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

Welcome to the JPMorgan Investor Call PT Bumi Resources Tbk 1Q '22 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 Mr. Soo Chong Lim, Head of Asia Corporate Research, JPMorgan for this call. So over to you, Mr. Song.

Thank you operator. Good afternoon, good evening or good morning, depending where you're calling from. Welcome to JPMorgan Call Series. My name is Soo Chong Lim, Head of Asia Credit Research. Today, I think, we have the pleasure to have the PT Bumi Resources management team to give us an update of their first quarter 2022 financial results. We have the CFO, Andrew Beckham, the CFO for BUMI Resources. We also have Dileep Srivastava, the Company Secretary and Head of our Investor Relations. And on top of that, I think we also have Adika Bakrie, which is the President Director of PT Bumi Resources. We also have Ashok Mitra, who is the new CEO for Kaltim Prima Coal. And also we have do Ido Hutabarat, he's the CEO for Arutmin. So I think we have the present all the senior management. I think it will be great to hear from Andrew an update on the first quarter number. Andrew, over to you.

Thank you, Soo Chong, and welcome, everyone. Get the financial presentation up. Okay. Next slide, please. Next slide, please. Okay. Total production for Q1 was at 16.3 million tonnes versus 19.3 million tonnes in Q1 '21 due to the heavy rains and, of course, flooding in East Kalimantan which caused a lot of problems for everyone there. Prices were -- realized coal prices for Q1 increased to $84.5 a tonne versus $53.10 in Q1 '21. Naturally, the high coal prices plus more high-grade coal production in Arutmin helped to that. You'll see in April already that realized price has jumped to about $124 a tonne. Production costs increased from $33.90 in Q1 '21 to $41.30 in Q1 '22, mainly due to the higher oil prices. Oil prices overall for Q2 '22 are also trending higher at the moment, so we expect an upward pressure on costs in Q2. As we've announced before, the Contract of Work status has been now all revised to IUPK, the new mining license the government has issued. That was on -- Arutmin was on the 2nd of November 2020. KPC's was on the 1st of January 2022 -- sorry, 31st December 2021, it was renewed. The key changes on the tax and royalties have been received now, and we now have a 28% royalty versus previously at 13.5% royalty, 22% corporate tax versus 45% corporate tax and a 10% profit share, which is after the tax, so it's a net profit share. Those all apply from January 1, 2022, and so KPC and Arutmin are both being backdating their numbers and having to pay additional royalty from January going forward. Next slide, operator. Our guidance is still between 81 million tonnes and 86 million tonnes for production, KPC between 55 million tonnes and 57 million tonnes and Arutmin at 26 million tonnes to 29 million tonnes. That will be updated. We are still experiencing a lot of rain at KPC up until May, so those numbers may be revised. Arutmin is still on schedule and looks good. Prices-wise is $107 to $133, with KPC at $120 to $150, and Arutmin at $80 to $100. Again, prices are still staying quite firm around the quarter [indiscernible] On the benchmark, and I'll come on to that in a bit more detail in the later slides. Costs-wise, as we mentioned, $36 to $41 is our guide. KPC between $40 and $45, Arutmin, $28 to $34, all subject to where the oil price drives us in terms of whether those costs go up. As I've said before, a good rule of thumb is a $10 increase in oil is about a $1 increase in our cost per tonne, as a guidance. Next slide, please. With the markets, they've been spiking up. And -- but as you noticed, the blue and the gray, I hope you can see the color, these are the ICI numbers. What you see is a slight drop off, although the GC NEWC has kept on going up. The reason for that is that China, India has been less -- there's been less demand from them in the second quarter -- in the first and second quarter. So because of the China shutdown, there's been the -- $4,200 coal price has been not trended as high as the Newcastle high-grade coal. So where you're getting $400 you're hearing on the GC NEWC, the ICI isn't trending to that same level. So to give you an example, the $4200 is probably around $85 today. I'll get corrected it in a minute on that. But about 85%, if you were following the GC NEWC, it would be more like $120, something like that. It's still very good. We can't complain, but you have to be aware there's a slight disconnect between the high-grade coals and the lower grade coals being sold out of Indonesia. Next slide, please. The forward curve, although it's still in backwardation, are still very good. You're looking at $206 in forward curve, these are a bit old actually this -- as of May, but they're still trending well in that sort of number up until 