p/e (x) - gulfbase.com€¦ · 08 august 2012 us$7.87bn 33.1% us$6.98mn market cap free float avg....

Ma’aden Mining –Industrial MAADEN AB: Saudi Arabia

08 August 2012

US$7.87bn 33.1% US$6.98mn

Market cap Free float Avg. daily volume

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 1

Target price 37.00 16.00% over current Consensus price 39.00 22.3% over current Current price 31.90 as at 7/8/2012

Underweight Neutral Overweight Overweight

Key themes

Capitalizing on Saudi Arabia’s vast mineral wealth, Ma’aden has forayed into two new businesses: phosphate (started in end-2011), and aluminum (to start by end-2014). We believe the company will benefit from low-cost feedstock as well as benefit from government support and emerge as a success story over the long-term.

Implications

We rate Ma’aden as Overweight. We believe the company’s top-line will surge to SAR9.7bn by 2015, with the commencement of the new businesses. Transparent disclosure should add a premium to Ma’aden’s share price, and we see it as a good buy for the long-term.

Performance

Earnings

Period End (SAR) 12/12E 12/13E 12/14E 12/15E

Revenue (mn) 4,640 6,094 7,754 9,315

Revenue Growth 206.4% 31.3% 27.2% 20.1%

EBITDA (mn) 2,322 2,944 4,122 6,130

EBITDA Growth 176.1% 26.8% 40.0% 48.7%

EPS 1.16 1.33 1.89

EPS Growth 14.8% 42.0% Source: Company data, Al Rajhi Capital

Valuation

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

01/08 01/09 01/10 01/11

P/E (x)

Source: Company data, Al Rajhi Capital

Research Department Mazhar Khan, Equity Research Analyst

Tel 966 12119248, [email protected]

Ma’aden Phosphate drives valuation Diversifying away from gold, Ma’aden has successfully commenced its

phosphate operations earlier this year while the aluminum business is slated to

start by 2014. We remain bullish on the performance of the phosphate segment

and expect it to stabilize by 2013, contributing substantially to the company’s

bottom-line. The demand outlook for DAP appears positive despite a slowdown

in the global economy. We have kept conservative near-term production

forecasts for the gold segment, though we have increased our terminal growth

rates for the phosphate and gold segments to account for the long-term

projects that Ma’aden is currently investing into. We feel investors should look

at the long-term growth prospects of the company. We maintain our

Overweight rating on Ma’aden and increase our target price to SAR37.

Phosphate is the prime value driver: Ma’aden commenced commercial

production of DAP in Q1 2012. We estimate phosphate revenue to reach

SAR3.5bn in 2012 and SAR5bn in 2013 (76% and 82%, respectively of the total

revenue). Phosphate will remain the key value generator for Ma’aden, with a

contribution of over 60% to the company’s appraised enterprise value. With

DAP prices remaining firm coupled with better utilization rates, we expect the

phosphate business to stabilize in 2013.

Gold business awaits new mines: Ma’aden’s gold business has remained

stagnant despite higher gold prices, as its existing mines are at the end of their

commercial lives. With two new mines under construction, we expect Ma’aden’s

gold production to improve from 2013 onward. Although revenue and earnings

contribution from the gold segment will be relatively small compared to the

phosphate business, we expect it to continue providing value to the company.

Aluminum’s contribution to overall valuation is small: The aluminum

project is progressing smoothly for a launch in 2014 and the necessary funds

required for investment have been arranged. When launched, Ma’aden’s

aluminum segment will be the world’s cheapest aluminum producer and will

cater to the under-supplied GCC markets. For now, aluminum represents a small

portion of our target price, as the company focuses more on phosphate.

Margins high; ROIC to improve: Being one of the cheapest producers of

phosphate and aluminum (in the future), Ma’aden will be able to generate

significant profit margins going forward. However, due to the massive

investments required to start its new ventures (more than SAR20bn for

phosphate and SAR40bn for aluminum), the company will require some time to

achieve decent return on these investments. We estimate Ma’aden to report only

3% ROIC in 2013, which shall gradually improve to 7% by 2016.

Valuation: We remain Overweight on Ma’aden and have raised our target price

to SAR37 (from SAR31) mainly based on the visibility of the phosphate segment,

which we believe will become stable in a year’s time. Our analysis suggests that

phosphate is indeed a major source of Ma’aden’s valuation. While on peer

valuation, Ma’aden is trading at higher multiples (2013 PE of 27.5 and

EV/EBITDA of 10.0), which we believe will substantially come down once the

new businesses gets stabilized.

91

97

102

108

114

120

125

131

23

28

33

Price Close MAV10 MAV50 Relative to SASEIDX (RHS)

Source: Bloomberg

-10

30

70

RS

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5

10

08/11 11/11 02/12 05/12

Vo

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Ma’aden Industrial 08 August 2012

Disclosures Please refer to the important disclosures at the back of this report. 2

Corporate summary Share information Valuation

Ma’aden was formed in 1997 by the Saudi Government to facilitate the development of Saudi Arabia’s non-petroleum minerals and to diversify away from petroleum-based sectors. 50% of Ma’aden is owned by PIF. In July 2008, Ma’aden was listed on the Saudi Stock Exchange. The company’s business was mainly exploration of gold, which has now been diversified into phosphate (which started in Q4 2011) and aluminum businesses (expected to start by end-2014).

Market cap (SAR/US$) 29.51bn / 7.87bn 52-week range 24.25 - 37.50 Daily avg volume (US$) 6.98mn Shares outstanding 925.0mn Free float (est) 33.1% Performance: 1M 3M 12M

Absolute -5.6% -1.6% 30.2% Relative to index -7.1% 3.8% 15.7% Major Shareholder:

Public Investment Fund 50% GOSI 7.7% Source: Bloomberg, Al Rajhi Capital

Period End 12/12E 12/13E 12/14E 12/15E

Revenue (SARmn) 4,640 6,094 7,754 9,315

EBITDA (SARmn) 2,322 2,944 4,122 6,130

Net Profit (SARmn) 786 1,071 1,230 1,746

EPS (SAR) 1.16 1.33 1.89

DPS (SAR) - - 0.33 0.57

EPS Growth na 14.8% 42.0%

EV/EBITDA (x) na 10.0 7.2 4.8

P/E (x) na 27.5 24.0 16.9

P/B (x) 1.7 1.6 1.5 1.4

Dividend Yield 0.0% 0.0% 1.0% 1.8% Source: Company data, Al Rajhi Capital

Phosphate prices to stabilize by 2013 DAP prices to stay firm

Prices of DAP – Ma’aden’s major phosphate product — witnessed correction from Q3 2011 as it has been the case with other fertilizers, owing to the prolonged Euro-zone debt crisis and demand slowdown from Asia. From its high point in 2009 of US$1,100-1,150/ton, prices now hover around US$500-550/ton, which we believe will stay at the current levels for the remainder of 2012 (refer to our detailed discussion on phosphate below). By virtue of being an integrated producer with one of the lowest cash costs (around US$300/ton), Ma’aden should be in a position to generate significant profit margins despite the correction in product prices. We believe Ma’aden will be able to generate a gross margin of 34% from the phosphate segment in 2013 as compared to a gross margin of around 10% of non-integrated producers. As can be seen in Figure 2, the phosphate business will contribute to 70% of the overall gross profits in 2013 and hence, become a flagship business for Ma’aden.

