Semirara Mining and Power Corporation (SCC) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining this Special Analyst Briefing -- Analyst and Investors Briefing of Semirara Mining and Power Corporation. I'm Hannah Chan, Investor Relations Officer of DMCI Holdings, and I will be facilitating today's session. This briefing is being held in light of the recent developments and media coverage relating to our coal operating contract. Our objective this afternoon is to provide clarity, share management's perspectives and address your questions in an orderly and transparent manner. So joining us today are members of SMPC's senior management team, as shown on your screen, and leading the panel are our Chairman and Chief Executive Officer, Mr. Isidro A. Consunji; and our President, Chief Operating Officer and Chief Sustainability Officer, Ms. Maria Cristina C. Gotianun. So before we proceed, please take note of the following. First, this meeting is being recorded. Questions should be sent -- submitted through the Q&A or panelist chat box and we will prioritize questions that were submitted in advance, but we will do our best to address as many as time permits. This session is intended for analysts and investors to gain insight into the management's perspectives and SMPC's strategic direction. During this discussion, management may make forward-looking statements regarding plans, expectations and growth prospects, and these statements are based on current assumptions and beliefs and are not guarantees of future performance. Actual results may differ due to various risks and uncertainties. So with that, may I now invite our President and Chief Sustainability Officer, Ms. Cristina C. Gotianun to deliver her opening remarks.

Good afternoon, everyone, and thank you for joining us on such a short notice, especially on a holiday. We felt it was important to speak to you directly following the recent news about the bidding of the coal operating contract for Semirara. As of today, we have not received any formal response regarding the decision on our request for a term adjustment. Still, we respect the government's process, and we remain engaged. Our operations continue as usual. Mining and shipments are not affected. Over the years, we have more than PHP 50 billion in infrastructure on the island, such as power plants, roads, port facilities, equipment and logistics. These are the facilities that allow us to operate safely and efficiently today. If operations were to restart from 0, would not happen overnight. It could take 2 to 3 years or more to build infrastructure and secure the necessary permits before full operations can begin. Meanwhile, Semirara Coal supplies about 38% of the country's coal-fired power plants and around 25% of total domestic consumption. Continuity of local production is important, not just for energy stability for -- but for the local communities whose livelihoods are closely tied to the operations. Our focus is simple. We will fulfill our contract until July 2027. At the same time, we are preparing to submit the best mine plan if the bidding proceeds. Throughout this process, our priority remains the stability of our operations, the welfare of our employees and host communities and the reliable supply of energy to the market. We have contingency plans, which we can discuss later on in the Q&A. Thank you. And we're ready for your questions.

Thank you. Thank you so much, Ma'am CCG, for your opening remarks. So we will now begin the Q&A session. And to open the floor, we'll start with questions that were submitted via e-mail. So the first question is directed to our Chairman and CEO, Mr. Isidro A. Consunji. Sir, I see the question goes, why did you request for a 13-year extension? Was this based on your estimated mine life?

Good afternoon, everyone. As early as 2023, we have talked to DOE and told them that when we took over Semirara, 13.3 years prior to our takeover, Semirara was a GOCC, a government-owned and managed company. And because of that, we told DOE that the 13.3 years should not be counted in the life of Semirara of 50 years because that is designed for private companies. So 13.3 years of the 50 years was managed by the government. DOE agreed with our position. But because of the fact that there were legal cases filed when [indiscernible] was extended DOE asked for a DOJ opinion on this matter. And the initial response of DOJ was, yes, that 13.3% should be deducted from the 50-year mine life of Semirara. But they produced a caveat that the extension of 13.3 years may favorably give an advantage to Semirara, okay? So because of that caveat, Secretary at that time did not sign the extension because of that caveat. So subsequently, Secretary sent another letter to clarify the position of DOJ. This time, instead of removing the caveat, DOJ completely reversed its stand and said the 13.3 years of government GOCC accepted that, we provided the documentary evidence to show that it was done by the government. Even though it is run by the government, it should still not be deducted from the 50 years. So again, subsequently, the Secretary sent another letter to DOJ and that has not been formally answered as of today. And because of the delay and because of the time of July '27, it's coming very soon and DOE did not want any disruption, they made a decision, [indiscernible] okay? So this is where we are today. But this bidding is not a financial bid. This is a bidding that will say, "Show me the best mining plan you have going forward, show me that you have the technical capability, show me they have the financial capability, show me you have the organizational capability to do what you say you're going to do," okay? So there is no cash involved as far as this is concerned. So that's what we are. So given that situation, [Audio Gap] the remaining results is probably not adequate for a new business to invest that CapEx requirement to extract that coal at the same rate that Semirara is extracting right now. [indiscernible] So, the life span is, unless there is new deposits, is less than 10 years at the current rate. So we're quite optimistic that Semirara has -- is in a position to provide the best mine plan for the bid. Thank you.

