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

Welcome to PT Bumi Resources Tbk 1H '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. Frank Pan from JPMorgan for this call. So Frank, over to you.

Thank you. Welcome, everyone. Good afternoon and good morning, depending on where you are dialing from. Thank you for joining Bumi Resources first half 2022 earnings call. My name is Frank I work for Asia Credit Research Team at JPMorgan. I'm helping to host today's call on behalf of my boss Soo Chong Lim, who is the lead analyst covering Bumi Resources. We are pleased to invite the management team to walk us through their first half result and also to provide an update on the latest development. We will set aside some time for Q&A towards the end of the company presentation. To start, I would first like to introduce the speakers from Bumi Resources. On the line, we have Mr. Andrew Beckham, who is the company's CFO; Mr. Dileep Srivastava, Director and Company Secretary; and we'll also have Mr. Ashok Mitra, who is the Finance Director at KPC. Given the recent highlights, I'm sure investors have quite a few questions for the management team. Without any more delay, let me hand over the remaining time to Andrew. Over to you.

Thank you, Frank. Welcome, everyone. Can we have the presentation up? Thank you. If we move on to the next page, I'll be as quick as I can as usual with the presentation, and then we'll open it up for Q&A. Next slide, please. So just the first half updates. Total production for first half of 34.5 million tons versus 40.1 million in first half 2021 due to the heavy rain, especially at KPC -- the floods that happened in KPC, which haven't happened in the lifetime of -- since I -- we've owned those mines. And one particular contractor, one of the very high-quality contractor was being flooded for a long time. So we're down a bit there, but we -- there has been a number of remedial action taken. And so we don't think that will be so -- that could happen again. On prices, realized coal prices for first half increased to $110.9 million per ton versus $56.2 million in the first half, almost a double of the realized price. Production costs naturally increased due to oil prices. Oil costs have gone up by almost 60%, if you compare first half of this year against first half of last year. On the debt restructuring, we announced the plan to hold an EGMS on the 11th of October, a non-preemptive rights issue. That means you only issue it to one person or one group of $1.6 billion in order to repay the remaining debt that we've outstanding. That process, if approved by OJK and the shareholders, 200 billion new shares will be issued in return for funds at IDR 120. This will avoid Bumi having to go into any liquidation of PKPU restructuring of its debt that we've been talking about previously with you. Next slide, please. Guidance wise, we're looking at 78 million to 83 million tons for the year simply because of weather and rain, which we will come on to later. Prices wise, at least a $120 to a $139 now. We see prices continuing to increase, and I'll come on a bit more a bit later on that. And with costs, probably costs, our net oil moves significantly again should be pretty steady per ton as more production is able to be done in a dryer season. The forward curve is in backwardation going forward. So in the years to come, hopefully, those costs can come down because of the oil price reduction. We go on the next slide, please. As you can see, and if you look at the yellow and red curves, this is the GC NEWC and HBA prices. The HBA has an index, which is calculated from the GC NEWC, the Barlow Jonker, and I think the API#4, but have to be checked. But those prices -- so it follows the international high-grade coal price. And that's really what you're getting with the GC NEWC, it's the international high-grade coal price out of Australia. If you notice the blue and gray ones, and that's the low-grade coal price. And that's the ICI 3, ICI 4 type numbers. And it's a typical Indonesian coal that is sold -- and especially to the domestic and now becoming a more main stay of the Indonesian exports. You can see the difference in the prices, the increase on the high-grade coal is because of the war, of course, and Russia normally exports a lot of high-grade coal, and there is a reduction in high-grade coal availability. And the low grade, the issue is that China's lockdown has -- is the major -- it causes the major demand or -- sorry, it's -- the China is the major demand and that lockdown has reduced that significantly. If we see that lockdown open up again, we expect to see our realized prices increase further significantly in terms of that. Also, India has been a bit more slower coming back into the market. And again, they take low-grade market. So it's quite important to see the difference. When you look at the GC NEWC, it's a very good price. But until China and India fully get back to normal, you won't see the low-grade coals catch up. So to give you an example, roughly today prices are $82 for the low-grade coals, the 4200 coal in Indonesia. Whereas the -- if you compare it to the GC NEWC it would be about a $130, a $140. So there's a