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

Welcome to PT Bumi Resources Third Quarter 2020 Results Conference Call. We have the pleasure of Andrew Beckham, CFO from the company, to walk through with us the company performance in the third quarter of this year and probably also to give us an update on the renewal or the extension of the CCoW for the Arutmin that's just been announced early this week. The presentation for this briefing has been uploaded to the website. You can still download it from the attachment and link tab, the presentation is there or you can actually go to the company website to download the presentation. Just a quick introduction for myself. My name is Soo Chong Lim, I'm Head of Asia Credit Research. We're going to take the next maybe 20 to 30 minutes to walk through the results and also to talk about the CCoW extension and then we're going to follow-up with the Q&A. [Operator Instructions] And then towards the end, we are going to answer the question one by one. Without further delay, I'm going to hand over the forum to Pak Andrew. Andrew?

Thank you, Soo Chong, and good afternoon and morning or evening to everyone. I'll start on Slide 3 and just on the 9 months update. I'll give a brief summary of the market. Up until midway through September, the coal price was at annual lows in quarter 3 due to the weak demand in China and uncertainty in the world economies due to the COVID-19, of course. From midway through September, the sentiment has switched 180 degrees, I think, with prices jumping to between $58 and $60 a tonne on the gC Newcastle. Even despite a ban on Australian coal in October from China, prices are still maintained in the high $50s and are currently over $60 a tonne in November. Even the lower-grade coals, which were down at maybe $22, $23 a tonne for the 4,200 and now recovered to about $28, $29. Obviously, the cold winters and the shortage in stockpiles in China has kept the demand high. And the -- it seems the NDRC has refused to lift the import quota at the moment for this year. So that's continuing to keep the prices high for the moment. And we see this continuing into next year as the elections of the U.S. gets out of the way and economies start trying to recover from the COVID. Also, you've just seen the Bank of England stimulating the economy with another, I think, GBP 150 billion or something. So I think there's a lot of possibility that the prices will be maintained next year, unless there's a sudden lockdown or shut down again because of COVID or some other unforeseen event. With regard to operations, overall prices were at annual lows in Q3 at $41.60. Q4 prices, as I said, should recover, but our realized price will be slower than the market because most contracts, coal contracts, are done based on a link to the last quarter prices or maybe a last 3 months average or the previous month average. So don't expect to see a sudden jump in our prices. Even though we're going from probably low $50s to low $60s at the moment, it will probably take another quarter for us to get the benefit. Production and sales were down in Q3 due to weak demand and due to the strengthening -- but we expect that, of course, in Q4 to come back up. And we should see production sales jump to over probably 20 million tonnes in the quarter. Costs remain low, and with oil prices remaining low at present, we don't see upward pressure on our costs. As Arutmin produces more high grade, now the coal price is slightly higher, we can start producing a bit more. In Q4, we will see the cost per tonne increase from Arutmin proportionally, yes, a slight uptick on cost for -- in Arutmin. On the important -- on the CCoW, just so we're clear, the CCoW is terminated as of the 1st of November. We are now being issued a new IUPK, which I will get you the name of it in a minute. That IUPK is the current form of the mining license. It's been issued on the 2nd of November and it's a 10-year extension on the first -- the first 10 years is automatic. There is an availability of another 10 years, but that's subject to conditions in the prevailing laws, among which is -- and this includes proof of downstream operations. So you're actually providing coal to coal gasification, things like that. If you have a -- my understanding if you have a mine-mouth power station, that won't count. It has to be some sort of processing and downstream to do that, say, coal bed methane or coal gasification, that sort of stuff. The license at the moment has not changed the economic terms that we are under -- we were under in the CCoW. So we're still under a 13.5% royalty, a 45% corporate tax and there's no VAT. We can claim back our VAT on the royalty at the moment. The only addition is, and this is in line with the other IUPK, is a 10% share of net profit split between the central and local government, as I've stated in the presentation. There is scope in the license, though, for the tax and royalty rates to be updated if the relevant laws are changed. That's what I believe the English translation of it says. We're going through that and getting a legal translation to make sure I'm clear, but that's my understanding of it at the moment. So it's possible that -- and there has been a lot of discussion about changes in the rates. And that's possible, therefore, that in the next 3 to 6 months, something could come out from the government. But however, as it stands at the moment, Arutmin will continue with the current rates, but then pay 10% on any net profit made at the moment. Of course, this year, it's probably pretty negligible at Arutmin. In a normal -- a good year, we would be looking at about probably $100 million to $150 million net income, which would be about, therefore, $10 million to $15 million would be paid to the government extra. We move on to Slide 4. This shows the historical coal prices. And the Slide 5 shows the forward curve in a much healthier position than before, as of mid-October, over $60 for 2021. Currently though, forward prices are at $61.25 for 2021. So we are seeing some uptick in that. Slide 6. Our guidance for production has slightly dropped due to the Arutmin coal sale forecast. Please note, now Arutmin has the new license, it's applied for the RKAB for the last 2 months, November and December. So we should get that through and that will confirm our numbers. But we're looking probably at that a 82 million to 85 million tonnes, depending on how sales go. Pricing and cost guidance, though, has not changed, and it remains the same at $43 to $45 for prices and cost between $32 and $34. Slide 7. KPC production remained above 15 million tonnes, but with lower prices at $43.80 in that third quarter. Year-to-date, $48.70. Arutmin production was down due to low PLN demand. But in Q4, we have seen demand and prices recover. Prices were still at $33.80 in Q3 due to some high-grade coal sales. As mentioned, overall, production and sales were slightly down, along with price in Q3 due to the slack demand. Slide 8 shows that overburden removal was down on last year, along with coal mined in KPC. However, Arutmin's