Saudi Arabian Mining Company (Maaden) (1211) Earnings Call Transcript & Summary

Good day, and welcome to the Ma'aden's Year-end Results 2019 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Yaser Barri. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you for joining us today. This presentation contains statements that are or may be deemed to be forward-looking statements, including statements about the beliefs and expectations of Saudi Arabian Mining Company. These statements are based on the company's current plans, estimates and projections as well as its expectation of external conditions and events. Forward-looking statements involve inherent risks and uncertainties and speak only as of the day they are made. As a result of these risks, uncertainties and assumptions, our prospective investors should not place undue reliance on these forward-looking statements. Without further ado, I hand over to the CEO, Mr. Darren Davis.

Thank you, Yaser. Good afternoon, everyone. Thanks for joining us on this call. Pleased to be able to share our 2019 results with you. Look first to production. On the aluminum business, good result last year. Most of the facilities running at the designed capacity. Primary production was up and we put more recycled material through to produce more primary aluminum. So getting close to that 1 million-tonne mark. And the alumina refinery operated very well at designed capacity during the year. Gold production was down a little, around 4% year-on-year. Copper was up around 19%. So those are both in line with the mine plans we had in place for the year. On the phosphate, that's where we saw bigger changes, a big increase in commercial sales, that's up 65% on 2018. It's around 17% if you look just volume to volume. And that's obviously as a result [Audio Gap] Looking at the financial performance. Sales grew as we added more of the revenues from Wa’ad Al Shamal and MRC, particularly and, of course, the contribution of the Meridian acquisition later during the year. So those volumes were much higher, but of course, we saw a very sharp drop in the prices of everything except gold. As we saw the commercial impact of particularly MRC and Meridian, these are lower-margin businesses by the nature of those types of industries. As MWSPC not operating at its full capacity means the margins there are also relatively low. So our EBITDA actually dropped around 22%, down to SAR 5.6 billion because of those lower-margin impacts. Now MRC and Meridian will continue to have those impacts, MWSPC, you will see better margins as that project finishes its ramp-up phase. Net loss reached SAR 1.5 billion during the year. And again, it's a combination of those 2 factors: one, a very sharp drop in prices, except for gold; and very high increases in depreciation and finances charges -- financial charges, particularly associated with MWSPC and MRC to a certain degree as well. Operating cash flow, however, remained strongly positive, over SAR 3 billion for the year. Market conditions are very tough. Phosphate prices were down almost 20% through the year, lower demand in some markets, particularly later in the year and a lot of exports from China early on, I'll talk about that in a moment. Aluminum prices also declined continuously throughout the year, mainly due to economic conditions. And alumina has also dived throughout the year as well. Gold prices were the bright spot for the year. There was a silver lining to global economic uncertainty, and gold is that for us. Copper prices weakened, although they seemed to have found a bottom during the year. In terms of executing our strategy, we are obviously pleased to close the Meridian acquisition in August. And that's turning out very well so far, on track to meet our objectives for the year. The debt-for-equity swap at MRC was important. Khaled Al-Khattaf will talk about that later on when we look at the balance sheet. The 2 big strategic projects we have, Mansourah/Massarah and Ammonia 3, are on track, both in terms of schedule and budget. And our exploration program, which we started at the beginning of last year, has started to show some promising results already. We're also making a lot of progress in managing our expenses, particularly around G&A and keeping our working capital under control. If we turn now to look at some of the market conditions. As I mentioned, phosphate and ammonia saw a very difficult 2019. We saw a decline pretty much steadily from the beginning of the year all the way through, which is really a continuation of what we saw in Q4 2018. So year-on-year prices for DAP were around 18% lower than the previous year. It's a mixed year. Early on, demand was good in the first part of the year, but there were a lot of exports out of China. Later on, we saw demand drop off a little bit, particularly in the U.S. and later in the year in Australia due to weather. And we saw a lot of exports going into the U.S. and then back down to Brazil, which weakened the Brazilian market. So it's a very tough end to the year. We're seeing some stabilization now, but we're going into 2020 with very high inventories. So we expect the pressure on prices to remain there for some time. Ammonia was slightly less volatile than usual last year but unfortunately, there's a range bound at a very low level. And again, similar to DAP, it was down by about 18% on average year-on-year, mainly because of the surplus in the -- along the supply side. Turning to aluminum. Again, a steady decline in aluminum. Primarily, aluminum prices during the year driven largely by the global economic situation, which is a combination of slower growth in China, some weakness in the automotive sector, particularly in Europe and of course, the trade tensions ongoing between the U.S. and China. Year-on-year, LME was down 15% on average to be well below $2,000 a tonne. Although we've seen some easing of trade tensions during the end of 2019, we're now seeing struggles to maintain growth, a lot of supply coming in from China during 2020, and demand still looking quite weak as we go into Q1. Alumina was mainly impacted by the supply side in 2019. Alunorte in Brazil came back online with full capacity. China added volume as did GCC, of course, with Al Taweelah refinery starting up during the year. The prices for alumina dropped even more precipitously, almost 30% year-on-year. Looking at gold and copper. Gold is the bright spot, and of course, benefited as a safe-haven asset due to the uncertainty, which impacted aluminum, in particular, so this is offset to a certain degree by our gold business. As we're into low interest rate levels and the alumina helps the gold price, and we see continued strength there going forward. Copper was subdued, but did seem to find a flow during the year. I think the concern now is what the markets will view in terms of potential demand, particularly out of China for 2020, which may keep prices down. Finally, just looking at profitability, I think this is an important slide when we report the net losses for the year, which is obviously a disappointment for us. If you look at the underlying strength of this business, we're still reporting -- at the bottom of the cycle for aluminum and phosphate, we're still reporting EBITDA margins almost 30%, which is really industry-leading. What we are suffering from, of course, is the impact of past capital investments in terms of depreciation and the financial charges, which continue to weigh on our profitability. I'm very pleased now to hand over to Khaled Al-Khattaf. Khaled joined us early January, as the CFO. We're really delighted to have Khaled on board, has a wealth of experience, both in the government sector and the private sector in terms of finance and brings a lot to the team here. Khaled, over to you.