potential increase or quite significant for low-grade coals if China opens up again. I saw Goldman Sachs -- is it Goldman Sachs who called that they are going to continue the lockdown. So we'll see what happens. Next slide, please. This is really just the benchmark. If you look at the calendar '23-'24, we're talking still of the API#4 and GC NEWC of $278, $258 or $352. We know this is only limited volume, but we will be looking at this and saying that if this happens, we will be making a lot of money in the next coming couple of years. We see -- we hope that the demand continues. I think it will be dependent on how the world economy moves coming into '23 and '24. Next slide, please. On operations, key on KPC. Well, tonnage wise we are down, as I said, about 4 million to 5 million tons because of the one contractor having significant effect on the -- by the flooding in Sangatta, both the other contractor and the -- our owner operator suffered a bit, but by no means were as much. But we see that in the second half recovering as the dry season gets better, although it did rain again in this month at the moment. Arutmin, you can see, although it's pretty similar -- it's slightly -- it's above on all its coal mine and coal sales for the half year, it's also got overburdened. You can see it's almost double last year. So the actual from a -- we've increased the strip ratio at Arutmin because of prices, of course, but there is a lot more equipment, and we're moving a lot more earth. So once the dry -- it becomes a lot dryer, we hope to be able to pick up a lot more coal, especially the high-grade coal. Currently, we're running at about 1.8 million tons for the first half, and we would really want to be at like 2%, 2.5%. That's the sort of number. We're looking at 5% for the year. That grade is 6000, 6300 coal, which will go in at $400, $430 a ton. So it makes a lot of difference. Just 1 million ton would add quite substantial. Price wise, as you can see, we're moving up at the bottom from $84.50 in the first quarter to $134.60 in the second quarter. Expect that to increase again in the third and fourth quarters. So you should see an improvement continue of this -- the first half of $110.9, which is double last years. So the prices are definitely outweighed any production shortfalls due to the rain. Next slide, please. And KPC's rainfall. You can see the big red line is the key one to follow, way above for the first 4-5 months. A drop down though probably normal. But as you can see, in August, it's come back up again. I don't know if we're going to get a dry season. You would only have a 6-month dry, 6-month wet. But -- can you what -- that's -- we'll see how that continues going forward. At the moment it is raining. If we go on to the next slide. You can see Arutmin benefited in January, February, March, April from that. That's why I think you've seen the increased reduction. But now you've seen the rainfall quite substantially above where we were -- where the long-term average is, and that's affecting our high-grade coal production, particularly. So there is a bit of that going on. Hopefully, we'll see this drop back down again over the coming months. Next slide, please. As I mentioned, overburden removal has gone up. And that's good. I mean, our mines, especially KPC, which is on a 9:1 strip ratio is sort of saying 95% of your cost in operation is about moving earth. So you -- a key is to keep increasing the overburden. And then if you do that, the coal will follow. Same with Arutmin now. It needs -- it's moving quite a lot more earth and therefore, we should see some improvements in coal as soon as the weather allows us. Coal mined, as we said, we've talked about its dropped in KPC, especially in the first quarter, and we'll see healthy improvements in Q3 and Q4. Arutmin has stayed above for the moment -- at the moment, subject to see how the rain is in Q3. Next slide, please. Coal sales, down as -- of course, we have the export ban that cost us 3-4 weeks in January of export market. KPC is down because of the -- both were following really the reduction levels and we'll sell whatever we can produce. Stripping ratio, as we said, has increased from 8.4 to 10.3 and Arutmin to 6. Overall, this next -- for the rest of the year, we shouldn't see this increase. In fact, it should come down slightly at KPC. Arutmin may stay as the high-grade coal, if we can get more high-grade coal production out. Next slide. Production costs, of course, due to fuel and especially in KPC and Arutmin is a fuel plus the higher grade coal production, but also the higher strip ratio as more coal becomes more economic at these prices. FOB price has also increased substantially, doubling in the terms of KPC and/or even more. As we said, we see it's $80 now for Arutmin today. Remember that the -- what's it called, the prices -- 25% of our prices are capped at $70 and supply to the domestic market. So don't -- you can't take out 100% of the indexes. You have to look at the 75%, which is exported and what we sell that. The other 25% is done at a maximum $70. So we give you an example on 4200 coal, we would be selling that at the -- to PLN at $35 a ton and export would be at $85. So