PT Bumi Resources Tbk (BUMI) Earnings Call Transcript & Summary

Good day, and welcome to the JPMorgan PT Bumi Resources Tbk 2019 Results Briefing Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Lim Soo Chong. Please go ahead, sir.

Hi. Good morning. Good afternoon, everyone. Thanks for joining the call. And just before that, let me apologize for all the technical hiccup for you to dial in. We apologize for that. Today, I think we have Andrew Beckham, the CFO from Bumi Resources; and also Dileep Srivastava, the company's Secretary, to give us an update on the company's performance in 2019. And also hopefully, we're going to give you some guidance of what to expect for 2020. Without further ado, let me hand over the call to Andrew Beckham. Andrew, over to you.

Thank you, Soo Chong. Good evening, everyone, morning, afternoon, whatever time zone you're in. Sorry for the delay. We had a bit of a virus on this system. Look, we're -- I'm going to go through the presentation, which hopefully you've either got or is on the website -- it's on our website. And I'll start with -- on Slide 3, which is the financial year 2019 update. I'll try and keep this as brief as possible to answer more questions. Overall, in 2019, we had Chinese demand improving towards the end as in quarter 4, because of the trade deals and the potential upside that it was looking at. China's demand in 2020 before this virus is expected to be about 4.2 billion, and frankly, it might be a little less, but we think it will be up on last year. In Europe, the strong price competition from gas coal-fired generation is at historic lows. And in India, the planned production on coal was -- Coal India was 583 in 2019, down 2%. We expect it to increase over -- up to 1.4 billion by 2023, and Coal India is aiming to produce 1 billion of that. So about 400,000 tonnes expected to be imported unless they can improve other production. And Japan and Australia, in October, set prices around $72.75, down from $94.75 in 2018. In April, March 2020 contracts, we're probably looking at -- sorry, in April 2020 to March '21, at the moment, it looks to be -- so still the contracts that we've locked in have been at $4 to $5 above the benchmark, and it's still being in that sort of level, which is consistent with previous years. But most -- as we said before, most are coming now to index-linked contracts. So even if Japanese are going away from the 1-year fix but having an index plus 4, 5 or somewhere like Indonesia with a freight advantage over Australia. But that's only for a couple of customers so far. Russia is exporting and still exporting even though they're making losses. I think that's the key issue in India as well. They are still producing a lot more coal. And I think that will continue this year, subject to the economy. Domestically, as we've said, the Indonesian government set a quota of 550 million tonnes for 2020, so a central quota of 340 million and a regional of 210 million. That takes everyone down. And as we reported before, our quota has been cut by 10% to 15%. However, we do expect that to be lifted in April at the moment, and we've -- also we've applied both KPC and Arutmin for that actually quota to be lifted. Hopefully, we should get some news in April or beginning of May. DMO for 2020 will remain at 25% with production plans approved by the government. If the producers fail to supply 25% on the contracted tonnage, then the government will impose penalties on that. They also kept in the benchmark price of $70, as the top level is the benchmark price. The GC NEWC price is below $70. They will use that. And if it's above $70, they will keep to the $70. That's kept our low-grade wholesale prices under -- quite down compared to the international market. Moving on to Slide 4. Coal pricing for 2019 fell from the beginning of the year from approximately $90 a tonne to $62 a tonne in August, recovering back up to $67 in the last 4 months. Prices still seem to be around that $65, $67 mark, with not much movement at present. Looking at the forward curve. We have quite an older one in the presentation there. But currently, we're looking at forward curves going up to about $68, $69 as of today, but still in price contago. I believe most people are looking at the virus concern and wondering what that entails. If we go on to the next slide, Slide 6, it's got our guidance. Now with this guidance as being sort of the bond, we're assuming that we will get lifted -- the quota will get lifted in quarter 2. We're assuming that we'll get the license for Arutmin will be extended shortly. And we then assume that prices will remain reasonable within the $65 tonne per annum $70 mark and then maybe a little bit more towards the end of the year. With that, we still -- we'll guide on production of 88 million to 93 million tonnes. Price is at $51 to $53 a tonne and costs still around the $34 to $36 a tonne. These will be reviewed, of course, with the impact of the virus and how that is affecting production. We -- at present, there's no effect on our production from the virus. And from a coal sales point of view, the only issue has been from postponements from India customers, where -- because of the ports being restricted and delays in unloading of the coal, plus also the Philippines, which seems to be getting hit badly by the virus and there's a postponement of shipments there. However, we are -- still got a number of tenders out there that are being offered to us for bidding, and there seems to still be the demand there. You also note that Petrofac Colombia has reduced its coal production. And even in Indonesia, certain producers are shutting down their production because of the effects of the virus. At present, we're okay. There is one -- I think one case at KPC at present, but nothing else. On slide -- going on to Slide 7. The operation was in line with guidance with 87.7 million tonnes of production. However, prices were lower at $51.70, as the coal price failed