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

Good day, and welcome to the Q3 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Frederik Michaelsen. Please go ahead, Sir.

Good afternoon. Thank you very much for your interest in Ma'aden. Just a quick disclaimer, this presentation contains forward-looking statements, which involve inherent risks and uncertainties, so investors should not place any undue reliance on these statements. Full disclaimer on Page 3. And without any further ado, I hand over to our CEO.

Thank you. Good evening, everybody, I welcome you all to this session. I will start slightly with the safety. I think Ma'aden is continued performing well in the safety and -- do you hear me?

The picture just disappeared.

Excuse me, can you hear me?

Yes, sir. We can hear you.

Is there a video? Can you see us? Or just the slides?

Yes, everything is viewable.

Okay. Great. The performance of Ma'aden safety starts continuing improving, and we have seen an improved in overall where the total recordable injury is about 0.18, which is really within the norm of the best 3, and actually, this is manufacturing and mining. And I will go to Page #6, talking about our ESG strategy. During the past September, the Board approved strategy the ESG strategy which is focused on the ambitious to be role model in KSA when it comes to the ESG objective. One of our major objectives to reduce Scope 1 and 2 greenhouse gases and basically CO2 equivalent emission by almost 60% in the year 2040, focus in renewable on the future and also for our existing plan and considering Scope 3 emission in the near the future. We are focusing in the water stewardship, and we need really to decrease the ground water usage by 65%, specifically in the North area and be central. In the gold mine, we are consuming a lot of gray water, completely our operation in gold is dependent on the treated water. We close any gap versus the peers in social dimension. We started our community maturity -- community engagement maturity, and we get the 3 out of 5, and we are heading really to achieve for within the next 2 years. Maintain a good position in governance. Ma'aden consider as a leader in the Middle East when it's comes to governance, and we will raise the bar to be more benchmark in Duwayhi. In the production update, the ammonium phosphate is 1.2 million tonne, which is 1.27 million tonne, which is down by 10% year-over-year and also quarter-over-quarter. Ammonia production was 329,000 tonne, which is 8% quarter-to-quarter, and unfortunately, 45% year-over-year for the main reason of the fire in MPC Ammonia plant. Aluminum production is 243,000 which is slightly down by 2% quarter-to-quarter and down by 3% year-over-year. The main reason is the recycling facility. Alumina production was 458,000, down by 6% quarter-over-quarter and down by 3% year-over-year. Both the aluminum and the alumina are above the design capacity. Flat rolled product reduction was 75,000 down by 5% quarter-over-quarter and 3% year-over-year. And, now, one of the main reason is the shortage of slab coming from outside during the crisis of the -- during the pandemic. The gold production was 75,000 ounces, down by 6% quarter-over-quarter and down by 18% year-over-year. The main reason -- the mining and the milling is really over capacity, over the design and above the budget. The problem which we have is the accuracy of what we have on the ground. That for mining, we found that the grade is less than what we anticipated. The copper production is 16,000 metric ton, which is 4% quarter-over-quarter and 1% year-to-date. I will talk about the unplanned shutdown in quarter 3. The unscheduled shutdown at MPC is basically due to the seawater leakage in the line, which is providing sea water from the Gulf to the plant. We have a crack there which is costing us almost 20 days of shutdown. The repair completed in September. The [ recent ] incident, which happened in the second quarter. The ammonia blend fire, it's -- the repair has taken also part 87 days of the third quarter. And fortunately, we started by end of September. And also, we have a quite good safety occurrence. There is no any -- there is no injury in this incident. In the market outlook, we have seen the phosphate prices are increasing. The main reason is high demand in both sides, in the East and the West, which is also coupled with high prices of raw materials, specifically the ammonia and the sulphur. We have seen an easement or flattening of the ammonia prices. However, lately, it's got increased because of the energy crisis, which we have during the last 4 or 5 weeks. In the aluminum, the aluminum prices continued climbing until by the end of the quarter. Currently, we are seeing a little bit in the prices. The alumina start responding to the increase of the [ LME ] and it's reaching about 400 Koc during end of the quarter during September month. Gold and Copper, specifically Copper which start reaming -- settling at below $10,000. And also, we are seeing a slight reduction on the gold for -- by the end of the quarter and more stability of the Copper at the prices, which is around $10,000. And now I will hand it over to Yaser, my CFO, to talk about the financial results.