we're a very generous company. We are subsidizing PLN to $50 a ton at the moment at Arutmin. Next slide, please. From receivables wise, we're maintaining the overall receivables as tonnage sales go the lower grade -- sorry, the over 90 days, receivable is sitting at 10. That's reduced quite substantially over the last 2 or 3 months. We're now almost -- I think KPC at the end of August was down to 0 above 90 days, and Arutmin was very small. So we are under -- at the moment, in control of that. And we believe that, that's improving our cash flows coming up to Bumi. Next slide, please. The average selling prices, this gives you a good example of what we're talking about overall with Bumi, the export coal price, which you look at the -- excluding the Ecocoal, is going at $134.50 in the first half 2022. Whereas the Ecocoal, which has got that mixture of $85 for export versus $35 for domestic. And that effect has it bringing down to about $50-$53 at the moment. So overall, $110. But still substantially better than last year. Next slide, please. Costs, we've talked about, higher fuel costs and higher stripping ratio, of course, and the rainfall. What it means is that we are now producing as much coal against our operation costs. Once we get dryer weather we'll get more coal out and allow -- you'll see the cost per ton drop, especially at Arutmin and partly at KPC. Next slide, please. With the overburden, the one thing to look at, if you look at the -- if you can read it, it might be a bit too small. But on the first half '21, the overburden per dollars per ton -- per bcm for Arutmin was $7.3 per bcm in 2021 and now it's $6.3. So it's saying that although we're moving more earth, we're doing it cheaper at the moment. As you can see, KPC, $4.4 to $4.8 really reflects just the fuel cost increase, but it's been pretty consistent going forward. Next slide, please. As we see, this is the fuel price, and you can see that the leaders and what we're paying. Remember, the industry in Indonesia is not subsidized, so we're paying the full price. And that, again, has been steadily increasing since January up to June. And I think you're still maintaining that sort of a level. Next slide, please. From the financial results. Naturally, the bottom line was the key change. The [ variable ] has increased from almost nothing to a $167.7 million in the first half. This is despite the higher royalty now we're paying of 28% that we're now paying on our revenues. Also, you notice that the current liabilities on the right-hand side of the balance sheet is $2.9 billion. That incorporates the $1.5 billion, $1.6 billion of debt. Well, actually, at that time, it's about $1.8 billion, $1.9 billion of debt as of the end of June because this is before the debt repayment in July and the planned repayment in October. But that's the number that we will see significantly full, assuming the deal closes in October, and I can come on to that in a minute. Next slide, please. This is on a consolidated basis. Try and give you a bit more clear how it looks and how the increase on revenues has gone from $2.2 billion to $3.8 billion. If we can get our production and sales numbers increase, we should see that number -- the revenue would be about $8 billion to $9 billion by the end of the year. From an operating income, we're up 2x or 3x. And as we've talked about net income has gone from 0 to a $167 million. Next slide, please. And this does really show you the quarter-on-quarter changes going forward. Yes, Q2 against Q2 last year. And then if we go on to the next slide, please. This is a consolidated against what we actually report. The reporting standards as dictated by the Indonesian Accounting Standards are on the right and the consolidated is assuming that we were -- we have 51% of KPC, but we have to only show it as equity income in the reporting standards. From a consolidated basis, this is how it would look. Okay. Next slide, please. So in summary, revenues are up by 66%. This is on the consolidated basis. So the cost of revenues are up 50% because of the fuel mainly and the higher strip ratio at Arutmin. Gross profit up 125%. Operating expenses up 39%, mainly the big change would be the commission that we pay on our -- to our marketing agents based on total revenue. Operating income, again, up 2x, 3x and our margin has significantly increased as well to 24%-25%. And we see this continuing in Q3 and Q4. Hopefully, with a lot more production, but even at lower levels, it still will be -- the margins will allow us to book a significant profit by the end of the year. Next slide, please. Equity is up 37% because of the profit in the first half as you would expect. And our last 12 months adjusted consolidated EBITDA is up 132% to $1.1 billion. And you'll see that gradually increase over the next coming quarters. Next slide, please. This is a great step down on a 100% basis how the coal companies are looking. It gives a bit more dial up for people. And then on the proportionate basis, which is what we use for any of our covenants and for reporting of our EBITDA. Next slide, please. Our earnings per share is also up going from IDR 28 in March to IDR 38 in June. You would like to say more?

