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

Good afternoon, ladies and gentlemen. Welcome to Ma'aden first quarter earnings call, and thank you for joining us. My name is Abdulaziz AlNaim, Investor Relations Director at Ma'aden. All participants on today's call will be in silent mode. The presentation and all relevant material will be available in our website and on Ma'aden App. Please refer to our disclaimer and all of the disclosure made in this presentation. I'm joined today by our CEO, Robert Wilt; and our CFO, Louis Irvine. They will take us through the company's performance in the first quarter of 2023. As usual, we will open the floor to your questions at the end of the presentation. Please feel free to start posting your questions at the chat box during the call. We hope to get through as much as possible on today's call. However, if you have any follow-up questions or clarification, please do not hesitate to email us. With this, now I'll hand it over to Bob.

Thank you, Abdulaziz, and thank you to everyone for joining today's call. I'd like to start off on a serious note by addressing the tragic loss of life of one of our third-party contractors this quarter. On behalf of Ma'aden, I extend our deepest condolences to his family and friends. We are committed to offer any further support and assistance required. Following the incident at our alumina refinery during a planned shutdown, we suspended operations for 10 days to conduct a comprehensive investigation. We implemented necessary corrective actions and reinforce safety procedures, which added another 10 days of the shutdown. However, this incident is a reminder of the need to be constantly vigilant and focus on our proactive approach to safety across all our operations. Now let's turn to our results. The first quarter presented clear challenges, softer pricing for ammonia, phosphates and aluminum had a major impact on our performance. However, on the operational front, we delivered a strong period. We increased production in our core phosphate unit and delivered record quarterly volumes. We use the softer ammonia pricing environment to bring forward essential planned maintenance and Ammonia 3 is now running at nameplate capacity. Our aluminum pot relining program is on schedule. As discussed at the end of last year, we finalized the settlement of a one-off legacy industrial utility charge in the aluminum business. This will not recur. All in, revenue came in at just over SAR 8 billion. Our adjusted EBITDA stood at SAR 2.67 billion, net profit was SAR 420 million, and earnings per share was SAR 0.17. Our focus on disciplined cash management continues. We generated cash flows from operations of roughly SAR 3 billion, and our net debt-to-EBITDA ratio stood at a very comfortable 1.4x, demonstrating our continued commitment to strengthening the balance sheet. As you can see here, commodity prices impacted -- impacting Ma'aden have come off historically high cycles. Last year, both phosphates and aluminum had exceptional years due to market factors and global uncertainty. We see some price stabilization for the balance of this year, but beyond market dynamics, our cost competitiveness is what sets us apart. Our phosphates and aluminum business units are comfortably in the lowest quartiles of the cost curve. This allows us to weather the softer pricing environment while maintaining profitability throughout the cycles. We will continue to focus on operational excellence every day. For gold, we are committed to bringing our production costs down as we review our asset base and transition to new mines. Let's look at our progress on our growth strategy. As mentioned, operationally, we've boosted our fertilizer production this quarter, hitting record volumes. Our exploration teams have drilled more than 100 kilometers in the quarter and are ramping up even further. At our aluminum smelter, the pot relining is on schedule and will be complete before the end of June. Ammonia 3 has reached nameplate capacity and our new gold mine Mansourah-Massarah, is on schedule. Also, the Phosphate 3 project is accelerating towards the final investment decision later this year. Our partnerships with the PIF, Shareek program and the Ministry of Investment are playing a crucial role in supporting the infrastructure of this project. Now let's pivot to our strategic highlights. We've completed the strategic investment of USD 126 million in Ivanhoe Electric and now own 9.9% of the company. We are concluding the 50-50 partnership with Ivanhoe to explore the Kingdom. Ma'aden will provide exploration licenses and Ivanhoe will contribute their proprietary Typhoon technology and exploration expertise to accelerate our program by over 6x. We've also expanded our partnership with Barrick, so that we have nearly 9x more area under exploration around our existing copper joint venture. Finally, we're advancing our partnership with the PIF to invest in global mining assets. These agreements are all intended to maximize long-term value for our shareholders as well as wider stakeholders. ESG, obviously, is a key area for me, our executive team and the Board. We've committed to be carbon-neutral by 2050 with a clear road map to get there, including interim milestones. We're currently tracking ahead of our 2025 milestones with some quick wins, including foundational agreements for carbon reduction and groundwater usage reduction. We have redesigned our operating model to create a strong foundation for future success. We're seeing real positive changes across all our operations with efficiencies and a flatter organization structure reducing layers from 12 to 6 to enable 50% faster decision-making. We're also driving increased diversity and freeing up opportunities for young people that will become the leadership of the future. To this point, we have doubled the number of females in our workforce this year. But admittedly, we still have a ways to go. Our all injury frequency stands at an all-time low of 0.12, but given the fatality, obviously, much more needs to be done. We are moving away from lagging indicators and focusing more on risk elimination and culture change. We are revising our EHSS management system to ensure that our practices are top tier across our operations, and we don't have to suffer further needless tragedies. I'll now hand it over to Louis to take us through the financials.

