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

Good day and welcome to the Second Quarter Earnings Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Frederik Michaelsen. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us today. And I must start by mentioning the standard disclaimer. The presentation contains forward-looking statements, which can be risky and uncertain. So please do not place undue reliance on these statements. All details can be found on Page #2. Without further ado, I hand over to our CEO, Mr. Mosaed.

Hello, everybody, and good afternoon or good day wherever you are. We are very pleased to have you with us to come to talk a little bit about our financial results of the second quarter and the overall financial results. I would like to start just with some strategic considerations and then touch on items on safety and COVID-19. And then go over to the financial results, if that's okay with everybody. And I would like always to start from a strategic perspective. And we always keep in mind, our -- where do we exist? And what is driving our businesses? And it is our ambition to be a sustainable mining champion for Saudi Arabia with a global presence. A global presence not only in sales and marketing, but also in distribution and manufacturing. And in order to achieve this in a sustainable, successful manner, we need to operate successfully in 4 pillars. The first one is on the operational capital and commercial excellence. We must [indiscernible] the operational excellence in 2 ways. In our cost, and that starts off from the mine side, all the way to delivery of the product to the customer. And so we believe we have a very favorable cost position. And as we benchmark ourselves, we always find ourselves in the first quarter or in the second quarter in all the businesses that we have. The second piece on operational excellence, of course, is having our assets and running it as hard as we can, getting maximum profit from them. So I think in this regard, we are achieving very good success. The only thing that is slightly good now is the recent project, Wa'ad Al-Shamal. We're still having some technical issues, technology issues. We have organized ourselves in an efficient way in order to actually work on those problems. I think it is fixed hopefully within the 1.5 years, plus or minus. And of course, capital excellence is very important for us. While we see our P&L strong in terms of our EBITDA margin, our balance sheet is a little bit heavy. And so we really need to work on our capital efficiency. And of course, commercial excellence. At the end of the day, we win or lose when the customers buy from us and when we realize the best retain from our customers. And so this is the first pillar. The second pillar is, we really want to drive very successful, very profitable business. And as we do this, we want to realize the value we create for Saudi Arabia in terms of Vision 2030. Because we are -- we want to position ourselves as the mining champion for Saudi Arabia. And so we major impact on GDP and our contribution to GDP. We measure our impact on value creation, creating fiscal revenue for the government. And as we excel in this, we built this [indiscernible] with the government, and therefore, we facilitate our business more effectively. A testing is, of course, we are not a case -- a player. I mean now we are a creative player. We think we are going to be focusing on the case. But in the long run, we see ourselves a global presence. Again, we are already global in our sales and marketing activities. Recently, we acquired Meridian, which is the African distribution and blending out in Africa. So that's kind of a small step in our global ambition, global presence ambition. Lastly, we know the acquisition we are working within is changing. And there is more focus on the sustainability and mega trend implication. And so we want to make sure that we do our part in a very responsible way. There are issues with the global warming, issues with waste generation, issues with depleting resources. And so we would like to make sure that as we do our business, we don't lose focus that we want to protect the ecosystem. And it is not -- we don't look at this as a cost. We are actually looking at this as an opportunity for us. And so we think we can contribute through our fertilizer or agri-nutrient solutions. We can contribute with the aluminum, with all the benefits that aluminum brings into the construction and the manufacturing space, et cetera. So this is how we see ourselves. We are seeing ourselves from a strategic perspective. And just on the second slide, I would like to touch a little bit on the value we create for our investors. And it's a standard way of looking at it. You see in the slide, the small box, our sales in 2008, we have made [ SAR 0.46 billion ] of revenue. Now in the last year, we made almost SAR 18 billion. That's a phenomenal growth. And as we made this journey, 2008, this is the year when we went public, when we did the IPO. And so you look at the people who actually invested in us and what happened is they validated. The price appreciated and, I mean, now it is north of SAR 40 per share, trade up to SAR 60.

SAR 57, SAR 58.

