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Edited Transcript of 1211.RI earnings conference call or presentation 24-Oct-19 12:57pm GMT

Q3 2019 Saudi Arabian Mining Co SJSC Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Saudi Arabian Mining Co SJSC earnings conference call or presentation Thursday, October 24, 2019 at 12:57:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren C. Davis

Saudi Arabian Mining Company (Ma'aden) - President & CEO

* Reem Asaad

Saudi Arabian Mining Company (Ma'aden) - Manager of IR

* Yasir bin Othman Al-Rumayyan

Saudi Arabian Mining Company (Ma'aden) - Chairman of the Board

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Conference Call Participants

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* Sashank Lanka

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Ma'aden Earnings Results Quarter 3 2019 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Reem Asaad. Please go ahead.

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Reem Asaad, Saudi Arabian Mining Company (Ma'aden) - Manager of IR [2]

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Good afternoon, ladies and gentlemen. Thank you for joining us today. This presentation contains statements that are or may be deemed to be forward-looking statements, including statements about the beliefs and expectations of Saudi Arabian Mining Company. These statements are based on the company's current plans, estimates and projections as well as its expectations of external conditions and events. Forward-looking statements involve inherent risks and uncertainties and speak only as of the date they are made. As a result of these risks, uncertainties and assumptions, our prospective investor should not place undue reliance on these forward-looking statements.

Without further ado, I hand over to the CEO, Mr. Darren Davis.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [3]

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Thank you, Reem. Good afternoon, everyone. Thanks for joining us at the beginning of the weekend. Another interesting quarter for our business. On the production side, a strong performance overall. Phosphate reached a new record of almost 1.4 million tonnes, up on Q2 and up from previous quarters. Ammonia production was hit, we'll talk about that shortly. Just during an extended shutdown during -- early in the quarter. Aluminium production, very strong. We're putting more recycled material through the system as well, so we're well on track to a run rate of 1 million tonnes a year.

Gold production recovered during the quarter after the dip in Q2, you'll remember, and we'll talk about that more during the conversation we're about to have.

Financially, sales flat. So even though increased production across most of the business, we did see a big drop in prices which kept the revenues broadly the same as the previous quarter. More positively, EBITDA did increase, however. And so the strength of the underlying business came through with an under -- over 10% increase in EBITDA.

Net loss narrowed during the quarter. Obviously the previous quarter were particularly impacted by the restructuring costs at MRC. But even so, even stripping that out, is a big improvement this quarter.

As I said, the big headwinds we're facing are on product prices. Phosphate prices continued to decline again in Q3. Lower demand in some of the key markets. And the impact of Chinese exports, I'll talk about that in more detail in the coming slides. Aluminium also declined not quite as rapidly as phosphate, but significantly. And alumina fell even more, particularly as supply came back into the market.

The bright spot was gold. Gold continues to be very strong. And that's the flip side to what's happening in aluminium, and that's that the global economic condition has been weak, pushing up the gold prices.

Looking forward to other strategic transactions. Meridian, the East African distribution business we acquired, closed in August 2019, and the integration of that business is going very well. The debt for equity swap on MRC is proceeding, and we'll have an Extraordinary General Meeting of the Shareholders on November 4, and we hope to close shortly after that.

Our 2 large growth projects, Mansourah/Massarah and ammonia 3 are progressing very well, both on schedule and budget. And at the moment, as you can imagine, and I'll talk about this in more detail at the end, with the ongoing outlook for product prices, we're putting a big focus now on reducing our G&A across the group.

Turning first to DAP and ammonia. As I said, the DAP prices or all phosphate prices averaged down in Q3 around almost 10%. We're seeing -- we saw low demand in some of the key markets. North America is suffering, and while it's not a market for us, it has an impact on Latin America, where we are selling into. And also weakness in South Asia.

Supply as well has come up during the year. Of course, we've been supplying more product into the market. Morocco has also been exporting more.

And more concerning is the exports from China, where the market in China has been weak, and they continue to export. There were some announcements earlier in the quarter that the Chinese would reduce production. We've not seen much evidence of that actually being enacted. And with key raw material costs like sulfur coming down, that is helping the marginal players in China continue to operate and export. Of course, we benefit also from the lower sulfur price. But overall, that puts pressure down on the market for phosphates.

