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

Good afternoon, ladies and gentlemen. Welcome to Ma'aden Earnings Call for Second Quarter of 2024. Thank you for joining us. My name is Abdulaziz AlNaim. [Operator Instructions] Once today call concluded the presentation and relevant materials will be available on our website and on Ma'aden app. Please refer to our disclaimer on Slide 2, which will be applied for all of our disclosures in today's presentation. Finally, note that all figures discussed in this presentation are in Saudi real unless otherwise stated. I'm joined today by our CEO, Bob Wilt; and our CFO, Louis Irvine. They will take us through the company's performance in Q2 and the first half of 2024. As usual, we will open the floor for your questions at the end of the presentation. However, the chat function is open. So please feel free to post your questions during the call. We hope to go through as much as possible in today's presentation. However, if you have any follow-up questions, please do not hesitate to email them to us. With that, let me hand it over to Bob.

Thank you, Abdulaziz, and thanks to everyone for joining today's call. As you can see here, we've delivered another strong first half of 2024, demonstrating our ability to realize the benefits of our improved operations in a relatively stable pricing environment. Net profit was up 160% year-on-year in first half to just over SAR 2 billion, reflecting improved production costs and operational improvements across our 3 business units. We generated over SAR 4 billion in cash from operations, giving us the firepower to continue investing in our key growth initiatives, such as Phosphate 3 and our investments in Manara, while maintaining our leverage ratio within the guided range. Turning to our operational performance. We've maintained our momentum in the first half of the year, with particularly strong production across alumina, primary aluminum and gold. Gold production continued to ramp up to 241,000 ounces, which was supported by the positive trend in prices. On the exploration front, we're making strong progress in the development of our Central Arabian gold region and have mobilized our third Typhoon system under the partnership with Ivanhoe Electric. We're leading one of the largest greenfield exploration programs in the world right now in order to scale in order to scale this potential 10 million to 20 million-ounce upside. Regarding safety, firstly, I would like to acknowledge a fatal contractor incident that took place at our Ras Al-Khair Industrial Village last month during routine maintenance procedure at a material warehouse. We send our condolences to the deceased family and have committed to supporting along this difficult time. This incident was especially tragic given the amount of focus we've placed on contractor safety in the last year. We'll hear about some turnarounds we were conducting in our key manufacturing facilities, especially in Phosphate. We have mobilized over 10,000 contractors during the summer in 4 major turnarounds and works 2 million man hours safely. This incident happened outside of the production area in the residential village, which houses our workers, highlighting the need to focus on safety everywhere we operate, whether it's a production center or not. We've continued to emphasize safety along 4 key fronts, focusing on serious injury prevention, asset integrity and process safety, leadership engagement and of course, heat stress here in the Kingdom of Saudi Arabia during the summer months. Leadership and culture remains the underpinning part of our safety program, and we've redoubled our efforts around contractor safety. Our innovation programs are key enablers towards our goal of being a global sustainable mining champion. One of the pillars of our strategy is to be an ESG role model and innovation plays a key role in that continuous improvement. We're proud to report that last year we were recognized by Forbes as one of the top 10 most innovative companies in Saudi Arabia. And this year, we are using innovation to become a sustainable mining champion. As part of our push towards a circular economy, we have patented technologies to attract sulfuric acid and capture CO2 from the byproduct of fertilizer production. We are also exploring ways to use bauxite residue as an emission-free alternative in the development of construction materials. When it comes to wastewater, we are making progress towards recovering 12 million cubic meters of water through improved processes. We've identified 40 projects with the potential to save SAR 64 million and are working with a national water company to reduce the intensity of groundwater usage. These projects will not only make us more sustainable, but also a more cost-efficient organization. Across the Kingdom, we have an estimated $2.5 trillion of untapped mineral resources in the ground. We are unlocking this potential through the largest single jurisdiction exploration program anywhere in the world. We're accelerating exploration through strategic partnerships with global companies such as Ivanhoe Electric, Barrick and our innovation programs. In particular, we are targeting areas within the newly discovered Mansourah-Massarah district in the Central Arabia and gold region to further define this potential 10 million to 20 million-ounce exploration upside. This is an exciting find that could be just scratching the surface of a world-class gold belt. During the first half, we conducted a further 236,000 meters of drilling across key targets in the region. Two state-of-the-art Typhoon surveying systems have been deployed in the search for copper and gold and a third system is now being mobilized under our joint venture with Ivanhoe to expand and accelerate our program. We have high ambitions for our exploration program and are accelerating our activities through innovative technologies. These technologies such as smart seismic sensors, and core scanner technologies will accelerate the speed of discoveries and improve the quality of the data we produce. This means we are more efficient, save money and reduce our environmental footprint. Exploration is another excellent example of how we are prioritizing innovation to support our growth. And I'll pass it over to Louis to talk about the financials of the half and the quarter.