And now for the time being, we are -- I mean, not only us, I mean, the whole market is struggling with the COVID-19 implications, all this tension between U.S. and China and all of the other factors that are slowing down the economy. But within this picture, if you flip to the second page, you look at what Ma'aden has done in terms of share price to retail. The way we define these retains, again, it end up being [indiscernible], they look like a [indiscernible] on -- in time. In this case, it's a -- the service revenue of September 2009 -- 1st of July 2009. So that's the starting point. And the endpoint is our current time, which is 1st of July 2020. As in here, the share gives the investor 2 things. They either give capital appreciation or dividends. And so you sum the dividends that we realized through this period as well as you add the capital appreciation and you divide this by the starting point, discussing the price of the share. And that is what we call retail. Ma'aden made 8.2%. Mining giant is less than that, 6.5%, and you see the definition of mining giant here in the footnote. As the pure players, 5.2%, Saudi Index 3.9%. So we think of ourselves as really have served our investors well. And I would like to go again and clarify. In terms of profit and loss, we are now at the time when we have losses, but the whole market is in a steady line. We look at our inherent strength in our EBITDA margin, and we stand better than our peers. We stand very, very well. And we will talk about this a little bit. We do have a heavy balance sheet, and we have quite a bit of obligation towards our lenders. I think we have completed, recently, 1 major step in managing our balance sheet with Wa'ad Al-Shamal refinancing that allowed us to strengthen our financial obligation over a longer period of time, 15 years. So that helped us in lightening our balance sheet. And so the -- moving down to some of the topics on safety and COVID-19. And like always, in all our meetings and everything that we do within Ma'aden, we always talk about safety and we do safety first. And also a transformation initiative we have, we call it SafeSTEPS. Because it's kind of -- we want -- we realize that there is -- I mean we are going to continue with journey. And I would like to make sure that we take these steps, always follow the steps. And SafeSTEPS -- and that is in the context of this focus area that I have listed here. So we want to look at our EHSS leadership. Leadership is the first theme in achieving superior EHSS performance, environment, health, safety and security. And so we'd like to provide leadership not only for ourselves but for the industry. Now talk about risk management. Risk management is extremely important, and we look at risk in a holistic way. It's not only EHSS, but the adjacent risks with us is the computational or with the financials or other risks. And learning from incidents is very, very important. Contractor management, by the way, is very, very important. We don't look at -- we recognize that there are critical partners that work with us handling a lot. And we look at our business together as partnership, and we must work together for good contracts for management. And then there is the EHSS management systems. We're putting a lot of effort this. We -- the system, we call it SHM. So it is safety, health and management system. Safety and health management system. Again, sustainability, we just talked about sustainability and our ecosystem. We want to be a player in protecting the environment and all the megatrends. Safety governance is very, very important. Safety governance is a way to institutionalize everything that we do. So that if we to do something, it's not an individual doing it, it is the whole enterprise doing it. And we want to do this, aside from, I mean, without killing the infill [indiscernible] spirit in our people. So it's a balance that we have to make. If we -- in institutionalizing our business and remaining businesses, they are just allowing rules for our people to drive innovation and create new things. And of course, performance management. You see in there the safety culture, process and enabling further insights into how we manage in the EHSS space. Moving forward, what we show here is the total report about incident, right? And you see our index year-to-date is 0.27. [indiscernible] industry standard than when we do benchmarking with our piece in the mining industry, with the -- benchmarking as well in the chemical industry because we have a processing [indiscernible]. [indiscernible] is present with a well with our -- I mean within the industry players. There is -- the some of the focus area, I mean, and I'm repeating something from the previous slide, contractor management system is very important for us. We do have exposure. The contracts community in Saudi Arabia is not as mature as we would like it. And so we'll be putting a lot of extra effort to ensure that we help our contractors mature with their management systems and EHSS systems, so as to be able to meet or exceed our expectation. Vehicle safety is important, especially in our mining operation. I mean this is not only passenger cars, but also the whole -- we use a lot of equipment to hold, I mean, works and deliver things from one place to the other. And so that's another focus area. And I always effectively [indiscernible]. We want to make sure that we have leadership that is always emphasizing a world-class EHSS performance and learning from incidents. And not only learning from our own incidents, it is learning from the industry incidents, which means that our leadership has to stay connected with the rest of the industry. Next is the COVID-19 and some of the things that we're doing. I have to say, we really have done very well in positioning ourselves right upon the beginning to respond effectively to the COVID -- to this pandemic. And we did have done substantial risk analysis and the exposure analysis of the COVID-19. And it's come down to 2 things. One is that we want to make sure that we keep the health and safety of our workforce. So that's number one. Number 2 is maintaining business continuity of our operations. And yes, this capitalization helped us coordinate our response management. So the health and safety and protection of the workforce, we basically, the difficult thing is that we protect, detect and isolate. So we protect our people through monitoring people coming into our premises, we do temperature monitoring, we do disinfection, we keep distancing -- social distancing, et cetera, all the things that I'm sure every one of us is familiar with. And the second thing is the safety. And all of this -- we're testing all of the guys that are potential carriers of the virus or infected. And so we have boosted up our medical capabilities. We have utilized -- we have boosted our own testing capabilities, but we have also maximized use of what is available from the Ministry of Health and the private medical service provider. We know that to spread our protection into a wider population. And whenever there is a problem, we isolate people and make sure that they get the best medical. So that -- the strategy has helped us a lot. And I have shown here a couple of the slides, just to tell you the KPIs, Key Performance Indicators that we look at. So in the first one, you see the daily number of positive cases, overall Ma'aden. At Ma'aden, we have almost 7,000 employees. That's I mean another huge number of contractors. And you can see that with this low infection number, we really -- I mean doing excellent work. And I don't want to push our luck too far because this is always a concern to us. Even with this excellent performance, we are not resting. We always push and deliver and demand better expectation -- better perform. One of the things that we have better performed, in our history, is that the contractors are big exposures to us. And actually, we had a kind of a breakthrough or an infection breakup in 2 of our projects, project sites that are isolated, meaning they are not new residential area. These are not the -- these are 2 projects, 2 camps under construction -- sorry, camps for projects under construction. And that was the first one that open up for us. We put what we call the Contractor Oversight Taskforce. And I was really, really thrilled with what those guys will -- -- this task force was able to do. And that has uplifted our performance, I mean, tremendously. And the data you see in these two graphs. So the first one is the daily infection. The second one is what we call the overall daily infection rate. And it is calculated according to the Ministry of Health...

