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

Good day, ladies and gentlemen, and welcome to the quarterly earning results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Fred. Please go ahead.

Good morning. Thank you very much for your interest and joining the earnings results call for the third quarter. My name is Frederik Michaelsen. Just a standard disclaimer on Page 3 for the presentation contains some forward-looking statements, so please don't put any undue reliance on these statements. Full details on Page 3. And with that, I hand over to our CEO to start the call. Thank you.

Thank you, Fred. And I'd like to wish everybody a good day. And as usual, we will start with the top, also our strategic positioning with Ma'aden continue to drive our long-term strategy and that our results based on before levels. The first one is, as we have shared with you last time, it is the operational and capital and commercial excellence. It's very important that we [ switch ] our assets as hard as we can and take costs as much recourse as possible and drive a strong P&L and drive a very -- an attractive return on investment for our investors. Second pillar is that we also want to make sure that we play in the fulfilling the Saudi Arabia 2030 Vision ambitions with regards to macro metrics, GDP contribution, job creation, fiscal revenue to the government, increasing local content, et cetera. And as we do the [ switching ] our assets and achieving good results and fulfilling our national ambitions, of course, focus on making sure that we have not -- we are a global player and that we have a footprint in Saudi Arabia. We're growing our footprint out of Saudi Arabia and Africa, and Inshallah, coming more of that. I'm just looking at -- our space is a global space. And recognizing that the -- our industry, where we are in with in the mining side or on the process side, that we have sustainability targets that we must achieve. And so we -- it's very important for us that we protect the environment, we preserve resources and keep our initiatives within control. So these are the 4 pillars, continues to be our guiding principles as we move forward and the basis for our growth and strategy. Next slide is just showing over our period since our IPO back in 2008, the value that we have created to our investors. Value created the investor in two dimensions. One is the price appreciation and the second is dividend payout. We don't -- we haven't done a dividend payout since our inception, but the capital appreciation has been tremendous. And the combination of the two put us in the leading position as far as our peers in the business. So if you look at Ma'aden, we have 9.4%. Mining giants, generally they're 7%. And pure players, pure players that are in one of the lines that we are in, it is 6.8%. And the Saudi index, we are way above the performance in the Saudi index. And we are very proud of this, that we're focusing on value creation for all of our investors. As we move forward, of course, when you're looking at a situation where we are deleveraging our balance sheet and reducing our financial revenues, so that the risk -- the cash that we generate can support our growth as well as support dividend payout. So just going into more specific, our EHSS performance: environment, health, safety and security. At very top in our priority and as I have initiated to you in our quarterly reviews, that we measure our success on primarily on how well we are doing in this space, environment, health, safety and security. And we firmly believe, if we can do our EHSS world class, chances are, we will do the rest of our business, we will do reliably into financial performance, we will do at equally world-class level. If we don't do our safety and EHSS right, chances that we are going to be struggling to achieve our ambitions in another area. And when it comes to EHSS, I mean we are very clear, initiative, very clear set of management systems that drive sustainable and proven performance. I have listed here a few of our focus areas. So leadership is important. And I believe that with leadership, it's extremely important that we have leaders familiar with our work processes and management systems. They are able to be present in the field, connect with the frontline employees, ensuring that everybody focused on safety. And that when we are dealing with any task, we start with thinking safe, thinking about safety analysis of anything we do. And that flows into our risk management, very important. And we have a structured management system and risk assessment. Risk identification assessment and mitigation. There, we go from incidents, very important that we will always -- so what we are doing and what industry is doing, where things can go wrong, so we always improve our management system. Contractor management, we -- is very important for us. We are using contractors in many aspects of our business. And one of the important aspect is our transportation. And as far as contractors, transportation is our biggest exposure, we -- especially the stuff that we hold between our site, in the north in Wa'ad Al-Shamal and the Arabian Gulf