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

Good afternoon, everyone. Welcome to the CLSA conference call today with Bumi Resources for its 2Q 2023 earnings call. I am [indiscernible] from Research, and I'll be the moderator for the session today. From the company, we have Pak Andrew Beckham as the CFO of Bumi; and then there is Pak Ashok Mitra, the Director; and also, we are joined by Pak Achmad Reza Widjaja as the Vice President of Investor Relations and the Chief Economist. So without further ado, I will pass on to Pak Reza to start with the presentation, and then we can move on to the Q&A session afterwards.

Sure. Thank you, Pak [indiscernible]. I'm starting with welcoming all the participants here. Thank you for joining our conference call for the first semester '23 earnings call by PT Bumi Resources. With me here are Pak Andrew Beckham as Director and CFO of the company and also Pak Ashok Mitra as the COO of the company. So we are thanking you all for the CLSA Indonesia for hosting this event also. Okay. And then I'm going to start with the presentation, and then Pak Andrew Beckham will continue with the financial results in the middle of the presentation. Okay. The next slide, please. Next. Okay, this is the information, the general information for our company, PT Bumi Resources. We are technically still the largest export coal mine in the world and both KPC and Arutmin are representing Bumi Resources with still sharing the dominion of 25% of Indonesian coal production. Then we produced 71 or about less than 72 million metric tons in 2022. And then we also -- what we've shared with you later, our production target in this year, okay? And then the resources and -- reserves and resources, 2.5 billion metric tons for reserves and 8.5 billion metric tons for resources. And then I'm going to tell you also in the table later. And high potential for expansion and KPC is only partially explored. And then we are now defined into 2 business segments: BUMI for the thermal coal production; and then we have also BRMS for the metal industry. Next. Okay. This is the structure of Bumi ownership. And as I mentioned to you, we have been divided into 2 segments: Oil -- sorry, coal and non-coal. And coal is at dominion by KPC and Arutmin. Also, we have Pendopo Energi Batubara in [indiscernible], and then also the Darma Henwa for the mining contractor. And in the minerals, we have Gorontalo Minerals; CPM, Citra Palu Minerals, for gold mining in exploration stage. And also, gold and copper for Gorontalo Minerals. And then the last one is Dairi Prima Minerals in North Sumatra. It's a zip of the zinc and lead mining. Next. Okay. This is what I mentioned before in the beginning. The reserves and resources for both KPC and Arutmin for [indiscernible] ones, and then also the [indiscernible]. KPC and Arutmin both only reserves about 1.1 billion. Then resources with about 6.1 billion resources for gold, so there's still a long way to go to producing, both KPC and Arutmin. And then next. Okay. I jump into the ESG and CSR for you, and we want to share and show what we have done so far. So we have the award from PRISMA. It's about the human rights education -- human rights assessment. And we earned a Green predicate for the award from the Ministry of Law and Human Rights. And then we have also the Gold Champion category award for the BISRA. It's from Business Indonesia Corporate Social Responsibility. Both we earned in this year, 2023. Next. Yes, okay. We have also -- in ESG, BUMI launched the Human Rights Progress Report, and then we are the pioneer in the mining companies. And the way we do it is for demonstrating and communicating to the public about what BUMI's commitment to human rights. So we believe that this is important for public to know what we have done in the Human Rights Report in the company. Next. And this is ESG, and if we check the scores from Bloomberg, so the ESG Disclosures Scores by Bloomberg, what we can see in BUMI is BUMI's overall rating increased by 17%. It's quite a significant progress for BUMI from 2021 to 2022, from 56.72 we jumped to 65.92, so increasing about 17%. And we are separately increasing in social rating indicators in the Bloomberg scores, ESG Disclosures Scores. Okay? And then next. Yes. This is the last one. Also, we got in 2023. What we have here is for several times BUMI received A+ Top Sustainability Report Award for the third consecutive year and for the Sustainability Reporting or Governance, Environmental and Social (ESG) reporting in 2021. And this is done by FIHRRST and UNDP. Okay? Next. Okay. And this is the data for our safety record. If you see here, what we can see in KPC and Arutmin, safety record is downward trending from 2000 to 2023, so in the beginning of Bumi Resources acquired Arutmin, until now, then we can see the progress of the best in class in the safety record for both KPC and Arutmin. Okay? Okay. And then now we will hand over to Andrew Beckham for the financial update.