Method.

Yes, method. And what it says here is that we are in the neighborhood of point to infection, say it 100 of our employees paired a month. And so this is how it works. And again, you see it and you see excellent performance. I will move now to some of the -- I mean our quarterly results. The ammonium phosphate and ammonia, so this is not a great revenue as we would like them. We had a reduction in the production. And the phosphate -- aluminum phosphate is mainly driven by the Wa'ad Al-Shamal. The ammonia, we had some reliability issues with certain equipment. But overall, we kind of -- I mean we look at the rest of the year and some recovery that we can achieve though the year. Aluminum, we had a better performance. Our production was up year-on-year and quarter-on-quarter as well. That reduced the amount of sales that you see low in the production. So it is down to 8% year-on-year and 1% quarter-to-quarter. Gold is good story for us. Now gold is really -- I mean the prices are just taking off, and we're putting a lot of efforts in keeping this trend of increase of gold production. And we have actually achieved more than our target in gold production. Financially, our sales revenue was SAR 4 billion, 8% below quarter-to-quarter and 7% year-on-year. Our EBITDA -- and, again, I would like to emphasize, our EBITDA is -- reached SAR 1.1 billion. And the EBITDA margin was in the neighborhood of 27%, very, very healthy for this kind of market situation. And that has allowed us to, of course, be very comfortable in supporting our business and supporting our growth because we have a number of growth opportunities, in particular Mansourah/Massarah and -- which is a gold mine that is under construction, we are about 25% complete. And the Ammonia 3, which is about 50% complete. So we support our operations. We support our growth projects as well as are able to -- we are able to meet the, I mean, debt obligation, either on debt services or on principal repayment. Of course, our net losses were 0.73%. This is the total.

Consolidated.

Yes, this is the consolidated. And it is higher than the 0.64% that we had in the quarter 1. Mainly it's a price to play. This is a very low -- in the market for phosphate and aluminum. We're seeing, especially in aluminum an up tier in the prices. And so we look at third quarter -- the second half of next year better. I was hoping that the phosphate and the ammonia were weak on sales. They have not, I mean, moved -- have not moved up. As phosphate, we -- but all indications that the second half will be even better. Of course, gold is a big success. Gold is about 18% of our total business. And so it's not small, it's substantial. And the gold contribution has been really -- very, very significant. And I have to say that gold and copper contribution is very significant. But the other businesses, phosphate and aluminum, from a cash perspective, they are able to end their own [indiscernible] and manage their own. Working capital is down 2%, which is positive that the leases capital come to us. Market -- I'm moving now to market outlook. Phosphate and aluminum -- ammonia. As I mentioned, we were hoping that in the lockdown -- we thought -- we were hoping that prices will go up. They did not go up as fast as we would like them. And we're looking at the second half of the year to be better. We still hang on to our -- I mean strategic markets. So India is strategic for us, and we maintain our market share. Africa is important for us. And of course, South America. North America is struggling in margins. And so we're trying to minimize our dependency there. In terms of aluminum, I mean, the trend was going down, I mean, since 2018. And it has reached a stage where the inefficient players are finding it very difficult to survive. In addition, there is kind of the inventory that has taken place over other periods of time, and now we are seeing the price is going up. And this is now -- we've been never heard of -- it's north of 1,700. Lastly, but not least, gold and copper. Gold is [indiscernible]. So when the market trends down, it typically goes up. It is seen as a safe haven, and that has worked for us really, really well. Because as the end of the business's struggle, gold is coming as a [indiscernible]. And that is actually -- I mean helping us and reinforce our growth ambitions in gold. We're having benefits in Mansourah/Massarah. On following on this step, we have another 2 projects that are coming. And what we would like to do is, of course, maintain growth in our copper business -- not copper, gold business. Copper is really -- I mean if you look at all kinds of the analysts' and industry forecast, it all says, copper is going to be -- going to have a brilliant future in the next period. And that is on the basis of the applications that copper go into, especially with regard to the...