on Ras Al-Khair and the other mine. We have a health, safety and environmental management systems. We have just finished now documentation of what we call MSEMS. And MSEMS stands for Ma'aden Safety Environment Management System. The comprehensive management system covers all aspects of our performance, from mining -- from exploration, mining, to processing, logistics. It also covers our corporate functions as well. And this system just specify what are the things that we're going to do and how we are going to do it. And we have audit and assurance function that will be associated and making sure that we say what -- we do what we say. This MSEMS is now being rolled out to the -- our affiliates. And it has a -- it will drive unification and standardization across all Ma'aden. Sustainability management is important. And again, we need to make sure that price on energy efficiency, we drive on controlled emissions, we drive on preserving water. This is very important. Water conservation in Saudi Arabia is very important, as well as waste management. And as you are maybe familiar, we -- our industry generate waste, and it is very prudent for us to make sure that this waste is handled with care and efficiently. And for safety, governance and performance management, very, very important. Performance management is extremely important because that's the ongoing management of our systems and making sure that what we say is actually what we do. And we have a clear set of parameters that when we review with the management on a regular basis, very comprehensive. Our performance review look at 2 sides, look at lagging indicators. Those are the indicators that come after the fact. And then more importantly, leading indicators. We look at things that we must be doing to prevent injuries, to prevent incidents. Things like our inspection of our protective systems, like mechanical integrity issues, and training and development of the people. And so we look at our performance on the leading side as well as in the [indiscernible] side. The performance in the next slide is to give you just an overall summary where we are in position. This is the total recordable incident rate performance. It is a well-known metric used through the industry extensively. And we look at ours and I look at our contractors, and we see a general trend coming down. We have to say that in the bottom of the chart, you have some benchmark metrics. So if you look at average mining, it is 1.1, look at average utilities, it is 2.2, and average manufacturing, 3.3. And you look at our metrics, we are having already -- I mean a world-class level in our incident rate. And even then, we start trying to drive it down and drive it to -- I mean below as possible [indiscernible] level. Very important for us and we've been focusing on this recordable incident ratio. Of course, next slide is COVID. Last time we met together, we articulated our strategy and our response planning for COVID. And just to repeat, our response is based on -- when we did the initial risk assessment of COVID, we saw COVID impacting us in 2 areas. One, on these people exposure and people safety, and the second is the business continuity. And we have designed our response plan accordingly. We are very proud that our business has been going smoothly and with no major interruption. We had, as I mentioned to you last time, some delays in our project work because of mobility -- restriction on people mobility and equipment fabrication. This is a quantifiable delay for us, and we have [indiscernible] to deal with it. But our base operation continued to run smoothly. We have -- on this -- the other risk, which is contraction, our strategy is simple. We protect, we detect and we isolate. So we protect ourselves through, I mean, using the prudent protection tools, like the mask, like the continuously disinfecting the -- our work area, and the separation, physical separation. All of these are protection measures. We focus on that. And then we detect. Everybody that comes into our workplace, we check the temperature, we do the COVID test for the virus. And we make sure that we capture and get a responding result at this entrance point. And when we have exposure, we isolate, we quarantine people. This simple strategy, simple principles, protect, detect and isolate, has really worked for us very well. And you can see it in the graph. This is our infection rate. And we're -- I mean looking at it compared to industry practices and the people that we are dealing with, we're doing fine. Thanks, God. We are very concerned, of course, now with the second cycle of the pandemic, and we are tightening our protection and procedures, our guidelines and making sure that we are adhering to them, and of course, continuously improving on that. Next slide. We are moving now into the actual results. I'm very pleased that this quarter, I mean, is -- I mean last time when we were talking in the second quarter, we kind of quite expressed on the second -- on the third quarter. We talked about our feeling, our views on where the market is. And the -- thank God, the market trend the way we were expecting it to fare. And