to recover back to Q1 prices. Not only on the international, in international, you've got also due to the domestic price cap of $70 for the benchmark coal that I mentioned. Inventories remained at sustainable levels as of 2019. On Slide 8, coal mined due to KPC -- due -- coal mined increased due to KPC hitting record annual production. And on Slide 9, KPC benefited from the higher inventory levels from their sales of coal and had a record -- as well production on Bengalon improved also. On Slide 10, production costs fell slightly due to the improved efficiencies and increased use of our facilities. As we've stated before, our facilities can do 95 million to 100 million tonnes. So as we push that production up and our sales up, we can reduce our cost per tonne because of that. Slide 11 with the PLN receivables, which are remaining under control in 2019. We're closely aware that in parts of this year in 2020, it was slightly getting higher because of trade in receivables due to a contract negotiation on the -- with PLN Batubara going partially now. And that has now been resolved, but it may show a slight increase in March on the receivable numbers. And Slide 12, we have the breakdown of average prices for sales of the international markets. Although in 2019, price for sale, both on international and the cap for the domestic market, as you can see, eco-coal stayed around the price per tonne at around $33.50, but the international price is up to $58.8 for eco-coal in 2019. Production cost point of view, we had -- it remains under control and in line with plan. We expect these levels to continue into 2020. Naturally, if oil prices remain low as they are today we will see our cost fall further. Really, the big impact on costs will come in from -- March is slightly down by probably $0.05 to $0.10 on average. So you'll see probably a $1 benefit in March. And then in the second quarter, we should see a good increase -- a good reduction in price -- in costs, sorry, because of the oil price. And to remain -- mind you, each $10 reduction in oil price really equates to about $1 per tonne for us in savings. So if we get prices remaining at the $65 to $67 and costs follow and carry on with oil coming down, then we should expect to get a reasonable good quarter in Q2. Naturally, it's probably unsustainable for oil and coal to remain as they are at the moment, with oil -- coal flat and oil down unless supply disruptions continue. Slide 14, it shows cost per quarter. It's important to highlight the increase in cost per tonne of Arutmin in Q4 was up to $35. This was due to the high-grade coal production and approximately around $24 million of extra costs due to the mining license having the next 12 months before expiry we wrote off in our fully consolidated numbers. So as you understand, if the mines are being opened and developed, it would spread the costs over those pits. However, with this only 11, 12 months -- or 11 months to go, we can't do that. So all the costs are taken into 2019. So you'll see our profit down again on Arutmin because we've taken all the costs to the P&L. That then adds the benefit of reducing tax payments for Arutmin in place for coal. So without the adjustment, without the one-off adjustment, we would have had a cost per tonne for Arutmin of about $32 per tonne in Q4. Slide 15 just shows you the fuel price, and it's pretty flat from July onwards. And actually, that's dropped significantly in the third -- by the end of -- by March. Slides 16 to 19, I show you the financial statement. We've done one under the reporting standards and Indonesian accounting standards and one under the consolidated accounts. I don't intend to go into any details on these, but if anyone has any questions, please ask them at the end of this or e-mail me, especially if you want detailed breakdown of any of the numbers. And I'm happy to get those to you. We can give a breakdown of everything. So we move on to Slide 20. Really summarizes where we are on the financial performance, with revenues down by 5%. Please note that if prices have remained in line with 2019, revenue would have increased by $447 million because of the increased production and sales. However, the price fall had a $670 million reduction on revenue, thanks to a decrease overall. The cost increased by 5% due to higher production, and therefore, gross profit was hit due to the lower margins. On Slide 21, actually, this slide details our EBITDA fell through and reducing our contribution to equity and of course, repayments. Slide 22 gives you the EBITDA through the quarters, and you can see that it's fallen gradually as prices have also fallen. And actually Q4 has got affected by the Arutmin adjustment. And Slide 23 shows the cash of Bumi with the stand-alone Bumi level, and that was reduced from 2018 due to the reduced dividend from KPC. Debt levels also have increased due to the compounding nature of the interest charges on Tranches B, C and on the MCB. Slide 24 is our -- highlights the debt position from the start and shows how our debt has increased. It emphasizes that once we have our licenses in place, which we do expect to have positive news in April through May on that, we need to look at refinancing our debt so that we no longer have this compounding interest issue. Currently, unfortunately, at the moment, the coronavirus has had an impact on that because although Parliament were meant to sit in March, on March 20, I think, it's been delayed until April. And so that put everyone back. But we do expect, assuming that they are going to meet in there, the Parliament are going to discuss this, the bill. We should get this cleared up in this next quarter. KPC and Arutmin numbers are there for your things. We will be distributing to lenders the KPC and Arutmin financial statements over the next week or so, but I won't go into any further detail on each one of them. With that, Soo Chong, I'll open it up to questions. Yes? Soo Chong, are you there?

