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

Good day, and welcome to the Quarter 2 Earnings 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.

Welcome, everybody. Thank you for your interest in Ma'aden, and welcome to the second quarter earnings results call. Just a quick standard disclaimer. The presentation contains forward-looking statements. These involve inherent risks and uncertainties. Therefore, please don't place undue reliance on those. Full disclaimer on Page 3. I'm here with the CEO and the CFO. And with further ado, I'll hand over.

Thank you very much, and thank you for your interest in Ma'aden, and welcome to this conference call. This page is really probably shade on our share value performance during -- since the inception. And as you can see, it's outperforming the mining and also pure players in Saudi Index. I will not spend that much time in this page as you know much better than me in this. Going to the next page. This is the -- our performance on the safety. As you can see, having direct employee doing a very good job when it's come to the safety. However, we need really to pay more attention for our contractor and the safety performance of our contractor. And there is a program really tackling this. But if we compare ourselves with the industry, specifically in mining industry, Ma'aden is performing very well. The benchmark is up to the end of 2022 -- 2020, and this is the result of Ma'aden mining portion only. So when we compare ourselves with mining companies' ICMM average, Newmont, Barrick, and Rio Tinto are doing reasonably good when it's comes to our mining safety fulfillment. In the next page, this page also will be covered by the CFO in his presentation, so I'm not going to really to spend time on this. And I'm not going to really read it or go over the information because it's going to be covered in the next presentation by the CFO. In the production, as you can see, the ammonium phosphate has increased by almost 31% quarter-on-quarter and also by almost 16% year-on-year. The performance is boosted up by ramping of our Wa'ad Al Shamal project, which is coming strongly ramping up during the last quarter. The ammonia production, unfortunately, affected by the emergency shutdown, which is reducing our production in quarter by 28% and also compared to the year is almost 36%. The aluminum production is within -- slightly less than the quarter, and this is really 249 is almost our design capacity. We had -- the main reduction was coming from [indiscernible] unit, which is totally dependent on the recycled product coming from outside. The alumina production is above the design. The design is 450, and we are running at 489, which is almost 11% more than the previous quarter and almost 14% more than the last year. The flat rolled products 68 which is almost down by 7% and down from the last year by almost 1%. The gold production is 80,000 kilo ounces, down by 18%. One of the major reason in this area is the [ grade ] control and the difference between the -- what we are finding in the ground and what we believe that we're going to find it in the ground. The copper production is 1% less than the last quarter and almost by 3% from the last year. The unplanned shutdown, unfortunately, this year, we have in Ma'aden Phosphate Company, we have 2 unplanned shutdown, 1 is 18 days due to a water leak from the steam system. The other one is 41 day in quarter 2 due to fire on the primary reformer. Next page on the prices. We have seen a great increase in the prices of DAP. And this is really supported by a high demand and the increase of subsidies in most of the countries and the affordability of the far more because of the increase in the gold price. The ammonia is also following up and sharply increased during the -- since the first -- middle of the first quarter, and we are still seeing those high prices. In the aluminum, again, is driven by the recovery in China, recovery in Europe and United States, and increase of the aluminum demand. And what we noticed actually that the alumina, which is a major raw material for the aluminum, is still struggling when it's come to the prices. And the reason is basically the oversupply happening in the market currently. And the gold and copper, gold rally actually in the end of 2020 fourth quarter continue increasing till the last 2 months where we are seeing pressure on the prices. And this is basically the consumer moderate the consumption. The gold actually enjoy really a very good time. There is an increase. However, we noticed that there is pressure on the prices, which is bringing the gold prices down to $ 1,700-plus. And now I will leave it to the CFO to go over our financial performance, and then we will go to our questions. Yaser?

