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

Good afternoon, ladies and gentlemen. Welcome to Ma'aden's earnings call for the third quarter of 2023. Thank you for joining us. My name is [ Fazel Gatani ], the Investor Relations Director at Ma'aden. [Operator Instructions] Once today's call has concluded the presentation and all relevant materials will be available on our website and on Ma'aden's app. Please refer to our disclaimer on all disclosures made in today's presentation in Slide #2 appearing now on the screen and kindly note that all figures discussed during the presentation are in Saudi riyal, except when otherwise stated. I am joined today by our CEO, Robert Wilt; and our CFO, Louis Irvine. They will take us through the company's performance in the third quarter of 2023. As usual, we will open the floor to your questions at the end of the presentation. But please feel free to start posting your questions in the chat section during the call. We hope to get through as much as possible today. But if you have any follow-up questions or clarifications, please e-mail us. With that, let me hand over to Bob.

Thank you, [ Fazel ], and thank you to everyone for joining today's call. In spite of a rough quarter on the earnings front, which we will discuss, we continue to make significant progress on transforming Ma'aden's operations, structures and culture to position the business for sustained growth. Our phosphate business unit is on track for a record year of production, and we are scaling the business by moving ahead with our long-term growth plans. This quarter, Ma'aden's Board signed the final investment decision for Phase 1 of our Phosphate 3 project, which will add 1.5 million tonnes to production by 2026. At the same time, we're accelerating drilling to deliver one of the most ambitious exploration programs worldwide. This is all unpinned by our new -- underpinned by our new operating model, which has now completed its final phase, and we've already realized significant performance efficiencies over the last 1.5 years. On the financials, quarterly revenue was SAR 6.2 billion, and adjusted EBITDA stood at SAR 1.7 billion. Results were influenced by commodity prices as well as planned maintenance and unplanned infrastructure outages in ammonia and DAP. Despite lower earnings, we delivered another quarter of strong operational cash flow, generating nearly SAR 6.5 billion. Long-term borrowings have been reduced by SAR 4 billion this year, and net debt is down by 10% as we remain within our guided range of 2 to 3x net debt to EBITDA throughout the cycle. We were assigned inaugural investment grade credit ratings in August, which further underpins our strong financial position. These charts illustrate the market backdrop and pricing environment. As you can see, phosphate, ammonia and aluminum prices remained significantly down on their peaks from last year. However, these are all stabilizing at higher levels than when we first entered the current cycle. We have seen a noticeable pickup in the ammonia price from mid-Q3 due to reduced global supply and higher fertilizer demand in key markets. Ammonia continues to benefit from our diversified low-cost model, which ensures our operations continue to generate strong cash flows across the cycle. Lou will discuss the specific impact of market prices on our financials later in the presentation. Our growth is founded on 4 pillars. We are scaling our operations, expanding our global reach, unlocking Saudi Arabia's rich mineral reserves and building a sustainability champion. This is reflected in our operational performance and strategic initiatives. Phosphate 3 is Ma'aden's third large-scale phosphate project. The final investment decision for Phase 1 is a significant moment. What's online in 2026, it will add 1.5 million tonnes to production and increase our annual capacity to 7.5 million tonnes. This will extend our leadership position in the global fertilizer market. The