there is a pickup in the prices and -- driven by good demand. So specifically for us, our aluminum phosphate production was 1.397 million tonnes, 13 quarter 3 -- quarter-to-quarter. And year-to-year, it's more or less the same. Ammonia production, 603 kilo tonnes, 33% year-on-year and 7% quarter-to-quarter. Aluminum reduction was 251 kilo tonne, 2% above year-on-year, and we had a slight decline from quarter-to-quarter because of some operating limitations. Alumina production is up, 472 kilo tonne. Ammonia reduction, because some of it -- most of it was to our capital use, but a little bit goes into the open market selling. And gold, the production is 91 kilo ounce, down 13% year-on-year and 9% quarter-on-quarter. A lot of it is due to the stripping. We're doing some catch-up work with the -- our stripping activity, something that we kind of didn't do in the previous years and now [indiscernible] share on activities is directed to the stripping the non-ore. And copper production is 7.9 kilo tonne year-on-year, 20% and 5% quarter-to-quarter. In terms of financial performance. The sales was up, a combination of prices and more volume. And so it was SAR 4.7 billion sales, which is 16% quarter-to-quarter. EBITDA is SAR 1.5 billion, 37% quarter-to-quarter. Very good, and it is again a combination of sales and volume. We also had a lower G&A and exploration expenses, partially offset by the higher operating costs. Net losses, SAR 100 thousand -- SAR 100 million, significantly lower than net losses last quarter of SAR 730 million and mainly due to EBITDA. So our financing costs with EBITDA, will evidently [indiscernible] more additional. So we can see that financing loss of gross, lower interest rate as well. We had higher share in JV income. And also, we had lower than -- the net losses, SAR 0.25 billion third quarter '19. So in third quarter '19, our losses were SAR 250 million. This year quarter in 2020, it is SAR 100 million. So it's an improvement over last quarter of last year. Cash generation, up 37%. We always look at our cash flow on [indiscernible]. And we are pleased that it is going up. Working capital did actually build up a little bit of working capital than we should. And that's an important area for us to continue to work on working capital, mainly driven by the inventories. And some of it is just the end of a quarter thing. I mean when you're having a big ship, it makes a difference it leaves in the 31st of October or the 1st of November. From a logistic point of view, it doesn't make sense, but from financial, it does reflect a little bit on the working capital. Market, looking good. We think that we have effectively more or less the bottom. And going forward, we're looking at the rebound. Some of the things are happening here, I think, the U.S. infections although there seems to be a little bit of a cloudiness around it, but that's not as bad. I think the market is seeing a good view on what is going to happen in relation with the Biden election. And so that should create some positive sentiment in the market. The fact that Pfizer is now producing a vaccine at 90% effective is a [ net of inflows ]. So before we look at the market moving in the right direction. And so now [indiscernible], I said we have hit the bottom of -- there is some dynamics in the prices in third the quarter. We benefited from the season in India as well as in South America, but the favorable pricing in U.S. because of the carbon [ payment duties ] that were in place in Russia and Morocco. And of course, we are, in Morocco and Russia, are competing in the open space. The demand in Africa continued to be good. And China is, I mean, bringing good impact on the market. I think, in fact, that they are getting -- that the virus exposure are well in check is helpful. Alumina and aluminum, again, offsetting the bottom and moving forward. Some of it is -- I think some of it is inventory buildup because the industry was the dealing inventory. Now we have more -- a little bit of buildup plus, the weakening of the dollar is -- and then, of course, the recovery. I think China is placing good demand. Europe is placing relatively good demand. And so looking forward, we think this is going to be -- prices are going up, and will continue. We're seeing the prices now actually north of 900 -- $1,900. Gold is -- I mean you're seeing a safe haven, continue to move for -- or, move up. And we're looking at prices continuing to strengthen around the $2,000 per ounce. Copper resume from a low spot in the second -- first and second quarter, we're seeing it's going up. So this is what I want to cover. Generally, we are very pleased with third quarter. Continuing to do well on our fundamentals, on EHSS performance, continuing to deliver on our reliability and volume. And market is turning to our advantage. Actually, Ma'aden itself took a positive income. The number we have just talked about is from the total growth. And so from just a sentiment and general feeling, we are very, very pleased with from Ma'aden perspective and our consolidated results, we are turning into a green territory. I'll turn it over to our CFO, Mr. Al-Khattaf.