Thank you, Engineer Abdulaziz. Good afternoon, ladies and gentlemen, and thank you for attending the call. I will start on Slide 18, please. Great. So let me just congratulate all the investors, management, everybody, with the best quarter results ever, with the record sales, EBITDA. This record sales, actually the increase in sales, led also to a gross profit margin increase from 7% in Q2 2020 going through 26% in Q1 2021, and we ended up with 34% in Q2. So this is a major increase in the gross profit margin. Also, we see that the increase in sales led to almost 60% increase in net profit. And this is quarter-on-quarter. So this is just and compared to the Q1. The attributable to shareholders out of this net profit is SAR 1.1 billion in Q2. So on the next slide, going through the bridge. The cost bridge that shows the difference between Q2 2021 and Q1. We see a major increase from SAR 848 million to SAR 1.35 billion. This increase mainly is coming from the price effect, around SAR 1 billion from that increases -- due to the price effect. And let me mention here that major part also -- or the bigger part is coming from the fertilizer increase. The price increased by around $116 quarter-on-quarter, which is around 28%. This has contributed around SAR 600 million to this price effect. The major, major contribution from the fertilizer increase. The sales volume and the decrease of -- or the offset of SAR 340 million, I would say that this is coming from Meridian sales, one, due to the seasonality. We know that Q1 is the season for Meridian. In addition to that, and as mentioned by the CEO, the ammonia incident, which also caused a reduction in the volume sold. But again, this was offset by the increase in fertilizer on MPC and MWSPC. And as again mentioned by the CEO, the good news that we are reaching around 85% of capacity. So that's a good sign for [ In Sha Allah ] -- reaching the nameplate. Finally, on the -- slightly on the finance cost, but let's talk about the others. The others is mainly the cost here. We have realized raw material increase. My belief is this is following the prices. So the big increase in prices may have affected the raw materials, and then that's what we see. In addition to that, we have recorded around SAR 56 million. This is the impairment due to this fire incident. This is as of June. This number might be a little more in July and in August. Also, due to the profitability, the increase in [ zakat ] provision. To the next slide and comparing Q2 '21 with Q2 '20, major increase coming from the price effect. Of course, the big losses tend to be a profit, a good profit here. And the major is coming from the price effect, around SAR 2.2 billion. The increase in prices, again, as I mentioned earlier, the top on the list is the fertilizer, around $226 compared to the same quarter last year or around 76%. So that's contributed around SAR 1.2 billion out of this price effect, slightly offset by the less volume, and this is mainly in the gold. As mentioned earlier, around 34,000 ounces. The CEO referred to the reasons for that decrease. And we will talk [ In Sha Allah ] about our margin plan in this regard. Also, the ammonia impact, which, again, we spoke about, the finance. On the finance cost, SAR 258 million difference, the major comes from lower SIBOR, LIBOR. And we know, all of us, we can see the trend and how is it going lower recently. We also have seen an upfront fee for MWSPC refinancing was recorded last year quarter, which has also contributed to this positive variance and also some capitalization of borrowing costs as per the borrowing cost standard. Finally, when we talk about the SAR 266 million cost, this is -- again, I referred this to the increase in raw materials and to the impairment loss in MPC of ammonia. Ladies and gentlemen, in Slide 21. And looking at our EBITDA, proud to say that we see increases in all businesses, especially phosphate and aluminum, except the gold which we have explained earlier. The good news is that we can see the 45% EBITDA margin and in both aluminum and phosphate. This is an amazing news for us. We can see that even now the phosphate business matches the gold, right, in regards to the EBITDA margin. The major increase, again, on the phosphate, as I mentioned, to prices, 76%, ammonia also around 200% increase in prices. So that's all contributed. The contribution to the group EBITDA, 52% -- in this quarter, 52% comes from the phosphate, 39% from the aluminum and only 9% from the gold. This is for the Q2. On the next slide, the quarterly EBITDA, EBITDA margin. It's very clear the increase in EBITDA and EBITDA margin. And it's the best ever in Ma'aden, if we consider that the earlier -- 2018, we have seen 55% and 53% and I have explained maybe earlier also calls that this is prior to commercial production of some of our assets, including MWSPC and the rolling mill. So that's why we see this because of the bigger margin, but it's not really comparable to what we see now with all our assets in commercial -- in the commercial period. And we see that huge from the EBITDA margin. On the next slide and talking about the cash flow, very healthy cash flow [ Alhamdulillah ] in this quarter. That is actually covering our investing activities and financing activities. But I have to just mention 2 issues here in regards to the investing activities. We see that around SAR 1 billion spent in this quarter, and it's mainly in Mansourah-Massarah and Ammonia 3. And I also have to mention that, although we're controlling our debt, and we will see and talk about this [ In Sha Allah ] in a later slide, but we have seen a need to have a new small debt of around $320 million. This is for Mansourah-Massarah, which we have utilized around $150 million or around 50% in Q2. And this is why we see the financing activities net of $119 million. So this is considering actually the amount or the utilized 50% loan. In the next slide and looking at our financial ratios. Starting with profitability, we see a major increase in profitability ratios. This is obvious due to the what we have spoken about and the increase of EBITDA. What is concerning us right now is some efficiency ratios, mainly inventory turnover and the accounts receivable turnover. Those are the areas that we see [indiscernible]. And this is we can initially say this is maybe because of the increase in prices, so the inventory increases, the account receivable increases, but we need to dig more and try to improve in this area. Good to mention also that our net debt-to-EBITDA is coming down to 5x from 7.6, although the small debt that -- or loan that we have added, but we see that a major decrease in the number. And of course, we still going to continue what we promised that we will control the net debt-to-EBITDA ratio, and we'll make sure that [ In Sha Allah ] within the business notch. On the operational performance side, starting with the phosphate. We have around 300,000 tonne of increase in production Q-on-Q. The -- what we mentioned earlier, the improvement in MWSPC and also the improvement and the higher production from MPC is in the picture. So the ammonia side and the decrease is obviously explained earlier. And [ In Sha Allah ] hopefully, we see that things recovered in the month of August and we go back to operation and the losses [ In Sha Allah ] will be limited to this period. On the next slide and talking about the aluminum, we see slightly a reduction in the aluminum. And this is a small number. Maybe the scale here will be misleading, but it's actually very minor, and it's due to the number of days of operation. And the flat rolled products, again, there is some lower supply of slab from cast house. It's, again, no major issue. And we see an increase of around [ 4 to 8 thousand ] metric tonne in alumina. This is again the reliability work that been actually considered in the aluminum business. Finally, on the gold side, we have, again -- and the CEO mentioned the reduction in the production due to the lower grade of the Ad Duwayhi mine specifically. And on the copper side, we see that it's a very stable operation. Thank you very much. I will now go back to the CEO.