Yes, just to point out that Bumi made a loss in 2020, but it's recovered in 2021. So if you're comparing 2021 year-on-year on the last 12 months, you are seeing a positive swing on the EPS of around IDR 89 per share. And if you look at quarter 2, which is June of this year versus the same period last year, which is the last 12 months, you're seeing a similar kind of rise. So essentially, what it's indicating is what Andy said, that with higher price is, even though we are paying higher royalty and we are subsidizing PLN at $70 per ton and the actual price we can realize is probably double that. We are still making a profit and that is increasing. The first half has been very good. We have already crossed last year's full profit in 6 months, and we think we can do significantly a step jump higher by the end of this year, and it should be better next year if the corporate actions are successful, and we can then set aside another $200 million of interest and put it on net income. There's a fair amount of equity interest here. By the local community and the international community we are receiving requests. And I think everyone is waiting really for what happens in October and the outcome of the election. These EPSs that I'm giving you last year versus this year, show the EPS on the increased number of outstanding shares. We have converted mandatory convertible bonds into shares. So last year, the number was 74 billion, and what we are showing up to 30th June is really 129 billion. Now have we done that on the 2021 level, the swing in the EPS would have been significantly higher. Next year should be far better.

And next slide, please. So cash, as we would expect has increased cash holdings from $106 million to $125 million. And from a debt point of view, it's slightly down because of the repayment in April. But if I come on to the next couple of slides, I'll explain that in more detail. Next slide, please. This is the cash balances. As I said, very healthy, getting much healthier because of the sales. And one thing to highlight is that in the end of June numbers, you'll see the royalty and others allocation deposits. That's in KPC up to $298 million and in Arutmin up to $78 million, that's because of this 28% royalty requirement. So it's tying up more cash of our free cash because of this requirement to pay in advance before we ship the royalty. So that's a significant thing. I don't think there's significant changes elsewhere, but anything you see or you want to check with me later, please feel free to e-mail me. Next slide, please. So from the debt side, we're looking at June 30 is done there for you -- for your balance. Then we paid a $115 million of principal in July 12 as it can be seen here. And we have about $1.6 billion, $1.7 billion of debt plus some accrued interest, which is in there. By October, we will pay another $100 million to $200 million of principal of in -- by the coal companies from the dividend. And the net balance will be about $1.54 billion that we will repay. And our intention is then on the 17th of October is to repay all of that with the NPR from the capital raising. The process, I have a timetable coming up, which I'll go through in a minute to give you more detail of that, and I'll do that in a minute. If we go to the next slide. This is just to give you an idea of the share position because there has been a lot of questions we've received. With currently at 143.8 billion shares, we just have another 4.6 billion that we plan to issue. However, that might have to wait until the NPR completes, but we'll be at about 1.48 billion plus we have the 200 billion shares that would be issued. You would end up with about 348 billion. In addition, there is the MCB outstanding -- of principal outstanding is a $171 million, and we have accrued like a full factor or accrued interest of 56.1%, which is still outstanding as part of that. So in total, about $227 million of MCBs are outstanding in terms of value. From an interest point of view, as we've got in the note at the bottom there, a $101 million is the peak interest outstanding on those that have converted, and there's another $56.19 million as I stated for those that currently as of the 8th of September for those that haven't converted. So that we're trying to work with the lawyers to come up. OJK have indicated that there is no way I can take interest and convert it into equity under Indonesian Company Law. And so therefore, we are looking at options of how we settle the balance of that. We will come back as soon as we can. I do apologize for those who are still waiting. It's a bit frustrating ourselves, but I know it's more frustrating for those who are converted. So we will do our best to come back as soon as possible on our proposal for that outstanding interest. Next slide, please. This is the timetable for the preemptive rights just so you understand where we are. The 16th of August has been done, the 19th of August, the NPR approval by the Board. There's no need for lenders to approve this NPR as it is -- actually use the funds to repay the debt. So there is no requirement for lenders to approve any part of this. The announcement of the EGMS for the NPR was on the 2nd. The 16th is the recording date of when who can vote at that EGMS and the key date is the 12th of October where we go ahead with the EGMS. This would mean on the 7th of October, we will publish the new -- we've published the notice with information. And OJK have given us request for more information to be included or changes to that information. That will all go out as planned on the 7th of October. So assuming that goes out, then the EGMS will happen and assuming the shareholders have approved, then the funds will be in the account probably by the 13th or 14th of October and paid on the 17th of October. The shares actually get listed on the 19th, so that's our current schedule. As I said, it needs OJK approval and it needs shareholder approval, but we're at the moment, very confident that, that will happen. Next slide, please. On ESG, we're still maintaining our ESG. We're still doing everything we can on what CSR expenditure that will increase probably over the second half. The land reclamation maintain our footprint. We do not want to increase the size of our land and everything. Trees have been planted by the day. Our safety we see as international best and our gas emissions, we are recording now. So we are trying to do more there. As I've stated every time there is a lot more data available. If anyone needs more -- we've published our CSR Annual Report, which has been independently audited and reviewed. If there is any more information you require for your credit or for anyone else, please contact us. Next slide, please. I think that's it. Yes. So that will finish the presentation. I won't go through KPC and Arutmin details individually as we've talked about them. If anyone has any questions on those data, please do. Frank we'll turn it back to you, yes.

Okay. Andrew, thank you for the update. Before we move on to Q&A, I do have one question for the management team. Just as you mentioned earlier, if I understand correctly, the amount of this paid in kind question at MCB, right now it's about $101 million. This is the portion that cannot be converted into new shares due to a rejection by OJK. With the share prices now much higher than conversion price, our understanding is that most investor may not want to settle for cash. Will this become a stumbling block for the private placement?