Let's go for the consolidated key financial results. As you can see, the sales have shown a great improvement since last quarter and the quarter of last year. The -- and it's a result of improvement in prices and volumes. And EBITDA has shown also a great progress. And I guess the shining star here is the operating profit, where if you look at it, the operating profit of last quarter was negative, and we were able to -- the results, as you see, going up from minus SAR 160 million to a positive SAR 250 million. Net losses were, again, improved on a consolidated level from a negative SAR 728 million to negative SAR 99 million, which is a tremendous improvement. And as a result, on a shareholder level, we've achieved a positive. We're back to the green, as the CEO mentioned. And hopefully, we can sustain this trend going forward. Again, it's a quarter where we saw improvement in prices; volumes; G&A, a better control. And also, we've seen the impact of Meridian of around SAR 24 million. And also, we saw a control on the depreciation and amortization as a result of the production trend in some of the commodities we're running. We go to the next slide, please. The net loss, lower than -- comparing to last quarter. And if you look there, you'll find the price impact, which is significant, SAR 281 million. And then the sale volume of SAR 126 million. And most noticeably, the financial costs, the result of the refinancing and also the SIBOR LIBOR decrease in rates, all together have sum up SAR 221 million comparing to last quarter just in the financial cost. On the next slide, which is a comparison from last year quarter. The -- it's an obvious, the volume had a major role in it, along with financial costs. The negative part was on what we call others, basically relating to costs, depreciating, G&A and others. The EBITDA. EBITDA this quarter on an absolute term, it continued to improve from last quarter. Even on the margin, from last quarter, it's improved. It's less than the previous year, but still on a positive trajectory. And then when you see the phosphate, we see the phosphate come back. The aluminum also showed a very significant increase of 4%. Gold has shown a little slowdown, but that will come forward in terms of the sales and production. And then you see the -- on a consolidated level, the company, it's -- the improvement is continuing. If you look at it where in quarter 1, we're at 25%. Now we're at 32%. The cash flow, it's still healthy. We are having a healthy operating -- cash from operating activities. We are maintaining our ability to invest in our projects. As you know, our projects are still on time, no delays. The ammonia project, the Mansourah-Massarah project, in addition to all the needed investments for sustainable capital and other needs. Here, we've added a slide of the financial ratios. And if you look at it, it has the major 4 section: the profitability, efficiency, debt coverage and liquidity. And the most important one that we focus on is, for now, it's the debt coverage, and we see improvement. And hopefully, as we go forward, with the excellence and production and with the improvement in market, we will see much better improvement on these debt coverage ratios. And hopefully, as we go, also, we'll see a better result on the return and the profitability ones as well. On the operational performance, we see -- on the ammonia phosphate fertilizer, we see a growth in both the production and the ability to sell. In fact, the quarter 3 where the sales surpassed the production capability, which is basically ended up with utilizing much better utilization of the inventory. On the ammonia also, we are in a positive trajectory in terms of production. The aluminum is, unfortunately, showing a bit of a slowdown by almost 1%, while the sales is still stable. And the alumina, the production is also showing a very positive growth coming, in fact, surpassing last year's level, similar [ cost ] of that is. Gold is showing a slowdown in terms of -- or lower production. And the sales are matching their production in the gold so -- and the copper, it's still maintaining the same level of a steady growth in terms of production and sales. So we open it for questions.