Yes. I'm going really to talk about the project and the pipeline of our project. We have a project under construction, which is Ammonia 3. And we are on schedule, and we are expecting the production to be in the first quarter next year. We don't have any doubt about the mechanical completion of the project. And actually, I have been on a visit last week to the project. It's progressing very well. The recommissioning has started, and we are expecting really the production to be on time in quarter 1 '22. Phosphate 3, that's a huge project, which we phase it in different phases. The first one will be in 2025, and the second one will be 2027. We are running the technology selection, and we have team in Morocco currently running the basic design and also that will complete the feasibility study -- applicable feasibility study. Remediation at Wa'ad Al Shamal. Wa'ad Al Shamal, we have probably a project which will increase our production from 2.8 to 3.1 in the coming year, but we are focusing in -- on improving the reliability, changing some of the equipment and also working in some of the design issues in project. We are expecting the increase to start from next year. So next year, we will have really a good production figures on Wa'ad Al Shamal. And Mansourah-Massarah is a project under -- this is the gold project. The previous one is the phosphate. The gold project we have, a project which is under construction in -- which will add about 250,000 ounces to our production. We are expecting the production to be in the third quarter of next year. The completion will be in quarter 2 next year. And the total cost of the project is about $880 million. The project -- the gold project on the Mahd -- in the pipeline, we have Mahd expansion, which is expansion of the existing Mahd another project. So this project is in stage gate 2, which is all about the pre-feasibility study and the geological analysis and drilling to compare the resource. Ar Rujum, this is another project in the same area -- in the same area of Ad Duwayhi. The Ar Rujum, is in gate 3, which has passing the geology confirmation and passing the pre-feasibility study and moving into basic design and process selection and also the bankable feasibility study. All the 2 projects are expected to be around USD 750 million to USD 780 million. In Mahd Ad Dahab will be in 2025. And the expectation of production of Ar Rujum will be in 2025. That's all for the project. And I think we are ready to receive the question if you have.

Thank you. We're ready for the Q&A part of the presentation. Moderator, please [ explain the process ] audience briefly.