Thank you, Pak Reza. Production wise, we're up on last year. Naturally, the weather has been a lot better than the previous year, where we had floods. And so production and sales are up. Realized coal prices unfortunately are down due to the downward trend in global coal prices and we're just following that trend. Production costs increased from $45.7 per ton to $52.8 per ton because of higher oil prices in this year and a slightly higher strip ratio, especially in Arutmin, where we've done a lot of predevelopment or pre-stripping in the area. Royalty update. The royalty was revised again, I think for the second time this year on the 11th of August. It's quite complicated -- it's not complicated, but it sounds complicated in the wording I've used there. But what we're really saying is that it's reflecting the second and third weeks previously of 70%, and then the fourth and fifth weeks of the backwards -- of the previous month for the 30% of the calculated HBA. Originally, the HBA, for those who don't know, was calculated off the indices until the GCNEWC indices became a society out-of-kilter with the Indonesian realized prices. So those indices will change to a 2-year -- 2-month calculation when used in the second quarter. Unfortunately, the prices used seem to be a bit -- it was unknown where they came from, but they've made the disparity even worse. And it ended up with -- now, we're current and up to June, our royalty rates, although it should be 28% of FOB royalty revenue, it's currently running at about 32% on a consolidated basis, which shall come on to the financial impact later. Hopefully, this adjustment has made it better, and we should see a much more -- get back to a normal -- at least paying just 28% royalty on our revenues. Next slide, please. Guidance wise, from a production point of view, we haven't changed. We're still at 75 million to 80 million ton and expect to still hit that. However, we have brought down our price realizations to between $80 and $90 a ton overall. And similarly, the cost, we've also reduced from the original outlook. Although oil prices have increased, they haven't stayed higher than where we would have expected them to go. So the actual outlook on costs and prices has come down. Next slide, please. On the international coal prices. Naturally, as we've talked about, I think, trending down. Although if you look at the GCNEWC, it has turned slightly back up, and there is talk that there's higher demand coming in September, October months as everyone comes back to a normal seasonality and we see China recovering slowly. Hopefully, that should be positive in the last quarter. Next slide, please. The price and the forward curves are still in some tango slightly, and have still remained quite strong. I think it's a good indication that demand is still there and still positive at the moment. And it doesn't look like recession is going to hit the U.S. too badly, if at all, at the moment. So we expect these prices to be maintained over the coming 6 to 12 months. Next slide, please. Here's our operational highlights. Overall, our overburden was up 16%. Our coal mined and coal sales, plus 2%. Naturally, prices were down slightly at 16%. But as I said, strip ratio-wise, it's slightly higher because of we've done a lot of pre-stripping at Arutmin. And you should see Arutmin's strip ratio over the coming 4 to 6 months come down from that 8.1% to more like 7.1%. Prices, as we said, are down for both parties, but we're still at good prices at KPC of $100 and at Arutmin of $77.40. If it weren't for the royalty, I think we see a lot more -- a much better profit. Inventory is also high. At the moment, we are full at most places. The reason for that is we're trying to let this royalty new rate come in and come, so that we're not selling coal at such a heavy discount or a heavy penalty on the royalties. Hopefully, by September, that we should see improvement. Next slide, please. As I mentioned earlier, the rain has been a bit better, especially in the second quarter. It's slightly higher in May and June in KPC, but they've maintained production at a good rate, and so has Arutmin. And so for once, we've had quite a positive position on rain in the first half of the year. Typically, we don't see more rain until about November, December. Next slide, please. As I mentioned, overburden removal. Our coal mining is all about moving earth on an average of a 9 -- 10:1 strip ratio. 90%, 95% of your costs is on moving the earth, and therefore, this is important in terms of our progression and our mining, how much coal we will get out. So it's good that we're up in both KPC and Arutmin. And on coal mine, we're slightly up on last year. Next slide, please. Coal sales, again, are up. And as I've mentioned, the strip ratio, but you can see that Arutmin is at 8 versus 6. We expect that 8 to come back to closer to 7 by the end of the year. Next slide, please. And production costs were up because of the fuel rates have increased from last year. Not as much as we expected in the budget, but definitely, it has increased, as we see, and of course, the strip ratio. And FOB prices following the global trends have come down about 16% so far for the first half. Next slide, please. If you see the slide, actual -- Ecocoal or sort of 4,200 CV coal has remained pretty stable from last year, as quite a lot of that is sold domestically, but the high-grade coal prices have dropped down quite a lot. So you see that $134.50 down to about $109 overall for BUMI. Next slide, please. And as we mentioned with the costs, costs have increased mainly due to the fuel increasing from 2022 to 2023 1st half. But as you can see, the global trend was slightly down up until June as the market has softened of all energy products, oil, gas and coal, into August at the moment. Next slide, please. We're actually seeing now Indonesian benchmark falling as well and it is catching up, which apparently lags about 2 months behind where the market is, so it's catching up with that trend. So it is getting prices -- costs should come down a little bit because of that depending on how the production does. Next slide, please. Now on our financials. As you can see, the revenue is down because of our prices, but also, you'll see that the interest expense is way down because of the no debt, as we've mentioned before. Arutmin's profit is that operating income of $68 million versus $157 million in last year. That's all due to the price realization, of course, and the royalty. Royalty for Arutmin is running at about [ 29.8% ], 29%, and takes up a big cost of the revenue -- the cost of revenue in there. You can see by other income, it's way down at $58 million. That's mainly KPC's reductions, again, due to the drop in prices and the high royalty. You'll see -- we'll show you on the next slide the sort of impact that has. If you look at the $81.8 million that we've had net profit in this half year. If royalty was just at 28% of FOB revenue, we would be back at $171 million, $172 million. About $90 million of additional royalty has been paid in the first half, so that's been pretty much the effect and the whole effect of the reduction in our net profit. On the balance sheet side, you see the current assets and current liabilities are both down. That's because of the material movements because of the settlement of the NCB interest in February. And when we settle, there still remains some outstanding, and we're still working with lawyers and asking lawyers for if there's any change in the law to allow us to convert the outstanding interest into equity. But at the moment, it's legally not allowed to be done and no change is expected to happen until at least start the election, if at all. Next slide, please. Now this is our consolidated where if we took the 100% of both KPC and Arutmin, as you can see, our cost of revenue there is $2.9 billion, over $1 billion of that is royalty. So in the first half of the year, based on about 32% royalty rate, we've paid about $1 billion to the government in royalties. If you look at the net income on a 100% basis of $150 million, that would be double that number if it wasn't for the royalty being at 32% versus the royalty rate that we should pay, which is 28%. So that would be another $153 million net income after all taxes and adjustments were paid. Next slide, please. This just gives you the comparison against our reporting numbers, so you can get a clear picture. Bottom line, we stood at $81.8 million, but the effects have been due to the lower coal prices and the royalty rates being higher than planned. Next slide, please. So in summary, revenues are down 13%. The cost of revenues are up 8% because of the royalty -- unfortunate royalty realization, shall we call it. The gross profit is down 67%. Operating expenses are down 29%, and operating income is decreased by 73%. Margins are down 7.6% because of this royalty cost. Next slide, please. At BUMI's level, our EBITDA pretty -- sorry, our equity has remained slightly up as the profit is slightly higher, $2.8 billion overall. And our last 12 months adjusted EBITDA naturally has come down as prices have fallen. And if you look on the next slide, please. Consolidated on the last 12 months is $1.5 billion of EBITDA, and our proportionate attributable to BUMI is $880 million, so $881 million overall. So still healthy, but slightly down of where it was. Next slide, please. Cash balances are still healthy at $412 million in total, KPC $277 million and Arutmin $120 million. But I'd point out that the royalty and other allocation deposits at KPC and Arutmin is $152 million and $22.25 million, respectively. So there's a lot of money that has to be put down to keep the operations going and to allow shipments to go out. Note, we pay royalty in advance of sales, and therefore, we're paying the royalty before we've even received the revenues. On top of that, as you may have heard, the government is now requiring 30% of your export revenues to be held in deposit for 3 months. That will affect us. It's not a major effect. We can borrow -- the banks are allowing to borrow the value back, but it's costing us about 0.5% on the fee or the cost of borrowing that money back. So it's very good for the bank to have increased deposits and increased loans, which are performing, but it just costs all the industry about 0.5% or whatever they can negotiate with the banks. So that's the current situation with that adjustment. Next slide, please. And with that, I'll pass it over back to Reza to finish up on this presentation.