Thank you, Bob, and welcome to you all. As Bob highlighted, we are coming off a peak year in terms of commodity prices. In aluminum, the impact of higher raw materials was also felt and this, together with the final industrial utility settlement impacted our overall performance. Let me now take you through some additional details. Looking at our year-on-year EBITDA bridge, it is worth noting that the drop is to be viewed in the context of 3 major elements. Firstly, lower prices have SAR 1.8 billion price effect which was partially offset by increased volumes as we ramped up phosphate and ammonia production. In terms of cost of sales, SAR 605 million was as a direct result of phosphate and aluminum running off inventories during this period. We also continue to invest in our broader business transformation strategy as well as increasing our value proposition to employees as previously reported. As mentioned at the year-end, these initiatives will help us to deliver through the cycles on a sustainable basis and realize more of the price and volume effects into EBITDA. Lastly, the final settlement amount for the utility charge is included in the one-off. We generated healthy cash flows from operations of SAR 3 billion during the quarter. The rundown of inventories referred to earlier, along with other working capital optimization initiatives generated SAR 900 million in the quarter. SAR 7 million was reinvested into the business through growth in sustaining CapEx. The Base Metals and New Minerals business received the largest share at 40%, mainly attributable to the Mansourah-Massarah project followed by Phosphates at 35% and the Aluminum business at 25%. Close to SAR 1 billion of debt was repaid in the quarter, further deleveraging the balance sheet in line with our capital allocation framework. Overall, we increased cash by 4% since the year-end. Our focus on financial discipline is seeing a consistent lowering of our gearing both long-term borrowings and net decrease from the year-end with lower net debt balancing the lower EBITDA for the period. We previously guided to 2 to 3x net debt-to-EBITDA and are currently well below that at 1.4x. We now move on to our business units, starting with our largest segment, Granulated Fertilizer sales volumes increased 59% year-on-year, which coupled with increases in ammonia sales volumes partially offset the year-on-year drop in ammonia and DAP prices of 29% and 27%, respectively. We made the decision to bring forward essential warranty maintenance at the Ammonia 3 plant during the period, which impacted ammonia production volumes. The Phosphate unit remains the main contributor to sales and EBITDA unchanged since year-end. This bridge breaks down the EBITDA performance in the Phosphate segment. We can see that the lower realized prices were offset by the increased sales volumes. As mentioned before, the higher cost of sales related to the inventory runoff during the period as well as higher production volumes and associated production costs. Turning to Aluminum. The business unit was affected by lower production and sales of primary aluminum due to the pot relining program as well as higher raw material costs as we have consistently reported on during the course of last year. The nonrecurring one-off charge is reflected in the performance of the business unit this quarter. In summary, the provision made at full year of SAR 317 million was based on ongoing discussions and was the best estimated outcome of the claim at that point in time. Subsequent to the year-end, we reached the final settlement. Accordingly, we recorded an additional amount of SAR 493 million in the first quarter as a full and final settlement covering 2021 and 2022, which were affected by a change in regulation introduced in January 2021. Turning to the breakdown of EBITDA. The drop in commodity prices was compounded by the higher raw material prices, with caustic soda up at 40% and carbon materials at around 15% year-on-year. On a positive note, we have seen a softening in caustic soda prices of around 20% quarter-on-quarter and carbon materials remain in line with the previous quarter. The drop in volume due to the pot relining program was balanced by inventory runoffs of SAR 235 million. During the quarter, we experienced higher maintenance costs driving our operating cost line. Base Metals and New Minerals remains a relatively small contributor to group sales and EBITDA. However, the unit remains a key driver of our growth ambitions going forward. Mansourah-Massarah remains on track to begin commercial production during the second half of this year. Margins were in line with the prior year, but somewhat offset by higher exploration costs. Gold prices are receiving good support from central banks and as a safe haven in the current uncertainty. The drop in volumes resulted from lower grades coming through from some of our older assets. However, I note that our full year guidance remains unchanged. Finally, I want to reiterate the capital allocation framework presented at full year. We have previously guided that we are spending SAR 3 billion on CapEx and SAR 500 million on exploration as part of our strategy of developing the third pillar of the Saudi economy. Additionally, we have made an initial commitment for international opportunities with the PIF of up to SAR 6 billion. As stated before, we will maintain financial discipline by targeting a 2 to 3x net debt-to-EBITDA ratio throughout the cycles. We believe that this is an adequate sustainable framework to deliver long-term value to shareholders. I'll now hand you back to Bob to close off.