Figure 1 DAP price trends Figure 2 Gross profit contribution to shift

0

500

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2,000

2,500

FY11 FY12E FY13E FY14E FY15E

SAR mn

Gold Phosphate

Source: PotashCorp, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Gold business awaits new mines Ma’aden’s gold business has not experienced any significant production growth after achieving the highest production level of 203,665 ounces (oz) in 2005. Since then, the company has maintained production at steady levels in a bid to increase the life span of its existing mines. The company also awaits commencement of production of two new mines — Ad Duwayhi and As Suq — which are currently under construction. According to our calculations, the two new mines should add at least 30% to the total production by 2014, and are crucial for the gold segment as the existing mines are on the verge of exhaustion.

New mines are crucial for infusing growth in the gold segment



Figure 3 Ma'aden's mineral resources

Indicated Grade Inferred Grade Total Grade Launch

Projects under evaluation mn tons g/t mn tons g/t mn tons g/t Status

As Suq 8.1 1.82 0.5 1.11 8.6 1.78 Jun-2013

Ad Duwayhi 10 3.87 11.6 1.22 30.6 2.43 Q1 2014

Mansourah 25.6 2.14 0.8 2.14 26.4 2.14 Pre-feasibility

Masarrah 14.2 2.17 2.6 2.09 16.8 2.16 Pre-feasibility

Zalim 10.8 1.70 10.8 1.7 exploration

Ar Rjum (Al Wasimah) 45.4 1.22 9.2 1.26 54.6 1.23 Pre-feasibility

Ar Rjum (Um Al Na'am) 20.4 1.64 0.02 2.23 20.4 1.64 Pre-feasibility

Bir Tawillah 97.7 0.54 0.1 0.47 97.8 0.54 exploration

Al Humaymah 13.2 1.03 41 1.00 54.2 1.01 Pre-feasibility

Total projects under evaluation 234.6 1.25 76.62 1.21 320.2 1.28 Source: Ma’aden’s Annual report 2011, Al Rajhi Capital

Aluminum to come into picture in 2014 Ma’aden’s another ambitious business — aluminum — is expected to be launched in 2014 with an estimated investment of SAR40bn. The project is a JV with Alcoa, which owns a 25% stake in the venture. This project, upon commencement, will be the first integrated aluminum factory in the GCC region and will be one of the cheapest producers of aluminum globally (energy represents 30-35% of the production cost and Ma’aden will benefit from the Kingdom’s cheap energy resources). The aluminum plant will address the needs of the domestic and regional markets for aluminum sheets, especially for beverage cans.

Recently, aluminum prices have witnessed a correction mainly due to oversupply and a slowing global economy. This price correction has led to capacity cuts and shutdowns among major aluminum producers. With prices hovering around US$1,750-US$1,850 per ton, most aluminum producers have found it difficult to even recover costs. We expect prices to recover over the near-term to average around US$2,000-US$2,050 per ton in 2012, as the capacity cuts normalize the demand-supply equation. While aluminum demand is slowing in industrialized markets, the demand is shifting toward Asia and also, the GCC region which is set to emerge as the aluminum production hub of the future. Various JVs are being forged between western producers and GCC players, with the former trying to reap advantage of the cheap energy resources, while allowing the latter to diversify away from an oil & gas-based economy.

Aluminum’s contribution to overall valuation is small We expect Ma’aden’s aluminum business to kick start only in the last quarter of 2014, and going by the company’s delays in commercially launching the phosphate business, we estimate conservative 25% capacity utilization for producing aluminum ingots, when it starts operations in Q4 2014 and US$1,955 per ton price realization. We expect aluminum to start phase-1 production in 2014 and phase-2 the following year. In terms of valuation, aluminum contributes a small but essential part to Ma’aden’s overall valuation. This is because of the lack of clarity on its commencement and the risks associated with the launch of such a large-scale project (SAR40bn worth of investment). We have valued Ma’aden’s aluminum business based on comparative valuation and thus arrived at SAR7.7 per share, contributing to 14% of the appraised enterprise value of the company.

Margins looks impressive; but currently low on returns We expect Ma’aden’s EBITDA margin to decline from 55.5% in 2011 to reach 48.3% by 2013, as Ma’aden shifts its focus from gold to phosphate business. However, we expect EBITDA margin to improve from 2013 onward, benefiting from a stabilizing phosphate business and rise sharply to 65.8% in 2015, driven by better profits from the phosphate business and capitalization of the assets in the aluminum business. The strength in the EBITDA margin will also translate into healthy operating margins, which we expect to reach 37.8% by 2015.

However, we do not expect Ma’aden’s net profit margin to expand at a corresponding rate due to higher financial costs. The company has started charging financial costs and other pre-operating expenses to the income statement after the launch of its phosphate business, which was earlier capitalized. We expect net margin to contract sharply from 27.3% in 2011 to 16.9% in 2012 and subsequently, we expect it to rise to 17.6% in 2013, before dropping to 15.9% in 2014. This volatility will be due to an increase in depreciation charges due to Ma’aden’s huge capex build-up (from aluminum) and as financial charges increase due to rising debt levels (from 2% of operating profit in 2011 to 37% by 2014).

Ma’aden will soon emerge as one of the lowest cost aluminum producers globally

EBITDA and operating margins to improve from 2013; net margin will grow but not at a corresponding rate



We expect the net margin to recover to 18.7% or above by 2015 after a full-year operation of the aluminum business and reduction in debt levels. In terms of ROIC and ROE, the returns would be in single digits as the huge investments will take time to show a decent return on the capital deployed. Nevertheless, both ROIC and ROE will improve sharply this year and will continue to be on an uptrend.

Figure 4 Profit margin trends Figure 5 Return on investment trends

0%

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25%

30%

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10%

20%

30%

40%

50%

60%

70%

FY11A FY12E FY13E FY14E FY15E

EBITDA margin Net prof it margin (RHS)

0%

2%

4%

6%

8%

10%

FY11A FY12E FY13E FY14E FY15E

ROIC ROE

Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital

Huge debt pile but cash position provides cushion Ma’aden had a high gross debt of SAR21.3bn on its balance sheet at the end of Q2 2012, which was raised to fund the company’s new projects in phosphate and aluminum segments. Of this, SAR7.7bn was contributed by the PIF (the 50% owner of Ma’aden). The other major shareholder, SIDF, has also been providing funds to Ma’aden for its new businesses, while the remainder (SAR13.4bn) consists of Islamic loans from commercial banks and financial institutions. Currently, Ma’aden has unutilized loan facilities of SAR10.8bn for its aluminum business apart from SAR7bn of revolving loan which it recently secured in June 2012. All the loans are long-term in nature with a ten-year repayment period in most cases. The financial costs on these loans are also on the lower side, ranging from LIBOR plus 0.5% to 1.15% per annum.

It should be noted that the debt has been raised at the level of Ma’aden’s subsidiary companies, while the company has large cash equivalents (SAR8.4bn at the end Q2 2012) at the consolidated level. As a result of the debt raising program and high near-term expenditure plans, we expect the company to swing into a large net debt position this year. Therefore, we expect Ma’aden’s net debt/EBITDA ratio to jump to 7.1x in 2013. However, the earnings from the phosphate business should rapidly boost its EBITDA levels in the future. As a result, we estimate the net debt/EBITDA ratio to decline substantially to 2.4x by 2016, as the phosphate business stabilizes and the aluminum business is launched, generating significant cash flows which will enable the company to retire its debt.