Electric vehicle.

Electrical vehicles and other electrical applications. We think the current period is mainly copper driven in the market situation. But we're looking at copper growth opportunity for us. So that's all I want to say. I'd like now to turn it to our CFO, Mr. Khaled Al-Khattaf.

Hello, everyone. Move to Page 21, which shows the consolidated key financial results. And in it, you'll see the 3 different dates, which is the second quarter sales versus first quarter sales and the second quarter sales of last years. And you see the comparison where we show a drop on the sales comparing to the previous quarters. And it's -- as mentioned before, it's a result of lower prices, except for gold, obviously. And also since we have one of the companies that we have acquired, which is Meridian in consolidation, also experienced lower sales. So -- and will come in the coming slides on the analysis of why we are -- where those impacts came from. And as a result, we saw a decrease in the reduction in the EBITDA, but a lower level than the reduction in the sales. We see the operating losses as well as the net loss. But then you see the net loss that is -- the net loss of SAR 728 million, this is on a consolidated level. For the shareholders of the company, our share is SAR 434 million of loss comparing to last quarter of SAR 353 million. And then you'll see the earnings per share as a result. The following slide that shows the, basically, high level analysis of what was behind the -- the major factors that impacted the net losses, which is basically, you'll see the price impact, you see the sales volume impact, the financial costs and then it leads to the breakdown of the overall loss of SAR 728 million. The following Slide 23, it's a comparison between the first quarter and second quarter.

Quarter-to-quarter.

Yes, Quarter-to-quarter of...

Just the last year.

Yes, this is year-on-year. And again, it shows mainly -- the main player since -- for the last 6 months, if you would, it is the price. And this is a reflection of the fact that we have almost 81% of our sales coming from the 2 major products, which is the phosphate and aluminum that experienced severe price deterioration, especially in the aluminum part. Then Page 24 that gets into the EBITDA breakdown, where we show the consolidated EBITDA of 27% margin, which is SAR 1 billion. And then you'll see the breakdown for each main product, which is the aluminum, gold and phosphate. Gold remains to have -- because of the price and production, to be a main player. Phosphate show a drop on the margin from last quarter. Aluminum, last quarter, was showing a positive EBITDA from the previous quarter. This quarter, we saw a slowdown or a drop by 12%. But again, overall, the EBITDA is -- the overall EBITDA shows from last year, a pickup, and it remains to be healthy. And if you go to 25, that's a trend basically. It shows our EBITDA margin since 2017, if you would. We chose the level of EBITDA in Saudi real. And as you see, the impact of the slowdown followed by the COVID, yes, we've experienced a slowdown, if you look at 2019 till this quarter. But still, the drop is something we can manage, and we are still on the positive trend. If you look at the last 2 quarters, actually, we experienced a pickup. On the cash flow, the breakdown of the 3 main legs of the cash flow, the operating, investing and financing. Still showing a positive operating cash flow. But also, we are still engaged in terms of our CapEx investment. Our projects under development, our sustaining capital, and what have you, all been maintained. And if there's any delay, it's due to the COVID impact, but it's not due to the funding requirement or what have you. In fact, the project, the major projects, which is Mansourah/Massarah for the gold and ammonia, we're meeting the deadline and, in fact, just ahead of that. And then going forward, the consolidated cash flow statement, where it shows -- try to show you a level of a trend of where we are. And again, the cash position for the overall, as a corporate, I think we're in a very good shape. We move to the operational performance. And then we will take it sector-by-sector, the phosphate and ammonia. In terms of production versus sales, we have the production -- we have a pickup from last quarter in terms of production, but still we have -- in the ammonia. And then we have the -- sorry, for the fertilizers, we have an increase from last quarter. And -- but it's not what we had budgeted for. We were expecting to take advantage of the market because what we experienced, yes, the price is up, but the demand is still there. Ammonia, as well, you see the sales and production levels. For the aluminum, the same trend, you'll see the production in sales. And the alumina, most of the production went to our sales with aluminum. So if you look at the sales level, it's still very low comparing to production. But that's because of the construction or the structure of our vertical integrated aluminum complex. Finally, the gold and copper. Gold is maintaining the high production, and sales are matching gold because of the structure of the industry. And the copper is also, although experienced a little slowdown, but it's still not that much. Do you want to cover the COVID, last point or...

No. Go ahead.

And that concludes the financial and production. And then we have -- on Page 33, a summary of the COVID and commodity prices caused the challenges, what have you. And this is basically a recap of what the -- Mosaed, CEO, has started with. So if you want to...