Okay. Thanks, Pak Andrew. And next slide, we will show you our ESG data for you to see the comparison, the total CSR expenditures, for example, and then how much land reclamation we've done so far, and how many trees planted, including the gas emission and LTI-FR or safely performance. And then this table reckons comparison between the year-to-date and half year of 2023 and also the last 12 months, and then we can see here the difference between the 2 periods of time. Next slide, please. And this is showing the in-house calculation for you to know the price-earnings ratio. We've tried to calculate in the loan at the end of the last 12 months until 30th June 2023. And our PE is about 6.4x, it's still far below the mining sector. PE in coal companies in Indonesia is about 21x or 22x. Next slide, please. And this is the way we show the performance of BUMI shares so far from April to June 2023. What we're going to show in this is that we have the upward trending in the coal sector, and also, we follow the price and the share price of BUMI according to the coal sector. And then we are dominant in the sector trade in coal mining trading, and of course, in IDX and also the global price equation also always affects the BUMI share price. And then the next slide, please. This is only the trade summary of BUMI shares from 2021, '22 and '23. And we can see here the total volume of trading. Comparison between '21 and '22, it's quite large. It's about 4x from '21. And then year-to-date, it's about 62 billion (sic) [ 68 billion ] total trading. So the BUMI share price growth year-to-date is minus 24.8%, so it's about the same in general in mining sector. Next slide, please. So this is the strong governance for improving the finance position and improving the governance. So what we have here is the RSM advisory, they conducted Independent Review of GCG practices in BUMI 2019, including the Standard ASEAN Corporate Governance Scorecard, OJK, international GCG standards, and then also the independent ESG ranking. And then also, our energy transition and the framework -- decarbonization strategic framework is also under preparation to implement this in the medium term. And in the last slide, it's about our management. It's still the same as last year except for the new BoD member, [indiscernible], and also the new BoD, Mr. Anggawira, and the BoD member is one of the businessmen and is very prominent in Indonesian Businessmen Association. And also, company members, Board of Directors, we have Agoes Projosasmito, Adrian Wicaksono, Phiong Darma and Pak Eddy Sanusi. They are 4 representing the new major shareholders group in Bumi Resources. And also, there is Himawan Setiadi as the Director of IT and he is an expert in business and digital technology. So I think that's all for our presentation today. So we move to the session of Q&A, and we can start with the Q&A from the participants.