overburn was slight -- removal was slightly higher than last year's number. Coal mined at Arutmin was still down compared to last year. Slide 9 shows us coal sales were down compared to last year, with strip ratio slightly above last year. Again, we see that -- probably in the fourth quarter, you'll see that come down slightly. Slide 10. Production costs were down compared to last year due to oil prices and cost-cutting measures at both mines. Prices, as mentioned, were severely down from last year. We're talking 12% to 14%. Slide 11, I'll focus on the trade receivables. It's a good point to point out the other trade receivables, international trade receivables, are all done on LCs now. So there's a lot of -- there's a little scope to cut that or to improve that. But we tend to go -- that's about 21 to 30 -- on average around 21 days for the LCs for international trade receivables. But for the domestic market and PLN, SMI and ANTAM, we are bringing that down. We are now down to only $2 million over 90 days. But it's a constant battle. If PLN is struggling, it tends to try and hold back payments. And so we keep working with them to try and improve naturally because of this situation as we're in. Slide 12 shows our prices we are realizing at the moment, the lowest for the last 4 years, you can see. As mentioned, we expect recovery in Q4, but we will lag behind the market due to the nature of the indexes and how the coal contracts are paid off those indexes. Slide 13, this is the production cost. We've put -- just to be clear, we sort of clarified this. It was production cash costs, but I've pointed out that it does include accrued expenses. So when -- it's technically not exactly cash costs, but it is our total production cost without including depreciation, amortization or inventory adjustment. So just bear that in mind, that's why we've called it production costs, not cash costs because we have to be technically correct. Costs remain low, and we see there's no real upward pressure on the cost at the moment, other than maybe slightly higher sales of high-grade from Arutmin, which will increase Arutmin's [ 2,670 ] up slightly. Slide 14 gives our costs by earth moving or by overburden. They are down due to the oil prices and the negotiations that both coal companies have had with the contractors. Thankfully, our contractors have been flexible and have been working with us because of the situation. Slide 15 gives the oil prices. And you can see the fall from $0.77 a liter in January down to now $0.60 a liter at the end of September. Slide 16 gives our financials for September year-to-date, as published. Please note that the movement -- if you see the move of the 76 -- $76.1 million profit in 2019, so a loss of $137.3 million in the same period in 2020, can be attributed to a reduction of profit from the coal companies of about $145 million, mainly due to coal prices. Additional interest charges of $39 million this year. And in addition, another $30 million, which is of -- in 2019, we had a one-off gain of about $30 million in 2019 and that's not in there. So those 3 items have really contributed to our losses at the Bumi -- holdco level, at consolidated level. Slide 17 shows our consolidated numbers, if we were allowed to consolidate the 51% of KPC under Indonesian accounting standards. Again, please note that our operating income of $156.9 million, if we consolidate it, becomes a loss of $137.3 million, mainly due to the interest costs of $165 million and tax of $142 million that the coal companies pay. So pretty much on an operating basis, we're breaking even or making a little profit, but the interest cost, of course, bring -- from an accrued and what we've paid brings us into a loss position. Slide 18 shows our quarter-on-quarter just to give you some comparison of how it's prevailing on a quarter-on-quarter, as we were requested. I won't say too much more on that. And Slide 19 shows the comparison between our published financials and our financials on a fully consolidated basis. Just to give you some comparison, so you understand the movements. Bottom line, though, is still a loss, and that's naturally something we're working on. If coal prices recover, that will help a lot, of course. Slide 20. Overall, we are down on revenues by 19% due to prices and slightly lower volumes. Costs are down by 12%, mainly due to fuel costs, but some cost-cutting measures as well. Operating margins are at 5.7% versus 12.5% last year, but we expect these to improve in the coming quarters, assuming prices start remaining at the $60-plus levels. Slide 21. Equity is down from last year due to our losses, of course. And EBITDA for the last 12 months to our last 12 months adjusted is now down to about $236 million due to prices. If we go on to Slide 22, our EBITDA from the coal company is still running at around almost $500 million, the actual on a 100% basis. However, as we've said, on a -- our proportionate basis is $235.8 million. Cash was lower. Bumi, at the end of September, at $6.3 million with debt increasing as the interest was capitalized. So we look at Slide 24. This gives the debt balances as of 30 September, in line with our financial statements and then again, at 16th of October when payments were made and as interest was capitalized. Note that we've converted another $8.4 million of MCB. The $610 million, you can see of OWK principal or MCB is -- another $8.4 million was converted into -- at the end of October. So that will reduce that number down by that amount. Just so you're -- for guidance, for Jan -- if we -- for January, we are still paying 3.5% interest and with the rest PIK -- the 2.5% PIK, yes? For -- if the $60 was to continue into the first quarter, we will be back to 6.5% of paid interest -- cash interest and 1% PIK, which would get us back to normal levels as we had probably from -- probably the first month -- from the first quarter of this year. So Slide 25 is our ESG slide. Details are summarized here. If anyone needs any further details or has any questions, we're happy to get on a call or provide the data, similarly to the financial statements, I should have said that. Any breakdown or detail you need, we'll happily give you that. With the ESG, we have the detailed report being done by S&P on our ESG and our -- the rating of that. We'll release that once it's finalized or at least release what we -- all the details we can from that. So hopefully, that's sometime towards the end of November or beginning of December. As usual, I won't go through the detail of KPC in Arutmin because I've already talked about it. I think, Soo Chong, it's probably best to open it up to Q&A now. And -- oh, just to add that because Arutmin is done, we are processing, of course, KPC now. That's still the actual -- to terminate the CCoW and to receive a new IUPK. However, that if possible, it could continue all the way through until December of next year when KPC's CCoW expires. But we hope to get something sooner, so that it provides much more clarity. With that, Soo Chong, I'll hand it over back to you, yes?