Now we're going to have a Q&A session. [Operator Instructions] I hand over to the operator. [Technical Difficulty]

[Operator Instructions]

Okay. The first question is from Nour Sharif, Arqaam Capital. Can you please guide us on gold production for the rest of 2020? Also, can you share any updates on Mansourah and Massarah gold projects? When should we expect commercial production? Can you shed some light on the recent market dynamics for that? And can you explain what are the struggles with Wa'ad Al-Shamal phosphate plant?

Okay. On the gold, I hope everybody can listen to me now.

Yes.

Gold is reacting now into the weakness of the dollar. I think the weakness of the dollar has pushed the price a little bit higher. But also, it is -- I said, when you look at the 10-year bond rate versus the gold, I mean, they typically go, I mean, in opposite direction. And so to the extent that interest rate goes low, the gold goes up. Demand for gold for actual usage in the sense that it goes into jewelry, that actually is a little bit squeezed -- I mean, it may be stable, but I think it's squeezed. So it's very difficult to predict the gold prices in the same time that it is difficult to predict oil prices and these major commodities. But generally, we are very pleased with the general trend. And as I said, it is countercyclic. So as the market deteriorates, meaning the commodity market deteriorate, we see a pickup in gold. And this actually gives us all our portfolio. I mean very -- I mean it's a very big strength in our portfolio to have such a diversified project portfolio. With regard to Mansourah/Massarah, the project now is mostly in the engineering phase. So we have our engineering teams, some in Europe and some in Africa and working on the plant design. There are some equipment -- yearly equipment that we have ordered. And certainly, project is moving very, very effectively, on the plan. I mentioned 25%, actually, it is about 23% completed now. Going forward, we think -- we also -- COVID-19 impact is behind us. And so with the hope that there will be no reemergence of COVID-19 and that economy will continue to open as we are seeing now. The projects should stay in cost, and we expect middle of 2022, we start realizing the commercial benefit of it. I hope that answered the question. The -- on the debt, can you repeat that?

The second part of the question was, can you shed some light on recent market dynamics for debt?

Yes. We really haven't seen any particular market dynamics. I mean demand is there, and it is survival of the fittest and the survival of those who have the logistic advantage. And so the -- I mean I say our traditional markets in Africa, Asia, mainly the India subcontinent and Africa and South America, we do have our own COAs and our charter vessels. That gives us tremendous capabilities in actually reaching our customers with the volumes they want, when they want it, with optimum logistic costs. And so that has helped us. The other suppliers, the high cost suppliers, they are, I mean, of course, suffering, and there is not much volume coming from China. So the market is kind of stagnating at the current performance. Of course, not many people have the financial strength to weather these situations for long. We believe that there will be -- market will start correcting and the prices will pick up. We have advantages in our ammonia, and ammonia gives us a big advantage in our logistic capabilities. We also have been working on our product diversification and mix. So we're selling merely aluminum phosphate, but we are increasing the portion of the mono aluminum phosphate as well as the NDK component. And in order to be able to serve wider product portfolio to our customers. The recent acquisition of Meridian in Africa has really helped us a lot because: one, it has secured our outlet into India, and we are exchanging product formulations that are proving successful in Africa and trying to adapt them to serve our business globally.

I hand over to the operator for the phone questions that are queued up.

All right. We'll take our first question from Anoop Fernandes from SICO. This is Anoop from SICO. My questions are on -- first up, questions on debt and the interest expenses side. Now what proportion of your debt is hedged for interest rate risk? Because when we look at your interest expenses, they're actually up quarter-on-quarter. And the implied interest rate works out to about close to 4.5%, which actually means a big spread versus the prevailing LIBOR and SIBOR risk? And secondly, on the debt side, now after the Waad Al Shamal refinancing, I think over the past maybe 2 years, you've refinanced the debt at almost all your operations. So is there any more ammo that is left on the refinancing side going forward?

Let's take the last one. For -- or take it one by one, okay. For the hedging, we are monitoring the interest rate behavior and following what's taking place on the cost of funds and on what have you. And currently, we're we don't think we need to make any active moves in terms of hedging because the recent debt, for instance, has been refinanced on very favorable terms. The existing one, most of it either have fixed in nature, by the Saudi Industrial Fund. And the remaining are all commercial based where it sits, if it's a dollar by LIBOR base or if it's real by SIBOR base. So for now, we're just monitoring, and we manage when we need to move either through refinancing, as we did with Waad Al Shamal or if there's a need for hedging, then we'll take care of it at -- when it's need to. In terms of ammo, ammunition for refinance, yes, I think we're looking at all different possibility as we're going forward to restructure, optimize and what have you. Don't forget that the nature of our assets are new. And it requires an ongoing optimization with the ramp-up and expansion. So we'll look at the need of refinance as we go.