Hello, everyone. We -- let's go to the consolidated sales and EBITDA by segment. On the consolidated one, if you look at the time series of 2017 to '19, we see a pick up on the sales, especially in 2019, we see a significant one. And it's due to the inclusion of the MWSPC and MRC, along with Meridian total sales. EBITDA still positive or a little dropped from the previous year, but still maintaining not that far from 2017. Margin, EBITDA margin, yes, it went down, but still, as previously discussed, within the accepted norms or in the positive side. Phosphate, again, on the 3-year series, we see a pickup, significant pickup on the sales. EBITDA is again positive, not following the same growth of sales, but that's due, as we mentioned, to the prices and the operation cost of -- including the MWSPC along with including the Meridian operation as well. Although Meridian parts had more positive -- had a positive, but segment -- it's not that significant. On the aluminum, the series of 3 years, again, we see a pickup in sales, significant one and positive EBITDA, margin is still positive, but on the lower side. And if you look at it between the 2, the phosphate and aluminum was almost at 80% of our EBITDA share coming from these 2 lines. The gold is of a different story. Its sales pick up as well. The EBITDA is on the positive side. And the EBITDA margin actually did not change that much from previous year, it's -- which is at 46% versus 48%. The financials -- on the net profit, if you look at the next page, where it shows the attribution of where did we lose and where did we make money from different factors. Mainly, you look at the first one, the price movement or price effect, the cost effect, in terms of the fixed cost of the MWSPC, MRC and the Meridian and then the third one, which is the depreciation and amortization factor, the fourth one, the financial cost. These 3 factors, if you would look -- or 4 factors are the main factors that made us go into the red zone, basically. The next page goes to the comparative P&L, on the sales, cost of sales, the gross profit and [indiscernible] all the way down to the earnings per share. And if you look at it, the one that's attributable to the shareholders, the SAR 700 million. And that's due to our -- the structure, the ownership structure of each company. So the impact is not totally on our balance sheet basically. The cash flow, which is the next page -- the cash flow, the operating cash flow remains to be positive at SAR 3 billion, which is a little bit less than last year, but still, the company is still generating positive cash flow, which is what we'll try to maintain going forward. On the operational performance, you can see the phosphate performance. In terms of the production, we see the ramp-up, the increase of 65% in terms of production capacity. And also, there's an increase of sales as well. And the same thing with alumina, a little bit increase. And the same thing will be -- if you go to the -- let's go to the aluminum, which is, although we increased the capacity in terms of adding the MRC, we see a little bit of increase, not as significant as in the phosphate. And the alumina, the same situation. And on the gold and copper, it's almost flat. The change is 4%, which is not that much of significance. And on the copper, we see a significant increase of 19%. And it's -- and we see also a slight pickup on the sale. On the financial position, the -- you have 2 sections. You have -- we have the -- on the left side, the balance sheet position where we had an enhancement on the capital structure by the payment of MRC, and that should reflect on the -- going forward on the cost of finance. And on the right-hand side, the structure of the long-term borrowing by subsidiary, by source and currency and type of loans. The last slide is the cash and long-term borrowing where it shows the capital structure of the debt to equity basically. And if you can see the last quarter when we did the refinancing -- or we did the payment basically, you see the drop of the ratio of debt to total capital ratio. And now Darren takes over.

