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

Welcome to the JPMorgan Webinar PT Bumi Resources 2021 Results Briefing. Please note that our conference calls and other events are intended only for the clients of JPMorgan Corporate and Investment Bank. 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 time to Soo Chong Lim, Head of Asia Corporate Research JPMorgan, for this call. Soo Chong, over to you.

Okay. Thank you very much, operator. Good evening, or good morning depending on where you're calling from. My name is Soo Chong Lim. I'm Head of Asia Credit Research. And welcome to JPMorgan Investor Update Call. Today, we have the pleasure of the management team from PT Bumi Resources to give us an update for the 2021 performance and probably also to share what they expect for the 2022. And more importantly, for a lot of credit investors, we also want to find out from the management some guidance about what you expect to do for the upcoming refinancing for your -- all the secured bond is coming due by end of the year. Today, we have 4 speaker from PT Bumi Resources. We have Bapak Andrew Beckham, the CFO from Bumi Resources. We have Bapak Dileep Srivastava, Company Secretary and also Director. And also we have Bapak Nalinkant Rathod, the Director of Bumi Resources; and Bapak Ido Hutabarat, Director and he's also the CEO for Arutmin. So we are further ado, can I hand over to Bapak Andrew to start the briefing. Bapak Andrew, over to you.

Thank you, Soo Chong, and good morning or afternoon, everyone. We'll go as quickly as we can through the slide shows, so we can get on to Q&A. So just bear with me, let us take you through. And hopefully, some of the questions will be answered in the actual presentation. So for our financial year update, production was down in 2022 due -- 2021 due to the heavy rains from 81.1 million tons to 78.8 million tons. Prices continued to increase in 2021. And we expect them to continue and they are continuing in 2022. But that should cost increase as oil lows compared to 2020 and spare parts cost increase, as there's a lot more -- as you see with the commodity demand spare parts for equipment is becoming -- is increasing quite substantially, the prices. Production costs increase as oil rose. I said that one. Finally, we have received both the new licenses on the CCOW, have now been awarded under an IUPK. Those were done on the 4th of March and run for KPC from the 1st of January 2021 to the 31st of December 2021. I've got some clarification on the tax and royalty rates in a later slide. So we'll go into detail on that. Next slide, please. On the guidance, we expect production to be higher than last year for 2022. As we hope, the range will be less, especially in the so-called dry season of May to November, typically, in Indonesia. Prices will rise, Already year-to-date, actually Newcastle benchmark prices are running at an average of over $220 per ton up until April year-to-date. That's on the benchmark. The forward curve is currently pricing quarter 3 and quarter 4 2022 prices at over $350 per ton on average. So if this is correct, it will mean we will still lag behind the benchmark prices. So constantly, every quarter, as I've been saying, our prices increase, but they don't increase up to the level everyone wants us to be because we're still -- our contracts are based on the previous months or the previous 3 months or the previous quarter index prices. So we just have to bear that in mind as prices continue to rise -- will continue to rise, but just lag behind. Costs will be maintained. However, if oil prices remain high, there will be upward pressure on these costs. So we have done a lot of work. Especially with KPC renewing its license, it was able to renegotiate a lot of its contracts. So it's been able to trade and reduce its costs quite a lot with contracting negotiations. As you will see, though, unfortunately, royalty increase has probably taken a lot of that benefit away. Move on to the next slide, please. So this is the KPC license extension that we finally got dated as of December 31, '21, but we got it in March of this year. It's called an IUPK and issued by the government, of course. The IUPK is granted for 10 years up until December 31, 2031, and can be extended in accordance with the provisions of the regulation. The key extension term is that you hold equity and supply coal to a downstream industry company. And by downstream, they mean things like coal to gas, coal to liquids, cold to methanol, coal to hydrogen, that sort of process. Not a coal-fired power station, will not qualify. So that's a lot -- and that has to be done. Within the first 5 years, satisfactory evidence, I believe, it's a word, we need to see that is happening. The IUPK are -- for the production operation that has retained 61,500 hectares. We've relinquished 23.4 million -- 23.3 -- 23,396 hectares, yes? And the total remaining reserves of 886.5 million tons will be mined over the next 20 years. It's pretty much -- our 10-year