Yes. Thanks, Pak Andrew and Pak Reza for the presentation. Now we can move on to the Q&A session. [Operator Instructions] Maybe I can start first with my question, Pak. We know that Bumi is one of Indonesia's largest coal exporters. And now that it is in a much healthier position, especially after the corporate action last year, what is the long-term direction of the company? And is there any expansion, especially in the core business segment in the pipeline?

No. From a coal point of view, we have sufficient reserves and resources to go through to 2040 quite comfortably. I think that's probably where you see the reserve currently getting closer to lower and running out. We have to go downstream as part of the requirement of the government for the extension of the license, so we are actively pursuing a coal to ammonia industry that we're looking at, at the moment, and hope to have some news on that over the rest of the year. And into other non-coal developments, we will announce them as and when we're ready to do that. But definitely, with coal, we can maintain definitely sort of levels where the current coal prices are. But as I said, it probably, by 2040 pretty much, will be finished.

Yes. I think it's very interesting that you mentioned about the coal downstream industry, because obviously it is one of the main agendas being pushed by the government. But what do you think of the feasibility of this project at this point of time? And what do you think are the main risks associated with it?

Look, with any industry, there's heavy investment that needs to be done, but the numbers are working. They seem to be reasonable. Unfortunately, the power-wise is the important thing, and power seems to be the big cost in any of these industries. And if you have to use a lot more green power, it's just not available where we are in East Kalimantan, for example. You haven't got the things that -- you can reduce the carbon, but you can't do 100% reduction. So therefore, that's the key thing. If we're allowed to bring on this industry with coal-fired power, then it should be not a problem.

Okay. But from the government side, do you see any incentives provided, if there's any, for this kind of development?

