Low commodity prices and higher financing
costs contribute to a fall in net income
Prices for aluminium averaged 9 percent lower in 2016 whilst prices for DAP and ammonia fell 30 percent and 31 percent respectively year-on-year.
However, as the year ended there were signs of recovery in commodity prices. We saw positive movements in aluminium and copper prices in the last quarter and the DAP market appeared to be stabilizing. The net effect of price movements in 2016 was such that despite increasing production across our business, we suffered a 13 percent drop in revenues.
EBITDA remains steady
We succeeded in offsetting the impact of this drop in revenues to a large degree through the realization of further cost savings throughout the year and maintained our EBITDA in line with 2015. Our focus on efficiency and efforts to identify further cost saving opportunities continue under a formal program that we adopted during the year. We are confident that this program will help us enhance our cashflow position further in 2017.
Our net income was also impacted by higher depreciation charges and increased finance charges. The higher depreciation charges were the result of the successful commercialization of major projects during the year: our largest gold mine, Ad Duwayhi, in April 2016, and our bauxite mine and alumina refinery in October 2016. The full impact of the depreciation charges for these businesses will be felt in 2017.
The impact of the debt associated with these projects – particularly the bauxite mine and alumina refinery – also had a bearing on our income statement for the first time in 2016 when they entered commercial operation.
This was compounded by other market factors. The financial markets saw increased costs of borrowing during the year, particularly in the Kingdom. The Saudi Arabian Interbank Offered Rate (SIBOR) increased substantially during 2016 as liquidity tightened, and it contributed significantly to the increase in our financing costs. The liquidity situation in the Kingdom started to ease in the fourth quarter and SIBOR has reduced. However, the outlook for interest rates appears to have increased upside risk, with markets expecting that US interest rates will rise further in 2017.
With a relatively high level of leverage, we continue to plan carefully to ensure that Ma’aden achieves an optimal debt structure and at the same time maintain our liquidity to manage the pressure on our cashflow in this low commodity price environment. We also continue to explore means to optimize our debt portfolio through refinancing. We achieved this with one of our subsidiaries – Ma’aden Phosphate Company – in early 2016, and we continue to look to develop new debt sources that can help to reduce our reliance on floating rate bank debt.
Transition to IFRS
An important step for Ma’aden in 2017 will be our transition to the International Financial Reporting Standards (IFRS) framework. This transition has led to a number of changes in our financial reporting practices. In particular, we are adopting a new methodology in respect of considering possible impairments to our assets.
This new approach has led to the impairment of some of our assets. This largely reflects current market conditions. We remain committed to realizing the fullest possible value from these assets and are working to ensure that they reach their full potential. Our move to adopt IFRS reporting standards is an important part of ensuring that we meet global standards in achieving higher levels of transparency.
We continue to strengthen our investor relations activities by actively engaging with our existing shareholders through direct interactions and by improving the access to information through new technology platforms. There are signs of a market upturn as we enter 2017, but we expect any recovery to be gradual. In any case, our focus on sustaining operations efficiency and controlling operating and capital spending will remain as we continue to grow. Regardless of the market conditions, this will benefit us not only in 2017, but in the years ahead.
Consolidated statement of income for the year ended December 31, 2016
The table above discloses the movement on a year-on-year (y-o-y) basis and only those movements that are significant in monetary terms (i.e. more than 10 percent) are analyzed and discussed in the corresponding explanatory notes in the audited consolidated financial statements.
The total consolidated sales decreased in 2016 by SAR1,450 million, driven by a decrease in average realized price of all products except gold despite an increase in volume sold of all products except aluminium and industrial minerals. The decrease in consolidated sales resulted mainly from the decrease in average realized prices of:
• aluminium (9%)
• phosphate fertilizer (30%),
• ammonia (31%).
Sales breakdown between international and domestic sales
Aluminium sales representing 45 percent of the total consolidated sales for 2016 declined by 11 percent (SAR511 million) due to lower average realized price by US$177/MT (equivalent to SAR664/MT) (price effect of SAR447 million) and also lower quantity sold by 8 KMT (volume effect of SAR64 million).
Phosphate fertilizer sales
Ammonium phosphate fertilizer sales representing 34 percent of the total consolidated sales for 2016 declined by 29 percent (SAR1,302 million) due to a lower average realized price by US$137 /MT (equivalent to SAR514/MT) (price effect of SAR1,374 million) despite an increase in quantity sold by 42 KMT (volume effect of SAR72 million).