On the interest expense side, let me just phase it a little differently. Do you expect these interest expenses to fall significantly from there, considering how interest rates have moved. Because, I mean, clearly, your interest expenses are not reflective of what the prevailing cost of funding is, especially since most of your loans are variable. They're not fixed rate loans?

No. On the contrary, if you look at our -- the interest cost, it did drop. The reason why it picked up in the last quarter, it's because of the refinance costs. But the interest rate, the overall, if you compare the last 3 quarters, it's actually in a downward trend, it's not an upward trend. The only difference is because of the refinance, there is a cost relating to it, and don't forget it's a sizable portion. So on the contrary, if you look at the trend, the trend is downward.

How much would that cost be the refinancing cost out of the total interest expenses?

About -- around between SAR 50 million to SAR 60 million.

SAR 50 million to SAR 60 million. But still, I mean, one would argue that the interest expense was still pretty high, anyways. The next thing is on your gold business, the production rate seems pretty high, and that's very good, but also costs have gone up maybe by about a little less than $200 per ounce. I was just wondering, is this deliberate in the sense that are you all -- is the company now mining the lower grade ores because the gold prices are high, and therefore, these highest [ tripping ] costs are leading to higher operating cost in total. And secondly, my question is on your mine life. Now, the fact that we are operating at such high rates, where does it take the overall mine life of your -- all your gold assets? And in particular, the Ad Duwayhi gold mine.

Yes. So on the cost, the particular thing about gold is the more your production, the more your depreciation charge you will queue. And so that has resulted in a higher cost. But on the other hand, there is a lot of costs that were avoided because of COVID-19. And so all in all, our cost fair ounce for the reduction of gold has really been very, very favorable. With regards to -- yes, so it's been very favorable. And with regard to the, I mean, our production and reserve, we are very, very active in our exploration efforts. We actually -- one of the reasons that we -- our cost has increased because of our exploration activities, we are pushing for more acceleration. And so we feel very confident in our ability to feed into the pipeline of our gold mining and gold production. We have, as you mentioned, Ad Duwayhi is depleting, but we'll also have expansion on Mansourah/Massarah. We have expansion in Mahd Ad Dahab. We have expansion on other site, [indiscernible] a [ third one ]. And so we're keeping feeding our pipeline. Our target is to achieve a certain production target of gold and keeping it. So we're looking at a target of hopefully achieving 1 million ounce, a year. And we are comfortable at...

Would it be able to split the gold volumes out of the 115,000 ounces that was sold, what proportion came from Ad Duwayhi?

We don't have.

Yes.

Currently, I don't have this breakdown.

Not a problem. Not a problem. Yes, just one last question before I join the queue. This question is on your impairment accounting. Now if I look at that section in your financial statements, and I look at the section on Waad Al Shamal, what I find very interesting is that you've assumed -- I mean, you've basically reduced your discount rate from about 10% to 8%. But the terminal growth rate has been increased from 1 odd percent to about 4%. Now someone -- one may argue that a 4% terminal growth rate is pretty high for fertilizer business. So -- and what I also understand is that your impairment accounting is based on a 5-year projections. And after that, you have a terminal [indiscernible]. So my question is when I try to look at it through your lens, what is -- what should we be inferring for the -- in terms of the Waad Al Shamal business performance over the next 5 years? Do you see that utilization rates will continue to remain very low because of these technical issues, or do you see a very lackluster market environment in terms of product prices? Because that's the only way that you can explain a 4% terminal growth after a 5-year period.

Should I take it?

Yes.

Okay. Well, as you know, these assets are of a very long-life, and they are built to produce at full capacity and last for the 30 years or what have you. And currently, as we stated, we are having some technical challenges that we're expecting to deal with it in the coming maybe 3 to 4 quarters. But afterwards, we are expecting these assets to act just like MPC, which is full capacity of SAR 3 million and beyond. As we go forward, and we keep applying after a full ramp-up and ongoing optimization, along with the diversity of products. And in terms of the terminal growth, after 5 years, we source this from different international publications that are well used in the market. And for the issue of the discount rate, and the issue of discount rate. Don't forget that the structure of Waad Al Shamal of a 70% debt and given that the current cost of debt is very low. So you do the math and you end up with a lower weighted average cost of capital.

Yes. My question was not actually on the discount rate because that is understandable, it was more on the terminal growth rate and...

Yes.

And where I was coming from the terminal growth rate is after a higher forecasting period. So my question was what happens in the 5 years. So it seems like you are maybe not too confident about this Waad Al Shamal reaching its full potential over the next 5 years, which is why you have a very aggressive terminal growth rate?

