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

Welcome to the PT Resources Tbk 1H '21 results briefing call. Please note that our conference calls and other events are intended only for the clients of JPMorgan Corporate, an investment bank and are available for replay for a limited amount of time. This conference call and other events do not open to any members of the press. For important disclosures and all companies covered by the firm's research department, please see our website on JPMorgan market. Without further ado, I would like to pass the more time to the moderator for this call. Mr. Soo Chong Lim, Head of Asia Corporate Research, JPMorgan. Soo Chong, over to you.

Okay. Thank you. Welcome to JPMorgan conference call series. Today, we have the pressure of PT Bumi Resources management team to actually walk through with us the first half financial results. We have Andrew Beckham, CFO for PT Bumi Resources. We have Dileep Srivastava, Director and also Company Secretary for PT Bumi Resources. We have Ashok Mitra, CFO and CIO -- CFO for Kaltim Prima Coal and also the CIO for -- COO for PT Bumi Resources. And also we have Thomas Kearney, independent commissioner from PT Bumi Resources. We're going to start with a short presentation to walk through the results, and then we're going to follow up with Q&A. I think without ado, let me pass over to Andrew to give us an update on the company financials.

Thank you, Soo Chong. And good morning, good evening, good afternoon to everyone. I'll just give you a first year half year update. Production was slightly down on last year due to the high rainfall that we've been experiencing in Kalimantan, where our mines are, in the first half of this year. And we are actually still experiencing quite a bit of rain up until August of this year. Prices continue to rise as more of our sales contracts, reflecting the current year pricing and the current year levels of pricing, and fuel prices are key cost concern with oil prices remaining high at the moment. There's been no real update on the CCoW from previous quarters, and we still expect KPC's extension to come in the fourth quarter of this year. Next slide. On our guidance, as we've mentioned about the range, we've had to cut, especially in South Kalimantan, we've had to cut our production guidance on Arutmin, down to 23 million to 25 million tonnes. We expect KPC to maintain at that 60 million, 62 million tonnes. On the other side or on the positive side, we've upgraded our pricing. I think mainly one of the key reasons, of course, prices have stayed high is -- has been the rain and therefore, the supply from Indonesia has been limited. It hasn't been able to increase as much as we all would want. So our prices are now up to $58 to $63 from $53 to $56 in the last -- our last guidance. We see cost maintaining at that $31 to $34 as much. Even with the oil price, we feel that we can keep within that range. Next Slide. I've shortened the period shown on this international coal price from previous quarters. Just to show the effects on our repayment since the debt was restructured at the end of 2017. In fact, on December 2017, as you can see, in 2019, we had relatively good prices. They dropped. So in '19 -- 2019 and '20, we had a very down trend in prices and then since about October of 2020, we've seen a stark increase back up. And we've seen prices now in almost record levels for the last 3 to 5, 4 years. Hopefully, they will be maintained at that sort of level. Next Slide. If you look at Slide 6, the forward curve, of course, is still in backwardation going up to calendar '23. But you'll note that the calendar '23 numbers especially for the Newcastle is now above $100. That's the first, it's been hit that sort of number. So even though a $100 coal price would be very -- over the next 3 years will be very positive. I note that JPMorgan have increased their outlook on prices as well in their monthly resource commodity update. Slide -- next slide, please. On Slide 7, on the operations. The first half saw us improve overall versus 2020 on prices, but both production and sales were slightly down on last year due to the extra rain. Both KPC and Arutmin prices for Q2 increased by approximately 10% on Q1 prices. And we actually see prices getting even -- I mean maybe up 10% to 20% at least in Q3 compared to Q2 if current prices maintain where they are. KPC sales and production maintained at approximately 15 million tonnes per quarter. But Arutmin's production was approximately 500k -- 500,000 tonnes per month lower than planned. We expect Q3 and Q4 to improve as a dry weather finally arrive but probably between 23 million tonnes to 25 million tonnes for Arutmin by the end of the year. Next Slide. Overburden removal and coal mines remained lower than last year, up to June, but we have seen improvements in August. Next Slide. Sales were down due to less