Can you hear me?

I can hear you now. Yes.

Okay. Okay. Since no one is -- have any questions, let me just keep -- start the Q&A. Just so -- can you just elaborate a bit more on your one-off costs for Bumi? So I didn't catch the number very well. You're talking about, what is it, $25 million or $35 million of write-off? And what is that item? What is that write-off again? Can you just elaborate? Not really clear on what you're trying to say.

So it's $24 million, and it's all development. While as we've developed the -- opened up the high-grade pits and all the development costs, and that we have, normally, you would spread those costs, some of that costs over the life of that particular pit. So you have 8 million tonnes in one of the pits. You would mine 8 million tonnes and you would spread the costs on. What we've done is taken all that cost in now and taken it all to the P&L because you only have 11 months of the contract left. So you can't expect to -- you can't say to the auditors that you can -- you'll spread the costs over a period. So we're taking that costing on Arutmin. So that's just -- brings the costs into the P&L and reducing the tax payments that you have to make in April of this year.

Okay. Let me just -- operator, any questions from the floor? Okay. Let me just follow up in that question. I mean, you -- operator, is there any question on the line?

[Operator Instructions] We have questions coming in, sir.

Yes. Why don't you just open up the Q&A then?

Your line is open. Please go ahead.

Just want to get a sense about the ongoing coal situation in Indonesia. So we see some of the competitors that they are forced to shut down for a period of time. So are we expecting this kind of shutdown in -- from a government level or from our own decision-making level because the coal demand is going to drop like what has been happening in China about a month ago? And the second question is about the CCoW process. So can you update us on that front? So any additional information that you see from government or any discussion in the -- around you, with the other parties, so you can give us some color on this?