plan from 2022 has not been affected anything. It's just -- there's about 60 million, 70 million tons of reserve that we've lost in total over the -- in 15, 20 years' time. But with additional drilling, we'll probably get close to that back. So there's no real effect on reserves. What will happen as with Arutmin/KPC will pay 4% of the net profit to the central government and 6% to the local government. So that's a 10% net profit. So when you look at our numbers, you would take normally -- for Bumi, you take 51% of KPC and you take 90% of Arutmin, you now have to take 90% of the profit of KPC and times it by 51%. And then you take -- what you actually are now with the Arutmin taking 90% of the profit and times it by 90% again. So it's just they're taking another 10% at that level. Next slide, please. The royalty rates. There's a lot of rumors going around forward. I think they've managed to top out the rumors at 28% for over $100. So if we're bullish on coal prices, as we are at the moment, we're expecting 28% to be the new norm for the next couple of years at least. That's a 14.5%, almost 15% increase and probably equate to about $800 million, $900 million more just at KPC in terms of extra taxes paid to the government. The royalty rates for domestic PLN sales shall be at 14%. So if you're selling PLN domestically, you get only a 14% royalty charge. But if you're selling to somewhat other domestic customer, it's still at the current rates. The government did lower the corporate tax to 22% from 45%. That's a big improvement. And that follows the prevailing rates. So now if the corporate tax is changed by government, we will change as well. So we have to follow that. These are all now -- there's no contract of work, no let specialists. So if the government changes the tax rates for any of this, it will affect us. VAT, it used to be able to be offset against the royalty. Now it's recoverable. So we will get a benefit of that VAT. But that is going to be a cash flow timing because you claim back about 3 to 6 months, it will get paid back after you've claimed it but a bit of timing. The service tax of 2.5% previously charged under CCOW would no longer apply. But we have a fuel tax levied of 7.5% on fuel purchases that we'll pay out. Next slide, please. Prices-wise, as I mentioned, coal prices continue to rise. They did dip towards the end of March but have subsequently bounced back up to almost record levels at the moment. Next slide. As you can see, these forward curves as of the 14th of April. But as I mentioned already, the Newcastle is about $350 for Q3 and Q4. So already, these curves are out of date. Next slide, please. Active prices for KPC was $76.5 per ton in '21. Already in Q1, we're seeing realizing average prices of about $98 per ton. Production for KPC was hit by rains last year, as we've mentioned many times and continues to be affected with an actual flooding in Sangatta, which is where the town where we are actually happening. That's never happened in -- since 2003 since Bumi on the KPC. So there is a huge rain. That means we looked at more like 11 million tons of production against 14 million in Q1 last year. Arutmin realized prices were $44 for the year in '21, but has subsequently increased in Q1 to almost $60 per ton. As they're now producing over about 6 million tons in the first quarter -- the selling about 6 million tons in the first quarter, and that is -- we're hitting up this all on target. South Kalimantan hasn't been hit by the rain, nowhere near the site. So it's benefiting from that and Arutmin's hitting its numbers. Overall, we realized a price of $67.4 per ton at Bumi level and sales of 79 million ton in 2021. Q1 realized prices will be up to $85 a ton and sales of nearly 17 million tons on a combined basis. We go on to the slide. Next slide, please. As I've spoken a lot about the rain the past year, I just wanted to show you the rainfall charts for KPC and Arutmin. The first one is KPC where the long-term average and last 5 years is plotted against the actual rainfall rate. You can see in the early months, we were in line with the 5-year average or a little below. However, from July onwards, we have stayed significantly above the averages. And this is continuing into Q1. So that's the issue. The dry season is typically May, June through to November, December. And we've been just -- the rain is being a big thing. But of course, it helps prices. Next slide, please. Similarly, with Arutmin, a bit more erratic. But what you see is that -- in that wet season of Jan to May, it's been pretty much averaging around the 5 and long-term averages, but then went crazy from July through to October in terms of way past the benchmark or the norm. And the averages that we base our production plans on. And now, just now, we're getting back to reasonable levels. And as I said in the first quarter, we've had a good dry season -- a good wet season, let's call it, and seen good production. Next slide, please. As production was down in '21 , so overburden removal came down. And as coal mine was down in KPC, it was down in KPC, but up slightly in Arutmin. And we'll see that increase continuing in Arutmin, as more high grade is produced this year. Next slide, please. Coal sales were lower in 2021 due to the production shortages. The stripping ratio was down due to the less Arutmin high-grade coal versus 2020. Next slide, please. Production costs were up due to higher fuel costs, spare part prices, as I mentioned and increased the demurrage costs. As last year, although with the rain, we were trying to maximize out all cells we could do. Naturally, with high prices, you don't know how long it's going to last. So we continue to push. And so to do that, you have to stack chips up and make sure that you maximize the ship loaders. And that, of course, causes demurrage costs. Next slide, please. Both the total domestic receivable and domestic over 90 days, receivables are up from the previous quarter as PLN pushed for more supply. Arutmin and KPC both hit their DMO targets of over 25% in 2021. Although you will note, we were still effective for the first 15 days in January by an export bank until it was agreed that those are -- satisfied that DMO was allowed to export again, okay? Bear in mind, a big problem with PLN, just for info, is to -- actually just getting the coal unloaded. And often you get big queues at the moment trying to supply coal, but they're not being -- delays -- the payments are delayed because they won't pay until you deliver the coal onto the jetty, on sort of their stockpiles. And there's a delay in getting that done because they haven't got the infrastructure to unload as quick as we should -- as they could. So that doesn't help us in payments, but it also doesn't help PLN, so keep saying they need more coal, but a lot of it, they need to get unloaded. So frustrating. Next slide, please. Slide 16, selling prices have risen for both domestic and export coal. We see this -- the domestic or the Ecocoal, that would be coal domestically as going export. Of course, it's getting very good prices. And actually, we'd like to maximize that, but we're keeping at the DMO of 25% for this year. Next slide, please. Production cost, as I say, due to higher fuel costs and spare parts and of course, the spare parts are because of higher demand from mining. Next slide, please. The cost per BCM or the cost of moving is also suffered due to the oil price increase, just making prices up. If we go on to the next slide, you can see the bent curve is the best indicator of our price in Indonesia and has typically increased in 2021. It also has increased in '22 from $78 a barrel at the beginning to now $106 a barrel, I mean, as of today. So probably -- of course, naturally due to the Ukraine-Russia war, shall we call it. So naturally, that's putting up for pressure on our fuel price, but it's keeping oil prices and coal prices high as well. Next slide, please. These are audited financials, which were published at the end of April, in line with regulations. And we saw a healthy return to net profit of $168 million. Operating income increased over 3x from 2020 due to Arutmin's performance. KPC increase in profit drove the other income, strong expense line that you can see there, improving nearly 4x better than in 2020. The asset increased naturally as well by 23% versus liabilities only 8.5% and allowing net equity to increase 3 to 4x. So putting us in a lot healthier position at the end of last year. Next slide, please. This shows our consolidated number if we -- assuming we consolidated 51% of KPC. Unfortunately, we're not allowed to under Indonesian accounting standards because of the tight shareholder agreement we have. If we were in America, we could consolidate. Although the net profit stays at $168 million, I think you agree that it looks a lot better -- a lot healthier with a $5.4 billion revenue and a $1.1 billion of operating income. And that would be realistic and more truer picture of how we look. Next slide, please. This shows us the improvement in Q4 '22 versus Q4 '21 -- sorry, '21 versus Q4 2020, just for dialogue purposes. Next slide, please. And then this is the comparison between our consolidated number against the current reporting. So again, although it's the same net profit number, I think it looks a lot more reasonable, understandable with the full revenues and operating income. Next slide, please. So our performance overall in '21 was a big improvement compared to 2020 mainly due to the operating margins up 20.5% versus 6.3%. And we expect that performance to continue as prices seem to -- as long as prices remain high and the rains do stop in line with the normal wet/dry season this year. Next slide, please. Equity has actually increased, as I mentioned. And consolidated EBITDA has naturally followed suit, increasing and should continue to increase in 2022. Next slide, please. And this is -- KPC EBITDA was up to $1 billion, $1.4 billion in 2021 for the last 12 months and