On the contrary, we know where the challenges are. And we have put at a very competent task force to deal with it. And hopefully, within the time plan, the asset will go back to its potential, and we'll take it from there.

So just to give you some insight. We have 3 issues with Waad Al Shamal. One on the beneficiation, one of the utilities and one on the phosphatic acidic plant. These are, I mean, with technology problems, but we know what are they and how to solve them. We have been maybe slowed down a little bit like contractual distribute, et cetera. But we are now unleashed from all distributes. So we are going -- moving forward. And so it's a technical undertaking, a technical challenge that we are familiar with, and we are -- we plan to fix it. You mentioned something about the growth rate, the terminal growth rate.

Yes. After 5 years.

Yes. After 5 years. I mean the -- and we -- as you had in the financial statements, I mean, we use the, I mean, industry standard to set this growth rate. And 4% is what was a setup for the, I mean, the impairment analysis. And of course, that can go up to 1.84 as we do the sensitivity analysis and now down to 1.84. So even if you use a lower growth rate, you're still on this safe side. One thing that you mentioned, I mean, we had the refinancing that I would like to bring. We moved -- I mean, Waad Al Shamal, we need refinancing we moved from project financing into cargo finance. And that really has a lot of advantages. In addition to reduction of the interest as well as the tenor of the loan.

And the covenant.

Yes, it gives us quite a bit of flexibility on the covenant as well. And that helps us quite a bit in managing our, I mean, a lot of cash flow is there. And just one last piece. We are very happy with the interest that the banks showing our debt. And that tells you how good we -- how confident the banks are in our operating model and our -- the financial strength of our business.

Thank you. Operator, can we move to the second question?

[Operator Instructions] And we'll take the next question from Sashank Lanka from Bank of America.

I have 2 questions. One on the phosphate side that's more pertinent to Waad Al Shamal. And you did speak about technical challenges, which was, I think, highlighted in the last quarter earnings call as well. When I look at the production volumes from your phosphate division, they seem to have fallen actually year-on-year. So I was wondering, if there is also some impact of lower production from MPC here. And if you could give us an outlook or rather some guidance on how operating rates were in Q2 at Waad Al Shamal. That will be very helpful. I think Q1, you said somewhere between 70% to 75% for the Waad Al Shamal unit. My second question is more on the aluminum segment. EBITDA margins, I think, in Q1 were very strong. We did see margins fall in Q2 quite a bit and more than the other segments. So is this mainly due to aluminum pricing? Or is there a cost aspect as well for this decline?

Yes. I'll take the phosphate. So we are -- we put a lot effort in our client reliabilities and making sure that we get the maximum out of the assets. In MPC, the -- we had difficulties on the -- technical difficulties on the ammonia plant as well as difficulties in the phosphate plant. There was kind of third -- second part of phenomenon. It is not a chronic problem that we would last for a long period of time. And if you look at the monophosphate, the second quarter of '20, we made a 753 tons. It's compared to 743 in the same quarter, the year before. So the trend generally is a little bit up, but it is a -- of [ initial dispatching ]. On the -- this is -- I'm sorry, this is in terms of production.

Yes, that's on MPC.

Yes, MPC.

Yes.

Yes. And in terms of the Waad Al Shamal, we had 480 compared to 585 in the year -- on the quarter last year. So that's where we had the biggest hit. This is where the -- and so in general, MPC in trajectory going forward and increasing the production, you may see a little bit of variation quarter-to-quarter within a yearly basis, we are going higher. And then on the aluminum, on the EBITDA and the [indiscernible].

Can you repeat your question again, please?

Yes, sure. So when I look at the aluminum segment EBITDA margins, they did fall quite significantly quarter-on-quarter. My question was, is this mainly to do with end product pricing? Or is there a cost aspect as well, where you saw increased costs, for example, in Q2, which wasn't in Q1?

No. It was due to -- I mean, first of all, the price impact is very prominent. I mean, if you look at it at as a LME continued depressed pricing. But also towards the -- there were some technical challenges due to maintenance and what have you, but overall...

So if you look at the aluminum EBITDA, quarter-to-quarter, it was squeezed by 13%. And last year quarter, it was squeezed by 12%. So more or less, I mean, we are in par between the 2 quarters. So second quarter to first quarter and second quarter to second quarter last year.

Okay, understood. So I guess, 1Q was kind of a one-off strong quarter, which you probably do not expect to repeat if prices stay around these levels, in terms of EBITDA margin -- for EBITDA margins?

Actually, first quarter prices were low. And the same thing in the second quarter. I think now is looking at the -- an uptick. So I think the margins at the EBITDA margin will hang on to -- and as we go forward, it should go upward. I think the second quarter 22% probably is the lowest we have reached. The lowest we will be reaching.

Yes, are there any other questions online?

There are no further questions at this time.