2024. But naturally, the effects of the Ukraine-Russia war has definitely had an effect. How long that will go on for is anyone's guess. Also, we -- demand-supply balances are looking good at the moment. China looks to be trying to come back into the market by September, I think. So therefore, we should see more demand come up -- come in the third and fourth quarters, which may have upward pressure on the price. That leads for the lower grade cost. The next slide, please. These are our operational numbers. As we said in Q1 actual from a mining at KPC were 10.4 million tonnes -- 10.8 million tonnes against 14 million tonnes for coal mined in Q1 the previous year. And -- but $98 realized price against $59 in Q1. In Arutmin, we're now -- sales were at 5.6 million tonnes versus 5.2 million tonnes. But FOB prices, you see at $59.60 against $35.80 because of that -- not only because of tonnage price but because of high-grade coal production. We're doing about 1 million tonnes in the first quarter, and we expect that to continue, if not slightly increase over the next 3 quarters. Realized coal, $84.50 against $53 and sales at 16 million tonnes against 19.3 million tonnes last year. Next slide, please. So the rainfall, as we're now going to put this in. As you can see, March, April, it's starting to come down a bit. The red is the key. The one is way -- for KPC, way above the last 5 years and last 10 years -- or the long-term average which is, I think, 10 or 20 years, Ashok? 20 years, the last 20 years. It's way above that, but it is trending down and that's continued into. By June, we're getting back to somewhere near normal drier weather. Next slide, please. With Arutmin, as you can see, it's completely -- and you've got to understand, we're talking the same island here, Kalimantan. But you've got East Kalimantan and about 3 hours flight in a small plane down to Arutmin, you're going to see rainfall below the long-term average and below the last 5 years. So because of that, we've had good production, and we see that continuing at the moment with not much change. So it's an interesting climate at the moment, but within 3 hours flight of each hour there the weather is completely different. Next slide, please. So on operations, rainfall still continues in Q1, as we've said, and you can see KPC to be slightly down on its overburden removal, but Arutmin is up almost double. Similarly, with coal mined, KPC's down in the first quarter, but Arutmin's is up. Next slide, please. BUMI's coal sales. As we said, following production, KPC is slightly -- is down at the moment, but we see that recovering in Q3 especially. Arutmin is up on this side. Strip ratio, because of the wet weather, you can't get down into the mines to get the high-grade coal out of the deep pits, so you're moving a lot more overburden, so your strip ratio is increasing up temporarily. You'll see that the benefit of that come through in Q3, Q4. Arutmin is up on -- compared to Q1 last year because of the high-grade coal. Our high-grade coal is -- strip ratio maybe 11, 12:1 at the moment, whereas your low grade is between 3 and 4:1 at the moment. Next slide, please. Production costs, as we've mentioned, up in KPC and Arutmin all because -- mainly because of fuel costs driving a lot of this. Remember, these don't include the royalty and commissions. This is only production -- costs of production, so they're not including the royalty commission there. The FOB price that we've talked about is up as well. Substantially at KPC from $59 to $98 and at Arutmin from $35.8 to $59.6. Next slide, please. Receivables, slightly down from month of December as of March in terms of total sales outstanding to PLN. And you can see that in the 90 days has also trended down back to about $8 million per quarter, and that's still continuing at the moment. It goes up and down on trends on sales month-on-month, but we hope to be down similar numbers at the end of June. Next slide, please. So average selling prices, here, we try to put the average selling price, excluding Ecocoal, which is the major domestic sale. So you can see the exports are running at about now $103 for 2022 and the domestic is running at about $38 [ '20 ] (sic) '22. If you think about it, you can look at the difference between export and domestic, and you can see why a number of domestic -- of Indonesian producers are not selling to the domestic market and are prepared to pay the fine on the domestic market because they get such a big upside on the export. This has, I think, been a big discussion at the moment and in the government, and hopefully some revised update on the -- how the sales are done domestically with regard to prices will come through soon. Next slide, please. BUMI production costs, Against Q1, it is up, yes, $26.90 versus $30.8, and KPC $36 up to $46. Again, we talked about the fuel costs and, of course, higher