Ammonia sales representing 8 percent of the total consolidated sales for 2016 increased by 7 percent (SAR54 million) due to an increase in quantity sold by 254 KMT (volume effect of SAR420 million) set-off by the lower average realized price by US$136 / MT (equivalent to SAR510/MT) (price effect of SAR366 million).
Gold sales representing 11 percent of the total consolidated sales for 2016 increased by 49 percent (SAR344 million) due to an increase in quantity sold by 59,639 ounces (volume effect of SAR255 million) resulting mainly from the commencement of commercial production and sales at Ad Duwayhi mine on April 1, 2016. Furthermore, the average realized price per ounce sold increased by US$105 per ounce (equivalent to SAR394 per ounce) (price effect of SAR89 million).
Industrial minerals sales
Industrial mineral sales representing 2 percent of the total consolidated sales for 2016 declined by 19 percent (SAR35 million) mainly due to lower quantity sold by 291 KMT (volume effect of SAR38 million) set-off by an increase in average realized price of LGB and kaolin by US$2 /MT (equivalent to SAR8/MT) (price effect of SAR3 million).
Cost of sales decreased by SAR1,057 million year-on-year attributed to a decrease in average unit cost of production of all products, except gold and industrial minerals and also due to a favorable economies of scale volume effect for aluminium and ammonium phosphate fertilizer.
Aluminium cost of sales
Aluminium cost of sales decreased by SAR880 million mainly due to lower average unit cost per MT by US$176 /MT (equivalent to SAR660/MT) resulting from increased efficiency and cost improvements and also due to lower quantity sold by 8KMT.
Phosphate fertilizer cost of sales
Phosphate fertilizer cost of sales decreased by SAR497 million mainly due to lower average unit cost per MT by US$43 /MT (equivalent to SAR161/MT) resulting from increase efficiency and cost improvements.
Ammonia cost of sales
Ammonia cost of sales increased by SAR73 million mainly due to an increase in quantity sold by 254 KMT set-off by a decrease in average unit cost per MT by US$20 /MT (equivalent to SAR75/MT).
Gold cost of sales increased by SAR254 million due to an increase in quantity sold by 59,639 ounces resulting from the commencement of commercial production and sales at Ad Duwayhi mine on April 1, 2016. Furthermore, the average cost per ounce sold increased by 17 percent due to higher on mine cost from Ad Duwayhi, Sukhaybarat and Mahad mines.
industrial minerals cost of sales
Industrial minerals’ cost of sales decreased by SAR7 million (12 percent) mainly due to due to lower quantity sold by 291 KMT in 2016.
The decrease of SAR122 million (23 percent) was mainly caused by a decrease in contracted, freight and overhead expenses of aluminium sales, decrease in deductibles and marketing expenses of phosphate sales and also a decrease in MRC product development cost.
The decrease of SAR115 million (26 percent) was mainly caused by reduction in personnel, contracted and overhead expenses.
The decrease of SAR93 million (65 percent) was mainly caused by reduction in personnel, contracted and overhead expenses and also due to a decrease of SAR20 million resulted from the impairment of exploration and evaluation assets that were charged during 2015.
The increase of SAR48 million mainly resulted from the write-off of certain assets in MGBM during 2016.
Share in net loss of jointly controlled entities represents Ma’aden’s share of 50 percent in the net income / (loss) of joint venture entities namely:
• Sahara and Ma’aden Petrochemicals Company (SAMAPCO), a joint venture between Ma’aden and Sahara Petrochemicals Company
• Ma’aden Barrick Copper Company (MBCC), a joint venture between Ma’aden and Barrick Middle East PTY Limited
The decrease of SAR18 million (20 percent) was caused by a decrease in the share in net loss of SAMAPCO decreased by SAR14 million compared to 2015 and an increase in the share of net income of MBCC amounted to SAR4 million resulting from the commencement of commercial production on July 1, 2016.
The increase of SAR116 million mainly resulted from an increased investment of excess fund in short-term deposits by Ma’aden Corporate during 2016.
The increase of SAR375 million (83 percent) mainly resulted from the repayment of loan in full by MPC under Common Term Agreement (CTA) with a consortium of financial institutions which was replaced by a Murabaha Financing Agreement (MFA) with Murabaha facility participants signed on February 25, 2016. Furthermore, increase in SIBOR/LIBOR rates and financial charges attributed to MBAC since the commencement of commercial operations on October 1, 2016 also contributed to increase in financial charges.
Other income declined by SAR23 million (41 percent) mainly due to MAC and MPC insurance claims recorded in 2015.
The basic and diluted earnings per share is calculated by dividing the net income attributable to the shareholders of the parent company by the weighted average number of ordinary shares in issue during the financial year under review.