Arutmin at $181 million. And we see that continuing and getting better in the 2022. And for note, there's PSAK 73. This is adjusted as in line with our financial covenants for the EBITDA. But if you want to add it back in, you just need to adjust for -- these are infrastructure leases, which are shown as assets and amortized instead of as a cost expense in line with PSAK 73. Next slide, please. Slide 27, cash has increased naturally. But remember, what happens this is Bumi's debt cash position. It looks very healthy, but we pay out that about $100 million in the 8th of January. So it's -- the price of cash there is all cash going to pay back to the lenders. And I said, although it looks like it's increased there because it accrues all the interest, but the active principal gets paid back on the 8th of December. So there's a slight timing difference on both of those, but that's how the financial statements will show it. Next slide, please. And this is where we split the cash balances at KPC, Arutmin and Bumi, highlight how much we have tied up in working capital for royalty. Now we have to pay the royalty in advance. And remember now it's 28% of the -- you're paying on the revenues, right? So even like anywhere like a $6 billion revenue in the year, $500 million, you'll be paying 28%, nearly $150 million, you've got to have in advance to pay the royalty. Then you've got the CDA, which allocates the cash out for the contractors and tax and royalty and other costs. And then you have a mine closure deposit, which you have to keep on a 100% LC, which has also helped. So in the case of KPC at the end of December, there was to, what, $94 million, $130 million, $140 million -- $300 million -- over $300 million tied up in restricted cash. That is what we manage with at the moment. The next slide, please. This is our debt position. The 2021 -- December 2021 is there, so you can tie that back to the statements. And then you see the payment made in 10th January to $224 million for A. We then paid another $65 million back in April. So it came down into about -- and we're expecting to repay another $100 million at least in July. So we'll be down to about $50 million. And Tranche A will be clear in October. And we'll start repaying Tranche B as well at the same time. So we expect Tranche B will be significantly repay -- a significant repayment of Tranche B over the course of the following 4 to 5 quarters. Next, just on that -- I should just update you we're we are. We had lots of discussions now with the major lenders. We've had a lot of detailed discussions. We're setting up calls between lenders at the moment to get sorted. We also have opened up the data room now for all lenders. There's a draft term sheet based on what we are proposing. It's not an agreed term sheet, but there is a draft term sheet in there. And as much -- depending on your -- what you're allowed to view, there's different steps to go through the data room in terms of what you can see first, which is mostly public, then what is nonpublic, and of course, there's models. And that is available to anyone who wants it with the reports -- the consultant reports. But naturally, it's not market information. It's not public information. But we are trying to get a -- if anyone has any -- wants to contact, we've sent out the contact details of BCG for you to contact. If you need it or you haven't got that, please let us know, and we'll give you those contacts so you can get in contact with them. And they will update you on the process. They will update you on the access to the data room. And look, we're still very confident that we can get something sorted out hopefully, in June, we can get to some clear where we are -- exactly where we are. And hopefully, that -- because it will take us 4 to 5 months at least to put any deal into practice or actually into documentation because we have to go through the Indonesian process, then through the Singapore process and the U.S. process. Now there's a lot of legal requirements that take, naturally the lawyers like, which takes long time. So we're trying to get things resolved over the next 1 to 2 months at the most. If we go to the next slide. This is our ESG slide, with our CSR and then trees. But we have a lot more information available to anyone who needs it. We also have a CSR report for 2021 coming out very shortly, which will be -- which is audited to United Nation's standards. We want to be part -- I mean for those who have issues with the ESG, I think it's quite clear, most people are seeing that coal is going to be around for a long while whether we like it or not. And therefore, we believe that we want to be part of the solution of trying to improve things, and we'll do as much as we can ourselves. But we urge people to look at how best we work with coal to get things improved, both in emissions of the coal-fired power stations and what can be done at the mines. With that, I'll leave -- I'll float it over Soo Chong to Q&A, I think that's the best.