strip ratio at the moment. Next slide, please. A bit [ small this ] but we're trying to show you the overburden. If you look at on the right-hand side, you can see Q2, Q3 and Q4 of 2021, and then Q1 of 2022. So although our costs are -- our actual cost OB overall has come down and even between -- because we're moving on earth at the moment while the heavy rains, mean that we can't mine so much coal. So it just gives you an idea of how -- our average strip ratio roughly is around 9:1, 10:1, so you can say that about 90%, 95% of our cost of mining is overburden if moving earth and 5% is moving coal. So the key is about moving enough earth. If we're moving enough earth, we'll keep on -- when the dry weather comes, we'll pick up all the coal production. Next slide, please. Fuel. It's continuing to rise as we see fruit in March, and that's carried on lately around that $1 a bit more at the moment because of the pressure on oil prices. So therefore, we expect to see higher costs. But as we've talked about before, without high oil price, we don't see why coal and oil tend to trend together, whether directly or because just of the energy demand, but they seem to trend together. So we can't expect high coal prices without the high oil price. Next slide, please. Our financial statements, which were an improvement on Q1 2021 up to -- even though despite we were way down on sales, with an operating income of $30 million, up from $12.4 million in Q '21 and a profit -- a net profit of $43 million against a loss of $11.7 million in 2021. Again, balance sheet has now -- has improved as well because of that, but note that the current liabilities now have the -- when compared to December the same has all the debt liability, debt that's maturing at the end of December 2021, as it's within 12 months. So we have to show it in the current liabilities. I'll come on to the debt update but at the end. Next slide, please. This is our consolidated number in terms of Q1 against '21. So you can see -- so this is KPC, Arutmin consolidated. So our revenue for the first quarter would have been $1.38 billion if we were in line with normal -- with a 51% ownership. We still can't consolidate because we have a very tight shareholder agreement with CIC and Tata Power, which doesn't allow any decision to be made without all 3 parties agreeing -- any material decision, I should say. And therefore, we have to show it as an equity income in our balance sheet and in our profit. We would love for the Indonesian Board to change their accounting standards because it's a better reflection of how we're looking. We look -- we are outsized at $1.4 billion at the moment. Our revenue could be anywhere up to $8 billion to $9 billion towards the end of the year. Costs, of course, are up because of that. But the gross profit then is at $325 million against $201 million, a very healthy gross profit, and operating income of $259 million against $145 million. Naturally, net income of the parent reflects the actual -- our actual share, so that's why the 43% comes back. And similarly, you can see the equity and the balance sheet improved as well because of the consolidation. Next slide, please. This is the -- if we consolidated just the movement from Q1 '22 from the previous quarter, you can see that slightly, the revenues are slightly down because of sales in quarter 4 were higher than Q1, and therefore, the profit flow through from there. I won't go on too much on this one. Next slide, please. And then on the consolidated against our reporting standards, so this just gives you a clear guidance. We're talking about what you can see is that $1.377 billion. It's quite clear that KPC is $1 billion of this, and the rest is Arutmin, and that's how our split will come for the first quarter. Go on to the next slide, please. So in summary, our revenues have increased by 33%. Our costs are up 26% because of oil -- mainly because of oil. Gross profit is up by 62%. Operating expenses are slightly up, that includes the commission in there on the revenue. The operating income is increased by 78%, and our income before tax is up, and our net income is also up. Go on to the next slide, please. Equity is up following that increased profit, and we'll start seeing increased quite substantially, I think, over Q2, Q3. And as you can see from the EBITDA -- adjusted consolidated EBITDA the last 12 months, that is. And that's in line with the financial statements, I'd say, the financial covenants that we follow and the calculation of EBITDA that way. And you've seen it from May -- March '21 to now, we see a big increase of about 143%. And we'll see that trend continue over the coming quarters. Next slide, please. And let's give you a breakdown of the EBITDA, so you can calculate it easily and find the right numbers. Remember with -- our proportionate basis is taking 51% of KPC and 90% of Arutmin. We