Yes, but we get a 10-year extension on the license automatically. That's the incentive for science focus, you would say. But you need to do -- Indonesia needs to, it needs to -- thing is, the coal mines are big employer. We have 23,000, 24,000 KPC people, and we have a population in Sangatta of about 100,000. In 15, 20 years, what are you going to do if the mine shuts down? You have to build more industries, you have to be responsible for that, and we are very sensitive to that requirement. So putting in new industries is what we want to do. Hopefully, the government will support us in that way.

Okay. That's very insightful. Maybe we can go to the question from the box from [indiscernible]. Thanks for sharing, but what do you expect the effective royalty rates for both mines going forward?

So going forward with the new regulation, the calculation has just been published last month. And hopefully we can see that the effective royalty should come down from 32% to around 28% -- between 28% to 29%. So that could be around a 3% reduction in overall royalty percentage.

Okay. Next question is from [indiscernible]. Is there any plan to enter the renewable segment?

Not at the moment, no. We're not planning to diversify into renewables at the moment.

Okay. Yes. [Operator Instructions] Maybe I can continue with my questions, Pak. Obviously, we still have a lot of potential in our current coal mines. And there is still one that is in exploration stage that you mentioned, the Pendopo coal mine in Sumatra. Do you have any sort of time line for this to start operation? Or is there any key challenges for that?

Yes. Pendopo, when we acquired, was when the plan in Sumatra was to expand a number of the power stations and seeing Sumatra with the idea of creating mine-mouth power at Pendopo. That unfortunately was then shelved in the existing government because there's a belief that they have enough power in Indonesia. We, therefore, are looking at coal briquetting. And even we're selling a little bit at the moment because of the high prices, but only about 15,000, 20,000 tons a month. If prices remain at this sort of level, it is possible that it becomes a bit larger, but it's a long distance to bring the coal from the mines to the port. And so therefore, we'll look at other ways to develop that with I think mine-mouth industry that would use Pendopo coal as part of the power source.

Okay. That would be quite interesting to see, Pak, the development. And then I think just now you mentioned that you have slightly lowered your guidance for coal price and also production cost this year. Can you share more color on this? And will the recent surge in the coal price spring a more optimistic view on the outlook?

So just based on our sales and our plan for the rest of the year and the forward curve, the prices are naturally going to be down on our regional plant. But when we had high prices, reasonable prices at the beginning of the year, we had oil prices also quite high as well. You can't have one without the other for long term. So naturally, our prices have come down, but therefore our costs have also come down, and that's really the essence of it. If we see prices recover over the next 3 or 4 months in terms of our realized prices, then we probably expect oil to come back up along with gas as well, because they always follow the trend at the moment.

I think, Andy, if you don't mind, just a little detail. I'll just add to what Andy has said. Almost every winter, we see a spike in demand for coal, and we are seeing evidence of that in India, who have already announced a policy that 4% of coal-fired power plants in India until February should import coal. And we are seeing China picking up activity, and we are seeing China and India growth at 6% to 7% that is being forecasted. And we expect the demand to grow, we expect the supply to become less as winter approaches. So as usual, every winter, there is usually a spike in price, and we are seeing evidence of that in the forward prices, which from a level of $180, $170, dropped to $130, currently are between $150, $160, and the forecast of some security houses is $160 to $180. It's very difficult to see forward, but it's also very difficult to see them come below $150, $160. No new capacities are coming up, but new power plants are coming up in China, India and Indonesia, that should also spike up demand. So we would view the prospects of the sector as growing. The challenges really would be growth, would be economic growth, would be recession, and where the fuel prices are.

Yes. Thank you, Pak, and that's very interesting to hear. Next, we have a question from the box from [ Felicia ]. BUMI's production sales volume picked up in 2Q. So how's the weather condition entering the 3Q? Is there any challenges experienced on the ground to achieve the full year target?

This is Ashok here. To answer your questions, since August, we are much higher compared to last year, both for KPC and Arutmin, and hopefully, we can continue for the rest of the year. So the projection of 75 to 80 should not be difficult to achieve for us at this moment. And for information, compared to last year, again, the weather has been much better. So hopefully, for the rest of, the weather will remain the same.

All right. But for the logistics side of things, is there any challenges that you see on the ground?