final phase of our new operating model has been completed. And as a result, we have delegated responsibility across the organization, empowered the business units and accelerated decision-making. We continue to make good progress on the exploration front, which we will cover in detail later. This is further supported by our exploration joint venture with Ivanhoe Electric, and I'm pleased to report the first Typhoon system is now deployed in the field for geophysical survey. We also -- we have also secured access to important green energy metals by agreeing to acquire 10% of Vale's base metals business. This was our first major investment into the global mining sector through Manara Minerals, our joint venture with the PIF. Because phosphate represents such a large part of our business, I thought I'd spend a minute talking about some of the highlights this quarter. We are one of the leaders in the global fertilizer market and one of the top 3 largest exporters globally of phosphate-based fertilizers. We're extending this leadership position through our continued operational excellence program in the previously discussed Phosphate 3 expansion. Year-to-date, we have increased overall production in our phosphate business by 10% versus 2022 and are on track for a record year of phosphate production. Commercially, we also signed a renewal agreement with the Bangladesh Agricultural Development Corporation to supply 600,000 tons of fertilizers. Notably, this deal was successfully led by [ Ms. Mawada Al-Silami ] and marks a significant milestone as the first such agreement fully spearheaded by a female in the fertilizer industry in Saudi Arabia. I'm proud of how we are diversifying our workforce and promoting female leadership across the organization. Operationally, this quarter, we completed the scheduled DAP maintenance shutdown as part of routine operations. Additionally, we addressed a seawater pipeline rupture at our Ras Al-Khair phosphate complex. As you can see here, this unplanned outage impacted ammonia and DAP production. However, we are back to full production levels by early October, and our year-end production guidance remains unchanged. Our safety transformation program is being implemented across the business as part of our overall operating model. We are emphasizing leadership and culture, contractor safety, risk identification and work permitting process. I am pleased to report our all injury frequency rate has halved since last year and now stands at an all-time low. But as previously outlined, we are shifting our focus to proactive approaches such as predict and prevent rather than lagging indicators to measure our safety performance. Obviously, there is nothing more important than the safety and welfare of our people. We are committed to building Ma'aden into a sustainability champion and developing the communities in which we operate. We are reducing the environmental impact of our operations through water recovery. And as you can see, we are making good progress towards our target to recover 12 million cubic meters of water annually. We're also taking carbon out of the atmosphere. This year, we planted 120,000 trees in addition to the 100,000 seedlings we planted last year as part of the Saudi Green Initiative. Education plays a key role in establishing mining as the third pillar of the Saudi economy. And I'm proud of the role we are playing in developing the next generation of mining champions and supporting female employment in the Kingdom. This includes establishing a new degree program in mining science at KFUPM and launching our third school of excellence in Ar'ar, the first dedicated to all girls. Additionally, we inaugurated the first class of female students at the Saudi Mining Polytechnic. Our efforts in driving positive social, economic and environmental change were recognized last month with the prestigious King Khaled Sustainability Award. I'll now hand it over to Louis to take us through the financials.