Thank you, Bob, and good afternoon, everyone. We reported a solid performance in the first half of the year with a focus on production and cost optimization across the operations. despite the marginal decline in revenue, EBITDA increased by a substantial 31% in the first half, benefiting from higher sales volumes during the period, which outweighed the lower overall prices. Additionally, EBITDA was positively impacted by the insurance claim benefit received in the first half and the absence of one-off industrial utility charges incurred in 2023. Year-on-year, our EBITDA margin was up 11 percentage points to 41%. The overall improvement in production costs and lower depreciation year-on-year boosted net profit by 160% to just over SAR 2 billion in the first half of the year. Turning to the EBITDA bridge for the first half. Year-on-year, we achieved strong results through improvements in raw material costs and higher sales volumes, particularly in primary aluminum and gold. Higher volumes in primary aluminum and gold contributed to a positive impact on EBITDA of SAR 223 million. The insurance claim received of SAR 469 million in the first half in addition to the absence of the one-off industrial utility charge incurred in the prior period supported the year-on-year increase of 31% in EBITDA to SAR 5.91 billion. We continue to generate healthy cash flows from operations of SAR 4.2 billion year-to-date. Year-to-date through June, the largest use of cash was our 10% acquisition in Vale Base Metals through Manara in addition to growth and sustaining capital expenditures. The Vale Base Metals deal completed in April this year through Manara Minerals with Ma'aden's contribution amounting to approximately SAR 5 billion. The majority of growth CapEx was related to the Phosphate 3 Phase 1 project in addition to the completion of Mansourah-Massarah in the first quarter. Our cash position for the first half stood at SAR 11.9 billion down 24% from 2023. Our financial position remains strong while maintaining adequate leverage to sustain our growth plans. Long-term borrowings remained stable, while net debt increased by 15% due to the lower cash balance as we completed the Vale Base Metals deal. Improved profitability supported leverage levels and net debt to EBITDA remains within the guided range of 2 to 3x. Looking ahead, we are focused on maintaining a strong balance sheet while investing in our growth plans either through organic growth CapEx in addition to the value accretive investments through Manara Minerals. Turning our attention to the Phosphate business unit. The business unit continued to be supported by stable DAP production quarter-on-quarter. As a result of turnaround maintenance in the second quarter, ammonia production was down 13% on the first half of last year. We also brought forward maintenance schedule for the second half at Mansourah-Massarah to this quarter, which impacted year-on-year performance. DAP prices were down on the first quarter due to the return of supply from China and subdued demand from key markets as they ran down the inventories. We expect prices to remain stable and firm up during the second half as China is expected to fall short of the full year export quotas and both India and Brazil replenished low inventories ahead of the key seasons. Ammonia prices remained relatively stable in the second quarter, but down compared to the first half of last year, primarily due to improved global production availability. Overall, business unit recorded an improvement in EBITDA margin from 43% to 46% in the first half, supported by lower raw material and operating costs and stable DAP production. Turning to the phosphate EBITDA bridge. Year-on-year, lower DAP and ammonia prices resulted in an impact of SAR 285 million on EBITDA. Despite higher energy costs, the business unit benefited from overall lower raw material costs, which partially offset the price pressures by SAR 183 million. Lower overall sales volumes impacted EBITDA by SAR 748 million due to the turnaround maintenance in the second quarter at Wa'ad Al Shamal, which I mentioned earlier. Overall, operating cost improvements had a positive effect on cost of sales by SAR 264 million. Transitioning to the quarterly bridge, the lower overall prices and ammonia sales volumes impacted EBITDA performance quarter-on-quarter. As a result, EBITDA for the second quarter stood at SAR 1.6 billion. In the Aluminum business unit, we delivered a strong performance. Our margins improved substantially on a quarterly and year-on-year basis, driven primarily by improved raw material costs, higher volumes and lower operating costs. Year-on-year, we achieved higher alumina and aluminum production and higher sales volumes for aluminum following the successful completion of the pottery lining program, which impacted the performance in 2023. Aluminum prices in the second quarter were supported by solid market dynamics in addition to sanctions against Russian metal in April. In alumina, global supply side disruptions pushed prices higher in the second quarter. Both production and sales volumes of flat-rolled product increased during the second quarter, with improved demand in the automotive segment and a recovery in can sheet post destocking. Overall, the market remains relatively subdued with lower conversion premier affecting realized prices. Turning to the breakdown of this period's EBITDA. The increase in primary aluminum volumes resulted in a significant positive impact of SAR 520 million, while a marked improvement in raw material costs resulted in a year-on-year improvement of SAR 391 million. Cost of sales also saw a solid improvement mainly due to the nonrecurrence of the one-off industrial utility charges from the previous year. The first half EBITDA was further supported by the insurance claim benefit received of SAR 469 million, of which SAR 270 million was received in the second quarter. Lower overall prices impacted EBITDA by SAR 199 million year-on-year, primarily due to flat rolled product. Quarter-on-quarter, the improvement in EBITDA is primarily due to higher overall prices with sales volumes picking up from the first quarter in both alumina and flat rolled products. As a result, our EBITDA for the quarter increased to SAR 936 million. Moving to our base metals and new minerals business unit. Mansourah-Massarah, our largest gold mine to date contributed to a significant increase in gold production to 241,000 ounces during the first half. Higher sales volumes and prices resulted in a 56% increase in sales year-on-year in the first half. EBITDA was also 44% higher during the first half with a healthy margin of 57%. Sustained higher prices supported quarter-on-quarter sales and EBITDA despite lower grades at De impacting our production in the quarter. On to the EBITDA bridge. Higher gold prices and increased sales volumes, notably from Mansourah-Massarah, drove a strong first half performance. This was partially offset by higher costs associated with the higher production and accelerated exploration efforts. So unlike last year, we are allocating our full exploration cost to the business unit on a quarterly basis. As a result, EBITDA for the first half amounted to SAR 1.1 billion. On a quarterly basis, the continued rise in prices more than offset the lower volumes, while costs remain stable. I'll now hand back to Bob to take us through the outlook.