Thank you, Engineer Abdulaziz. Good evening, ladies and gentlemen, pleased to talk to you today in our earning call -- Q3 earning call. I will start with Slide #16, shed some lights on the consolidated key financial results. So Ma'aden continued to have a new record sales and EBITDA, even net income. Sales reached SAR 6.7 billion in this quarter, 10% above previous quarter. Reasons for that is prices continue to increase, an average of 8% we have seen Q-on-Q. And also, we have seen slightly improvement in the volume. The EBITDA being SAR 3 billion, 10% again for the very same reasons. Our depreciation, the consolidated depreciation is around SAR 1.16 billion, that's on a quarterly basis. This takes us to SAR 1.8 billion, SAR 1.9 billion operating profit. Our financing cost around SAR 300 million on a quarterly basis. This leads to our net profit of SAR 1.6 billion. What attributable to Ma'aden is SAR 1.27 billion or SAR 1.03 earnings per share compared to SAR 0.01 on the same quarter last year and SAR 0.89 on the previous quarter. If we move to the next slide, Slide #17, we have explain quarter-on-quarter. This quarter, this shows the Q2 to Q3 bridge, where we analyze the amounts coming from price. It seems to us here is [Foreign Language] it's a big amount, around SAR 587 million coming from price. As I mentioned, the sales also slightly contributed. And the others or the SAR 346 million is mainly because of our sales. We are seeing also increase in raw material prices. This goes with the increase in the prices of products. Next, we compare -- the next slide, we compare the quarter to the same quarter of last year. SAR 99 million losses compared to SAR 1.6 billion of this quarter. Again, SAR 2.3 billion is coming from the price effect we have seen from quarter to quarter, we have seen around 50% as an average increase of prices. Mainly the increase is coming from the prices of fertilizers. Also the aluminum -- the gold, unfortunately here, we see around 10% reduction in prices. On the sales compared to the same quarter last year, we have SAR 263 million lower than last year quarter. And this is for the 2 reasons. The first one is, as mentioned by the CEO, the ammonia fire incident. And the second is also as mentioned, the gold grade, which is lower than expected, causing 16,000 ounces lower than -- production lower than the previous quarter. On the others, furnace cost is also contributing to the profitability. The others is actually -- again, it's mainly the cost of sales, and as I mentioned, the increase in raw material. In addition, we have seen or recognized SAR 52 million as an impairment loss of the ammonia, one fire incident. This SAR 52 million, if we combine to what we had last quarter, around SAR 58 million to around SAR 110 million total impairment losses on the incident. It's good also to mention that if we consider the deductible, this amount is ensured, and we are in the process of communicating this with the insurance company. We haven't seen yet any payments, so we have recognized the losses. The -- still the payments from the insurance, we're expecting [Foreign Language] in Q4, Q1 next year. So on the next Slide 19. The EBITDA on the -- maintaining this margin at a very excellent level. We have seen 45% in Q3 '21. This percentage is mainly -- or the 53% coming from the fertilizer business, 40% from aluminum and 70% is coming from gold. On the next slide, Slide 20. This is the trend. We see that we're coming from around 25% into 2020 to reach around 45%. We're [Foreign Language] maintaining the number and hopefully, prices continue to be in the -- on the same level. This will help Ma'aden a lot in achieving also the delivering strategy where I will [Foreign Language] talk about it later. So here we come and let me talk about the cash flow. The operating activities, very healthy cash flow of SAR 2.5 billion for the quarter. That enabled us actually to cover the investment activities and refinancing activity. This, as I mentioned a while ago, will help us in deleveraging, considering that we are getting only the -- or relatively less percentage of debt, right, in our projects. In the meantime, Ma'aden continue [Foreign Language] to repay the debt on an average of around SAR 3 billion on an annual basis. So the next slide showing the ratios. The annualized 2021 compared to 2020. We have seen an impact of improvement in profitability. On profitability, debt coverage and liquidity, no doubt. On the efficiency side, on the inventory turnover and accounts receivable turnover, we see slightly unfavorable variance. We may say that because of this is might be the increase in prices that affected the receivables and the inventory and then we're seeing this lower ratios. In general, all the ratios are going towards the favorable variance. The next slide on the Ma'aden growth CapEx, from 2019 up to end of 2021 and slightly in 2022, we're focusing in building the Ammonia 3 and the Mansourah-Massarah projects. Those 2 projects, actually, we are depending on them on really bringing more cash to Ma'aden that will help us [Foreign Language] in building future projects and supporting us in the financing of those projects. In 2023 and onwards, we will be [Foreign Language] focusing on Phase 1 for Phosphate 3 and also potential -- new potential mines, Mahd expansion and other ones. On the operational performance, it shows from even the bridge, the cost bridge that I showed earlier, we have a flat level of production in most of our products with a favorable variance, which is around SAR 10 million. So it's slightly improved, but it's almost the same level. We -- on Slide 25, can only talk about the ammonia where, again, the incident that we spoke about, affected our production and sales. On the aluminum, again, it's a flat performance on the quarters. The sales of aluminum are double than previous quarters. This is just the timing of ships, 3 ships in Q3 compared to less in previous quarter. Finally, on the gold, the gold production is -- and sales are lower. And this is basically of the mentioned grade of Ad Duwayhi. With this, I'll go back to Engineer Abdulaziz to continue more on the call.