The weighted average number of ordinary shares for 2016 and 2015 total to 1,168,478,261 shares.
* Depreciation of property, plant and equipment and amortization of Intangible assets does not tie in with Note 2 since this represents the total depreciation and amortization which includes depreciation and amortization charged to cost of sales, general and administrative expenses and exploration and technical services expenses.
Consolidated statement of financial position as at December 31, 2016
Current assets increased by SAR1,255 million in 2016 and comprises mainly the following:
- Cash and cash equivalents in 2016 were SAR4,370 million compared to SAR4,308 million in 2015 (an increase of SAR62 million) mainly due to an increase in Corporate short-term cash deposits, off-set by the utilization of funds by MRC and MBAC for the project development.
- Short-term investments in 2016 were SAR2,711 million compared to SAR899 million in 2015 (an increase of SAR1,812 million) mainly due to Corporate short-term cash deposits resulting from the receipt of contractual dues from joint venture partners during the year.
- Trade and other receivables in 2016 were SAR1,273 million compared to SAR1,252 million in 2015 (an increase of SAR21 million) attributable to increased sales of products and also due to an increase in other receivables of SAR29 million from SABIC, set-off by a reduction in withholding tax receivable by SAR32 million and reduction in insurance claims of MPC by SAR13 million.
Inventories in 2016 were SAR3,116 million compared to SAR2,942 million in 2015 (an increase of SAR174 million) mainly resulting from an increase in raw materials of aluminium companies.
The increase of SAR12,205 million is mainly attributed to addition and transfer of assets from capital work-in-progress / inventory of SAR14,736 million reduced by assets written-off / adjusted during the year of SAR44 million and depreciation charge for the year of SAR2,487 million.
- During the year addition and transfer of assets from capital work-in-progress / inventory of SAR14,736 million comprise of:
- MGBM contributed an increase of SAR2,100 million relating to the assets capitalised for Ad Duwayhi mine due to commencement of commercial production on April 1, 2016 and also for the water pipeline.
- MBAC contributed an increase of SAR12,240 million relating to the assets capitalised due to commencement of commercial production on October 1, 2016
- MPC contributed an increase of SAR323 million relating mainly to fixed plant and civil works.
- MAC contributed an increase of SAR54 million relating mainly to mobile workshop and laboratory equipments.
- Remaining increase of SAR19 million was accounted for by MIC pertaining to buildings and civil works.
During the year the following movements occurred:
- SAR14,457 million was transferred from capital work- in- progress to property, plant and equipment mainly due to commencement of commercial production at Ad Duwayhi gold mine and MBAC.
- SAR8,976 million additions, of which SAR7,650 million was attributed to phosphate segment, mainly MWSPC, SAR955 million to aluminum companies, SAR127 million to Corporate, SAR207 million to MGBM and SAR26 million to IMC and SAR11 million to MIC
- SAR40 million transferred to intangible assets, advances to contractors utilized during the year amounted to a SAR210 million and assets written-off amounted to SAR34 million for certain assets in MGBM.
The increase of SAR37 million is mainly attributed to additions in MGBM relating to Mansourah, Massarah and Ar Rujm gold projects amounting to SAR23 million and for the phosphate project 3, amounting to SAR14 million.
Current liabilities decreased by SAR1,644 million in 2016 and comprise mainly of the following:
- Projects and other payables were SAR1,408 million compared to SAR1,810 million in 2015 (a decrease of SAR402 million). The decrease was mainly attributable to lower projects and other payables in aluminium companies and MWSPC.
- Accrued expenses were SAR2,629 million compared to SAR4,521 million in 2015 (a decrease of SAR1,892 million). The decrease was mainly attributable to lower project accrual in aluminum companies and MWSPC.
- Current portion of long-term borrowings were SAR2,753 million compared to SAR2,131 million in 2015 (an increase of SAR622 million). The increase was mainly attributable to MRC (SAR441 million), MBAC (SAR339 million), MGBM (SAR78 million), MIC (SAR78 million) and MPC (SAR60 million) whereas a reduction in MAC (SAR374 million).
- Zakat and severance fees payable were SAR85 million and SAR8 million compared to SAR51 million and SAR16 million respectively in 2015 (an increase of SAR26 million)
Other non-current liabilities increased by SAR826 million mainly due to an increase in project and other payables of MWSPC which represents the project retention payables amounting to SAR1,907 million in 2016 compared to SAR1,130 million in 2015, an increase of SAR77 million.
Darren C. Davis
Senior Vice President Finance
and Chief Financial Officer