Yes. So on the coal production, as I said, KPC and Arutmin are producing as normal at the moment. If we take KPC as a one area, there's about 20,000 to 25,000 employees there in one area. That always is a risk, of course, in there. But if we shut that -- this mine down, not only we have to remind everyone that KPC is a national asset, so the government would have to -- PLN still needs coal for electricity. Secondly, by taking that -- shutting down that mine, you've got 25,000 people that need to be moved somewhere. Now as they start moving, all you're doing is spreading a virus. That will be the last thing we do. So we don't believe we're going to get impacted that way in terms of a shutdown of the mine at KPC. Where we could get impacted is logistics. Barge is not being available, not being able to move supply of any normal spare parts, facilities and everything like that, fuel, that sort of stuff, with restriction somewhere out to prevent some of these being delivered. That would be where you -- so you might see a drop in production in the next quarter if these things impact us. But otherwise...

Andy -- I would just like to add on to Andy. Basically, what happens -- the operations are well distributed within our concession. So even if one location is affected for whatever reason, it is that area we can close it and the rest of the company can operate. However, we have enough of production for us to see through April of at least 5 million tonnes on KPC alone. So we see April is a very safe journey. We are currently planning for May. So as Andy said again, unless there are no vessels coming in or parts which are affected for whatever reason, which is outside our scope because we sell everything on an FOB basis. If the customer is not lifting, but the material is already there but it's already sold. So we need to see how we can move it, if at all, it comes up to it. But so far, there are no vessels that have not come after having declared that they can. Sorry, go ahead, Andy.

Yes. As far -- I mean, on your second question on the contract of work, as I stated, we're really waiting for Parliament to discuss to approve the omnibus law. We won't -- we're waiting for that date of that. It's set to be in April, but I don't know the date for Parliament per se. But it is...

I think it's important that people have -- Andy, this is more or less sort of a given thing because if the draft is already there in the Parliament, it should have been -- supposed to have been completed in the end of March, but we all know the reasons for a marginal delay. But we still believe that being either debated on a remote basis or within the Parliamentarians, and we were told that it is sort of -- it's a matter of time, but not, if at all, but it's definitely going to happen. And we have been asked to even make an application for extension, which we are doing, okay? But the law, when it comes into effect, I think it will come quickly and then we'll go ahead with the extension.

Yes. And just to add, both KPC and Arutmin have applied for extensions. So they've submitted their request for extension. Operator, any more calls -- questions?

Your next question is from Mr. Jin Chng.

A few quick questions for me. In terms of the -- you just mentioned about the expansion for the mining license of KPS and Arutmin. Previously, with the Harum situation, there was reports that there is no proper or legal process for an extension license. Do you foresee that being an issue assuming that the downside scenario you don't get any extension on CCoW resolved by then?

Just to answer that, the -- Andy just referred to something called an omnibus law. That law is an amendment to the existing mining law that will provide for accessing now the whole CCoWs as is where is.

No. The omnibus law just means that all different amendment that wants to be amended will all be put together, so they can be -- it can expedited under Parliament floor. And it's been heard. It's not a law itself. Essentially, they're all different laws can be put together. The mining law...

No, the amendment, the mining law is included in that.

What? The mine law you just mentioned -- hold on. Can I finish? So I just want to be clear. When you mentioned that you applied for extension, I thought based on the amendment, assuming the CCoW extension doesn't come out in time, you're applying for an extension of the existing CCoW like what Harum did last year. So my question is that, that point in time, Harum's license got revoked because there were no "proper legal process" for the extension of CCoW. Is that still the case?

Okay. Let me address that, okay? Number one, we still have time up to November, okay? So that's number one. So we are not in a situation whereby the period is over and then we are still making an application for an extension outside the existing mining law. So our extension request is to make an -- extend the existing CCoW IUP under the new mining law, which is a new mining law with amendment. So is it clear?

No. It sounds like you do not know the answer for that. So there's no answer on the extension. For just going back to Arutmin, can I get, in terms of production, high-grade, low-grade mix for fourth quarter?

Andy?

Yes. For fourth quarter, for Arutmin, it was probably 8.3 million tonnes of sales. And 6.4% were low grade, 1.9% was high grade. So your total for the year was 4.7 million tonnes of high-grade coal and 21.2 million tonnes of low-grade coal.