Yes. And the update of the project, I think it is clearly that we are achieving our milestone in Ammonia 3 in spite of the [indiscernible] and shortage of manpower we faced. Really a huge shortage of manpower specifically from India and also we are facing a delay on some of the equipment in different countries due to lockdown of some of the workshops. The -- we are expecting about a 2-month delay in the Ammonia 3. So we will have our production starting in the first quarter this year. Currently, we are in the decommissioning phase, and it's gaining ground, and I think we will be able to achieve the target date on time. The Phosphate 3, which is a completion of Ammonia 3, actually expected to reduce about 3 million tonne per annum. And the cost estimate, as of today, is about USD 4.2 billion. The completion date will be -- Phase 1 in 2025, and 2027 for the Phase 2. The ammonia production will be similar to what we have. It's duplicate of our land, which is about 1.1 kilometer per tonne per annum, and the cost is $1.113 billion. This is a contracted, mostly contracted projects so the figure is more -- much more accurate than the [ current ] phases. Mansourah-Massarah, the total production is 250,000 ounce per annum across the life of the mine. The cost is $880 million. This is the budgeted costs and we are expecting to touch the ground on the same cost. The same issue, the project is under construction. Again, the same issue, which is COVID-19 created a delay of about 4 months. And we are expecting to achieve the first ounce of gold by quarter 2 next year. The project is gaining momentum, specifically during the last 3 or 4 weeks. We have more than 5,000 workers currently working in this project. And we are expecting that the completion of the project will be in quarter 4. Mahd expansion, this is a Stage 1 project. So the targeted production will be about 220,000 ounce, the average of the life of the mine. We expect it close to $670 million and this is really the cost of prefeasibility study, which is technically plus or minus 40%. The completion is expected to be in quarter 4 2025. Ar-Rujum expected to reduce 230,000 ounce per annum, the average of the mine life. The project cost will be about USD 812 million, this is plus or minus 20%. The completion expected to be in quarter 3 2026. Thank you very much for listening for the presentation. And I think now it's open for questions.

Yes. Thank you very much. Operator, please briefly review the audience on how to proceed with questions.