Thank you, Bob, and welcome, everyone. Continuing the trend from the first half of the year, we remain in a post peak pricing period for commodities. The third quarter saw our revenue adjusted to SAR 6.2 billion, reflecting softer pricing with a year-to-date total reaching SAR 21.2 billion. EBITDA was down to SAR 1.62 billion, affected by reduced sales volumes in key commodities. It is important to note that EBITDA now includes the share of profit from equity-accounted joint ventures as of the third quarter. Detailed information on this is available in the appendix. The quarter recorded a net loss of SAR 83 million due to higher depreciation and finance costs. However, our operational discipline has ensured strong cash flows, further strengthening our balance sheet and supporting our deleveraging efforts. Turning to the EBITDA bridge showing our year-on-year 9-month performance. We've seen the impact of lower commodity prices on our EBITDA, which has resulted in a SAR 10.2 billion effect. However, this was partially offset by lower raw material costs. Our record sales volumes in DAP as well as higher gold volumes have helped offset some of this impact. In terms of cost of sales, SAR 742 million was as a direct result of running off inventories during the period. Other cost drivers reflect our growth in capacity building, which include higher personnel and exploration costs. As mentioned, our EBITDA now includes our share of JV profits, which were down on the prior year, mainly due to lower commodity prices. The adjusted EBITDA includes SAR 853 million of one-off costs year-to-date, where SAR 76 million accounted for this quarter relating to industrial utility charges that we've discussed previously. Once again, we have provided a breakdown of these adjustments in the appendix. Throughout the year, our operations have consistently delivered robust operating cash flow amounting to SAR 6.4 billion year-to-date. Our ongoing focus on working capital management has contributed SAR 2.3 billion to cash generation from operations. We allocated SAR 2.2 billion for capital expenditure, in line with our guidance, of which roughly SAR 618 million and SAR 1.6 billion were directed for growth and nongrowth CapEx, respectively. Notably, SAR 722 million was directed towards our base metals and new minerals business unit in line with completing Mansourah-Massarah and our exploration efforts. In alignment with our strategic focus on strengthening our financial position, we've repaid SAR 4.4 billion in debt. This includes SAR 3 billion in prepayments, a continuation of our deleveraging strategy. These repayments have lowered our overall cash balance but are key to reducing our net debt and enhancing our long-term financial health. Our balance sheet shows our focus on financial health and strategic growth. We've trimmed our long-term borrowing by SAR 4 billion, which includes early repayments and reduced net debt by 10% since 2022. While our net debt-to-EBITDA ratio has seen a slight increase, it remains within our guided range of 2 to 3x. Although our cash position is lower compared to '22, as previously discussed, this aligns with our debt reduction strategy. And to reiterate a point made from the last quarter and mentioned by Bob, at the outset, our financial health has been recognized with investment-grade ratings from Mooney's and Fitch, a testament to our sustainable operations and strong financials. Our balance sheet reflects the careful execution of our strategy, aimed at maintaining financial discipline while pursuing growth opportunities. We now move on to our business units, starting as usual with our phosphate business. We sustained record production levels year-to-date despite the softer price environment. Year-to-date, DAP production was up by 19% compared to '22, while ammonia production was stable at 2.3 million metric tons. A temporary outage this quarter impacted production volumes, which Bob has covered earlier in the presentation. The phosphate unit remains the main contributor to consolidated sales and EBITDA. The year-on-year EBITDA bridge for the 9 months shows the biggest hit to profitability has come from significantly lower ammonia and DAP prices compared to last year, accounting for a SAR 9 million impact. However, this effect was somewhat softened by lower raw material prices, particularly molten sulfur. Year-to-date, we have achieved record volumes in fertilizer production, which, despite the market's downward price trend, had a positive SAR 1.7 billion effect. On a quarterly basis, lower commodity prices did affect EBITDA, yet it was the decreased sales volumes linked to the temporary outages that had the most sizable impact this quarter. Full production was brought back online in October. Turning to aluminum now. On the production front, both our refinery and smelter are performing very well, following the essential maintenance and pot-relining program, which was concluded last quarter. As a result, both alumina and aluminum production are now above nameplate capacity on an annualized basis. We [ have curtailed ] the production in flat rolled products to account for weaker market demand and, thereby, effectively managing our working capital levels. Despite the higher production, sales remained largely flat quarter-on-quarter as a result of lower realized prices. Turning to the breakdown of the first 9 months' EBITDA. As we reported previously, we faced 3 main headwinds. Lower realized prices have impacted EBITDA by SAR 1.3 billion. Our production volumes, while down year-on-year due to the comprehensive pot-relining program, are set to increase as we've completed this maintenance. Lastly, the one-off charges from earlier utility adjustments are now fully addressed. The fourth quarter will have an industrial utility one-off cost amounting to SAR 76 million, after which this will not recur. As discussed in the previous quarter and based on our forecasted power requirements for the next year, we expect to move to a lower net usage tariff in 2024. Looking at the quarter-on-quarter bridge, the higher sales volumes and lower raw material costs were offset by the lower sequential prices. Looking at the base metals and new minerals business, the higher gold price continues to support the higher sales both on a quarterly and yearly basis. Sales increased 10% quarter-on-quarter. However, when combined with higher exploration and volume-related costs, EBITDA was marginally higher by 1%. Production increased by 11% quarter-on-quarter as Mansourah-Massarah continued to ramp up significantly in the third quarter. Year-on-year, the higher production and realized prices had a combined positive effect on EBITDA by SAR 437 million. This was partially offset by higher exploration costs. On a quarterly basis, the ramp-up from Mansourah-Massarah is clear to see with the SAR 89 million positive impact on EBITDA, slightly offset by higher volume-related costs. I'll now hand you back to Bob to take us through the outlook.