Thanks, Louis. Now turning to the outlook. As you can see, we are making good progress across our pipeline of projects. Early construction work is underway at Phosphate 3, which will add another 1.5 million metric tons of capacity once Phase 1 is online. The development of a new recycling -- aluminum recycling plant at Ras Al-Khair is currently in pre-feasibility stage and will move towards bankable feasibility stage this quarter. We're currently looking at how much we're actually going to spend on Phos 3 this year, and some of it might be pushed out a little bit to next year, but we won't have any impact on the schedule overall. We're on track to deliver our 2024 production targets with DAP volumes expected to reach the upper end of our guidance. For aluminum, the upper limit has been adjusted upward by 10% to over 1 million metric tons. In terms of near-term priorities, we're going to continue focusing on company-wide safety programs with a focus on contractor safety Operationally, we're keeping a close eye on construction works at Phosphate 3 and continue our large-scale drilling program that I mentioned across the Central Arabian gold region. We're also moving forward to complete the acquisition of Mosaic's 25% stake in Wa'ad Al Shamal facility later this year. This transaction will increase our stake to 85% and significantly expand marketed phosphate volumes. We're becoming a more efficient organization every day, and we've set a platform for profitable growth. We're now focused on innovation and exploration to unlock new opportunities to deliver on our ambitious growth targets.

Thank you, Bob. Thank you, Louis, for the presentation. Now the floor is open for your questions. I see that I have one question from Jason. Jason, I'm going to unmute you. You are unmuted now, please ask your question.

Can you hear me okay, Abdulaziz?

Yes, go ahead Jason.

So look, 2 quick questions. First, you're buying out Mosaic from the Phosphate JV. I'm just wondering how are you thinking about the partnership with Alcoa? Is there an opportunity to buy them out as well? And then second question is just about the overseas M&A. I think Bob has been quoted in the press as saying that we could hear of some deals before the end of the year. I'm just wondering if there's any incremental color you can provide here.

That's good questions. So relative to Mosaic, we will conclude that deal this year. Relative to Alcoa, we have a great partnership with Alcoa and plan to continue that. So no news on that front. Relative to overseas M&A, we do have Manara stood up as our international investment arm. And we -- as Louis said, we closed Vale Base Metals this quarter or last quarter and they've got a healthy pipeline of projects that were some are further along in diligence already. So perhaps something in the future forthcoming.

Okay. Maybe if I could just follow up with one more. This would be for Louis. Louis, can you give us any color on the cost reductions. So to what extent is this a cyclical cost unwind? Or do we have something else going on here? How permanent are these?

Yes. Thanks for the question, Jason. In terms of raw material prices, I think they are cyclical. So we're definitely seeing we've finally been seeing the reduction in caustic soda prices, in particular, as well as coke prices. molten sulfur is also down year-on-year. So that will fluctuate depending on the market, but very pleased with how that's recovered. Internally, we continue focusing on operating efficiencies, and we're just pushing the businesses harder and harder. And so -- but most of what you've seen today is as a result of raw material price reductions.