[Operator Instructions] I'll now turn the call over to Mr. Michaelsen for any written questions posed. Thank you. My apologies, we'll actually take our first question over the audio from Faisal Azmeh from Goldman Sachs.

Congratulations on the strong set of numbers. Three questions on my side, please. So the first is on the phasing of Phosphate 3. So you're going to conduct the expansion over 2 phases. Just from a capacity perspective, is it right to say that it will be split equally between the different phases or will the first phase be smaller in size? And that's my first question. And my second question is regarding to the gold production capacity. So what's your target production post these expansions? Where do you expect your capacity to be at? And my final question relates to the volume impact you've shown...

Faisal? Faisal, can we just like take 1 question like at a time?

Okay, sure.

Yes. Fahad, for the first question, yes, there will be equal. The 2 phases, they will be equal. The main reason there we have really to be responsible to produce and have the growth based on the demand of the market.

And could you just go through your second question, Faisal, before moving on to 3?

Yes. What is your net production capacity going to be at for gold post the expansions if we add all these projects? And we also take into consideration the declining rates for some of your mines as well. So do you have a target for that growth, just taking into consideration what you've provided us with?

Yes. This is very good question. And we are expecting really to have some of the mine getting out of the surfaces. And we need really to keep our production to get into our target of 1.6 million in the long term. So our strategy is really to keep the pipeline full of project in order to keep our reduction for at least the next 10 years spending around or above SAR 1 million.

Got it. And just my final question relates to the ammonia sales volumes. So you've mentioned that you've had quite a -- what was a bit of a delayed shipment from Q2 into Q3. So as we think about the volumes coming back post the shutdown, would your volumes be or would your sales volumes be equal to what you did in Q3? Or would it be slightly lower or higher? I'm just trying to gauge where the volumes are likely to be because you had a one-off quite high sales impact in this quarter if I'm not mistaken.

I think if you're talking about the ammonia, the ammonia is going to be at capacity some time in Q4. So no change in that, we will come back to [ capacity ]. The shipments, the one I was explaining is the alumina, not the aluminum. So on the alumina side, we have seen shift. The ammonia will come back [Foreign Language] to the normal designed capacity.

Our next question today comes from Indika Hemantha from Alistithmar Capital.

I have a couple of questions. Starting with the MPC's shutdown, can you please give us like -- is that the reason why the DAP volume sale is -- production is substantially lower than last quarter? And just to see whether the plant is back to normal right now?

Yes. The plant is back to normal in the ammonia. And what's the other part of your...

My question is like you mentioned something, the water leakage, also having like a third quarter that it's a water leakage and 20 days of shutdown or some impact -- production impact.

Yes, the 20 days for the water leakage there is a water -- kind of seawater coming, which we have a crack on this. It's repaired and the whole line is inspected, and back to normal. The highest effect was in the ammonia, which is already shut down. So it's not a [ 0.5 billion ] back to the ammonia. The ammonia impact is coming from the explosion. The other impact in our BAB plant, which is reflected in the production of NBC this quarter. Currently...

So you think -- So you're expecting no impact for the production, fourth quarter?

Yes, fourth quarter, we will have everything going at 100%.

My second question is regarding the logistic issues, of course, everyone is talking about. This is especially valid for a container-cargo producers or exporters. But we just wanted to understand, do you have any sort of impact from higher trade cost and insurance or any delays in export volumes to maybe nearby countries or North America?

Actually, the impact on Ma'aden is very small. The reason that most of our product is bulk product, the phosphate and then somehow the aluminum. The only product which is affected by this is part of our pellets sales and the [ slab ] product in rolling mills. In both of them, we don't have a delay on the dispatch to our customer, however, we have dramatic increase on the cost.

One final question from my end. Do you see like -- the current level of like premiums, especially the aluminum premiums, are significantly high. Do you think like these premiums and the prices will sustain for the next 2 quarters?

You are talking about the premium or the LME?

Both premiums and the LME. I mean, I just wanted to understand how many months you have already booked in terms of sales volume.