Gearing should surge next year but decline later



Valuation: SoTP method

Summary of our approach In our initiating coverage report on Ma’aden published in August 2009, we had used the long-run discounted economic profit (DEP) method for valuing the company’s business. At that point, there was lack of guidance in terms of each business, and therefore we thought of valuing the company as a whole. However, we have now replaced it with the sum-of-the-parts (SoTP) approach to ensure more clarity on the various business segments. We believe valuing each segment separately will be more appropriate for Ma’aden, given the significant investments made in diverse businesses such as phosphate and aluminum (apart from its gold business), which will spur the company’s growth going forward. We have used two different valuation methods for Ma’aden’s segments. For the existing business segments of gold, phosphate, and industrial minerals, we have used the discounted cash flow (DCF) valuation method. For the company’s aluminum business, we have used the relative valuation method as it is expected to commence operations only by end-2014 and therefore, has higher risks attached to it.

Figure 6 Cost of capital assumptions

Particulars

Risk-free Rate 1.4%

Market Risk Premium 12.1%

Adjusted Beta 1.11

Cost of Equity 14.8%

Pre-tax Cost of Debt 3.9%

Effective Tax rate 7.5%

After-tax Cost of Debt 3.6%

Target D/(D+E) 45.0%

WACC 9.8%

Long term growth rate

Gold 3.0%

Phosphate 5.0%

Others 3.0% Source: Bloomberg, Al Rajhi Capital

Our SoTP valuation indicates a fair value of SAR37 per share for Ma’aden. Our valuation exercise reveals that the phosphate segment has a fair value of SAR33.5 per share on a stand-alone basis, contributing 61% to Ma’aden’s appraised enterprise value of SAR55.3. Hence, the performance of this segment will be crucial for the company going forward. We have currently assumed higher terminal growth rates for the phosphate segment, as we expect this segment to grow rapidly in the future and also account for the Umm Wual project, which is still in a nascent stage. The gold segment contributes 25% of the appraised value, at SAR13.8 per share. The aluminum segment provides a smaller but essential contribution of 14% at SAR7.7 per share, as its operations are expected to commence by end-2014. After adjusting for the investments in associates, debt and minorities from the appraised value, we arrive at the fair value of SAR37 per share.

We have used the SoTP

method to value Ma’aden, due

to its diversified business

segments



Figure 7 SoTP valuation for Ma'aden

Ma'aden's

Equity Valuation SAR mn SAR Stake SAR

Gold segment 12,806 13.8 100% 13.8

Phosphate segment 44,264 47.9 70% 33.5

Industrial minerals segment 258 0.3 100% 0.3

Aluminum segment 9,437 10.2 75% 7.7

Appraised value of the enterprise 66,766 72.2 55.3

Value of associates and non-core assets 448 0.5

Value of debt (12,942) (14.0)

Value of minorities (4,443) (4.8)

Appraised value of the equity 49,829 37.0 Source: Al Rajhi Capital

Gold segment valuation Ma’aden’s erstwhile core business of gold mining has become a minor segment, after the launch of the phosphate segment. Although the company had announced in 2010 that it plans to produce 400,000 ounces of gold by 2015, we have seen limited production growth till date. Hence, we have conservatively assumed production levels of around 240,000-260,000 ounces by end-2015. This is based on our assumption of a moderate growth over 2012-2013 and a significant uptick in volumes after the introduction of new mines from the second-half of 2013 onward.

We have assumed capex of around SAR2bn spread over 2012-2016, taking into account the development of the new mines, resulting in a significant increase in sales volume from the current levels. Our DCF valuation for the gold segment is as follows:

Figure 8 DCF Valuation for the gold segment (In SAR mn)

Years to forecast FY12E FY13E FY14E FY15E FY16E FY17E

Terminal

Value

Pre-tax operating profit 442 436 509 611 778 827

Post-tax operating profit 389 388 468 580 739 794

Add: Depreciation & amortization 145 143 257 522 515 499

Add: Change in working capital 39 62 126 131 165 0

Less: Capex (345) (404) (404) (404) (404) (180)

Free Cash Flow to Firm 228 190 447 829 1,015 1,113 16,931

Discount factor 0.95 0.87 0.79 0.72 0.66 0.60 0.60

PV of Free Cash Flows (FCFs) 218 165 354 598 667 667 10,137

Sum of present values of FCFs 12,806

Value per share (SAR) 13.8 Source: Al Rajhi Capital

Phosphate segment valuation For the phosphate business, we have conservatively assumed gross margin levels of around 30-40% over the forecast period. Since the commercial production and sales of DAP have begun in Q1 2012, we have assumed a gradual improvement in gross margin levels and only an incurrence of maintenance capex during the forecast period. We are yet to obtain clarity on the Umm Wual project, which is expected to be launched by end-2016 and hence, we have not included it in our model calculations. We have assumed a higher long-term growth rate of 5% for the phosphate business, considering the growth potential of the current and forthcoming projects, and the robust outlook for DAP over the long-term. Our DCF valuation for the phosphate segment is as follows:

We have assumed conservative

growth in the gold segment

We expect profitability in the

phosphate segment to improve

gradually



Figure 9 DCF Valuation for the phosphate segment (In SAR mn)


Terminal

Value

Pre-tax operating profit 920 1,546 1,979 2,083 2,128 2,212

Post-tax operating profit 810 1,376 1,821 1,979 2,021 2,124

Add: Depreciation & amortization 816 807 795 1,456 1,148 1,029


Less: Capex (925) (497) (512) (557) (576) (602)

Free Cash Flow to Firm 839 1,986 2,647 3,382 3,121 2,553 56,149

Discount factor 0.95 0.87 0.79 0.72 0.66 0.60 0.60

PV of Free Cash Flows (FCFs) 801 1,726 2,097 2,440 2,052 1,529 33,620

Sum of present values of FCFs 44,264


Industrial minerals segment valuation The industrial mineral segment is relatively small compared to the phosphate and gold segments. We do not expect any significant capex investments in this segment since the company is focusing on the phosphate, gold and aluminum segments for its growth. Hence, we have modeled a steady-state performance for this segment going forward. Our DCF valuation for the industrial minerals segment is as follows:

Figure 10 DCF Valuation for the industrial minerals segment (In SAR mn)


Terminal

Value

Pre-tax operating profit 24 19 20 23 24 26

Post-tax operating profit 21 17 19 22 23 25

Add: Depreciation & amortization 5 5 6 13 13 12


Less: Capex (20) (18) (17) (18) (18) (18)

Free Cash Flow to Firm 10 10 18 26 27 19 296

Discount factor 0.95 0.87 0.79 0.72 0.66 0.60 0.60

PV of Free Cash Flows (FCFs) 10 9 14 19 18 12 177

Sum of present values of FCFs 258


Aluminum segment valuation Since Ma’aden’s aluminum business is scheduled for commercial launch by end-2014, we have valued the segment using the average 2015 EV/EBITDA multiple of comparable global players. We have used two of the largest global aluminum producers — Russia’s Rusal and US based Alcoa — and two major aluminum producers from the emerging markets — India’s Hindalco and Aluminum Corp Of China (Chalco) — to arrive at the average EV/EBITDA multiple. Our relative valuation for the aluminum segment is as follows:

Figure 11 Valuation for the aluminum segment

Price Cap Value

Company Name (SAR) (SAR bn) (SAR bn) 2012E 2013E 2014E 2015E

Alcoa 31.4 33.5 75.3 8.7 6.1 5.1 5.4

Chalco 1.6 40.1 82.7 18.8 13.1 9.1 6.5

Rusal 2.0 31.1 72.8 13.3 10.4 9.4 10.0

Hindalco 8.0 15.4 40.7 6.4 5.6 5.1 4.5

Average 11.8 8.8 7.2 6.6

EBITDA - 2014E (SAR mn) 1,428

Estimated Value (SAR mn) 9,437

Value per share (SAR) 10.2

EV/EBITDA

Source: Bloomberg, Al Rajhi Capital

We now present Industry section in detail:

The industrial minerals segment

will be a small contributor to the

overall valuation going forward

The aluminum business, set for

launch in 2014, provides a

nominal value to Ma’aden



Gold: New demand factors emerge

Gold remains a safe bet for investors Gold remains an attractive asset class for many investors, who consider it as a safe haven to hedge against the prevailing uncertain macroeconomic climate, as the value of currencies and equities tend to be very volatile. Data from the last five-years (Figure 12 below) reveal that gold has remained the least volatile commodity providing the highest returns as compared to the benchmark indices.