Thanks, Khaled. Let me just finish up with a summary. I think there was some good progress made in 2019, notwithstanding some of the challenges in the Meridian acquisition, particularly was a big step for us as a company. It's well on track, contributed SAR 93 million net profit just in the period from August to December, so we're pleased with how that business is going. As Khaled just mentioning, the debt-for-equity swap for the MRC that was very important, not only for that business, but for our business overall. Our net debt now is the lowest since 2015, having the combination of that plus the repayments we're making on the debt. So we're heading in the right direction in terms of leverage, although there's some way to go. We're pleased that the 2 big projects we have underway, which total in investment of around $2 billion, Mansourah/Massarah and Ammonia 3, both on track. And we're pleased with both of those, we're on track in both, in terms of time and in budget. And we're making good progress in terms of managing our expenses, particularly on G&A and working capital, and those will be things that we continue into 2020. But the market challenges we saw in 2019 are continuing. We believe phosphate will remain under pressure during 2020, given where we are on inventories. We're hopeful that Q2, when demand typically picks up, should see some strengthening in prices, but we're not expecting a big uptick in prices during the year. Aluminum also is a concern, remains heavily under pressure, particularly with the impact from Chinese demand, not only of the underlying economic growth, also the recent development in terms of the extension of the Chinese New Year because of the coronavirus situation there in China. There's still supply coming on in China. That's going to weigh heavily as well, so we expect aluminum prices to struggle to break out from where they are at the moment. Gold prices, we think, will remain elevated, given that uncertainty, and the copper price recovery really going to depend on what happens in China and demand there. So in 2020, our focus is really going to be mostly on safety and efficiency. We launched a safety transformation program last year. Mining is a tough industry when it comes to safety. We need this to be our #1 priority. At the same time, a lot of what we're doing in terms of safety translates into a better operating environment as well, more efficiency and more empowered employees. We have some technical challenges at Ma'aden Wa'ad Al-Shamal, which we are overcoming. And we spent the last few months, particularly in this down season for phosphate, taking some time to do some turnaround maintenance and some other remediation at MWSPC. The alumina refinery, we're aiming to complete the debottlenecking this year, which should add another 200,000 tonnes of production. And we continue to optimize the smelter through our Creek project, and the rolling mill continues to grow as well. Our gold mines, we've invested more in 2019 in terms of people, technology and sustaining capital. And we are getting increasingly optimistic that the potential of our gold mines looks very positive. And we have just some more news to share on that during 2020. Part of optimization -- our digitalization program, we have a significant program this year of investment. We see a lot of potential there. It's one of those programs, at the moment, it's difficult to pull numbers on. I think we will continue to surprise ourselves with how much of an impact that can have on our business. We need to continue to control expenses and working capital. We have ongoing programs to do both of those in 2020. Our capital structure. We made good progress in '19, but there's more to do. Liquidity, though, is very good. We remain comfortable even in this situation of the market. We're highly liquid and very stable position. And most of all, the success of Mansourah/Massarah and Ammonia 3 are good and we will continue to be disciplined in making any further growth investments. We have a number of opportunities to look at in 2020. We'll be very careful before we make any future investment commitments. With that, we'd like to open up to Q&A.

[Operator Instructions] We now have a question over the telephone from [ Saeed Akhtar ] from [indiscernible].

My question is regarding -- like -- okay, the -- in China, because of coronavirus, obviously, there is a slow -- demand growth is there. But do you think that it will be -- it might -- what is your take that it might delay the capacity expansion over there, so it might be benefit to margin in 2020?