Thanks, Louis. Now turning to the outlook. As you can see, we have a good pipeline of projects in both execution and study phases to drive future growth. Mansourah-Massarah will be our seventh and largest gold mine, producing 0.25 million ounces annually. We are ramping up and the project is currently undergoing final commissioning activities, which due to complete by the end of the year, ahead of the formal start of commercial production. We've already talked about Phosphate 3. And in addition, we are exploring a brownfield expansion of our aluminum smelter and 2 additional gold mines. The exact timing for these will be considered in light of recent exploration discoveries as part of -- and as part of our 5-year planning discussions currently underway. We will communicate specifics next year. I said we talk about exploration. So we are currently exploring Saudi Arabia's vast mineral endowment. We're engaged in the largest single jurisdiction exploration program in the world. As you can see, we now expect to drill over 400,000 -- 430,000 meters this year, nearly 3x more than last year. Our partnership with Barrick continues to deliver. Jabal Sayid, our underground copper mine, produced approximately 18 million pounds of copper this quarter, and we're jointly exploring near the existing mine to further expand copper production in the Kingdom. As mentioned, the joint venture with Ivanhoe Electric is mobilizing, and the first Typhoon system is now in the field. As you can see, we've added 3.5 million ounces in the last 2 years with more to come. We'll be making more announcements on this front in advance of the Future Minerals Forum here in Riyadh in January. As previously announced, the July agreement to acquire 10% of Vale's base metals business marks the first major investment of our joint venture with the PIF to secure critical minerals necessary for downstream industrial development in the Kingdom. The deal remains on track to complete in the first quarter of 2024 following regulatory approvals. Moving on to our production and CapEx guidance. The only change in our guidance is in flat rolled products. We now project to come in between 250,000 and 300,000 metric tons due to market weakness in can sheet. The industry overstocked in 2022. This inventory is now working its way through the system, and we expect demand to return to normal levels by the middle of next year. Aside from FRP, we're on track to hit our production targets for the year. We're also maintaining CapEx guidance for the year. We retain a positive near-term outlook on the markets as commodity prices continue to stabilize. Longer term, our end markets are supported by strong fundamentals. We have a growth mandate, and we are committed to building a stronger business that will deliver value for our shareholders and support Saudi Vision 2030. With that, I'll hand it over to [ Fazel ] for Q&A.

