight them on the cost front in North America.”

Timminco will hold a 20% equity stake in the combined company, which will be called Applied Magnesium International (AMI) and based in Denver, Colo. Timminco will have members on AMI’s board and its personnel will fill key management positions in the new company.

From its roots in eastern-central China’s Henan province, over the last decade Winca Tech has grown into a major player in the magnesium industry. The company specializes in magnesium alloy sacrificial anodes for electro-chemical corrosion control, high-purity magnesium, magnesium alloys and magnesium extrusions.

Timminco will contribute its manufacturing facility in Nuevo Laredo, Mexico, to the merger and a smaller operation in Australia’s New South Wales. But Mexico will be the key to AMI because that is where many products will be finished and shipped to customers.

“It’s quite competitive to do the functions we do in Mexico as opposed to doing it in China and shipping it,” Dietrich says. “There are time-to-market issues, you don’t have to worry about damaging product on the water, and you have a more predictable just-in-time capability. The service pipeline can be better controlled for the customer if you produce it closer to the market.”

Timminco is also contributing a global customer list, a reliable supply chain, and an experienced technical sales and marketing team, not to mention sophisticated extrusion technology and knowhow — something that most Chinese companies have yet to develop.

From Winca’s perspective, not only can it service customers from Timminco’s Mexico operations but it can also transfer advanced technology to its operations in China to serve the domestic market.

“Incorporating Timminco’s magnesium production and extrusion technology into our recently upgraded Chinese operations will allow us to further extend our technical and quality leadership with minimal capital, making us one of the lowest-cost producers in the world,” Winca’s chairman, He Xu, said in a statement.

Dietrich declined to put a dollar value on the deal, which he says had

“too many moving parts” to measure accurately, but says he believes having a 20% stake in AMI would prove lucrative in the long run.

“We think that it will be a profitable company that has very good growth potential,” he says. “It can serve the Chinese domestic market and be more cost competitive and also the Chinese cost position will help the company be more competitive in North America. . . With a lower-cost structure, the new company will have a broader market.”

Timminco says it expects to record a charge of about $3 million related to severance costs in the first half of 2009 due to the closure of its Aurora manufacturing facility.

Timminco’s high value-added magnesium extruded products are used in a range of specialized applications for the water heater, construction, consumer products, sporting goods and container industries.

Magnesium is one of the world’s lightest structural metals and is known for its superior strength-to-weight ratio.

Apart from its magnesium business, Timminco is a leader in low-cost solar-grade silicon for the solar photovoltaic energy industry. The company purifies silicon metal into solar-grade silicon that is used to make solar cells.

At presstime, Timminco shares were trading at about $3.20 apiece.

The Toronto-based company has a 52-week trading range of $1.60- 35.69 per share and 111.5 million shares outstanding.