Figure 12 Gold vs. equity benchmark indices

5 years 3 years 1 year 5 years 3 years 1 year 5 years 3 years 1 year

Gold 143% 89% 13% 21% 17% 21% 1.00 1.00 1.00

ESTX50 -43% 10% -17% 28% 24% 29% 0.02 0.18 0.16

S&P 500 -3% 64% 6% 24% 19% 21% 0.03 0.29 0.22

DJIA 5% 63% 7% 22% 17% 20% 0.00 0.28 0.23

Performance %* Volatility %* Correlation

Source: World Gold Council, Al Rajhi Capital

*Annualized returns and standard deviations of weekly log returns, data up to March 30, 2012

ESTX50 = Euro Stoxx50, S&P500 = Standard & Poor’s 500 Index, DJIA = Dow Jones Industrial Average

The Eurozone crisis has prompted investors to look toward gold as a safe investment, especially in the form of ETFs and other securities based on gold. Demand for gold bars and coins have also reached an all-time high across Europe. Net official purchases (net purchases made by central banks) present another new source of demand. According to the World Gold Council, net official purchases constituted around 7% of global gold demand in Q1 2012 at 80.8 tons. We believe the demand from net official purchases will increase in future, on account of the perceived need to acquire tangible assets rather than currency denominated reserves.

Asian demand for gold to come under pressure over the near-term India has been the largest consumer of gold accounting for 29% of the global demand in 2011. Majority of the demand in India is in the form of jewelry, stemming from religious and cultural traditions rather than having a direct linkage with global macroeconomic trends as in other countries. This growing demand has moderated recently when the Indian government raised custom duty to 4% for standard gold bars and 10% for non-standard gold and jewelry, in a bid to reduce its widening current account deficit. Further, a declining rupee and rising inflation have reduced the discretionary spending capacity of urban consumers, while a deficient rainfall is likely to impact rural demand (estimated to account for around 60% of India’s gold demand). These combined factors could lead to softening demand over the near-term.

Figure 13 Gold demand volumes, by region Figure 14 China Quarterly GDP growth rate (y-o-y)

Title:

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Jewelry Bars & coins

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India China Middle East Europe ex CIS

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Source: World Gold Council, Al Rajhi Capital *Provisional number Source: China National Bureau of Statistics, Al Rajhi Capital

Gold demand in India to remain lack luster over the near-term



China – the second major market for gold in Asia – had witnessed increased consumption of the yellow metal in the beginning of 2012. According to Census and Statistics Department of the Hong Kong government, Chinese imports of gold from Hong Kong alone surged by more than 8 times to 239.1 tons in the first four months of 2012 from 27.1 tons a year earlier, implying a rapid build-up of gold demand. We believe a large portion of the gold demand comes from official purchases rather than retail demand. China has not maintained any transparency in its official holdings – it last announced its gold reserves three years ago, which was 1,054 tons. We believe most of China’s imports have been used to further build up these reserves.

The US dollar to play a key role in gold demand over the near-term With demand stalling in key Asian markets and economic uncertainty in developed markets of Europe and the US, the focus has shifted to price movements of gold against the US dollar. Historically, a firmer US dollar has led to weaker gold prices and vice-versa. As a result, traders who are bullish on gold are anticipating for the announcement of a third round of quantitative easing or QE3 by the Federal Reserve, which would lead the US dollar to drop and in turn will boost gold prices. Though, there have been no such announcements so far, we believe that any further deterioration in the US economy could compel the Federal Reserve to pursue such QE policies. For now, we conservatively expect gold prices to remain range-bound for the rest of 2012 between US$1,500-1,650/oz, without taking into effect of the launch of any further quantitative easing.

Figure 15 Gold price trends

Title:

Source:


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1600

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Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

US$/oz


Ma’aden’s gold business Ma’aden continue to sell gold from five of its mines, though one of the mines (Sukhaybarat) has already ceased its operations and is now mainly being used for processing ore transferred from another mine (Bulgah). The company’s overall gold production has been on a declining trend and has hovered around 150,000 ounces per annum. According to the management, gold production will receive a major boost when two of its new mines – Ad Duwayhi and As Suq commence their production. Both these mines are in construction stage and according to the management, As Suq will start commercial production in the second-half of 2013 and Ad Duwayhi by 2014. We have therefore conservatively assumed around 30% increase in gold production in 2014 attributing to the new mines. Our estimates for the gold business are mentioned below:

Figure 16 Ma'aden's gold business: ARC assumptions

FY09 FY10 FY11 FY12E FY13E FY14E FY15E

Sales vol. ('000 oz) 162.45 140.02 147.21 158.28 161.24 193.49 236.06

US$/oz $966 $1,223 $1,568 $1,637 $1,672 $1,600 $1,600

Gold revenue ('000 SAR) 588,653 642,068 865,751 971,488 1,010,965 1,160,954 1,416,364 Source: Company data, Al Rajhi Capital

Gold prices to remain stable, with lack of real consumer demand

Gold business should pick up in 2014 when two new mines are expected to be operational



Phosphate:

Fundamentals remain intact

Long-term demand for nutrients to be healthy The ever-increasing global population has resulted in a decline in available arable land per person, which in turn, has led to the requirement for higher crop yields to match the growing demand. Apart from the rising population, the disposable income levels in the emerging Asian countries have witnessed a steady rise, leading to increased grain and meat consumption than ever before in the past. This rising demand for higher crop yields is being met by the use of fertilizers based on the three nutrients of nitrogen, phosphorus and potassium. Although nitrogen-based fertilizers attract bulk of the global fertilizer demand and will remain the dominant nutrient, demand growth for phosphorus and potassium fertilizers are likely to remain relatively more robust over the near-term (source: International Fertilizer Industry Association - IFA). We expect demand for phosphorus and potassium fertilizers to grow on account of the correction in nutrient imbalance in Asian countries, where currently nitrogen-based fertilizers are used more heavily than phosphate and potassium-based fertilizers.

Figure 17 World Crop Consumption Figure 18 Global Fertilizer demand, by nutrient

Title:

Source:


World Crop Consumption

bn tons

2020F

2000

1980

4.9

3.4

2.2

2020F

2000

1980

bn tons

Title:

Source:


0

50

100

150

200

250

08/09 09/10 10/11 11/12E 12/13F 16/17F

MMT

Nitrogen Phosphorus Potassium

2.3%

1.5%

CAGR3.7%

Source: Potash Corp, Al Rajhi Capital Source: IFA May 2012, Al Rajhi Capital

According to IFA, more than three-fourths of the demand growth is expected to originate from the Asian and Latin American countries over the next five years. Going by IFA’s version, these demand forecasts are dependent on the outcome of diverse factors like the ongoing Eurozone debt crisis, movement of crude oil prices, movement of crop prices, and changes in fertilizer subsidy & export tariff policies in importing & exporting countries, respectively. Demand forecasts are also reliant on the unexpected weather conditions, which could lead to crop surplus or shortfalls. While we do take cognizance of these uncontrollable factors, we agree with IFA’s view, that demand for all nutrients shall remain strong over the long-term.