sales in Arutmin and lower strip ratios of both KPC -- at both KPC in line with plan and Arutmin as the high-grade coal still struggles to get going in the heavy rains. The biggest issue has been pumping all the coal with the water out, getting all the pits drained because of the high rainfalls. Next slide, please. Slide 10. Production costs were up overall due to the fuel prices as predicted and following well oil prices. However, this is offset by the increase in prices. Slide 11. PLN receivables increased as more sales went domestically. I can come on to that in a minute about the issue we had faced there. However, our aging remained under control with only $8.2 million over 90 days. PLN has been demanding more coal. I think you've got a bit short -- got caught short with supply, especially with the domestic market obligation is not being fulfilled. Therefore, Arutmin was restricted and along with 36 other coal companies was restricted from exporting because we had them on the -- under the sales contract, although our DMO was above our requirement. That was resolved over about 2 weeks, and now we are exporting again. So we should see that. But bear in mind, if PLN are requesting more supply to them, and we're doing it as much as we can. PLN sales are at $70 cap. So for those sales, which will probably end up on average for Bumi, around 20%, 25% of our sales will be at that $70 coal price. So bear in mind, you can't look at the Newcastle and say, "Oh, okay, take all my coal production. You've got to look at the -- there's a 20% to 25% that's going to go to PLN. Next slide, please. Bumi's average selling prices shows the difference between the higher-grade coals sold abroad. So that's what you can see is what we're realizing abroad for our average coal is about $63, $70 in the first half and much better in actually Q2. But -- and Q3 is even about -- above $70 now. But for the domestic coal and a lot of the Ecocoal goes domestically, you can see it's staying around that $29, $31, now it's $31 mark because it's still off the $70 cap benchmark price. Next slide. Slide 13. Costs, as I have mentioned, as expected, have increased as fuel prices increase. We expect the Arutmin cost to increase as the high-grade coal does get -- we do get some coal production out of Arutmin. Naturally, both mines, costs would increase further if oil prices continue to rise. I saw they dropped a little bit overnight, but who knows how long that will last. Next slide, please. This slide gives you the coal cost per tonne and the cost per bank cubic meter or per tonne -- or ore if you're moving. Both compared to the same period last year and the change quarter-on-quarter. The cost per bank cubic meter takes out the effect of the strip ratio differences. In 2021, cost per bcm, per bank cubic meter, have kept around at $4.70 per bcm. You'll probably see that come down a bit as we get the dryer weather and more overburden and coal can be mined. Next slide, please. Slide 15. As stated fuel price has gradually increased, since probably what, October 2020, they've been increasing as well as coal prices. So we can't complain with high oil prices if it maintains coal prices at the same level. Next slide. Our financials for the half year were published on last Friday and showed a welcome return to a positive net income, mainly due to the higher coal prices and an improvement in the bottom line of Bumi Resources Minerals, one of our subsidiaries. The overall balance sheet improved also due to the better performance of KPC and Arutmin. Next slide. Slide 17, this shows you the 100% consolidated number. And with KPC and Arutmin both consolidated, we have a turnover of about $2.3 billion and an operating income of $371 million or about 16% at the moment. Next slide, please. On Slide 18, this shows the 100% consolidated numbers quarter-on-quarter and shows the increase in operating income from $60 million in quarter 2 last year to $225 million in the same quarter this year. Next slide. On Slide 19, this shows our results reported compared to the fully consolidated numbers for comparison. As I've stated before, the -- we cannot -- although we own 51% of KPC, we have a very tight shareholder agreement, which is very good on a governance position because it restricts all shareholders from doing anything without full approval. But it also under the PSAK, or the Indonesian accounting standards, we aren't allowed to consolidate. We have to show it as equity accounting. Slide 20. So overall on a consolidated basis, our revenues are up 16% on last year. Costs are only up 4% due to the oil price. Gross profit more than doubled, and operating margins increased by nearly 10%. Next slide, please. Our net equity has improved as well due to the better performance. And our last 12 months EBITDA has also improved compared to last year and compared to last quarter. If you look at the next slide, please. And