[Operator Instructions] We'll take our first question from [ Ebrahim ] from GIB Capital.

I have a couple of questions. First, regarding the gold production. I know Mr. Mosaed that -- mentioned that -- has mentioned that there is a slowdown in the gold production. But I didn't get why the gold production was down for this quarter. The second question is regarding the selling and marketing expense as well as the G&A. So if we look at the sales and marketing, they are up Q-over-Q, 17% and down 32% year-over-year. However, we know that in Q3 '19, there wasn't -- the new acquisition, it wasn't included in Q3 '19. And the same goes for the G&A, the G&A are up. The reason for this, is it because of the new acquisition? And why is it up Q-over-Q by almost 10%?

I'll take the first -- thank you, [ Ebrahim ]. I really appreciate the question, and I will answer for gold production and about sales and marketing and G&A. I'll take the gold and production. And our CFO, Saleh, will answer the other question. Now just in -- when you are mining for gold or any other metal, the core -- the ore itself exists in -- I mean sometimes, above ground, sometimes, underground. And to reach to the basin so the layer that has the ore, you have to remove the non-ore containing materials. And so this was the called stripping. And there's typical ratios between how much of this there that you move just to get to the ore versus how much you are moving to -- for the ore itself to get the ore to the crushing and the mill station. And so I think it's very prudent to reminding operators that they always keep moving the strip, the non-ore containing dirt for us to get to the ore itself. We -- this quarter, we have focused on this stripping and getting the non-ore containing dirt away so we can get to the ore. That's why as you look at our -- I mean dirt -- the amount of dirt and most rocks that we are moving, we are moving at the same pace. But rather than this moving into our ore inventory, it's going on the landfill space. And that's why it is -- the production. I hope it's clear. Saleh, on the...

Yes. For the sales and marketing, it's basically -- and this quarter experienced an increase in the aluminum freight and what have you. And that shows the impact. And for the G&A, last quarter, we had participated in a donation which -- it was a significant amount. We had this quarter lower salaries in terms of G&A with the contractors. And also, the exploration and technical service, we've spent less this quarter than the previous one.

Sorry, I didn't get the first -- it wasn't clear, the sales and marketing. Just because of...

The sales and marketing was due to an increase on the freight for the aluminum section mostly.

[Operator Instructions] There are no questions in queue right now. Handing it back over to you, if there are any questions on that.

Gentlemen, you can also ask questions not vocally, but submit them in writing. So just give you few seconds in case there's any questions. Well, in that case, any closing comment from the CEO or CFO?

So I'd like to thank you very much for the time. As I mentioned, we -- I mean we feel good about our results. Of course, definitely, the level of performance is not our ambition, but we're looking at the trend, and that is why we are happy with the trends. We look forward for a much better fourth quarter. We'll continue to work on our reliability to make more production. This quarter, we had -- and especially in aluminum, we were challenged with the -- some operating issues with our worker system, utility systems, and that slowed us a little bit down. As I mentioned to you last time, we have Wa'ad Al-Shamal still not achieving its target production, but we have a very solid plan on how we're going to make sure that we fix all the plant issues. And we'll go back to full capacity. We have the 3 areas where we are working on the beneficiation in our utilities as well as in the sulfuric acid assets. So we feel good about it going forward, and we will continue to focus on our fundamentals. Thank you all very much.

Hold on, hold on. We have a question in writing. Bear with us one second. EFG, Yousef Husseini has a question. We're having trouble seeing the question you submit in writing, Yousef. Would you mind asking the question vocally, verbally? Okay. Yousef told me the question. So the question, he just like asked me here, like on mobile. So the question is, why is it the DAP production up? Analyzed, it would imply 95% and will be sustain. That's the question from EFG, Yousef Husseini.

Can you repeat the question, please?

Regarding the DAP production, why it is up? And the increase would imply, according to this calculation, 95%. And will this be sustainable?

Yes. That's a good question. And as I mentioned, the DAP is -- look, we have 2 assets, making DAP, one is our MPC, Ma'aden Phosphate Company, and Ma'aden Wa'ad Al Shamal PC. The MPC runs well. It's been in operation now for about 10 years or so. We debugged the plant and it is running at full capacity. The problem within the DAP is on the Wa'ad Al Shamal. As I mentioned, since the inception of this project, we've not been able to ramp up to the core capacity. And this is for problems, technical problems, we know on the plant, and we have a good robust plan to fix these technical issues. And I mentioned the 3 areas, the beneficiation section, the utility section and then the sulfuric acid asset section. As we move forward, we are working on these problems. And so in beneficiation, we are working on our resource model and making sure that we have consistent quality of ore being fed to the crushing and the milling section. And what you see here is that as we progress on implementing technical solutions, we are adding more reliability to the plant and being able to see -- get more production. And this trend is going to continue [indiscernible] until we achieve capacity of the plant. Plant is designed for 3 million tonnes. We are now around 70% of its production.