An overview on the DAP business What is DAP? We limit our discussion here to diammonium phosphate (DAP) – the main fertilizer based on phosphorus (36% of the phosphoric acid use), as this fertilizer is going to be the prime revenue driver for Ma’aden over the long-term. DAP is a compound of phosphoric acid and ammonia. It is mainly produced in a granular form for direct use as a fertilizer or blended with other fertilizers. DAP is also used in liquid fertilizers in a non-granular form. The main reference price for DAP is the FOB Tampa quote as it represents nearly 50% of the global DAP trade (source: ICIS).

Who supplies? Most of the phosphate deposits, from which phosphoric acid is produced, are concentrated in China, the US and Morocco. Morocco dominates the production of the phosphate rock and the phosphoric acid export market, enjoying a 33% market share. State-owned Office Cherifien des Phosphates (OCP) is currently in an expansion mode and plans to raise its production of phosphate fertilizers (DAP and mono-ammonium phosphate - MAP) to 10mtpa by 2020 from current levels of 3.6mtpa. Of this, OCP targets to reach capacity levels of 7mtpa by 2015. This ramp-up in processing capacity will reduce exports of phosphate rock

Demand to remain healthy in the long-term due to an ever-increasing global population and higher disposable income

Ma’aden will become a leading producer of DAP



and phosphoric acid, exerting pressure on global supplies and non-integrated producers of phosphate fertilizers, who make up for around 30% of the total number.

Figure 19 Phosphoric acid utilization

Title:

Source:


36%

26%

5%

23%

3%

7%

DAP MAP TSP Other Fertilizer Feed Food & Industrial

Source: PotashCorp, Al Rajhi Capital

Ma’aden’s DAP capacity, in comparison, will reach 4.4mtpa by 2017 (including the new 1.5mtpa facility planned at Umm Wual) placing it among the leading integrated phosphate fertilizer producers, competing with companies like Mosaic and PotashCorp.

Key markets for DAP? Asia accounts for more than 60% of the global phosphate fertilizer consumption (source: PotashCorp). China and India have been the largest growth markets for phosphate fertilizers due to their burgeoning population and rising per capita income levels, driven by robust economic growth. While China represents 36% of global phosphate fertilizer consumption, it has been moving toward self-sufficiency by investing in fertilizer plants. Resultantly, it has transformed from a net importer of more than 3mn tons of phosphate fertilizers in 2002 to a net-exporter of more than 4mn tons by 2011. However, the Chinese government has been exercising caution in allowing exports as is evident from the high export tariff of 110% for DAP and MAP exports, except during the June-September period, when the tariff is kept at a minimum of 7%, which can be further raised based on a rise in export prices of the fertilizers. Although this move effectively restricts Chinese exports for a four-month period, it coincides with the peak shipping period for India, Pakistan and Brazil.

Figure 20 DAP consumption trend in India Figure 21 DAP & MAP consumption trend in Brazil

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012F

MMT

Imports Domestic Production

Title:

Source:


MMT

2005

2006

2007

2008

2009

2010

2011

2012F

Source: PotashCorp

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012F

MMT

Imports Domestic Production

Source: PotashCorp, Al Rajhi Capital Source: PotashCorp, Al Rajhi Capital

Given its limited phosphate rock deposits, India relies primarily on imports to meet its ever-increasing demand for phosphate fertilizers (nearly 30% of the global DAP and MAP trade). Hence, India will remain one of the main markets for phosphate exporters going forward. Brazil is the second-largest importer of phosphate fertilizers, after India, and despite the fact that the country has been scaling up domestic production capacity in recent years, imports

India and Brazil will remain the key markets for DAP exporters

China’s net export capacity

is tempered by high export

tariffs



hit record-levels in 2011. This upsurge in imports is largely on account of Brazil being a global leader in the production and export of several agricultural products, including corn, soybeans, coffee, sugar, meat, tobacco and ethanol.

Near-term factors remain positive, concerns linger in India Crop prices are at elevated levels. Fertilizer demand as well as fertilizer prices are directly influenced by international crop prices. Although there was a correction in crop prices since August 2011, prices had recovered by March 2012. Since then, prices have fallen for some commodities like corn, wheat, and sugar, which we believe is mainly due to the global macroeconomic uncertainties and a strengthening US dollar. However, prices of key agricultural products continue to remain above their six-year average. Although the Food and Agricultural Organization (FAO) recently revised its forecast downwards for cereal production for 2012 to 2.4mn tons due to the prevailing dry weather conditions, cereal production still continue to be 2% higher than the previous year’s production numbers. Over the past decade, crop production reached one of the highest levels, which convinces us that fertilizers would experience healthy demand, resulting in favorable pricing.

Figure 22 Global crop price trends (rebased to 100)

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Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

Corn Soybeans Wheat Sugar Rice Thai 5%


Mixed demand remains in India over the near-term. Indian Farmers Fertiliser Co-operative Ltd. (IFFCO) – the largest fertilizer supplier in the country – expects a 25-40% fall in demand for non-urea fertilizers. The main reasons for this demand drop are a declining rupee against the US dollar (-14% between February to June 2012), monsoon deficit (70% of the country received less than normal rains so far, according to the Indian Meteorological Department) and more importantly, a cut in subsidy on non-urea fertilizers. It is pertinent to note that non-urea fertilizers were partially decontrolled under a nutrient-based subsidy policy launched in April 2010, while urea prices continue to be regulated by the Indian government. The Indian government has slashed the subsidy on phosphate and potassium fertilizers by a fifth in 2012/2013 to trim the widening fiscal deficit. As a result, prices of non-urea fertilizers have shot up due to a declining rupee and this cost burden has been passed on to the consumers. For instance, IFFCO hiked the retail price of a 50-kg bag of DAP from Rs 950.25 to Rs 1,260 (+33%) at the end of June. These factors will result in demand destruction over the near-term and lead to contraction in imports. Despite these negative trends, India has been entering into import contracts at competitive rates.

In the first week of June 2012, India entered into a 1.2mn tons supply contract with PhosChem (A US phosphate export marketing agency comprising Mosaic and PotashCorp) for DAP at US$580/ton, which is 17% higher than the average price in March of US$495/ton of DAP FOB Tampa. According to recent press reports, India has entered into supply contracts with Russia’s PhosAgro for around 3mn tons of DAP in the month of June, and is currently engaged in discussions with different companies based in China and Ma’aden to buy significant volumes. We expect India’s dependence on imports to increase over the medium to long-term, due to its limited phosphate deposits and comparatively low usage of phosphates, thus turning the country into a preferred destination for phosphate exporters.

Near-term headwinds persist in India due to a declining rupee and lower subsidies on phosphate fertilizers…

…medium to long-term prospects appear good



DAP prices to remain firm DAP prices, which had been on an uptrend since the beginning of the Q3 2010, saw a correction from Q3 2011 as is the case with other fertilizers, owing to the prolonged Eurozone debt crisis and the slowdown in Asia. However, it is worth noting that prices remain significantly higher compared to the low levels seen in Q3 2009. Although there has been a slight uptick in prices in recent times (with India entering into contracts at US$580/ton), we believe there is limited upside and prices will hover slightly below current levels over the near-term. We estimate DAP prices to average around US$500-550/ton in 2012, and gradually increase going forward as demand picks up.