Thanks, Louis. Relative to near-term growth projects, we're pushing ahead with the project pipeline that extends out the next couple of years to 2027. Beyond Phosphate 3, we also have 3 other projects that are in early-study stage. Like other miners, we're seeing increases in the cost of major capital projects, thus, as mentioned by Louis, we will actively review all of these opportunities in line with our disciplined approach to capital allocation. Our exploration program is accelerating. And during the quarter, we've drilled over 100 kilometers. We're continuously adding resources and have 36 active projects at present. We are also deploying next-generation technologies with our partners such as Ivanhoe to accelerate our exploration program and unlock opportunities faster. Our production and CapEx guidance will maintain a production guidance, as previously outlined, we will achieve nameplate capacity across all of our operations by year-end. We'll also maintain CapEx guidance as we maintain our operations and grow the business. Looking ahead, our landscape remains uneven and uncertain. We're focused on what we can control, and we'll balance our decisions with our financial position in line with our targets. We've got a growth mandate, and we will continue to execute profitably and responsibly. Our long-term vision will not be swayed by short-term factors or events. With that, I'll hand it back to Abdulaziz for questions and answers.

Thank you, Bob. Thank you, Louis for enlightening presentation. Now we'll open the floor for the questions. Please, if you have any questions, raise your hand and unmute your task. Until we receive few of these questions, I received few on the chat box. So maybe this is a question for Bob. Can you elaborate more about Ivanhoe joint venture? What's the area targeted to explore? And what's the time line?

Certainly, yes, that's obviously a very exciting news for us. We announced the deal at Future Minerals Forum in Riyadh and we consummated it here in the last couple of weeks. But the basic framework is we will acquire 9.9% of U.S.-based Ivanhoe Electric. They will basically pour half of those proceeds in cash into the 50-50 joint venture in the Kingdom along with 3 of their Typhoon exploration units and a category of trained geologists to operate them. We will contribute about 48,000 square kilometers of exploration licenses located mostly in what we call Zone 4, which is the area between the well-explored Arabian shield and the totally unexplored Arabian platform. So we're going to deploy the Ivanhoe technology in vast areas that here before been unexplored and take advantage of that technology.

Perfect. Thank you, Bob. Now I have a question from Sashank Lanka from Bank of America.