Okay. Thank you. And then the second question from EFG is for the CFO. Regarding the lower finance costs, is it sustainable? And then do we expect rates to stay where they are?

Well, the -- is it sustainable? It's -- the saving or the difference here, part of it was the cost of refinancing -- or the result of refinancing MWSPC. So some of the numbers, you may not see it going forward because it was a onetime setup. But the interest rate, the SIBOR and LIBOR, it will be low as long as the general interest rate in the market is low. Our margin, in general, what we pay is of a low level given our perceived credit status.

Okay. Thank you, Khaled. Any questions in the queue? Otherwise, there's another written question. Operator, any questions in the queue?

There are no questions in queue right now, Fred.

Okay. I have another written question here. That's from Bank of America, Sashank Lanka, wanted to know, can we talk about debt to operating rate trends in the third quarter, and how the ramp-up has been since the beginning of the year? And that's the first question. And the second one, what is our leverage target net debt-to-EBITDA for the next year?

Frederik, can you say the first question, please?

First question is the debt to operating rate trend in the third quarter, and how the ramp up at DAP 2 has been since the beginning of the year?

Yes. Okay. I think one thing is that our debt is -- as we go forward, we are deleveraging. And we are paying our -- and so directionally and the market, of course, going up, and so that is helping with our operating rate and operating revenue and operating cash. So directionally, we are going in the right direction, and that is to reduce our debts to our operating cash ratio. We -- as we -- we've now engaged into 2 major projects. One is the ammonia 3, which is $1.1 billion project. And the other one is Mansourah-Massarah, a gold project, bringing about is more than 0.25 million tonnes per year to our production. That's about $870 million. So those will be mostly financed from our own cash, but there will be a little bit of borrowing that we will be bound to support. But that's the overall scheme of our debt. The [ vessel ] is not going to lead to a material increase. And so as we move forward, we will continue to see a reduction in our debt profile.

Okay. And then that ties into the second question. Do we have a leverage target net debt-to-EBITDA for next year?

Yes. Net debt to EBITDA, our target, if you look at the slide, there's a slide on the -- here, I'll show you. It's -- I think -- yes, where the financial ratios, yes. And it is one of the metrics that we are following. And it's -- even we are building our strategy, it's one of the main metrics that we include in our strategy, which is the net debt to EBITDA. And currently, we are at a high level. But as we go forward and we -- the EBITDA increase in terms of the increasing our degree of operating leverage and increasing our degree of financial leverage, then we expect this to drop to the expected level of low single -- very low single-digits. We're looking at 2 to maybe 3, sometimes 4 to 5 years once we see our -- we realize our full capability of in Wa'ad Al-Shamal, MWSPC. And once we improve also and optimize our operation and other legs in the aluminum, what have you, we are planning to have this ratio to drop to international standards, where we are very competitive. And it is part of our strategy work and part of our plan.

Thank you. And operator...

Pardon the interruption, but we've got one question in queue.

Yes. Please, proceed.

We'll take our next question once again from [ Ebrahim ] from GIB Capital.

Yes, yes. Just the following question on the interest cost. So to understand -- and the line wasn't clear. So SAR 350 million of this quarter, as you said, any onetime thing? Or at currently, should we expect this to continue? Yes, and a question, interested to stay where we are?

Well, if I may? Okay. Don't forget that this is a comparison between 2 quarters. The last quarter was a cost of an all debt of the project finance base. This quarter is showing the results of: a, lower interest rate with the new margin, average margin; and b, the cost of the -- that used to be in the amortization of the previous debt was eliminated. In addition to, also, we got some reimbursement after the refinance. So some of it is saving just because of the refinancing, just of doing the transaction itself. And some of it is the change -- the difference in the interest rate. Again, these usually shown in a onetime up, and then it goes steady.

[Operator Instructions] Handing it back over to you, Fred. There are no questions in queue for now.

Okay. Any follow-up comments from the CEO, CFO? If not, I think we can end the call here.

Okay. Thank you so much.

Thank you, all.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.