have an adjustment for the BUMI, of course, and we have to take account of the PSAK 73 and there's an adjustment there, so you can see how that works. If anyone has any questions on PSAK 73, please call me or e-mail me, and we'll give you a detail. We have gone through it a number of times. Okay. Next slide, please. We've added a new [indiscernible]. So for the equity holders, we hopefully, over the next year or 2, debt can be cleared up if prices continue and people will focus on the earnings per share. And you can see already that for March 31, '21, we've increased -- improved from minus IDR 61 to a positive IDR 28. This is a positive swing of IDR 89 per share year-on-year. And again, we expect this to increase even though we're having to issue more shares for the MCB conversions, we see this earnings per share increasing. Next slide, please. Cash balances from December 31 to March has come down because, as we told you, we were paying corporate tax. We're paying backlog royalty and sales are slightly are less, so they've come down. And debt now has still improved down at the moment from $2.7 million. This doesn't include the April payment of $62 million, $63 million of equity -- of debt -- sorry, principal, that was paid in April 11, 2022. Next slide, please. I think it's all now. For the cash balances, continue to be up in -- overall when you look at KPC, Arutmin and BUMI. On that note, this is as of the end of March, so our $75.6 million is because of the cash that we have in there to pay the debt in April 11. We paid a certain amount to interest, then overheads and fees, and then the $62 million, $63 million of principal repayment can be repaid out of that $75 million. But both -- all are very healthy at the moment. The royalty has to increase because we're still -- revenues are still increasing. As you see in KPC and in Arutmin, you can see that $55 million of deposit now against $15 million at the end of December. So that's the allocation to pay those already. So you're allowed to export nowadays, you have to pay in advance. So it affects our working capital. Next slide, please. This is the current payment for Tranche A. Tranche A now is down to $160.8 million, and we're guiding on over $100 million for payment in July. Final number will be finalized by the end of June. We're just making sure of collections and also the royalty adjustments we have to make -- to ensure that that's all covered. But we still expect over $100 million, and therefore, by October, we still expect to repay Tranche A without any issue. Tranche B and Tranche C are still -- are the main ones that we'll be talking to as part of the debt. Currently, we've been in discussions in Miami and New York with various U.S. and other lenders, which are, I think, quite positive. However, we're still doing a number of requests from the Chinese lenders for the data and reports, which have been finalized now. And hopefully, over the next couple of weeks, we'll talk in more detail with them on any term sheet. We know that BCG will be talking to them this week to get an update from them on what their views are on the original term sheet that's been shared with everyone. There was a lender's call last week, where we -- 2 weeks ago, sorry, where we gave a presentation and explained the data room is available for people to look at our lenders. There's a public one that's a lenders one, and then there's a non-public information one which you've all the forecast, which you'd have to sign an NDA for. Those are available to all lenders. If anyone didn't get the recording or the presentation who is a lender, please contact us. And if anyone needs access to the data room, please contact BCG. We'll update people with the contact details on our monthly e-mail that goes out every month a month in arrears. If there's -- if you're not on that list or you're not there, please contact me, and I'll make sure you've got the details. Next slide, please. On ESG, we continue -- despite Europe's sudden change of heart on the environment and what's important, whether it's energy or whether cost or environmental issues, we feel it's very important and we are still promoting a lot of as much as we can. We have the numbers here, but we have a lot more data available. Our CSR annual report has been published, and if anyone needs it, that's on our website. But please contact us if you can't see the information you need or if you need it for your committees, please contact us. We will continue to do that and we'll probably improve -- change this enough. Improve it as we go along once we've got the debt restructured and look at further targets of what we can do. And with that, Soo Chong, operator, I think we're done. As usual, I won't go through the detail of KPC and Arutmin. It just gives you a bit more detail by mining company or those who do the models. But we're happy to take Q&A.