Thank you, Bob and Louis for the presentation. Now we will open the floor for the questions. For those who have questions, please raise your hand. Okay. Faisal, you are unmuted now, Faisal Al Azmeh. You can ask your question, please. Faisal, do you hear me? You are unmute now.

Yes, now I'm on. Just 2 questions from my end, and maybe the first is just regarding the outages that took place in the third quarter. How should we -- where are we today in terms of the ramp-up post the shutdown? And should we expect full production for the fourth quarter? That's my first question. And my second question is you've mentioned some weakness on the demand side in aluminum. Maybe if you can talk us a bit what are the key areas or the end markets that you're seeing those -- the weakness? And at what point do you expect some form of a recovery?

Thanks, Faisal. Yes. So the outages in the third quarter were one-offs, and we -- the issue has been addressed. We're back to full production as of early October, and we'll see great production numbers coming through the quarter, like I say, in line with annual guidance. So no long-term issues, full production guidance being maintained, and the weaknesses in the aluminum market is related to can sheet. The industry overstocked post COVID, had excess inventory on the ground going into this year. We're unable to burn off all that inventory, and we anticipate that inventories will be down to a point where demand will return to normal levels by the middle of next year. And it's only in can sheet that we're seeing the weakness.

Okay. Next question from Anna Antonova from JPMorgan. I unmuted you, so you can please ask your question. Anna?

Hello, gentlemen, can you hear me well?

Yes, we can hear you now.

Just a couple of questions from our side. So first, on the phosphate division, you stated in the press release that the Phase 1 of Phosphate 3 has received the FID. My question is on CapEx. So does the SAR 1 billion's EPCM contract cover the full CapEx for this Phase 1? Or can we expect some additional expenditure to bring this first phase online? And that's my first question.

Okay. So I'll answer that one. The SAR 1 billion does not cover the full investment decision amount authorized by the Board. We are in the process of signing subcontractors onto the project right now. And once all those agreements are reached and negotiations are concluded, we'll be able to tell you what the final investment price tag looks like early next year.

All right. Understood. My second question is on new minerals division and Mansourah-Massarah mine in particular. So I remember that the first gold pour was, I think, in September last year, correct me if I'm wrong. So could you please just shed some light on what are the kind of underlying issues or -- that have caused the delays of commercial production? If I understood you correctly earlier during the call, you commented that the mine will start commercial operations early next year. Is that correct? And within that framework, so how much did the mine contribute to your Q3 gold production of 112 kiloounces?

So Mansourah-Massarah amounted to about half of our gold production in the quarter. And the delays are really minor delays associated with reliability testing and final checkouts and certifications that we're doing. Nothing to be concerned about. We may actually finish this year, but most likely, it will push into next year to reach commercial production. So no worries on that front when we're already exceeding -- or we're already at commercial production levels. We just haven't taken formal handover from the contractors yet.

Right. Understood. And my final question is on your comments on the press release. Can you please shed more light and maybe provide a quantum of these significant performance efficiencies that were realized since 2021? So you've been talking about them for quarter 1. Maybe you can provide us with some kind of indications, whether improvement in yields or kind of financial contribution. Anything would be much appreciated.

So in terms of cash flow, we've probably generated over SAR 1 billion in cash through our working capital initiatives, our productivity improvements, procurement excellence and volume increases. So we're keeping a running tally, and we think there's more -- there's obviously more to go, but we've probably generated SAR 1 billion in cash over the last 1.5 years.

All right. Next question from Anoop Fernandes from SICO Capital. So I'll mute you now. Hello, Anoop, do you hear me?

First one is a follow-up to the previous one. So regarding the aluminum business, I think your press release mentioned some efficiency gains on volume. So how should we look at the nameplate capacity now after the pot-relining? I mean what is the production level that we can expect on a normalized basis from the smelter? And what sales should we pencil in on a sustainable basis from the smelter alone because you'll have casthouse as well, scrap recycling? So how much should we pencil in from the smelter? The second question is on your DAP production. So if I look at the levels you're running at currently, it's at about 6.4 million tonnes annualized. So is it fair to assume that Wa'ad Al Shamal is running at 100% now? And are you operating MPC over the employed capacity? The third question is on the cash on your books. It's currently at about SAR 15 billion cash and liquid investments. How much of this is attributable to margin? Is it fully 100%? Or is it about 70%, 80%?

Okay. So on the aluminum side, we are back to above nameplate in the refinery and the smelter/casthouse. So you can expect us to be at the mid- to upper end of the ranges that we've provided previously. So back to running those operations well. Wa'ad Al Shamal is at nameplate or beyond. That's how we're able to make the claim that we will establish new production records in DAP this year. So Wa'ad Al Shamal is performing splendidly. And I'll turn it over to Louis on the cash question.

That's a great question. And I'd like to get back to you with an accurate answer, but I think you can assume roughly, I'd say, around 70% is attributable to Ma'aden. And I'm basing that on the fact that we have shareholders -- 70% in our PC business. We have 60% in Wa'ad Al Shamal and then 100% in MFC. And then we have 75% in aluminum. So that's just a rough guide on it, but I'll get back to you and firm that up, okay?