Thank you so much, sir. So we proceed to the next question. The next few questions are addressed to our President and COO, Ma'am CCG. So ma'am, the first question goes, what would be the worst-case scenario if SCC does not win the bid for Semirara COC? And also, let's say, the COC does get awarded to another party. Can you provide some color on what may happen to SCC?

In the worst-case scenario, there will be 2 things that we're going to look at. The first one is the country. There will be a volatility in the foreign supply and the cost of coal because of the shipment, this will be coming from abroad already. And the second one on Semirara side, we have to explore other options, and we can capitalize on our mining competencies and we can provide these services to the eventual contract holder or to another -- look for another mine and mine somewhere else or operate -- help operate the mining assets of DMCI Mining. So at this point, we have to focus on the bidding of the COC.

Thank you, ma'am. Ma'am, next question. Does the company have any contingencies or plans for capital recovery?

Actually, the only way is really to repurpose the assets that we have at the end of the expiration of the COC and maybe do something else with equipment.

Thank you, ma'am. The next question is addressed to CTCG, Mr. Christopher C. Gotianun, our Vice President, Head for Business Development. Good afternoon, sir CTCG, the question goes, if SCC does not secure the contract in 2027, how would this affect coal supply to the power segment? And what contingency plans are in place? And any other backup sources for coal in this case?

So in the short-term, our existing coal inventory is sufficient to support the power segment even beyond 2027. In the longer term, we can easily source coal externally, most likely from Indonesia because our plants are designed to use the range of coal that is available in Indonesia, particularly the low-grade coal, which gives us flexibility and keeps us competitive in the market. And we can also leverage our existing relationships with our coal buyers for the supply.

Thank you so much, sir CTCG. Now we go back to Ma'am CCG for more -- for the rest of the questions. Ma'am CCG, next question, does SCC stand to forfeit any hard assets from the possible non-extension of the contract?

There's no forfeiture of assets as per feeding #972. So the assets will be ours and as well as that we can re-purpose them on our private plan.

Ma'am next question, will Semirara -- in terms of the bidding, we now proceed to the questions addressing the bidding part. Will Semirara participate in the bidding for the coal mine contract?

Yes, we are going to participate. And I believe that we have the advantage because we're already there. So on day 1, after the expiration of our present COC, we will be generating -- producing the coke. And like another bidder who would have to mobilize and might take some time to be able to gather all the resources needed to operate the mine.

Next question, is there an estimated date range of the auction for Semirara mine? And will there be any changes to the current royalty structure?

As of now, we're waiting for the OE to officially invite us to the bidding and give everybody -- the public, the terms of reference. We have to wait for that and then [ see ] its content.

Thank you ma'am. Ma'am next question, how is SCC positioning itself to be the most qualified bidder in the DOE Semirara coal contract process? And what gives you the confidence in retaining the contract? So -- we also combine this with another question we received. So beyond incumbency, what operational, logistical or environmental strength does SCC bring that could differentiate from new entrants?

We've been mining coal on Semirara Island since 1997, that's decades ago. We've been able to build up on our competencies in the exploration. So at the time that we -- that we won the COC contract in 1997, the coal reserves then is the same as the coal reserves now. So it just proves our exploration capability. And to be able to mine in the Semirara, you have to manage the water seepage. And I believe to a large extent, we're able to do that in Molave and in Narra, and we have to -- we're doing that in Acacia mine. And if the Acacia mine will not be maintained because if another bidder will win this project, then this contract -- then the Acacia mine will be lost totally. So I think we are in a best position to be able -- and the facilities are already there. We don't have to invest in the facility. So I believe that we're in the best position to continue mining on the island.