Okay. We have one question via the webcast from Aneel Kanwer, HSBC Asset Management. Can you please shed some light on the technical difficulties faced in the Waad project. Isn't technology very similar to phosphate Phase I project? When do you expect the utilization rate to be 100% at Waad?

Yes. The -- as I mentioned, the technical problems. We have -- the plant is major number of sections. And the fairly small is what we call the beneficiation client. So this is when the rocks come from the mine, they get a crush. And then they fed into the beneficiation, where the rocks are chemically treated so that the phosphate is leached out, and the rest is rejected. That is a water clarification process. And it is -- we add chemicals to float the [indiscernible] and the ore is chemically behind and so -- I mean, settled at the bottom of the clarifier. This is one of the processes that we have a problem with. And we have done testing of the technical solution of it. And we have a solution that is -- that works and it's a matter of implementing it. The second one is in our steam generation, is the turbines have some mechanical problem with them and we know how to fix them. We have -- one of the issues that we have is getting the technical expertise flown into the country to help us. That is behind us now, and we are able to get the technical experts in. This one is in the phosphoric acid. It's a -- We have a covenant that has material construction that are giving us a problem. And so we know what are the suitable materials that we should be using and we can implement those. So none of these things are technically very difficult. We know what we need to do. It's mainly just the project execution time. These equivalents that we are going to be doing, I mean, require time for fabrication because these are high and low material. And so it's just a matter of time until we get those. The steam generation and power generation, that seems to be a little bit easier. So that should be the one we saw fares. The other one is going to be a little bit longer in time. So we're looking at early 2022 when we get the full capacity. But between now and till then, we're going to see a gradual ramp-up on the capacity. I hope that answered the question.

Is it the same technology?

Well, they are more or less in terms of technology similarities. In the most part, they are similar. I mean, MPC is an older technology, but you have tried to implement MWSPC and newer technology. So we have advantages -- in technology advantage in Waad Al Shamal. And we see this part of the plant that runs well, the phosphoric acid is a slightly different technology, it's not the same technology. Well, the technology is the same, but the equipment construction is a little bit different between the 2 technologies. And that is what's giving us the issues -- the different material construction. And the beneficiation, it is the same, it is a scaling size and scaling issue that we have there.

Aneel, I hope this answers your questions. Another question via the webcast from Yousef Husseini from EFG Hermes. Could you comment on the reasons behind the spike in general and administrative expenses this quarter and should we expect this to sustain?

The G&A, you mean?

Yes.

Yes. Well, the main difference or increase was due to the social responsibility part that the company is playing in the community. The second quarter, the company participate in giving out donations relating to COVID community support and government support.

Thank you. And the next question is online from Anoop Fernandes from SICO Bahrain. Could you please comment on the MRC performance and of strategic importance of automotive sheets? Why not exit the project and focus on can sheets?

Yes. The MRC is an interesting business for us. We think the asset is not running at its optimum efficiency. And so especially in terms of the recycle amount and the energy consumption, we think that's a big opportunity for us, and we have a clear plan on how we're going to seize the opportunity there. I think the auto sheet is a premium project for us. We have not been pursuing our market share as aggressively as we can. We think we have the financial strength and we have the cost competitiveness that allow us to increase our market share into auto sheet. And so there is a number of things that we can do to improve the financial performance. Overall, we agree that -- I think you're proposing that we get out of this business. That is something, it's consistent with our thinking and with our MRC [indiscernible] with our [ portfolio ] versus it is better run in the hands of someone who focus on the downstream. But the MRC inherently is a good business because in some strength, we just not in need to know how to realize this trend and the energy efficiency and the recycle as well as on the market share realization.

Okay. Anoop, I hope this answers your question. The second part of your question was out of the $653 million CapEx this quarter, how much was sustaining CapEx?

$635 million between new projects and [indiscernible]?

I mean...

Okay. Well, most of it, I would say, it's between new -- the new projects and between the sustaining projects. I would say, almost 30% more than 30% is on the sustainable -- sustained CapEx. But don't forget, we have also projects, the Greenfield, which is the ammonia and Mansourah/Massarah. And they are also taking -- and they are on time. So our spending is very active.

Okay. There seem to be no more Webex questions. Are there any questions online? Operator?

There are no questions at this time.

Okay, great. Well, I would like to thank everybody for this excellent opportunity. Hopefully, we have given you fair and transparent, I mean, view on our business and how we look at the business. And we have helped you see the inherent strengths that we have and how we are leveraging those strengths to achieve, I mean, market performance that is better than our competition as well as we have given you confidence of our realization of where the challenges are. And how we are moving up to achieve -- to meet those challenges. And all in all, what is our strategy and what are our priorities. Thank you very much, and look forward to seeing you in the third quarter.

Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.