Figure 23 DAP prices


Integrated producers to have an advantage We believe that having access to low-cost phosphate will remain the key determinant to succeed in the phosphate business. Procurement prices of feedstock required to produce diammonium phosphate (DAP) – phosphate rock, ammonia and sulfur – have been increasing over the years for non-integrated DAP producers, who purchase the commodity and do not have their own phosphate deposits, as compared to integrated producers like Ma’aden. Phosphate rock prices for non-integrated DAP producers have more than tripled since 2006. The difference in costs and margins are clearly evident in the figures 24 and 25 below. With OCP and Ma’aden planning to significantly increase DAP and MAP capacity, we believe they will displace the non-integrated producers. Further, this wide cost-differential will ensure that integrated producers generate higher profits and survive even if the demand for DAP was to decline at the cost of non-integrated producers. Although we estimate that Ma’aden’s current production costs are on the higher side as it has started operations recently, we expect production costs to come down significantly once its phosphate business stabilizes.

Figure 24 Production costs for Integrated Producer Figure 25 Production costs for Non-integrated Producer

Source: Fertecon, CRU, PotashCorp, Al Rajhi Capital Source: Fertecon, CRU, PotashCorp, Al Rajhi Capital

Companies like Ma’aden, who are integrated producers, stand to gain in the future



Ma’aden phosphate business

Ambitious expansion plans Ma’aden operates its phosphate business from Ras Al Khair where it has a facility with 3mn tons DAP capacity, 1.1mn tons of ammonia, 4.5mn tons of sulfuric acid and 1.4mn tons of phosphoric acid. The raw material — phosphate rock — is sourced from Al Jalamid mine which is 1,400km from the plant. The company is now contemplating to expand its phosphate project and has identified the prospects in the Umm Wual project at Al Khabra for this purpose. This project is expected to add 16mn tons per annum of phosphate-based products. These products include phosphoric acid and sulfuric acid and various animal fodder related products. The total project cost has been estimated at SAR26bn and the tentative date for launch has been announced as Q4 2016. Similar to Al Jalamid, this project will also utilize the rail network for transferring the ore to the Ras Al Khair plant for production. Unlike the existing JV arrangement with SABIC to sell and market DAP, this project is standalone and 100% owned by Ma’aden. This project lacks visibility at present and hence we have not included it in our model and valuation. However, we have uplifted the terminal growth rate for the phosphate segment to match the high growth trajectory that it will achieve, once both the phosphate operations attain full utilization. We are positive about the company’s future developments related to phosphate and expect it to add value to the company’s overall business.

Should stabilize by 2013 Ma’aden profitability will primarily depend on the performance of its phosphate business in the future. The company commenced commercial production of phosphate in Q1 2012, with a 22% capacity utilization (our estimates), thereby producing close to 160,000 tons of DAP. We believe the capacity has increased to nearly 50% in Q2 2012 with production near to 365,000 tons of DAP. We expect the company will target to achieve around 80% capacity by 2013, which translates into an operating profit of SAR1.5bn in 2013 from the phosphate segment, resulting in a y-o-y growth of nearly 70%. We thus see phosphate operations stabilizing from 2013 onward.

Figure 26 Ma'aden's phosphate business: ARC assumptions

FY12E FY13E FY14E FY15E

DAP

Sales vol. ('000 tons) 1,228 2,070 2,236 2,497

US$/ton $535 $550 $575 $560

Revenue ('000 SAR) 2,466,020 4,272,143 4,820,409 5,242,860

Ammonia

Sales vol. ('000 tons) 641 392 98 109

US$/ton $448 $474 $480 $470

Revenue ('000 SAR) 1,078,519 697,941 176,580 192,113 Source: Al Rajhi Capital

Ma’aden’s phosphate operations will diversify itself with introduction of Umm Wual project



Aluminum:

Industrial metal for the future

Aluminum consumption will grow over the long-term Aluminum's properties include light weight, resistance to corrosion, strength, conductivity, recyclability and non-toxicity making it the world's second most used metal after steel. The transportation, packaging and construction sectors put together account for more than two-thirds of the global aluminum demand. Demand from these sectors is expected to be strong in the long-term owing to increasing consumption from Asia and Latin America. The current per capita consumption of aluminum in these emerging markets is very low compared to the developed countries. Fast-paced industrialization and urbanization in these emerging markets and the resultant rise in GDP per capita will create more demand for better and diverse products, including aluminum products (lighter cars, diverse packaging products, and corrosion-resistant construction material).

Figure 27 Aluminum demand, by sector Figure 28 Aluminum per capita consumption in a year

Title:

Source:

Please fill in the values above to have them entered in your report33%

20%

15%

32%

Transportation Packaging Construction Others

Title:

Source:


0

5

10

15

20

25

India Brazil China Developed countries

kg per capita

Source: The Aluminum Association, Al Rajhi Capital Source: Rusal, Al Rajhi Capital

Chinese supply-demand dynamics to hold the key over the near-term China is the largest consumer and producer of aluminum. Chinese aluminum consumption represents more than 40% of the total global consumption (source: Rusal) and an equivalent amount of global production (source: International Aluminum Institute). This strong market presence is expected to grow further in the future. According to industry reports (Brook Hunt – a Wood Mackenzie company), global aluminum consumption is expected to grow at a CAGR of 7% during 2011-2015, while the Chinese consumption is expected to grow at a CAGR of 10%. However, considering the current slowdown in China (as discussed in detail in the gold section), we believe the domestic aluminum demand will come under pressure over the next few quarters, which in turn will lower domestic aluminum prices.

Moreover, prices will remain subdued, since aluminum production growth has been steadily rising in the country. In May 2012, domestic production levels reached an all-time monthly high of 1.69mn tons, 7.7% higher than the previous year. Production capacities in high-cost provinces like Henan are being idled and replaced with newer, low-cost capacities in Xinjiang. Even in Henan, the provincial government has been providing support in the form of subsidized power, which accounts for around 40% of the production costs. The government is keen to keep these facilities in operation to avoid thousands of people from becoming unemployed. Since Chinese aluminum products are trading at a higher price over spot LME prices despite factoring in the LME premium (money paid over the benchmark LME spot price to secure actual delivery), we believe the possibility of China emerging as a net exporter is remote and its rising supply will meet the local demand only. Hence, we believe that new capacity additions will be delayed and bauxite imports into the country will come down over the near-term (especially considering the export duty on Indonesian bauxite, China’s main source of imported ore).

Demand to remain healthy over the long-term on the back of growth in Asian markets

Aluminum demand to soften in China due to a slowing economy and higher supply



Figure 29 Chinese aluminum consumption vs. Rest of the World Figure 30 Monthly Chinese aluminum production

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70

2010 2011E 2012E 2013E 2014E 2015E

MMT

China Rest of the World

Title:

Source:


1.0

1.2

1.4

1.6

1.8

Jan 2010 May 2010 Sep 2010 Jan 2011 May 2011 Sep 2011 Jan 2012 May 2012

MMT

Source: Brook Hunt, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital

Near-term global demand remains soft, producers cutting production According to the World Bureau of Metal Statistics, the excess aluminum supply over demand stood at 482,000 tons in the first four months of 2012. This surplus has forced major aluminum producers to announce a cut in production capacities by either temporarily or permanently removing some of them. Despite these announcements, LME prices touched three-year lows in the last week of July 2012, reaching US$1,840 level, which is lower than the cash cost of production for some of these producers. The only reason for this price fall can be attributed to fragile demand due to the prevailing macroeconomic uncertainties in Europe and the US.