Yes. Thanks, Andrew. Operator, do you want to just inform investors, how do they raise their hand or ask a question. Operator?

[Operator Instructions] And yes, I see the raised hands.

Yes. I think just go ahead, I think. Yes.

Yes, Robertson can ask a question.

Robertson is on mute.

Yes. Let's move on to [ Nitin ], operator?

Can you hear me?

Yes.

Yes, we can.

I've got 2 questions here. One is on the China import situation. I mean, there's been a lot of noise of late about kind of China replacing imported coal with -- perhaps increasing domestic capacity. Just wanted to get some sense on do you see that as some threat to demand in the near term? And then I have one short follow-up on the DMO.

Ido, do you want to answer that one? .

Yes. For -- there are 2 markets. For the high CV coal there are lack of supply because the coal from Russia has not been sold to the Western Europe, and they only sell their coal to China, Korea, Philippines. The Japanese buyers start to find the replacement for the high CV coal from Russia. In terms of the low CV coal and mid-CV coal, yes, China right now is in the -- still a lockdown. They're trying to control the demand -- on domestic demand, and they also controlling the import price. So that's why the price of the low CV and mid to low CV and mid-CV is not following the high CV coal. But so far, for Arutmin and KPC, because we have a long-term contract with the China buyers, our sales to China is not effective. They're still taking our coal.

I think, Ido, one more thing that we need to add to [ Nitin ] is the increase in production in China can most probably look after the inner power projects. But all the coastal power projects, they still need the imported coal for, which is more economical, and that is about 200 million tonnes for China.

Yes, China is still taking the 200 million tonnes import.

Yes.

Right. Understood. If I may, I just have one quick follow-up on the DMO mechanism?

DMO for the -- yes.

Sorry, yes. So on the DMO side, and I think, Andrew, you touched upon this a little bit in that. I think last year or earlier this year, there was some change in periodicity for the fulfillment of domestic obligations. I'm not quite sure what the earlier frequency was, quarterly or yearly, and think it was changed to something like monthly. So just wanted to get some clarity on what that is? I mean, do domestic producers need to fulfill this obligation on a monthly basis? And then I think you indicated that there is a propensity for domestic manufacturers to kind of pay the fine and still try and sell out in the export market because the arbitrage is so big. And I think you said that there are some potential changes that might kind of try and sort of curb this behavior. Do you see that as a threat to, let's say, your annual price guide? Or do you think that's baked into your assumptions?

Yes. For DMO, we -- all the producers of Indonesia as usually seen several years ago, we always make the report to the Ministry of Mining every month. What is our sales, total sales, and what is the export sales and then what this [indiscernible], and how many tonnes the domestic. But the changing is before the Indonesian crisis of coal, the government will yearly review, quarterly or yearly basis. But since there are crises last year or 2 years ago, now, the Ministry of Mineral Mines, they're checking and they control the review, the DMO on the monthly basis. So far, since there is no more crisis in Indonesia, the level of the stock in Indonesian power plant now reaches around between 20 to 25 days. We are still controlling every month. We are still reviewing on a monthly basis. But so far, there's -- since the stock is safe, there is -- the situation in domestic market is quiet. For the pricing, yes, the price of the domestic is based on the $70 SBA. This is only for power utilities, and $90 for fertilizer and cement company. The rest of the user will use the market price. So for our financial model, our forecast, we calculate the 25% of our sales based on the selling price to PLM based on the SBA $70. So that is the -- for the pricing and DMO.

Right. And so any changes to that -- to the calculation or how the domestic market obligation is done wouldn't make our prices any lower. It would just be an improvement on that.

Understood.

I think, [ Nitin ], the point to note here really is we've been beset by problems of rain in the first 6 months. And in these first 6 months, we've diverted more domestically. Now when we go into the second half of this year as production normalizes, that normalcy of balance in exports and domestic should come back, and that is likely also to affect and result in maybe higher realizations that we get this year.