I have 2 questions from my side. Just looking at your presentation, when I look at the inventory drawdowns, you had both in the Aluminum and the Phosphate segment. Can you just give us some more details on that? I think in the Aluminum segment, you mentioned around SAR 235 million. Is that mainly because caustic soda prices in Q4 were much higher than Q1 and you sold some of the aluminum produced in Q4 and Q1? And also the same thing for phosphate, what led to these inventory drawdowns? And just tying into that, I think the Aluminum segment margins were quite weak this quarter as well as the last quarter. You did mention that you don't expect these one-off charges to the utility provider to recur again. So how should we be looking at margins going forward? Because historically, I think you were making around 30% or 40% margins in the segment even at these aluminum prices. So I would appreciate some guidance there.

Yes. Thank you. Those are very good questions. So let me deal with the inventory movements first. In the case of the Aluminum business, essentially, we ran down bauxite inventories as our refinery -- we undertook an extensive maintenance shutdown at the calciner that saw that unit out for 64 days. So essentially, we're running down bauxite inventories as a result. It was the main driver there. And then we also negotiated better terms to some of our customers internationally offtake terms. With regards to the Phosphate business, essentially, what we had was a fairly large buildup in inventory during the first quarter of last year as we had shipping challenges, and we had delayed shipments in the first quarter of last year. So the way that these EBITDA bridges come across is you've got a big variance when you have a -- you're capitalizing on holding more inventory on balance sheet during the first quarter and then a lesser amount. So the delta results in the big swing. But in any event, we were running down our inventories as well during the third quarter -- of the first quarter of this year. With regards to the Aluminum segment, yes, I think our results were definitely impacted by these one-off settlements. I don't think we were that explicit to say that we didn't expect any more. And at the end of the day, it was ongoing discussions between 3 parties at that point in time. And if you think of it this way, we booked SAR 317 million during the fourth quarter of last year, it's slightly higher at SAR 493 million this quarter. So that explain some of the movement in the -- or sorry, the consistency in the variance and the aluminum prices were higher during the first quarter relative to the fourth quarter of last year. I think as we said now in our presentation, that should be behind us, that pertain to '21 and '22. We have an agreement in place. Our tariffs haven't changed. We understand the rules of engagement and we move forward.

And one thing I would add, Louis, is we've also had the extensive pot lining program that will conclude this quarter. So I think going forward, you can expect our margins to be in line with first quartile performance.

Yes, I just had a follow-up to Louis. I mean I just realized you were talking about a year-on-year inventory drawdown, but how about Q4 versus Q1? Was there any inventory movement both for the Aluminum and the Phosphate segment?

Just give me a second, not to the same extent. It was -- just give me 1 second, I'll give you the answer to that now. So quarter-on-quarter, the movement in inventory was around SAR 260 million at the group level. I don't have the breakdown per business unit now.

Thank you, Sashank. Now I have a question on the chat box. This is to Bob. Can you elaborate more on the joint venture with Barrick and the target products and expectation on this joint venture?

Sure. So the Barrick joint venture is another exciting strategic opportunity. We've -- since the middle part of last decade, we've had a 50-50 joint venture partnership with Barrick around our Jabal Sayid copper mine. They're the operating partner and so the license areas surrounding Jabal Sayid, we already had some exploration licenses that are joining that and then in conjunction with the new mining law and the new auction process through the Ministry of Industry and Mineral Development, they auctioned off another block next to Jabal Sayid that Barrick and Ma'aden went in on and were the successful bidder. So when you look at all that, you had an existing joint venture, Ma'aden exploration license and an exploration license recently acquired by Ma'aden and Barrick. So we've combined all of those under one umbrella to basically increase the size of our footprint by over 8 or 9x with Barrick around Jabal Sayid, exclusive -- not exclusively looking for copper, but mostly looking for copper.

Thank you, Bob. Now again, I'll open the floor for a question from Dr. [indiscernible].