Thanks, Saeed. I mean it's still too early to say, of course, exactly what the impact of the coronavirus is. At the moment, what we know is they've extended the Chinese New Year period. That's having 2 effects that we can see immediately. One is demand for aluminum, which traditionally is lower in Q1 probably because of the Chinese New Year. It's likely to be weakened further because of the extension of the holiday. Second, the impact on production, we're seeing potentially more in the phosphate area. So the area Wuhan -- the province the Wuhan is in actually contains a large amount of production for phosphate. Most of those businesses are currently shut for the Chinese New Year and will remain shut for longer than they normally would be because of the coronavirus. So that may have an impact on Chinese production. In terms of smelter production, we don't see any signs at the moment that those start-ups or expansion will be impacted by coronavirus. But as I said at the beginning, we don't know, it's still too early to say what the longer-term impact this year will be of the virus for the moment.

Okay. And my one last question on the financing costs because we saw -- as per your financial statement, the financial cost has increased to SAR 2.4 billion. What -- because -- it's a big amount. So -- what measures you guys are taking to dilute the impact of this high financing cost?

I mean, of course, what we're seeing in the finance costs are a reflection of decisions that were made some years ago. So the Wa'ad Al Shamal finance costs were incurred with -- finance was incurred some time ago, so that's just recognizing in the P&L, what's there. If you look at the costs, in 2019, they don't fully reflect the impact of the MRC debt for equity, which was around $800 million. That wasn't completed until late in '19. So that will be a more positive impact in 2020. But we're always looking at opportunities, and that's one of the things high on Khaled's agenda, for the moment is how do we continue this good progress we're making in terms of managing our leverage.

[Operator Instructions] We can now take our next question from Sashank Lanka from Bank of America.

I have a couple of questions. Would you be able to provide us some guidance on operations at the Wa’ad Al Shamal Phosphate plant? And how the 2019 operating rates were on an annual basis? That's my first question. And given how weak phosphate prices are, are you, at some point, going to look at lowering your operating rates in production in order to balance the market?

Thanks, Sashank. And I think we had a question from [ Breer ], actually on a similar tone on the webcast. In terms of operations, MWSPC, 2019. I mean, the operating rate, it varies between the plants, but if you like to think about between 75% and 80% of capacity during the year. What was more of a concern, though, is the costs are running because it's in a ramp-up period, there's a lot of optimization still to be done. And we'll start to see some of that come through in 2020. We'll also see a much higher operating rate as well. In terms of your second question, we've done 2 things to deal with the weakness in the market. One, you'll notice that our working capital inventories increased at the end of 2019. That was in large part because we held back some sales in phosphate, as we wanted to keep that out of the market. We'll sell them in Q1 instead. And the second thing is the remedial work we're doing on Wa'ad Al Shamal. We've tried to bunch into December, January, February period as much as possible, so we are indirectly taking out some capacity but not as a deliberate ploy to boost the market more. It makes more sense for us to sort of match our production with the global demand.

Okay. That's helpful. And if I could just follow up on the -- you mentioned the technical turnaround, what exactly is this turnaround related to? And is this something to be concerned about going forward in terms of production from the plant?

Mostly about optimizing 2 areas: beneficiation was a challenge since startup because of some of the technical designs and construction of the facility. And what we've been doing, certainly in December -- November, December and in January was to remediate some of those just to make the plant operate in a much more efficient way. So we're pretty pleased with those works, and they should show through fairly quickly. We had some challenges around the sulfuric acid as well. That was more about reliability. So we're looking at what we can do with that plant to improve its reliability and run more consistently. But those are the 2 main areas.

There are no further questions on the line at this time.

I think there was a question from [ Breer ] online. We answered the first part, which was around the operating rates of Wa'ad Al Shamal. The other part of the question was around the operating rates at MPC. MPC pretty much runs at/or above designed capacity across all of the plants still in 2019, and we would expect it to do again in 2020. If there are no more questions ...

No more questions, sir.

Okay. Thank you. I'd just like to thank you all for joining us. Appreciate you taking the time to look at the presentation and follow up with the questions. Of course, our Investor Relations team remains available to deal with your queries going forward. I'm sure you have the contact details. Thank you, everybody.

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.