[Operator Instructions]

Okay. We start with -- from Nick Paton, HSBC. Okay. He's disconnected. Please, Anoop Fernandes from SICO.

We can now take the first question.

Yes. This is Anoop from SICO. Congrats on the great set of numbers. My first question is on the ammonia impairment, SAR 53 million impairment this quarter, and you've suggested that there could be impairments in the next 2 months as well. What is the tune of impairments that you expect from this -- from MPC ammonia going forward? Would it be significantly higher than what we saw in the second quarter? That's question 1. And the question 2 is on your recycling. At the start of the call, the CEO mentioned that there was some -- there was lesser output from the rolling mill because of lesser slab availability due to a reduction in your recycled material output. What's really driving this reduction? Are used beverage cans not available within Saudi, so do you have to import a lot? And why can't this be replaced by slabs from your smelter? What does happened to recycled metal on this. Yes, that's these 2 questions on my side.

I'll take the first question about [ MPC ]. So yes, we have mentioned that we have impaired around SAR 56 million. And yes, there is some more to come. Now we're -- our expectation is between business interruption and damage and property damage that we go from $50 million to $60 million. That's our expectation. This number may vary, but this is our forecast. Up to June, we have only SAR 56 million.

Yes. And just a follow-up on this. You've claimed for insurance here. Now will the insurance claims help you recover your lost output as well? Or it is just related to the damages cost due to the fire?

No. Actually, the insurance will cover both property damage and business interruption. But of course, there is in property damage. For example, we have around $2 million. This is the allowable. And also, for the business interruption, the insurance will cover after 2 months. So the first 2 months will not be covered. Beyond that, it will be covered by the insurance [ In Sha Allah ].

Okay. For the second question, the rolling mill is totally dependent on 3 sources of metal. One, is the fresh metal, which we don't have any problem with. The second one, is the recycled product, which is we have an issue not in the supply of the recycled product, but the process of the product. The -- we have some issue with the equipment itself, specifically in the remelt fairness of Can Rec unit. The other thing we try to import slab from outside. And we face some of the issues specifically during COVID-19, the availability of alloy metals. So the alloy is not available all the time for our supplier. And again, after the recovery of the pandemic, we are seeing easing of recycled alloy material. The pressure has become in the availability of slabs from our suppliers.

I hope this answers your question. Next question from Ebrahim, GIB.

Congratulations on the results. I have a couple of questions on my side. One is [indiscernible]

One at a time, please.

I have one regarding the Ammonia plant. Yes. So my question is, is the fire issue resolved or not? And the second, how long did it take for it to be resolved? That's the first question.

Yes. The -- if I understand your question, is it resolved? Yes. Currently, we have -- handing over the plant to operation from a maintenance point of view. So all the remediation, all the repair is completed. And they hand it over to operation. Unfortunately, this is a major incident in the reformer, so we have to start commissioning the plant from zero. Is there any remaining part of the question?

Yes. What is the current utilization for the Ammonia plant from [ production of ammonia ].

Zero. It's not started yet. So we're expecting to start within the next 2 weeks.

Okay. My second question is regard Ammonia 3. Could you give us the -- is it owned fully by Ma'aden? And -- or is it a JV between large [indiscernible] companies? Is it fully owned by Ma'aden?

It's Ma'aden 100%, yes. Did this answer your question, Ebrahim?

Yes, that's it.

If you have a written question...

[Operator Instructions]

Okay. We have a written question from BlackRock, Ashwin Gupta. What impact do you think will be on Ma'aden from China lowering exports of phosphate products?

That's very good question. And I think the demand in phosphate east and west Suez Canal is very strong. And as I said before, Bangladesh increased the BADC sector to [ 850 ] and there is an increase in subsidy for farmers. There is an improvement in Europe and United States and South America in the prices of the crop. And we do believe that China will play a major role inside China. We don't see them very active in exporting their product. And I think the stability of the market will continue. Our concern is really from a continuous increase of inflation prices, which will affect our customer affordability.

Thank you. A related question from [ Nada ] from FALCOM Financial Services. You mentioned that subsidies increased in some countries. Which countries increased subsidies on fertilizers? And what is our sales contribution to these countries?