Thank you, Jason. I have a question on the chat. So maybe this is more to Louis. So how much Vale Metal contributed to last quarter or last half income statement?

Okay. Thank you for the question. It contributed nothing because the transaction hasn't closed yet. And we're still finalizing how we will account for Manara at least will account for the acquisition in Vale Base Metals, whether it will be on an investment accounted basis or whether with equity account. In which case, we will account for our share of the noncontrolling interest in that venture. But it had no impact during the first half.

Thank you, Louis. Another question about the performance of the Base Metal, really the gold. So the question related to Mansourah-Massarah, is it fully operated at the moment? And about the reduction, does it have anything related to a reduction in the overall?

Okay. Once again, thank you for the question. In fact, Mansourah-Massarah production was up quarter-on-quarter. The reduction that we've seen is, as I mentioned earlier, we are seeing mining lower grades or getting lower grades from our ore stockpiles at Ad Duwayhi. As I mentioned, I think, during the first quarter call, Ad Duwayhi is currently undergoing a major pushback. So we're mining the ore stockpiles at the moment, so slightly lower grades out of that operation.

Thank you, Louis. So I don't see any more questions. I'll give 30 minutes -- 30 seconds for anyone to raise their hand. If you have any follow-up questions. Jason, you're back again.

I'm back again. If everyone else is being shy, I'm happy to ask questions all day. Just, Bob, you're talking a little bit about Typhoon. Robert Friedland, your partner, is promoting it as a game changer. Are you actually finding anything with this new technology? And I guess, if not, how long before we see some fruit from your efforts?

That's a great question. So it's a game-changer technology in terms of the depths we can explore and the vast lots of real estate we can cover. So first Typhoon unit showed up in November of last year. We already have deployed it across about 4,000 square kilometers, and we've got 2 prospective strikes already that we're drilling out. So I think you'll see the fruits of those labors within the year.

Thank you, Bob. I have [ Draknan ], he's raising his hand. Draknan, I'm going to unmute you and you can ask your question. Please go ahead, Draknan.

Congratulations on the set of results. I just have a question. Could you give us your outlook or your demand outlook for DAP and flat rolled products for the second half?

Yes. So the outlook for DAP, as I mentioned, was on the positive side for the second half. There was some DAP out of China that came in during the second quarter. We don't expect them to meet the export quotas this year. And what we also saw during the first half of the year is both India and Brazil were running down inventories, and we expect them to come back to the market during the second half ahead of the key planting seasons. In terms of flat rolled product, I think the market is still destocking at the moment. We've benefited during the first half in the can sheet side of things as a result of the Olympic games. As I mentioned earlier, conversion premia is still lower year-on-year. So we are watching the market, and we are looking to increase our sales by actually negotiating with new customers as well. So the outlook for FRP at this stage, I'd say it is neutral to moderately positive.

Anna, you are unmuted. Please go ahead. We'll move to the next question. Prateek, you are unmuted. Please go ahead. Prateek, we missed your question. Could you repeat it?

Yes, sorry. I had just one question, which is, apart from the insurance gain which you had, is there any other one-off benefit or costs which you experienced this quarter?

Would you repeat the question? Sorry, we missed it.

Sorry, apart from the insurance gain which you had, did you have any other one-off benefit on costs in this quarter?

No, Prateek. It was predominantly the insurance claim.

Thank you, Prateek. Anna, back to you.

Can you hear me well?

Yes, go ahead, please.

Two questions from our side. So first, maybe ask me that during the course of the presentation. But could you remind us, do you expect any additional insurance claim benefits in the aluminum division that you expect to receive in the second half of this year? That's the first question.

Yes, let me just get you the number. But yes, very, very small amount. I think it is about SAR 69 million, but I'll just confirm that. Ask your second question, Anna.

The second question is, I think you mentioned that the lower gold production in Q2 was mainly because you were mining lower grade stockpiles. What is the outlook for the second half of this year? Do you expect to continue mining kind of processing the lower-grade ore from stockpiles or do you expect it to normalize?

Anna, I think we expect to remain within the guided range that we've provided. So we're not changing our guided range on gold production.

I don't see any more questions. Thank you, Bob. Thank you, Louis, for this presentation, and thank you all for attending this call. All materials will be uploaded on our website and on Ma'aden. But if you have any follow-up or questions, please send them to our e-mail, [email protected]. With this, I'm going to conclude today's call. Thank you, and have a good day.