Thank you, ma'am. Next question is addressed to IAC. So sir, IAC, the question goes, are you expecting credible competing bidders? Or are you expecting this to be largely procedural?

I -- frankly speaking, I'd be very surprised if there will be any serious bidder considering the amount of investment involved. You probably need about PHP 3 billion for each million tonne of production. So if you want to produce 15 million tonnes, you probably need an investment of PHP 45 billion. And aside from the financial requirement, there are certain specific skills like we are mining at minus 350 meters below sea level. And one of the challenges is the seepage or control of water preventing the sea from operating. I think we are probably the only one in the whole country who's got the equipment, the experience and the qualified personnel to be able to manage this. I think the failure of the original Semirara management mining was they were not able to manage the seepage. And therefore, seawater kept on coming in and that prevented them from mining properly. So these kinds of skills and competencies are not easy, and we develop them over time. So major [indiscernible] unless they will hire foreign consultants, which might be quite expensive. And this equipment and [ not ] off-the-shelf equipment for managing seepage, they have to be manufactured to specification. And like in our case, it took almost a year before we were able to get the right equipment to do that. So still a remaining challenge. So the scale is also quite big. We are running 350 more or less 100-ton dump trucks. That's about $1 million per dump truck and about $3 million per excavator. We have more than 60 excavators. [indiscernible] is probably the largest earth moving company in the whole country, maybe 4 or 5x bigger than Atlas Mining. So in terms of volume of earth we move every day. And it's not easy to assemble a team of that magnitude. So we still believe that we are still in a good position to be able to win in this. Thank you.

The next question is addressed to CCG again for. Ma'am, do you think that there should have been greater coordination between the DNR and DOJ on the SSC (sic) [ SCC ] and are already allowed clearance?

Well, they have certain rules and regulations. So it's very difficult for them to tie this up because there's no one agency to tie up everything. But our ECC was granted on the -- and can be extended if we have the COC. So there are some permits like that. So it really depends on the agency concern.

Thank you, ma'am. Ma'am, now we proceed to questions addressing the impact on capital. So the question, does the company plan to revise its sales volume and CapEx guidance and given the uncertainties surrounding the COC bidding? If so, what would be a reasonable target on sales volumes and CapEx for the mining unit?

We already anticipated that this will happen. So our mine plan we submitted -- we submitted to the DOE last -- latter part of last year, already consider the extension of the COC beyond 2027. So there's nothing to revise right now. We have our targets in terms of production and shipment, and we just have to follow the plan that we submitted.

Thank you so much, ma'am CCG. So we've come to the last part of our questions received. So there's -- the next questions are addressed to sir IAC. Sir, we just received a new question, sir, would you be open to partner with the local or foreign firm for this bidding? Or are you hearing any foreign firm that would be interested? Any foreign firm interested to bid?

Not that I know of. We've not heard of any foreign firm who has approached DOE for request for information, although initially, 1 or 2 large Filipino conglomerate has approached them previously. But lately, there's been no sign of continued interest, maybe because it's probably not financially feasible given the limited reserves and the amount of investment that is needed. But I'm not sure. I'm just guessing. Thank you.

So we've also come to the last question of the afternoon because of the time allotted. So sir, the most important question for that we are interested in, how is the management thinking about the outlook of special dividends knowing that you may need to allot funds for the bidding?

Well, I think financially, I think Semirara is still quite liquid. But we don't know what is the financial requirements required for the bidding. So at the moment, we want to look at the terms of reference of the bidding, and then we will then decide what to do with the cash after the bid has been announced or awarded.

Thank you, sir. So before we answer, maybe request for your closing remarks.

Well, thank you very much for the interest. This development is completely surprised us given the initial acceptance of DOE and DOJ of our legal opinion. So -- and the fact that DOE is meant on bidding it considering the time constraint, we are comfortable with DOE's decision. Thank you.

Thank you. Thank you, sir IAC. So also on behalf of Semirara Mining and Power Corporation, thank you once again to our analysts and investors and panelists for taking the time to join us today. So we appreciate your continued engagement and support. Have a good afternoon and to those celebrating Happy Lunar New Year. Thank you.

Goodbye.