you can see the improvement on EBITDA on a 100% basis and also on the proportionate basis in line with our debt covenants. Next slide. Slide 23 shows our cash improvement since December to June. And the 28 before we paid the debt -- the interest and the principal and overhead in July of the year. Our debt has slightly increased because although we are -- we paid back -- it doesn't include the, of course, the July payment of $15 million, $16 million, but also with the capitalization of tranche B, tranche C and the MCB's interest, it's increased our debt at that level. Next slide. There's some confusion over the cash balances they gave last quarter. So we've just analyzed, broke it out a bit more. So the top was what we show -- and what we've tried to show you now is the breakdown of, say, for KPC, it's $260 million. What you've got is $95 million of royalties that goes to the royalty, that goes to the government has allocated for the payments of royalty. We have to pay that in advance before shipments are made now. So that's almost restricted cash. If we look at the mine closure deposit, that's $41 million, that's for the closure of the mine has to be put into the bank and restricted. So we can't do anything with that. That's based on the area you've disturbed and what you have to do to put it back. And the CDA restricted fund, the 124, is really the key number for us, as a Bumi, because it -- and that's the money that is used for the other suppliers and contractors, but also is available for dividend. There's not -- don't get me wrong, that 124 is not dividend money. That's -- we pay the contractors, you pay other suppliers, you paid any CapEx and then the dividend can come up. So that's a sort of breakdown. I think if you look at Arutmin, of course, it's struggling still a little bit because it's not got full production at the moment. The biggest hit it gets is mine closure deposit because it has 5 different sites all we've made buildings and everything on them, and the cost in South Kalimantan for rehab is higher. You've got this extra -- a larger cost or cash tied up in mine closure deposit. That's why that 53 is there. Next slide, please. This is the -- that side -- and just showing you the -- as we've indicated, if you get my monthly e-mail that came out, I think, yesterday, we're expecting to -- for October, to pay about $50 million to $60 million of principal back in October. We still believe that in Q4, we expect that to increase further as prices continue to rise. The rule if -- could we adopt $60 million, $70 million, we just were slightly down on sales in KPC at the moment based on forecast for September. So that's why it's slightly behind. But we think by Q4 sales will be good with the good weather and with the prices that we're realizing over the $70, we should see an increase on that amount of cash. I'll give guidance on that number come -- once we've closed Q3 and we'll get the updated forecast from KPC. But it's still -- it's looking positive, and we still believe that clearing tranche A end of 2022 should be achievable. Just few updates we have on the debt. We have appointed CICC as adviser to help, they're one of the major biggest investment banks in China and are well connected with CIC and CDB, but we'll work on all aspects of the debt refinancing or restructuring whichever you want to quote it. We're working with them now, and they'll be shortly conducting, discussing the structure and checking the models and et cetera, as we go along. Next slide. This is the MCB conversions position, slightly moved since you probably saw it. The key update, the MCB trustee amendment whose votes were passed with 99.7% approval. The EGM will be called as soon as possible. I first have to get directors and full directors' and commissioner's approval for a new series of shares to be issued as per our articles. So we're just doing a circular resolution for that because the next meeting is in October. And so we'll get that and then we'll call the EGM to get this new series of shares open and done. We're talking to [ HPT ], the lawyers on this. We expect it by sometime in October, the actual EGM for this. And if it's passed, if the meetings held and it's passed, we would expect probably 2 weeks. After that, we could get the shares to the holders that have converted. This is our ESG data, which we produce. We've come out with our sustainability report as well, our annual one, which is audited. If there is more data you need or more questions on this, please feel free to contact us directly. We can -- there's a lot more information. There's a huge amount of information that KPC and Arutmin have on the ESG side and on -- with our sustainability report, in the annual one, if there's any questions on that, please contact us as well. I think that's about it. Yes, that's -- Soo Chong, that's about it. I think we should open up to Q&A now.