Seeing some recovery in the U.S. market. And what happens in the domestic China market over the winter season when they're restocking ahead of the spring application season will be very important to see what happens in terms of demand. In India, the late monsoon was good and looks promising for demand there, although we've not seen much so far. But overall, the outlook for the next quarter is weak. It's a traditionally lower season. We see no reason to expect anything other than a decline.

Ammonia, at last, bounced back a little at the end of the third quarter, mainly on low demand a little. So some reductions in production as well.

Moving on to alumina and aluminium. The aluminium price, although it declined, the decline has slowed somewhat. What we're seeing in the LME price is really expectations pressuring prices. The aluminium market of course is very driven by industrial demand, which is driven by the global economic situation. And the trade war between U.S. and China is not helping those expectations at all. Certainly when -- if you spend any time in China, you get a sense of the slowdown there, and that's definitely feeding through to demand and expectations for aluminium.

We would expect the situation to continue to deteriorate. We see no support for the price even at the current levels. And particularly, if we turn to alumina, obviously one of the key raw materials for aluminium, declined rapidly in the third quarter as supply came back online, particularly in Brazil and the new capacity in the Emirates from EGA. So we see more pressure on alumina prices which will obviously remove some of the support for aluminium. So the outlook for aluminium also is weak into the Q4 and beyond.

Towards something more positive, gold. Gold holding up very nicely, even increasing over the quarter. That's the flip side, when global economic outlook is so unsettled as it is and with interest rates dropping as well, the outlook for gold is much more positive.

Copper is an interesting one. We still are great believers in the long-term outlook for copper. It's a fantastic future metal and we see a supply side crunch coming in the next 2 to 3 years. At the moment, it's being weighed down by, again, the economic outlook. But it's interesting that it seems to have found a relatively healthy floor at around the $5,500 a tonne level. And I think that underlines that the fundamentals for copper are actually very strong in terms of supporting prices.

Finally on 9, just tracking the evolution of our EBITDA and the margins. We look at the net loss, and of course a lot of that is driven by depreciation and our finance charges. But the underlying business, if you look at this, we're in the bottom of the cycle or very close to it of aluminium and phosphate, very depressed markets, and we're still turning in 33% EBITDA margins. That gives you an idea of how positive the -- how strong the underlying business of Ma'aden is, and also illustrates the lack of correlation between the businesses. Phosphate's not really driven by economics, it's more about supply and demand. Gold and aluminium tend to move in roughly opposite directions. So the diversified portfolio showed its strength in maintaining these margins even through a very, very weak market for our 2 biggest commodities.

With that, I'll hand over to Yasir.

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Yasir bin Othman Al-Rumayyan, Saudi Arabian Mining Company (Ma'aden) - Chairman of the Board [4]

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Thank you very much, Darren. Good afternoon, everyone. On Slide 11, talking about the consolidated sales and EBITDA. On the sale, we see that compared to Q -- to quarter 3 2018, we see a 27% increase on the sales, and this is basically due to increase in volume. So we see increase in fertilizers, [broad] product and also in gold.

This actually could have been even more. It could have reached over 40% if it's not for the less prices that we are seeing or the pressure from prices in Q3 2019.

The same applies to versus Q2 2019 or versus the last quarter. Again, we see it as flat. This is due to prices. Although volume has slightly increased, we could have seen 2.5% increase in sales due to volume if not for the more pressure from the prices.

On the same consolidated results. If we look at the EBITDA compared to Q3 '18, we have 18% negative EBITDA, and that's mainly the prices again and also due to the product mix. So some product margin is actually higher than the other, so this also affected our EBITDA here. If we compare to Q2 '19, and the positive 10%, Ma'aden is actually reacting to the pressure on the prices, and they're working on a lot of projects on cost reduction. And this is where we see -- even quarter-on-quarter, we see lots of cost reduction.