[Foreign Language]

[Foreign Language] I'm going back. He's just commenting about the performance. That's it. No questions. So we have also another question about the joint venture with PIF. Could you elaborate on the joint venture with the PIF? What's the target product and what's the time line?

Certainly. So we -- so last quarter, recall, we announced the establishment of a new joint venture company with a PIF, Ma'aden at 51%, PIF at 49% with the explicit goal of going out and sourcing the critical minerals required for downstream development in the Kingdom's diversification program associated with Vision 2030. So as the Kingdom progresses towards developing an automotive sector and aerospace sector, renewable energy sector, we are charged with going out, securing equity positions in assets or companies, minority positions where we can also enjoy the offtake of critical transition minerals associated with EV, cobalt, lithium, nickel as well as things required for the development of the steel sector in the Kingdom. So iron ore is on that list as well. So we've got a very targeted list of essential minerals associated with EV transition and iron ore. We are looking globally but specifically focusing on Africa and Southwest Asia, where we have a logistical advantage. So that -- more news to come on that front as we progress this year. We've announced, we've got SAR 6 billion earmarked for our share of the investment first year, but more to come on that front.

Thank you, Bob. Again, I'll open the floor for questions. We have Anoop Fernandes, please go ahead.

I have 2 questions related to your Aluminum business. So firstly, on the legacy aluminum charge, can you please give us some more color on what this charge was related to, was it capacity payments of the past? Because I think a couple of years ago, there was this issue about the power cost. The company was supposed to pay capacity charges as against not paying it earlier. So has -- I mean, is it related to that? And are you paying capacity charges to Saudi Electricity now in the current setup? That is question one. And question 2 is on your aluminum expansion over the long term. So we see a 90 [ KTPA ] addition. So are you adding new pot lines? Or is this expansion from crepe capacity? And considering your cost structure, which is so competitive, you are at the lowest decile, what are the challenges in expanding your integrated aluminum complex? Why aren't we adding integrated aluminum capacity, both in the alumina and the aluminum side, given that the longer term under current because of the Green infra program is sort of very bullish?

Yes. So I'll answer the second one, and I'll let Louis answer the first one. Certainly, you've got a very good memory or good notes. We've got a brownfield expansion of lines 1 and 2 on the drawing board. That project is under consideration. As a matter of fact, I have the FEL-3 document on my desk right now. But recall what I mentioned about the escalation of capital charges and capital costs. We want to be responsible in when we invest. And right now, that project is marginal. So we're going to give it further scrutiny and value engineer a bit more. But we'll certainly, we want to expand the existing smelter. And then as we look towards our 10x growth target by 2040, there's an additional potline and additional alumina refinery in the pipeline at some point in the next decade.

Okay. With regards to the legacy contractor, essentially, it came about as a result of the change in the regulation that I referred to earlier in the presentation. In terms of the changes in the regulation, companies are required to -- all companies in the Kingdom are required to elect their consumption and how that consumption will be used, which in fact, ties back to your question around capacity. So there was a difference of opinion in terms of how Ma'aden's rights were being exercised. As I said to you, that has now been resolved and settled. Going forward, we know what the arrangements are and our power tariff remains unchanged. So it was just how the contracts were interpreted and how demand was costed.

Yes. Just a follow-up on this. Don't you own the power assets? So why is it that you're paying a capacity charge to Saudi Electricity if you own these captive power assets?

We don't own them. We don't own the assets.

So again, going back to the chat box, I have one question. It's maybe a mix between you, Bob and Louis. So it's asking about the Phosphate 3 progress and what's the financing -- expected financing structure of the Phosphate 3?

Yes. Thanks, great question. Obviously, it's one of the cornerstone expansions in the Kingdom and for Ma'aden. So we -- as we mentioned, we are moving forward with a final investment decision later this year. We've appointed Worley as our EPCM lead. So the preliminary engineering, a lot of the upfront work is being done as we speak. We've got some incentives from the PIF, Shareek program as well as Ministry of Investment relative to infrastructure required around the project to make it even more attractive, but we'll make that decision post September Board meeting most likely. How we're financing it, that is a subject that Louis and I and others are discussing the most appropriate way to fund that.