No. Under the repayment and the common mechanism, we have to clear Tranche A interest and principal and Tranche B interest and principal, then the CVR and then Tranche C. That way we could clear all our debt that's maturing in December 2022. So there's no restriction for that. Then will -- the MCB will then start being paid interest -- cash interest from October onwards. And then we have to settle this situation by December 2024, which is the maturity of the bonds of the MCBs. So that's really -- as soon as we've paid this, our full focus will be on the MCBs and what we can do best.

Okay. Operator, let's open up the floor for a Q&A.

[Operator Instructions] So we have a question from [ Nitin Arora ].

I've got sort of a broad-level question on your ASP guidance, and then I've got a short follow-up on the strip ratios. So I guess, looking at your full year guide in relation to, let's say, the API#4, I guess, which is broadly currently averaging about, let's say, $300 for the full year '22. On KPC, I mean it seems like your realized price guide at midpoint, is that a fairly steep discount to that benchmark? Now, I appreciate that you said that there is obviously that 25%, which is capped for PLN. But I'm trying to understand if there are any other factors that you think are influencing this? And sort of do you see this realization in relation to API#4 sort of changing going forward from next year?

With regards KPC prices realized, if you look at the Q1, you were at $98. Q2, you'll see it's at $152. So it's quite a significant jump over the last 2 quarters. And I think Ashok please correct me if I'm wrong.

Yes. So let me answer that. See our high-grade coal of 5,800 GAR, which we produced around 6 million tons that goes at GC NEWC plus premium to Japan and Philippines. But our average quality coal is around 5,000 GAR. See these are not linked to GC NEWC. These are linked to ICI 3. So where the ICI 3 average is around -- last week, it was 119, but it dropped to about 90 in the month of June, July, and all. And going forward, the ICI 3, we think it will be around 125 to 130 by the end of this year. The main reason is that the -- this coal goes to China. Basically, China is the main importer of this coal and India. India has almost stopped -- what is happening in India that they are buying coal from Russia, the 6,000 GAR coal, which is around $180, 6,322 GAR CFR. They are blending with the domestic coal. So there is a big shortage in exporting to India at this moment. So this is roughly the -- because all these coals are sold at ICI 3. Otherwise, even if you produce if you are not able to sell, we will be sitting on inventory.

Right. Understood. And I guess on the strip ratios, I just wanted to understand and confirm if my understanding is correct. I think, Andrew, you kind of commented that going into the second half of the year, as weather becomes dryer, you should see a marked improvement in the strip ratios because I think the annual number certainly indicates -- or the annual guide indicates that there's a steep improvement in the strip ratio in the back half of the year. So I guess, is it largely only a function of whether being sort of conducive or do you think there are other things that need to happen in order to the strip ratio to improve?

Andy, just let me explain. See, if you look at the price, yesterday the GC NEWC went to $438. If I have some customers who are willing to pay $438 and my cost is, say, max with royalty and all goes to $120, shouldn't I go for higher strip ratio. That's the way we look at. See the high strip pressures are mostly in the bituminous coal pits, both in KPC and Arutmin. We go right up to 14, 15. These are opened at 16, 17 strip ratio. We also cover for start opening pits for next year, because if we start doing in January, we won't be able to catch up with the production. So these are all the factors we take into account. It is not a function, not strictly a function of rain, but it is all how much high-grade coal we are producing and what are the pits you are going to open next year, that's what we normally look at, both in KPC and Arutmin.

Right. Understood. And last one, if I may. I guess, as it relates to the NPR, I guess, assuming that if the NPR is sort of a success -- replacement is a success, then sort of what's the management's position on kind of restarting dividends?

Under the rules, we have a negative retained earnings. Unfortunately, you are not allowed to declare a dividend until your retained earnings are positive. So barring a significant change, we will probably be looking at more '24 -- 2024, before we can pay actual dividends. Options like share buybacks and that sort of thing are available, I think, still, but dividend would be unlikely because of this, what you call it, the restriction on negative retained earnings.

Right. Understood. Sorry, and I know -- that would be my last question. But one quick follow-up. So in terms of the investor for the private placement, I guess, I mean, is the management inclined on disclosing at some point who that investor is. I believe you haven't disclosed this publicly at the moment. But I'm just trying to understand if there is an intent to disclose to the market who this investor is?

Look, what we can say is that it's the Bakrie Group with the investors are doing this and that's why it's not -- there's no takeover issue, but that's all we can -- we know at the moment.

Our next question is from [ Kenny Lee ].