If I talk about the phosphate and the aluminium, I may sound like repeating myself. We have -- compared to Q3 2018, we have introduced commercial production for 2 companies: One on the phosphate business, one on the aluminium business. So the 18% of volume due to adding the Ma’aden Wa’ad Al-Shamal into the picture, although we have less prices of DAP -- both DAP and ammonia.

If we compare to quarter 2 2019, the sales of negative 8%, again due to more fertilizers volume but less prices of DAP and ammonia.

EBITDA on the phosphate, ladies and gentlemen, negative of 34% is because of more cost of sales due to adding more volume from the MWSPC and again the product mix as I mentioned earlier. The 5% compared to Q2 is due to prices, although we have reduced the cost looking at our material -- the input. So the reduction there in costs have also reduced our EBITDA negative percentage.

Maybe what was said on the phosphate applies to aluminium in regards to adding MRC and I said -- and also the pressure from the prices although we have increased the volume.

In the gold side, the increase in prices and ounces in gold positively affected the Q3 29 (sic) ['19] in comparison of both quarter -- Q3 '18 and Q2 '19.

So moving to the next slide, ladies and gentlemen. Net losses in Q2 '19, SAR 590 million, were reduced by over or around 60%. So we have lower losses of around SAR 254 million, 57% exactly lower than the losses in Q2. This is coming from the sales volume. You can see SAR 101 million from volume. We can see SAR 184 million from the effect of cost. But unfortunately, the prices on effect of SAR 103 million is reducing that number.

Also if we compare to -- in next slide, if we compare to Q3 '18, we see a SAR 1.4 billion coming from the sales. At the same time, we see around SAR 500 million of price effect, negative price effect. And of course -- effect of course of adding this volume, around SAR 1.1 billion.

Due to having commercial production of our new companies, Ma'aden Wa'ad Al-Shamal and the rolling mill, of course the depreciation and also the finance cost will be at the peak.

If I go to the next slide, to the income statement, I think we've been through most of these numbers, but I just would like to grab the attention here to the reduction of cost of sales of around SAR 126 million, although the volume did not decrease, actually slightly increased.

Also some increase in G&A, and this is basically due to adding our new company in Meridian.

More -- on Slide 16, more explanation also on production and sales and prices of -- per product. And we can look at the fertilizers, where we lost almost SAR 100 million if we compare to Q3

(technical difficulty)

in volume. Same applies on the ammonia. If we talk about the prices, there is some reduction in Q3 2019, as mentioned by Mr. Darren, is because -- is temporarily due to some shutdown. And the operation is ongoing, up again, and no issues in this regard.

Same applies on the next slide, ladies and gentlemen. On the aluminium, alumina, we see also pressure coming from the prices.

On gold, we see an increase actually from $1,200 to $1,400 and also increase in production. So that's really making the gold business' story in Q3 is a very positive -- to our results.

On the financial position, we can see if we compare to Q3 2018, that we have moved around net of SAR 25 billion from the CWIP to be in the PP&E, and this is basically, as I mentioned earlier, the rolling mill and also the Ma'aden Wa'ad Al-Shamal. We are also adding to the CWIP on our new project, the Phos 3 and Mansourah/Massarah.

On the cash and long-term borrowing, gentlemen, we see that the net debt position, which demonstrates strong liquidity of the group despite the ongoing project or spending on project expenditures.

With that, I will hand over again to Mr. Darren Davis.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [5]

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Thank you, Yasir. So just to summarize on Page 22. Again, the underlying business is performing well. And the focus, as Yasir's highlighted, has really been to maximize production as much as possible from our existing assets and to really focus on cost control within those businesses. We had the negative headwinds of the ammonia 2 shutdown. This actually would have been a short shutdown, but we decided, given where the market conditions were, we brought forward a maintenance turnaround. So that's why the shutdown was longer than we had initially anticipated. But that made a lot of sense given where the ammonia market was at the time.

MWSPC has moved through a lot of its challenges now. We're pleased with the operation. Wouldn't we say we're through everything, but the operating rate is much closer to where we had expected it by this year. And I think in Q4 even, we'll be above what we'd expected it to be for this part of the year.

Aluminium business and gold businesses are both doing well. They're on target to meet the plan for 2019.