Figure 31 Capacity reductions of major aluminum producers

Company '000 tons Announced Product Additional Points

Rusal 300-600 May-12 Aluminum Permanent closure for some capacities from H2 2012

Alcoa 430 Apr-12 Alumina Cuts in the US and European facilities

Alcoa 585 Jan-12 Aluminum Nearly 50% to be permanently closed

Norsk Hydro 180 Jun-12 Aluminum Separately, alumina refinery in Brazil (CAP project) postponed

Rio Tinto 54 Jul-12 Aluminum 15% of the plant's output Source: Press reports, Al Rajhi Capital

Although LME spot prices have been experiencing a decline and there is an oversupply of aluminum, LME premium has paradoxically increased. At the end of Q2 2012, LME premium was above US$200/ton across markets in Europe, Japan and the Midwest US (source: Alcoa). LME regulations allow companies that operate warehouses to release only a fraction of their inventories each day – much less than the stored inventory. As a consequence, customers face hardships in acquiring aluminum from the world’s biggest open market of industrial metals. They have to wait for months to take physical delivery from LME-monitored warehouses, which are owned by institutional investors and commodity traders such as Goldman Sachs, JP Morgan, Barclays, Glencore, and Trafigura.

Order backlogs persist in these warehouses and the warehouse operators cite logistical factors as well as low interest rates, which facilitate financing of inventories. However, there is a growing concern among industry sources that the real reasons are: 1) it provides rental income to the warehouse owners, since customers have to pay rents even as they wait for their delivery, 2) the aluminum stocks are being used as collateral for selling forward in the futures market for profit (aluminum financing deals). Although these factors may have propped up the prices by a margin, it is evident to us (Figure 32) that these prices are not sustainable and have to eventually follow the supply-demand dynamics.

Producers outside China have cut their production to reduce excess supply

LME aluminum premium has increased across regions, constraining physical delivery



Figure 32 Premium and prices above LME spot price (US$/ton) Figure 33 LME official offer price per ton in US$

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Source:


50

70

90

110

130

150

170

190

210

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

LME spot average prices Actual delivery price Premium* (RHS)

Title:

Source:


1,863

1,901

2,022

2,123

2,213

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

Aug 2012 Feb 2013 Aug 2013 Feb 2014 Aug 2014 Feb 2015 Aug 2015

Source: Rusal, Alcoa, Al Rajhi Capital

*Assumed premium for Q2 2012 based on data from Rusal and Alcoa

Source: LME, Al Rajhi Capital

We expect aluminum prices to recover as the effect of the production cuts are felt over the next few quarters and prices move up to more sustainable levels. However, considering an uncertain global economy, we estimate a limited recovery for the remainder of 2012. That said, we remain positive on the price outlook of aluminum in the long-term which shall be driven by strong demand from the emerging Asian markets. For now, we expect average aluminum prices to be in the range of US$2,000-US$2,050 in 2012, and strengthen further going forward.

Figure 34 Aluminum price trend (US$/ton)

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1,500

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Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12


GCC poised to emerge as the aluminum production hub of the future European and US aluminum producers are shifting their base to the Middle East to cut costs. Rio Tinto was the first to enter the region in 2009, through its JV in Oman – Sohar Aluminum. Norsk Hydro has formed a JV with Qatar Petroleum, Qatalum, which reached its full capacity of 585,000 tons in 2011. Abu Dhabi is reportedly engaged in talks with a downstream US aluminum company to strike a deal to lease land in the Khalifa Industrial Zone Abu Dhabi, where the state-owned Emirates Aluminum smelter is producing 750,000 tons per annum. While the western producers seek to benefit from the lower energy costs in the region, their Middle East partners seek to diversify away from an oil & gas-based economy, and generate employment opportunities.

We expect prices to recover slightly, considering the production cuts by major aluminum producers

Aluminum producers are shifting to the Middle East



Figure 35 Current and expected aluminum capacity in the GCC (‘000 tons)

Country Company Current Additions Stake Holders

Launch

Year

Oman Sohar 375 625 Rio Tinto, Oman Oil & Abu Dhabi National Energy (TAQA) N/A

Qatar Qatalum 585 Norsk Hydro & Qatalum

Abu Dhabi EMAL 800 600 Dubal and Mubadala Development Company 2014

Dubai Dubal 990 State owned

Bahrain Alba 881 400 Bahrain Mumtalakat Holding & SABIC Industrial Investment Co. 2015

Saudi Ma'aden 1120 Alcoa and Ma'aden 2014

Total 4371 2005 Source: Press reports, Company data, Al Rajhi Capital

Ma’aden’s aluminum business update: Ma’aden’s aluminum project construction has already started and is set for launch by 2014. The company recently obtained commitment letters from local banks for a SAR7bn Murabaha facility in March 2012, which we believe will be utilized for the construction of the refinery and also to add a new production line with a capacity of 100,000 tons per year of aluminum sheets to be used for the automotive and construction sectors.

Q3 2012 results:

We expect better results While Q2 was disappointing for Ma’aden, we expect Q3 to be slightly better in terms of results. While we think profit contribution from gold could remain flat, we expect phosphate performance to dominate the results. With gold price trading near to US$1,600/oz, we estimate revenue of SAR199mn in Q3 for the gold segment. This would represent a 7% q-o-q increase, and a slight decline of 2% y-o-y. For the phosphate business, we expect around 50-55% capacity utilization for DAP with pricing around US$535/ton, resulting in revenues of SAR659mn. Around 30% of phosphate segment sales could be contributed by ammonia, which is in good demand in the Asian markets in Q3, as it coincides with monsoon and the crop plantation season. Both ammonia and DAP put together would result in a revenue of SAR966mn for the phosphate segment representing a 6% q-o-q increase. We present our expectations for Q3 2012 below:

Figure 36 Ma'aden: Q3 2012 results (our estimates)

YOY% YOY%

SAR mn 2011Q2A 2012Q2A chg. 2011Q3A 2012Q3E chg.

Revenue 246 1,123 357.1% 225 1,188 428.0%

Gross profit 160 340 112.1% 153 431 182.7%

Gross margin (%) 65.3% 30.3% -3498 bps 67.8% 36.3% -3150 bps

Avg. gold price (US$/oz) 1,504 1,554 3.3% 1,709 1,600 -6.4%

EBITDA 89 491 451.8% 84 581 591.2%

EBITDA margin (%) 36.2% 43.7% 751 bps 37.4% 48.9% 1155 bps

Operating profit 72 247 241.8% 69 342 395.3%

Operating profit margin (%) 29.4% 22.0% -742 bps 30.7% 28.8% -190 bps

Net income 63 128 105.1% 27 185 574.0%

Net income margin (%) 25.5% 11.4% -1404 bps 12.2% 15.6% 337 bps

Capex 1,516 3,425 125.9% 966 2,068 113.9%

Capex/Sales (%) 617% 305% n/m 430% 174% n/m

Net Debt 5,015 12,942 158.1% 6,975 14,384 106.2%

Net Debt/Annualized EBITDA (x) 14.1 6.6 n/m 20.7 6.2 n/m Source: Company data, Al Rajhi Capital



Income Statement (SARmn) 12/11A 12/12E 12/13E 12/14E 12/15E

Revenue 1,514 4,640 6,094 7,754 9,315

Cost of Goods Sold (482) (2,901) (3,680) (4,407) (5,214)

Gross Profit 1,033 1,739 2,414 3,347 4,102

Government Charges

S.G. & A. Costs (366) (383) (427) (507) (583)

Operating EBIT 667 1,356 1,988 2,840 3,519

Cash Operating Costs (673) (2,318) (3,151) (3,631) (3,185)

EBITDA 841 2,322 2,944 4,122 6,130

Depreciation and Amortisation (174) (966) (956) (1,283) (2,612)