We don't have -- you know that the aluminum, we don't have a problem selling this because it's really very -- so market price, so you can push the quantity. And I -- for me, the prices, I think, 1 of the 2 major things, which is currently emerge is the energy prices in China and Europe and also being transportation. Those 2 things, if they continue for the fourth quarter, then we will see an increase of prices. The prices reached -- specifically the LME, they are reaching really a record for the last probably 11 years. And definitely, we would likely to see stability in the price, and the price has to be fair for us and for our consumer. Otherwise, we will see a little bit of movement in demand.

[Operator Instructions]

We'll go to some written questions now. The first question is from Alpha Capital, Abdulaziz, who wants to know if there's any plan to start paying dividends in the next years.

Yes. The payment of dividends is a very ruminative process and very transparent usually by the end of every fiscal years, the Board will recommend to the general assembly and they approve it. So I don't have any information really to say about this.

And then another question from Abdulaziz, Alpha Capital. What was the impact of the fire incident at MPC in the third quarter? Is the insurance covering most of the loss in production? And then I have some other questions.

Yes, the -- as stated by the CFO, we are claiming the damage and also we are claiming the business interruption. The business interruption is anything above 60 days.

And a follow-up question on this, from Anoop from SICO, is that we guided on the Q2 conference call for approximately SAR 200 million is our total impairment and has taken SAR 110 million so far. So any more color we can give on that insurance?

Can you just repeat the question, please.

We guided for approximately SAR 200 million total impairment during the second quarter -- SAR 200 million, and has taken SAR 110 million so far.

No, no. We have impaired SAR 58 million in Q2, and SAR 52 million in Q3. This is a total of SAR 110 million. This is communicated already with the insurance company. And we said that we have a SAR 2 million that are deductible. The rest is still under negotiation. And we expect that the payment will be received [Foreign Language] in end of Q3 or early Q1 of next year. The business interruption is a longer process. So we're still calculating, we're still communicating with the insurance company, and this will take a little longer.

So the payment will be end of quarter 4 or the early quarter 1.

Q1- for the damage.

For the damage. The business interruption will take longer.

Yes.

So moving on from the insurance and the fire incident back to ESG. A question from Nour from Arqaam Capital. How do we expect to cut emissions by 60% by 2040?

Yes. The main thing which we are really trying to do currently is improving in recycling for -- specifically for the aluminum, use the renewable energy in other areas of mining and manufacturing. The -- we are looking for -- and this is a longer term strategy where we look to new processes, and decommission any processes which is not really -- which has a very high emission. That's a very long-term process, and I am expecting really this to be achievable in the 2040.

Second question from Nour, Arqaam Capital. Are we able to secure magnesium in 2022 with the recent headlines on that topic?

A very good question. The magnesium has a severe shortage and -- across the world. Yes, we have -- we have a long term and we secure quantities probably up to the mid of next quarter, which is first quarter 2021 (sic) [ 2022 ], and we are working really to secure more magnesium. And this -- If we have a shortage, god forbidden in the future, if there is no easement in this, that will be impacting the rolling mill only.

Thank you. Now we're going to the gold production, Yousef Husseini from EFG Hermes, asking whether we expect gold operations to go back to normal production levels as it has been several quarters of declines? Also Asmar Shams from Saudi Fransi Capital is asking whether there's a particular mine where the ore grade's below expectations or the decline is across all existing mines.

Yes. Going to the previous question, the magnesium is affecting only our rolling mill product. So it's not really -- it will not be significantly impacting the aluminum. For the gold, yes, you are right, and unfortunately, our major impact is in our biggest mine, which is Duwayhi, and that will be collected this year. We are investing more in drilling and trying really to make sure that what we are planning in 2022 is an accurate and our mining plan is accurate.

And on that detailed question from Anoop from SICO, you said that in the annual report 2020, you said that we relinquished 63% of the exploration licenses we had in January 2020. What is the reason for such a big change in the exploration footprint? And is it fair to assume that most of these licenses were for the exploration of gold? And then how optimistic are we given the lower grades to really reach our gold output of 1 million ounces?