Operator, do you want just to give an instruction how people can raise question.

[Operator Instructions]

Okay. While waiting for people to raise a question, I think we have a few returning question. I think I'm going to just go through some of them. Some, you could have answered that. But some, you probably can elaborate a bit more. One is [indiscernible] from Barclays. When is the debt restructuring expected to be complete? So I think you have answered the first part. My follow-up question is that what if -- I think the restructuring because of legal process, it doesn't complete by December. So what's going to happen? Are we going to just continue with the existing cash flow? Or what is going to happen to the debt?

The first part of doing the deal is the Indonesian process where if we've got an agreement, we'll go through the Indonesian process to get approval under those Indonesian docs. Assuming that we're doing this -- in a friendly way and there's no issues, that should be quite quick. That probably will help us drive the actual deal and that may even allow us to start following that deal. But if not, the worst-case scenario, yes, we would have to continue having extension and continue under the existing until it was final.

Okay. I think just -- I think people like myself, which is on the public side, right, so we can't [indiscernible]. So my guess is actually how much can you share with us what is the broad term and what are you trying to achieve for the restructuring? Are we -- my guess is actually so far we [indiscernible] some extension of tenure. But then what is the priority of cash flow? And the other part is also that what are you expecting in terms of interest coupon? Is it going to be scalable? Is it also going to be lower and how that's going to evolve?

Yes. Look, you're going to have a -- we want to -- we have to extend out the maturity. So conservatively, we've gone with 5 years. Based on our numbers and looking at prices, we won't need that. But prices can change any day. The actual, what's it called, the 5-year extension, we will want to pay cash interest to all tranches. The reason for that is to pick interest. This costs us a lot of money and delayed our repayments because of that. So we want to have a cash interest. And we want to have that interest on a scale -- an increase in scale depending on coal prices. The actual numbers are being discussed at the moment. So I don't want to put them out in the public. But I've talked to people about the range before. So most people understand where that is. But that's where we are at the moment.

So can I just assume that what you basically treating the cash [ quarter 4 ] is assuming that the money coming once -- assuming that the Tranche has been fully repaid, so the interest will be paid on Tranche B and C. And then whatever residue after the interest payment, the residue will be used to repay the Tranche B business purpose. Am I right to say that?

That's still up for discussions. And we'll -- as soon as we can get all lenders to agree to that format, we'll let you know. But that's still being discussed. So definitely, cash interest is no problem. Cash interest will be paid on A and B -- B and C, sorry. And the As, we'll try not to actually engage with because we shouldn't need to. So the cash interest will be paid. But how the payments of the principle will be done, that needs to be finalized.

Okay. But then if you want the C and B and C to share the principle, my guess is it's going to be a long discussion, right?

Mr. Chong, it's Nalin here. I agree with this got to be a long discussion, but the most important thing for us is CDB the single largest lender on a combined basis more than 51%. So we need to bring them along. Without bringing them along with us is also going to pay a much more longer time. So we are still working with all the lenders to see as to what is the best solution in terms of surplus sharing between the lenders after the payment of interest.

But my question is actually very simple, right? So I would say that if you want to share that, that's going to be a lot just because from the standpoint of a Tranche B, yes, we really -- they have given in by allowing Tranche C to get the interest, yes? I know that you're saying that they're the majority. But my question -- the next question I have is actually for you to push this whole restructuring, what is the percentage? Or let's put a nicer way, your liability management exercise -- so let's say, you want [indiscernible] liability management, what is the minimum you need? Because I don't think you have a super majority. You have majority, but you don't have super majority. So -- and you have to be -- my guess is actually then we are going to have a conversation that's going to be much longer than what it is.

Yes. Soo Chong, if you look at it, actually, the 2 main major lenders or largest lenders have about 70% of the secured debt at the moment. So the Nalin quite rightly pointing out, both of those parties have to agree. There's also a number all the other lenders that have to agree as well. We want all parties to come over the line. But we have to take into consideration those because they can block. And historically, we've known that they will block. They will not -- if they're not happy with the deal, they won't do the deal. So we have to find a solution to that, and we will. And look, we are in the good discussions...

One more thing, Andy. Andy, one more thing here is we intend to bring in together all the lenders between A, B and C for a mutual discussion because we are, in a way, neutral, whether [indiscernible] will get paid, B and C. We are neutral to which loan gets paid. We intend to bring in both -- all the lenders together to negotiate amongst themselves so that the deal can be quickly structured, but we intend to do that pretty soon.

Okay. Yes. I think my guess actually, it depend what you offer, right? So I mean from -- I mean put it bluntly, if I'm a Tranche B, I would just happily keep this account going for another one more year, right? So yes, but anyway, that's...