Operating Profit 667 1,356 1,988 2,840 3,519

Net financing income/(costs) 64 (120) (286) (955) (950)

Forex and Related Gains

Provisions (85) (80) (60) (60) (60)

Other Income

Other Expenses 14 15 - - -

Net Profit Before Taxes 658 1,171 1,642 1,824 2,509

Taxes (120) (140) (180) (146) (125)

Minority Interests (125) (245) (391) (449) (637)

Net profit available to shareholders 413 786 1,071 1,230 1,746

Dividends - - - (307) (524)

Transfer to Capital Reserve

12/11A 12/12E 12/13E 12/14E 12/15E

Adjusted Shares Out (mn) 925.0 925.0 925.0 925.0

CFPS (SAR) 2.61 3.20 5.40

EPS (SAR) 1.158 1.329 1.888

DPS (SAR) 0.000 0.000 0.332 0.566

Growth 12/11A 12/12E 12/13E 12/14E 12/15E

Revenue Growth 114.3% 206.4% 31.3% 27.2% 20.1%

Gross Profit Growth 168.0% 68.4% 38.8% 38.6% 22.6%

EBITDA Growth 436.3% 176.1% 26.8% 40.0% 48.7%

Operating Profit Growth 744.4% 103.4% 46.6% 42.8% 23.9%

Net Profit Growth 90.3% 36.2% 14.8% 42.0%

EPS Growth 14.8% 42.0%

Margins 12/11A 12/12E 12/13E 12/14E 12/15E

Gross profit margin 68.2% 37.5% 39.6% 43.2% 44.0%

EBITDA margin 55.5% 50.0% 48.3% 53.2% 65.8%

Operating Margin 44.0% 29.2% 32.6% 36.6% 37.8%

Pretax profit margin 43.4% 25.2% 26.9% 23.5% 26.9%

Net profit margin 27.3% 16.9% 17.6% 15.9% 18.7%

Other Ratios 12/11A 12/12E 12/13E 12/14E 12/15E

ROCE 1.7% 2.9% 3.8% 4.8% 5.9%

ROIC 2.7% 4.3% 4.7% 5.9% 6.6%

ROE 2.5% 4.5% 5.9% 6.4% 8.5%

Effective Tax Rate 18.2% 11.9% 11.0% 8.0% 5.0%

Capex/Sales 540.3% 211.2% 134.3% 105.8% 20.0%

Dividend Payout Ratio 0.0% 0.0% 0.0% 25.0% 30.0%

Valuation Measures 12/11A 12/12E 12/13E 12/14E 12/15E

P/E (x) na na 27.5 24.0 16.9

P/CF (x) na na 12.2 10.0 5.9

P/B (x) na 1.7 1.6 1.5 1.4

EV/Sales (x) na na 4.8 3.8 3.2

EV/EBITDA (x) na na 10.0 7.2 4.8

EV/EBIT (x) na na 14.8 10.4 8.4

EV/IC (x) na 0.8 0.7 0.6 0.6

Dividend Yield 0.0% 0.0% 0.0% 1.0% 1.8% Source: Company data, Al Rajhi Capital

Revenue surge in 2012 will help drive profitability

EBITDA should surge over the next few years; however, net profit growth will be constrained by financial costs.

We expect capex/sales ratio to remain very high till the aluminum business is completed

P/E and EV/EBITDA will decline sharply once the aluminum business has commenced



Balance Sheet (SARmn) 12/11A 12/12E 12/13E 12/14E 12/15E

Cash and Cash Equivalents 11,226 9,292 8,805 9,010 11,234

Current Receivables 482 640 733 930 1,118

Inventories 562 1,002 1,147 1,473 1,677

Other current assets 324 655 655 655 655

Total Current Assets 12,593 11,588 11,339 12,068 14,683

Fixed Assets 29,691 38,546 45,778 52,698 51,950

Investments 448 448 448 448 448

Goodwill - - - - -

Other Intangible Assets 500 804 804 804 804

Total Other Assets 342 345 345 345 345

Total Non-current Assets 30,980 40,144 47,375 54,296 53,547

Total Assets 43,574 51,732 58,714 66,364 68,230

Short Term Debt 762 794 794 794 794

Accounts Payable 1,342 1,948 2,229 2,791 3,354

Accrued Expenses 1,503 2,226 2,548 3,334 4,006

Dividends Payable - - - - -

Other Current Liabilities 83 49 49 49 49

Total Current Liabilities 3,833 5,079 5,683 7,031 8,265

Long-Term Debt 18,815 24,050 28,966 33,820 32,539

Other LT Payables - - - - -

Provisions 1,042 236 236 236 236

Total Non-current Liabilities 19,858 24,286 29,202 34,056 32,775

Minority interests 2,897 4,594 4,984 5,433 6,070

Paid-up share capital 9,250 9,250 9,250 9,250 9,250

Total Reserves 7,736 8,523 9,594 10,593 11,870

Total Shareholders' Equity 16,986 17,773 18,844 19,843 21,120

Total Equity 19,884 22,366 23,829 25,276 27,190

Total Liabilities & Shareholders' Equity 43,574 51,732 58,714 66,364 68,230

Ratios 12/11A 12/12E 12/13E 12/14E 12/15E

Net Debt (SARmn) 8,352 15,552 20,956 25,605 22,099

Net Debt/EBITDA (x) 9.93 6.70 7.12 6.21 3.60

Net Debt to Equity 42.0% 69.5% 87.9% 101.3% 81.3%

EBITDA Interest Cover (x) (13.2) 19.4 10.3 4.3 6.5

BVPS (SAR) 19.21 20.37 21.45 22.83

Cashflow Statement (SARmn) 12/11A 12/12E 12/13E 12/14E 12/15E

Net Income before Tax & Minority Interest 658 1,171 1,642 1,824 2,509

Depreciation & Amortisation 174 966 956 1,283 2,612

Decrease in Working Capital (705) 180 366 824 843

Other Operating Cashflow (2,718) (1,471) (180) (146) (125)

Cashflow from Operations (2,591) 846 2,784 3,784 5,838

Capital Expenditure (8,182) (9,799) (8,188) (8,203) (1,863)

New Investments 2,496 2,126 - - -

Others 1,098 (109) - - -

Cashflow from investing activities (4,588) (7,782) (8,188) (8,203) (1,863)

Net Operating Cashflow (7,179) (6,936) (5,403) (4,418) 3,975

Dividends paid to ordinary shareholders - - - (231) (470)

Proceeds from issue of shares - - - - -

Effects of Exchange Rates on Cash - - - - -

Other Financing Cashflow 638 630 - - -

Cashflow from financing activities 6,699 5,897 4,916 4,623 (1,751)

Total cash generated (481) (1,039) (487) 205 2,224

Cash at beginning of period 11,706 11,226 9,292 8,805 9,010

Implied cash at end of year 11,226 10,187 8,805 9,010 11,234

Ratios 12/11A 12/12E 12/13E 12/14E 12/15E

Capex/Sales 540.3% 211.2% 134.3% 105.8% 20.0% Source: Company data, Al Rajhi Capital

Cash & equivalents should reach SAR11.6bn by 2015

Net debt/EBITDA will jump in 2013 but should then decline after a surge in EBITDA in 2015

Capex will decline substantially post Aluminum start-up



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Dr. Saleh Alsuhaibani Head of Research Tel : +966 1 2119434 [email protected] Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.

p/e (x) - gulfbase.com€¦ · 08 august 2012 us$7.87bn 33.1% us$6.98mn market cap free float avg....

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