Yes, we have seen it in Southeast Asia, and Southeast Asia is almost 30% of our product go there. But we are seeing during the pandemic that most of the governments are focusing on food security and making sure that the supply chain of food security is intact.

Thank you. We have a question from [ Nada ] Financial services on the financial impact of the shutdown and what the insurance claims are due to the fire?

I think this is something we just answered a while ago, Fred. So we said we estimated around $50 million to $60 million, right? And it will be covered. The property damage will be covered. Whatever above the $2 million are for the business interruption, it will be covered, right, above 2 months. So after 60 days, all the cost will -- losses will be covered.

Thank you. A follow-up question on the fire from Mohammad from KASB Capital. Can we give any forecast on how the fire will affect third quarter production at this stage yet? [indiscernible]

I cannot really give you the right figure because usually this type of incident, you believe that you finish and you maintain the plant and then when you start to find some other things. So my personal expectation that we will be starting within the next 2 weeks. How long they start up, how the plant is going to behave, it's very difficult really to predict at this time.

Thank you. Then there's a question from Faisal from Goldman Sachs. It relates to decarbonization and carbon-reduction efforts, if you could kindly shed some light on our strategy in this area and any plans to use green aluminum.

Very good question. And I think there is 2 things in the carbon footprint and ecological footprint in general, whether it's greenhouse gases or CO2. There is 2 things in this. First of all, the national interest, what's the government want from us and what's our customer want from us. We have seen the pressure on the market from -- specifically from packaging in the aluminum and automotive manufacturing. They want to know exactly what we are doing in our production and what's the CO2 and the carbon footprint and greenhouse gases. What we have done in starting of 2020, we start defining our base case, and we complete defining our base case. We give it credited by third party. And we worked our plan, which is matching the requirement of the market and matching the national interest and the objective given by government of Saudi Arabia. We know what we need really to do, and we know our plan up to 2030. And we -- what we are working on now is really to work out's. What's the required investment to bring our mission to the targeted area. And the water storeship, we are doing extremely well by investing in pipeline of wastewater and treated water. That's really save a lot -- a huge amount of the water, and we are doing -- and we know what we need to invest and how we are going to bring our consumption in the water. For the green aluminum, it's a part of our strategy, which is a growth, and there is a team working in how we are going to produce green aluminum. That's including the blue ammonia, including renewable energy. And I'm expecting really next year to have a clear plan on how we are going to produce green aluminum.

Thank you. And there was a second question, follow-up on Phosphate 3 from Faisal. When should we expect CapEx for this project to start?

Can I take [indiscernible]

Yes, please.

Okay. So as the CEO mentioned, on Phase 3, we have 2 phases. Phase 1, we're expecting to see CapEx on 2023, so starting 2023. For the Phase 2, we are expecting to see, can be start in 2025. The total of this is around SAR 4.5 billion, as explained in one of the presentation slide.

And it's worth to mention that the Ammonia 3 is part of Phosphate 3. So Ammonia 3 is the first project in Phosphate 3. It will be followed by Phosphate 1 and Phosphate 2, which is '25 and '27.

Okay. Thank you. There's another question submitted from Arqaam Capital, Nour. We've seen gold volumes and downturn for the last year or so. Can you please give us some guidance on production for the next year?

We are -- the problem which we have on the gold currently is not related to equipments and people. The plants are running in their designed capacity. The issue which we have that, in some of the area, we expected to find certain concentration and certain ground. And when we dig in the ground, we found that this is not the correct ground. So we need really to focus in understanding the ground more. I did really give you an overview before on the future and the pipeline project on the gold.

Then we have a question from EFG, Yousef. On the ammonia plant shutdown has been forced to import any ammonia Saudi Arabia to feed the downstream that plants? And if so, could we give guidance on how much we had to import.

We don't need really to import because we are losing the ammonia from Wa'ad Al Shamal. So the surplus ammonia from Wa'ad Al Shamal is fed to Ma'aden Phosphate Company. So there is a swap of the ammonia between the 2 plants. There is a slight amount on both [ fed ] . I think it is about 10,000, but I'm not expecting really to or more, any more than this. And that one is really to compare some of the -- our commitment with our customer. The good thing that all our customer has not been affected by this shutdown. We even increased our delivery, and we delivered some emergency quantities to some of our old-time customer.