I think there's a couple of questions from the floor now. Maybe I'm just going to read out to you, and then you can go through them, right? First question is that can you provide a breakdown for third quarter EBITDA of KPC and Arutmin without the PSAK 73 adjustment.

Okay. The -- yes, we have that spreadsheet. And if anyone needs that breakdown, we have it. Let's see. Anyone? We'll get it -- we've got it in front of me here. So EBITDA for KPC is $116.3 million -- yes, 1-point -- for the quarter 3, it's $116.3 million, split $68.9 million of EBITDA and then $47.3 million with the PSAK effect. On Arutmin, it's -- well, it's negligible, about $1.1 million negative. There's no adjustment. And combined, therefore, it's the same for KPC. But we have that broken down from 2018 through to 2019, so you can see the analysis. If anyone needs that, feel free to either contact Soo Chong and give them your name or e-mail us and we'll send it through to you.

Sorry, Andrew. Do you mind just clarify the number again? I didn't really catch it. You're saying the KPC is $116.3 million EBITDA?

Yes. So if you look at Slide 22, that shows you the -- on a 100% basis, quarter 3 is $116.3 million. That's split $68.9 million in EBITDA and then the PSAK 73 effect is $47.3 million. You got that?

Okay.

And we can provide that on a quarter-on-quarter basis, yes?

Yes. Maybe it's good to because we always want to do a comparison to historical data, right? So it's easier to follow. It's good.

Yes.

The next question is -- this question is about Arutmin new mining license. Regarding Arutmin new mining license, do you get the IUPK for all of your our Arutmin land area or limited to 15,000 hectares?

No, the actual area or the exact number, I got it, is 35,000 hectares, down from about 54,000 hectares that we originally had. Exact number I will clarify in a minute. I've got that in the actual document, I think. That, though, is in line with our mine plan and our reserve -- has no material effect on the actual -- on our production plan or our reserves that we've got and resources. Actual -- sorry, the actual area that we will have is 34,207 hectares. So we have released 22,900 hectares.

Okay. Okay. The next one. Has the government finalized the tax rate for IUPK? What are the taxes that Arutmin would need to pay besides the 10% of net profit stated in the presentation slide?

Right. So as it stands today, the license says that we -- pretty much see the taxes stated are exactly what we pay under the CCoW. So the 13.5% royalty, the 45% corporate tax, various things. There's a 5% sales tax on goods, which has always been paid. And fuel tax is a recoverable against the royalty and VAT is recoverable against the royalty. So there's no new -- there's nothing different other than the 10% we talked about. Those -- can they change? Yes, they can change. And the way they change is that the government and parliament issue another change in the law. I think the minister can actually change the law for these things. And therefore, we have to be prepared that, that could change again because there has been lots of discussions on those rates and how it should be applied. But at the moment, that's where we stand.