Yes. Just one more question, if I could squeeze in. And that's regarding the FRP business. So the realizations are down from about $3,800 to about $3,300 during this quarter. I mean is this related to the movement in the LME? Or is it just product mix related? And I mean it would be great if you could give us some color on where the product mix stands right now. And since this business profitability is typically measured in terms of EBITDA per tonne, I mean, that's how Novelis and Arconic talk about it. When you -- I mean since -- how do you all view this business on an EBITDA per tonne business -- or basis on a sustainable level once all this whole inventory cycle sort of corrects? And on a normalized basis, what sort of EBITDA per tonne can we look at from MRC on a sustainable basis?

I'll answer the first bit, and Louis answer the EBITDA margin. The LME inventories dropped by about 10% this quarter, so that helped prop up the price, keep the prices stabilized despite weaker Chinese demand. So the LME fairly flat, but low inventories did support the price -- the LME. On the product mix, we are about 20% auto sheet, 80% can sheet in our rolling business. So that's why the downturn in the can sheet market had such an effect on us.

With regards to EBITDA margin per tonne, Anoop, we have not disclosed in the past any of our unit costs per products, and we don't report the business as such. So we've always reported our aluminum business on an integrated basis. We are taking this on review at the moment, and we'll keep you guys posted as to whether we break that down further going forward.

Just while we're on this, was the MRC business -- was the FRP business EBITDA-positive in 2Q and 3Q? I mean if you could just give us maybe not numbers, but directionally, was it EBITDA positive or not?

I'm not going to comment on that now, Anoop. So if that's okay. We report it on an integrated basis. I think it fluctuates. There are pluses and minuses.

Thank you, Anoop. All right. We have our next question from [ Antech Gotham ]. So I'm mute you. So can you please go ahead and ask your question?

I just wanted to understand in regards to your African strategy, Meridian in specific. You had mentioned last time you're integrating the business. How is that progressing? And what's the outlook and your strategy for the other geographies as well?

Yes. So we've -- I would -- we reached a fairly significant milestone in terms of -- we have now fully integrated our Meridian operations in Eastern Africa, our distribution assets into Ma'aden. So we're taking advantage of that distribution network. We've appointed a new CEO, a new CFO, a new leadership team with [indiscernible] and Ma'aden employees. We're enforcing governance and safety standards. So the integration is coming to pace, and we're enjoying that -- the benefit of that distribution business because we're able to reach the farmers in those countries. We're able to get insight into the markets. We're able to establish G2G relations. So we're really pleased with that investment and that integration thus far. Now will we replicate it? I don't know. I mean we've got a capital allocation strategy that is -- that forces some financial discipline and forces us to make decisions. And if you see our growth pipeline, I would probably be more inclined to invest upstream rather than downstream distribution. But that doesn't mean we're not interested in expanding our distribution footprint, other ways and other parts of the world.

Okay. We have a couple of questions in the chat, but some of them are too detailed. So one of them is from H.A. Please, can you e-mail me your inquiry at [email protected], and I'll get back to you on that? And I will share the presentation as well. [ Abdurakhman Al-Ubekkan ], he's asking, "Could you shed some light on the gas price grace period on Wa'ad Al Shamal in terms of the price during the grace period versus after?"

We haven't publicly spoken about this. The -- I think the grace period comes to an end in 2023, and then the price will be market-related, but we don't disclose that.

Thank you, Louis. And could you give us some guidance on when should we expect Mansourah-Massarah to reach full capacity?

But I think Bob actually answered that question earlier when he said that our run rate at the moment is at annualized capacity. So I think that's -- we're getting there.

All right. Thank you all. I think we reached to the end of this call. So I would like to thank everyone who participated, and we'll upload the presentation on our website shortly after this call. So thank you. And if you have any follow-up questions, please send it to [email protected]. With that, I will conclude today's call. Thank you for your time, and goodbye.