Understood. Appreciate it.

Operator, next question.

We have next question from Robert.

Robert, you're on mute.

Okay. Let's move on to the next one then. Operator, [indiscernible]?

[indiscernible]

Okay, yes.

Yes, Robert, go ahead. We can hear you.

Yes. My question is, I understand, obviously, the rain issues and so forth with project KPC. My question is, if you take a look what's going on, everybody knows what obviously, coal price has done in the last 2 years. But when you look at the securities, both equity and debt across, let's say, the Indonesia companies like Adaro, Indika or Harum, if you look at these stock prices over the last 2 years, they're up anywhere from 200% to 600%. And in the case of Indika, when you look at their 2025 bonds, they're yielding 7.2% where the BUMI B's are trading around 58%. So obviously, very, very distressed territory. So my question is to the management and the Board, what is the company -- what does the company think they need to do to get investors to obviously look at BUMI going forward, to try to get the same kind of returns you've seen in Indonesian coal companies as well as obviously core companies in Australia and the United States, which obviously, you've seen multiple hundreds of percent in returns on equity? In many cases, in the case of Indika 2025s or Peabody 2025s, these bonds have been big outperformers in a very, very difficult high-yield market over the last few months. And so it seems to me that there's a real lack of investor confidence in BUMI right now, where the stock trading at 56%, which only is 14% above its all-time low of 50%. And again, the bonds, the B's trading at 58% versus Indika's or BTU's. So it seems to me when coal price is up, pick a number of 4x, 5x, 6x and stock price is up 200% to 600%. Obviously, BTU's case is probably 30x off the low. What is it going to take for investors to get on board and say, look it, the forward value of BUMI seems to be worth a lot more than the stock price -- where the stock price is currently trading?

If you look at where we are and look where we've been, the last 3 or 4 years since 2017 when we did the restructuring, we had 65 billion shares in circulation. We now, as of today, have 128 billion shares, so we technically have actually done a lot. There's been a lot of issuance of shares because of the conversion of the MTBs into that. I think, personally, there's a lot of [ riding ] on the debt. The debt position has to be clear because of the potential default, if there was a default at the end of December of this year, and people want to see that debt issue go. We believe that we're -- by next year, our debt would be below 1x EBITDA with the current prices where they are. And therefore, I think then you'll see a lot more interest in the equity. We also think that by '23, '24, dividend will be able to be -- will be an option as well. For Indonesian stock, dividend is an important element, and we have to have our retained earnings positive before we're allowed to give dividends. So that's the key. I think the -- the historical issue is that every time people have been trying to buy the shares, we've been issuing more shares because of this MTB conversions. And then, we've got -- to get it changed, we have to get our debt below -- back to a manageable level, below 1x EBITDA for sure, and show them a dividend being paid, which is what I think everyone wants.

Yes. No, I understand. I mean, obviously, I was along a lot of BUMI '17s back into the restructuring. And so I understand the massive amount of shares that were issued in the restructuring. I guess my fear is that, obviously, coal prices are not going to stay up forever. Clearly, when you look across the globe, certainly in the United States, and my guess is Europe as well, there's certainly a decent probability that a big chunk of the world is going to probably move into sort of recessionary territory in the next 2 quarters, which could have an impact on energy prices across oil and coal and so forth. So I guess my point is, you've had this unbelievably move -- large move in coal prices. And even though I understand your issues with debt and so forth, the stock price still can't get out of the 50s. So what happens if you see coal prices, this is a Newcastle for just a level, goes from $400 to $392 back to $150 or back to $120 or back to $100, to be quite honest. So I guess my concern is it doesn't seem like the investors right now have a whole lot of confidence that BUMI can sort of get out of this issue of shares being constantly converted to the MTB, and obviously, the BUMI B's and other debt. So it seems like, make hay while the sun's shining, and right now the sun is certainly shining on coal prices. It seems like you'd want to be as aggressive as you possibly can to declare this debt some way and find cheaper ways to fund the current, very expensive debt that was issued in the restructuring in 2018 or 2017.