What we can't do much about is the weaker commodity markets. As I said, with the declines we saw in Q3 in both phosphate, aluminium and of course in alumina as well, the trend has been down for most of this year, and we expect that to continue into Q4. We don't see any market fundamentals changing the direction of travel there. Some of that is because raw material costs are coming down. So of course, that removes the porphyry prices, while on the other hand of course, we gain from that just like other market participants, particularly on sulfur.

Ammonia prices have strengthened, although it's too call -- too early to say they will hold up in Q4, we'll see. Ammonia typically is a pretty volatile commodity. And the gold outlook does remain strong, and we're confident that, that will remain elevated at least for Q4 and probably well into 2020.

On the growth investments, I think we're still in a very good position to continue growing the business because of the underlying strength of what we have. The Meridian acquisition was very successfully closed in August 2019, on target. We're integrating that business now into our phosphate operations, and we're confident that's going to have a very positive effect particularly in 2020 as we start putting more volumes through that East African outlet.

The Mansourah/Massarah gold project and the Ammonia 3 projects are on track. No concerns on either of those.

Financially, we are in a strong position to endure these low-price conditions. We're very liquid and remain so. We believe that's a good position to maintain in these uncertain times. We don't know what's coming in 2020, but it's hard to believe things are going to improve massively during the following year.

The restructuring of the MRC business we talked about more in the last quarter, that's progressing well. That will help us on our net debt position and also help to focus that business on continually growing the output and reducing cost. And that business is already showing a lot of promise this year.

As I mentioned, we're working hard now on our G&A. So in the business, we've done a lot to improve efficiency. And of course, improving production levels helps on unit cost.

Well, we're now spending more time on G&A, we've been working on this during the year. So you'd have seen from the earlier slide, actually our G&A, if you strip out the Meridian, has actually gone down year-on-year. And that's despite the fact that last year, G&A didn't include Wa'ad Al Shamal and the Rolling Company. So the underlying trend on G&A is down. We think we can push that further.

We have a specific program underway now which we are putting into practice, focused first on HQ. And we expect that to be well in progress by the end of this year and will continue into 2020. And then we'll start working on the affiliates' G&A as well. And we think we can have a big impact on the bottom line next year, which we will need to offset the market conditions.

With that, I'll hand you over to the (foreign language), so we'll take any questions you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And we do have a phone question. And we'll take our first question from Sashank Lanka with Bank of America.

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Sashank Lanka, BofA Merrill Lynch, Research Division - Analyst [2]

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I have 3 questions. My first question is with regards to the EBITDA margins in the phosphate business. We've seen an improvement quarter-on-quarter despite prices being down.

So what is driving this? And is this a result of which the group EBITDA margins are also up quarter-on-quarter? That's my first question.

The second question is on the outlook for DAP demand, specifically in India and in the U.S. Now that the wet weather in the U.S. is past us, so how do you see demand there for that?

And finally, my third question is on the DAP 2. You did previously highlight a production guidance of around 2.5 million to 2.7 million tonnes for the year. Is that still intact?

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [3]

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Thanks, Sashank. Just on the first, I mean EBITDA margin in phosphate, really 2 main factors: one of course is higher production, so that obviously reduces the unit cost; and the second was the drop in sulfur prices which is continuing actually into Q4, to answer your question.

The DAP outlook in demand, Q4 is the low season anyway. You're right that the worst of the U.S. seems to be past. And we're seeing more demand picking up in the U.S., the problem is we're seeing more exports going into the U.S. as well. So the U.S. is still a market under pressure. But we're starting to see some signs in Latin America of demand increasing there.

India, again, now the late monsoon wet weather is relatively positive for demand. The problem is that what happened in Q2 and Q3 to a certain degree was that the Chinese were exporting into India and the Indians were opportunistically buying. So stock levels in India at the moment are very high. So that will weigh on demand going into Q4. As I said, even though demand is good, we'll see. We'll be watching those stock levels to see whether they get drawn down quickly.

On DAP 2. We're probably a little bit below the bottom end of what we said before, so probably closer to 2.3 million, 2.4 million for the full year.