Thank you. I was thought there was a verbal question from [ Millennium ] Please put through.

Congratulations on the results. So the first question is just on freight rates. I see in your footnote that there's quite a sharp increase there, which I guess we all know. I'll try again. So on freight rates, are you seeing any moderation in those? Or should we expect that those should remain elevated through the year?

Sorry. The video feed just stopped. Would you mind repeating the question, Matthew?

Sorry. Question is on freight rates. Can you give us any guidance on whether those are expected to remain high through the year? Or are you seeing some decline?

We have seen an increase in the freight rate. And we have seen also during the last 2 or 3 months, a shortage of containers. Is it going to increase? I'm not sure out of this question, but I'm sure that it will not go down. There is a strong demand in this commodity, whether it's [indiscernible] or containers. And I feel that the increase -- the prices will remain high in shipping. However, Ma'aden has a certain strategy where we secure probably more than 70% of our bulk in time charter.

Okay. And then the second question is on the gold sales volume. Can you clarify, please? Because I see 80,000 ounces in the presentation, but also 116,000.

Which page you are talking about?

Well, I can't -- we don't have the slides. I'm...

Okay. Can you repeat your question again?

So you show 116,000 ounces on the slide, but I think earlier in the slide deck, you referred to 80,000 as well.

No, 80,000 is the quarter results, the quarter 2 results. However, the reduction is almost 14,000, and this is really compared to the amount of production is a really sizable reduction. We are expecting really to recover during the second half.

We have a written question submitted from Fasanara Capital. Could you please comment on the performance of Meridian? What has been the progress on the integration and growth?

Can you repeat it?

Could you comment on the performance of Meridian and update on integration and growth?

Yes, that's a very good question. We are proceeding on the integration at the consolidation level. Safety, we have really very good integration. We start registering their safety performance with us. The cyber security and IT, we are really integrating in this area. And I think we are progressing quite reasonably when it's come to integration. The performance is extremely improved this year, and there is an increase of -- in their performance, we have the figures of...

On Q-on-Q sales, around SAR 500 million.

Yes. So there is a tremendous increase in our distribution in Africa. And I think this will continue as far as we are able to provide more distribution units and gaining more contract with the local governments.

Thank you. And then FALCOM Financial Services with a question on the current high global food inflation that seems not so sustainable in their view. And whether there's a risk for phosphate prices to correct 2022 onwards, both in terms of demand or higher level of supply-side growth.

Yes, absolutely. I agree with this direction. We are expecting that the market to be corrected. When it's that [ concrete ] to have in. That it could be in the 2022 and it could be later on. But I agree totally that the increase in the price will really touch the affordability of the farmer, and it will go back and correct the prices.

Okay. We're nearing the end of the call. We have time for 1 or 2 more questions. Saudi Fransi Capital is asking whether you expect an impact on aluminum prices in Q4 due to the export tax on exports from Russia.

Yes. This is quite seen today. The market starts reacting to this. And however, in general, the aluminum, most of our analysts and consultants, we are expecting this high price to really trigger restarting some of the smelter. And we are expecting the balance of supply and demand by probably in the Q4 or the first quarter of next year.

And then a follow-up question on fertilizers from FALCOM Financial Services. At this high level of pricing for chemical fertilizers, is there a possibility for organic fertilizers to be more economical for farmers? And could this affect prices.

I cannot really answer this question because I don't know what's the dynamic of the organic. Is there -- is any enough organic fertilizer on the market or not. So I'm not really in a position to answer this question.

Yes. Moderator, could you ask one last time for a final question before we end the call?

[Operator Instructions] It appears at this time there are no further questions. I'd like to now turn the call back over to the -- my apologies, we do have a late question coming in from Anoop Fernandes from SICO.

Just 1 follow-up on ammonia. Now assuming you'll start the MPC ammonia plant in the next 2 weeks, do you expect an impact on the global ammonia prices? Do you expect ammonia prices to correct significantly from your [ $600-plus ] levels?

Okay. Apologies. We had a small technology issue, but we're also out of time now, so thank you very much for your interest in Ma'aden today. If there are any unanswered questions, we are an e-mail or a phone call away. Thank you very much.

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