I can't hear you very well.

I'm saying that if I'm a Tranche B bond holder, I'm okay, that we continue with this discussion for another 1 more year and then I get paid. And then the PIK is the same. Everything is the same. That's the best case if I were Tranche B.

Soo Chong, there is a risk of bankruptcy. So if an unrestructured debt, anybody could bring down the company. So I don't think we should go towards that direction. The whole idea should be we cannot keep the suggestion hanging around and anticipate that Bs will be fully paid. That will be a very risky proposition.

I hear you, but Andy said to be something that is palatable to everybody. So let's move on to some other question that I have on the floor. One question is the [indiscernible] Private Limited. How much of the MCB have been converted?

Currently, at the moment, $405.6 million has been converted and including pool factor. And $330 million including pool factor is outstanding at the moment. Did you get that? Okay, Soo Chong? Yes.

Okay. I got it here. Yes. Next question is actually, what is your -- it's Brian [indiscernible]. What is the average FOB pricing? Why is the average FOB price only $62? My guess is actually talking about historical. And then there's the next question is about what's the differences -- from [indiscernible] the differences between KPC dividend and Bumi dividend received on its cash flow.

Right. Okay. So first one, the $62, I don't know where you get that from. It was $67.4 at the end of December, realized. As we've said in Q1 of this year, we're already coming up to about, yes, $85 a ton for the first quarter. So we're already increasing. As we've said, we lagged behind. We have a realized price based on our quality of coal. And we have a realized price that we're catching up with the benchmark. But the benchmark keeps on getting larger. So that's good. But it takes us a bit longer to get there. With regard to -- what was the second part, the?

Why the differences between KPC dividend and Bumi dividend received on its cash flow.

Yes. So KPC has had a lot more revenues and less liabilities against it historically. It's now, of course, has always been paying up cash. Arutmin had a major dispute with a contractor, which cost us a lot of money, which we're still repaying. And we also got tax and royalty liabilities to clear up. But we expect money -- dividends from Arutmin in the second half of this year. If prices and production start are good, we expect it very soon.

Okay. We have one question from the floor. Operator, you want to open up on Nikita.

Yes. We have raised hand from Nikita. [Operator Instructions]

Do you hear me?

Yes, we can.

Okay. Andrew, couple of technical questions. Let's say, Bumi sells its coal at $120. Is 28% royalty rate going to be applied to the whole revenue or just as a difference between $120 and $100?

Whole revenue release.

Whole revenue?

Yes.

Okay. Then one more question about new taxes. For KPC, you have a corporate tax of 22%. And there is also central government tax rate of 4% and local government 6%. So basically, you have 32% of net income tax rate for KPC?

No, no. 22% of your profit before tax, so 22% charged on that. And then that gives you a net profit. Let's say, it's $100 million, right? Then $10 million will go to the government; $4 million to the central government, $6 million to the local government. So then the $90 million is what's left.

Okay. Understood. And there is last one. When you discussed with Mr. Chong about the interest rates for the remaining tranches, you didn't mention CVRs. So should we expect that CVRs are going to have some interest rate as well?

No, there is 0 at the moment, and we don't intend to change that.

Can you repeat? Sorry.

That the current interest rate on the CVR is 0, 0%. They don't charge. There's no interest on them. And we don't intend to add an interest rate to them.

But you want to have some still maturity extension for them, right?

We want them to -- Yes, they still -- in theory, they still need to be part of the approval, yes.

We have next question from Tanvi Murudkar. [Operator Instructions] She just lowered her hand, so yes. As of now, we don't have any raised hand.

Okay. So if no question from the floor, let me ask the next one, yes? I mean can we -- since we have Bapak Ido on the line, I mean, the one that big disappointment for Bumi has been Arutmin and have not paid -- my guess is that almost a new dividend to Bumi. Now you're talking about second half so -- dividends start to come in, so how much have you clear out in terms of your outstanding payable to your contractor? I mean I used to know that it's about $180 million. How much of debt been paid off? One, first question. And what else are there in term of -- is there any other -- besides the main contractor, is there any other receivable that you have to -- or any payable that you did set up before we see any money being upstream to the [indiscernible]. Bapak Ido, I think you're on mute. Okay.