Okay. The other question is also on Arutmin. What is the -- how much high-grade and low-grade coal was produced in the third quarter and also sold in third quarter?

Yes. I'll give you that number. I've got it here somewhere. Yes. So for Q3, I mean, really, KPC is all high-grade at 14.7 million -- 14.8 million tonnes. Arutmin high-grade was 0.9 million -- 900,000 tonnes and 3.1 million low-grade. So total combined was 15.6 million high-grade and 3.3 million low-grade. Again, if someone needs a breakdown, we can send it on quarter-on-quarter.

Yes. So the 15-point -- the low-grade -- the high -- sorry, the low-grade coal that's sold by Arutmin, what is the average selling price?

That -- if you take the price, if you look at prices on -- it's 4,200-type coal. So we -- have I got the breakdown there? I probably haven't got that breakdown to that. But it's probably around 20 -- in Q3, it was $23, $24 a tonne.

Okay. Okay. Next question is actually, with the IUPK awarded and confirmed, what is the next step for Bumi refinancing plan? Have the Chinese lenders been updated? And what is the status and next step with them? When would the company likely have a plan buttoned down, ready for execution? Can the company provide what is the wish list target plan for refinancing? How do we get there?

Okay. We're just going through, making sure the terms and clarify everything on the IUPK. CIC and CDB are on our Board. They're already aware of the full details of the announced -- everything. Naturally, we'll start talking to them about possibilities. Realistically, to get a deal sorted out will probably be first quarter sometime. We would like to get a deal done as soon as possible, I would, especially because at the moment, we're still capitalizing $10 million a month in interest costs, which is just crazy. We're sort of borrowing from our credit card to pay our mortgage sort of thing. So it's not we want to keep. And hopefully, with prices moving back up, it gives us or everyone an incentive to get something done. As I said, really, details are to be discussed and worked out. There's a, as I've said to you, Soo Chong, there's a hundred ways we can do this. And it's just trying to find the one that will work for all parties or the majority at least. So we're working on that, but we'll be able -- we'll talk to everyone as soon as we can.

Okay. So any wish list? What is the wish list?

I got to bring -- the interest cost has got to come down so I can pay back some principal, right? That's the simple thing. It's -- you forget -- we don't want to give -- we're not looking at haircuts. We're not looking at plan -- I mean, we have another 2 years before the expire -- the debt becomes to a maturity. So we would hope that we can find a solution with the majority of lenders which will help us do that. And not in terms of kill the interest rate and make -- have it in a position where, across the board, it allows maybe interest goes up as prices go up. So it follows the coal market. Because we can all see, when the coal price was up, I was paying debt back. When prices are very down in like last 4 years, the lowest -- historical lows, I can't pay -- I can pay the interest, but I can't pay any principal. So that's the key thing.

Okay. The next question. At current cash profit per tonne estimated at about $5 to $6 per tonne, would Bumi be able to generate sufficient operating cash flow to meet this interest payment due? And what is Bumi current cash interest payable per year and per quarter?

Well, we're paying on quarterly basis based on the calculated prices. So for January, we'll pay another 3.5%, which will be another $2 million, $3 million, $3.5 million of interest costs. And then there's no issue with paying our interest on aid. It's similar even if it goes back up to -- with the higher coal price to 6.5% with 1% PIK. We still feel we'll be comfortable because we're picking up the new coal prices. So our cash flow will increase. Hopefully, we can get back to some sort of normality and some principal repayment in the Q1. But let's see, don't quote me on that one. But the fact is that we have no problems paying our interest costs, and we can keep paying it, but it doesn't help anyone because our debt keeps increasing. So hopefully, if these prices maintain through to next year, we should see some proper movement on the principal. But I wait until we get the final confirmation on the -- make sure that the rates are the same as in the IUPK and then our updated budget, which we're just going through now to finalize for KPC and Arutmin.

Okay. Do you -- the next question is that KPC CCoW. Why would it take so long to get the IUPK license for KPC? Why is there no better clarity on this? Will this impact your refinancing and discussions with the Chinese lender?

Right. The expiry of the CCoW is December 2021. It seems to be a position here, especially the ministers have taken or the ministries have taken that they follow those -- the letters of the law. So when that terminates, then you get the new license. I'm very happy if we can get it earlier. We are in a position where everything is being done. So I don't -- it just depends on the Indonesian government and the Ministry of Mines whether we are allowed to accept something earlier or we wait until the end of the contract of work. We're really following the government and it's their choice. What was the other -- second part of the question?