Thank you, Bob. Now again, I'll open the chat box, Faisal Al Azmeh you are unmuted. Please ask your question.

Faisal Al Azmeh from Goldman Sachs. Just 2 questions, if I may. Just thinking about your net debt-to-EBITDA target in the context of the declining product price environment, where do you see -- or what's your target generally over the cycle if we are to kind of take into consideration that the prices are normalizing this year and next year? Do you see yourself working on reducing your leverage profile? And how does that go hand-in-hand with the expansion programs that you're currently thinking about? If you can shed some color on that, that would be quite helpful. And my second question more relates towards how do we think about generally the Ma'aden as a group? Do you see room for any divestments or these things in the future? Do you see ways to extract more value for some of these assets versus how they are today?

It's a good question. And I'll let Louis elaborate on this capital allocation framework, but I'll give him the credit for bringing a sense of discipline to the organization, doing significant benchmarking work to find out best-in-class operators, where we need to be in net debt-to-EBITDA targets through the cycle, and that's why we've established 2 to 3x throughout the cycle. So certainly, we're at a great position last -- end of last year and currently, but there's some room to deteriorate further and still be in our target range of 2 to 3x. And how that goes hand-in-hand with our expansions is why we continue to talk about our capital allocation framework. We're going to do it responsibly. We want to maintain the proper gearing and leverage so that we don't get into a position where we were 5, 6, 7 years ago. We're 7x times and the biggest concern about Ma'aden was our balance sheet. Yes. So I'll let Louis elaborate if you care to.

Yes. Thank you very much, Bob. Faisal, that's a great question. Yes, I think what I would say to you is, I mean, yes, we have growth aspirations, but we don't have to write the check all today. So we have the ability to prioritize our capital spend over the business plan period and beyond that as well. I think we're in a very fortunate position in terms of the rights to the assets we have at the moment. They are long-life assets, and they give us a lot of flexibility and optionality. Yes, we're going to -- obviously -- so we can address funding and net debt-to-EBITDA ratios through controlling our spend -- through -- on capital especially the growth capital. Our focus will always remain on sustaining the businesses and to ensure that they're running efficiently and safely. And then clearly, we would like to delever the balance sheet. So that's how I think about it in terms of prioritization, sustaining the businesses, servicing our debt and then prioritizing our capital.

And then relative to your second question about divestments, I broadened that aperture out a little bit and just talk about our portfolio reviews. I tell, Ma'aden is 25 years old this year. But essentially, for the first half of that period, we were operating legacy gold mines. And we've really only been operating our core phosphate and aluminum businesses for the last decade or so. So we've got a fairly new fleet of world-class baseload assets in phosphate and aluminum. So we're very happy with that portfolio we don't want to grow on. Now the legacy gold mines, you saw where we were positioned on the cost curve and our business -- our gold and our Base Metals and New Minerals business is undergoing a strategic asset review to find out at what point we retire some of those assets and bring new assets online based on our exploration success. So as far as divestments or closures, retirements, I think the only thing you could expect to see in the near term would be some legacy gold mines.

Thank you, Bob. Again, one more question from the chat. So basically asking about the aluminum line 1, 2 expansion. From where you're going to procure the feedstock, is there a plan for expansion of the refinery upstream?

We actually are long in alumina right now so we can absorb internally -- we can source ourselves internally from our existing refinery for line 1, 2 expansion. If we would go to line 3, we would need to have another solution. But a potline expansion of the existing assets, we can source internally.

Thank you, Bob. I don't see any more questions or hand raised. So with this, I would be concluding this presentation. Thank you all for joining us. If you have any follow-up questions, do not hesitate to send us a follow-up e-mail on [email protected], and follow-up on Ma'aden App on Android and on the Apple iPhone. Goodbye.

Thank you.

Thanks.