Yes. This is a very good question. This is -- most of those licenses, an old license, which we have done all the exploration which we need. And by law we really needed to return them back in order to reduce your cost and also to focus on what you need to do. And we -- Currently, we are discussing with the ministry, and we're still receiving the new license to improve and increase the lands which we have in order to have really a good work. The question is, yes, it's mostly in copper, zinc and gold.

Okay. Then going to our fertilizer part, what is the management outlook on ammonia prices in the context of the coal price cap in China? How much from the [indiscernible]?

The ammonia prices, unfortunately, is very, very volatile. I just received the call today, there is some $800 per tonne floating in the market, which is extremely high. I think the gas issue, the shortage of gas in Europe, shutting down some of the plants requirement for energy specifically that we have winter and also the [ lumber gain ] coming, and we have seen clearly that China is easing the restriction in the coal and the prices is totally dependent on the availability of the raw material for the ammonia.

Now we go into the outlook in alumina and aluminum prices. Several clients asking a general question about the outlook, and whether scrap availability is an issue for us?

Yes, the scraps is -- first of all, the LME and alumina, [ aluminum ] start responding to the market and coming back from low prices, which is really doesn't make a big sense, specifically that the correlation between the two is usually very high. We are seeing an increase on the alumina prices for the last probably 2 to 3 weeks. The aluminum is -- again, it's totally dependent on the -- what's the Chinese are going to do when it's come to the energy policy and the environmental policy. And we have seen them 2 weeks ago relaxing in the copper and probably the production in the aluminum will grow and increase more. The inefficient smelter will come back into production, and we have seen the Chinese are very strong and resilience when it comes to starting and shutting down the smelters. We're still watching the energy issue, and we are expecting that being the prices and the balance will come slowly during the next 4 or 5 months.

We don't have many questions left operator. Could you just give a quick reminder on how to proceed if you want to ask a question.

[Operator Instructions]

We have 1 last question from Ebrahim, GIBC. The utilization rate at MPC prefers to give 100%. Well, can you share the expected utilization rate in Q4 post-fire and also the utilization rate for Wa'ad Al Shamal?

Yes. The MPC usually is really very good operating company. They are always operating about their design. Unfortunately, the incident of the ammonia followed by the incident of the seawater is reducing the reliability, both ammonia and the utility. What we are doing now, we are coming back 100% for the quarter 4, and we will continue focusing on our planned liability, including the changes of system changes with people and trying really to make sure that we are sweating our assets. For Wa'ad Al Shamal, Wa'ad Al Shamal still will be ramping the stage. Wa'ad Al Shamal is a new plant with a new mine and with a new people. So we need really to look at this. We have a dramatic change in the way we're operating or we are dealing with the project. The project is still not completed. So what we have done has really taken a step and changing what we need to change. Three [ towers ] is going to be changed starting from December this year. We have spent a lot of money this year in order to improve the reliability. So I'm expecting really to reach our maximum capacity within -- by the end of 2022 or early 2023 by changing 3 major equipments starting from December. Plus what we have done on the beneficiation for the last -- the last year, we changed a lot of sales in the beneficiation. We changed -- we work also on the -- in the environment, improving the environment by changing the dusting system and improving the capacity of our crusher and milling and also the flotation cell.

Okay. And we have a last question also from Ebraheem GIBC. Why is the gross margin lower in Q3 in the phosphate segment?

Why...

Why is the gross margin lower in Q3 in the phosphate segment?

We actually spoke about the increase on the raw materials, more conservative, for example. We have seen a major increase. This really affected the gross margin. Although on the EBITDA side, we said that we are maintaining the same percentage. But on the gross margin, yes, we can see that the raw materials is increasing.

Okay. So thank you very much. It seems we have no more questions at this stage. So thank you very much for your interest in Ma'aden. If there's any follow-up questions, we are a phone call or an e-mail away. And with this, we end the call. Thank you very much.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation today. You may now disconnect.