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Operator [4]

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(Operator Instructions) And there are currently no further phone questions at this time.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [5]

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I think there is a question online. How is the cost of production different per tonne of MPC versus the new MWSPC?

As you'd expect, MWSPC is higher. MPC has been running now for 6 years. And as you'd expect, a lot of efficiencies have been achieved in that period of time as you fine-tune our operations. MWSPC, of course, has been more focused on ramping up to full nameplate capacity and has had its fair share of challenges. So the optimization process is still to come in MWSPC. So there is a difference. It's not significant -- or won't be significant once MWSPC reaches full nameplate, but there is a difference. MPC is more efficient. I think that came from [Indika]. Hopefully, it answers your question.

Any other questions today? Three.

I think we have a couple of other questions online as well. This one is also from Indika . Regarding the pre-approvals we have for aluminium products from the vehicle producers.

I think as we've said before, we are qualified and we are supplying Land Rover. We are also working with 2 other manufacturers, one very major European and one in the electric vehicle sector. And we're working on qualification for those and we'll talk more about those probably in Q1.

And then the last question. This is around the initiative to convert the PIF loan to equity. Are there any further plans?

I mean we always look at our debt portfolio and look for creative solutions. As you all know, we are over-leveraged for a commodity company. We're aware of that. We have some refinancings that we'll look at from time to time, as we've done in the past. We're always open to all options. It will depend on our needs. We're not really pressed at the moment. We have enough liquidity even in the current situation to both withstand the market conditions and also to continue to invest in the 2 projects we have.

And the last question is when should we expect Mansourah/Massarah to be operational?

That, from recollection, I think is late 2021, early 2022. We can confirm that to [narrow them].

Why did we see a drop in finance cost in Q3? Simply, LIBOR and SIBOR coming down. We're starting to see the impact of that.

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Yasir bin Othman Al-Rumayyan, Saudi Arabian Mining Company (Ma'aden) - Chairman of the Board [6]

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Compared to Q2.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [7]

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Next question from Mohammed. Company's generated return on assets lower than cost of borrowing. Will the debt-to-equity solve this problem or not?

I mean, you have to remember, for a commodity company, we do go through cycles. And there are some really good times and there's some really bad times. Unfortunately, the really good times tend to be quite short, the really bad times tend to be longer. So returns obviously are cyclical and you will see dips like this.

The debt-for-equity swap has a positive impact of course while it's relatively small in the overall scheme of things, but it's still worth it. And the real benefit from the MRC debt-to-equity swap is that for the MRC business itself, it's very difficult for you to operate in the conditions where they have an unsustainable debt load. So by removing that from that business and making the debt more sustainable, there is still debt remaining in the company, it allows them to focus more fully on running the business.

Number 7. I think production guidance for MWSPC, we answered that just a moment ago.

Discussion on Ma'aden JVs with Sabic transfer to separate affiliate with SABCO.

Not quite sure what the question means. Certainly no change planned with our partnerships with SABIC and Wa’ad Al-Shamal and MPC.

On the strong improvement in gold division EBITDA quarter-on-quarter, can you break that down as far as how much is volume-driven versus price-driven? If gold prices maintain at the current levels, can you sustain this EBITDA?

The quarter-on-quarter was impacted because Q2 was particularly low in production only because of the grade at Duwayhi. So Q3 is actually a more normalized level of production, which is in line with expectation that it will produce around 400,000, 410,000 ounces this year. I think the actual breakdown versus volume and price, we don't have it at hand, but we can help you with that, Yousef.

Anoop, he's asked about any update on gas prices in full year '20. Are we expecting an increase?

I mean, the truth is we've been expecting an increase for the businesses that aren't enjoying the grace period for some time now. So that applies to MPC. MWSPC and the aluminium is still in that growth period, so we're not expecting any increase in 2020. We hear lots of different proposals being floated as I'm sure most of you have as well. We've seen nothing official and we don't expect anything immediately. You'll know when we know.

And how much volume from MRC was sold in the U.S. market in the third quarter?

We're little bit careful about disclosing details about MRC. It's a very commercially sensitive segment, so we don't disclose either the margins we make on conversion or the markets we sell into. All I can say is the U.S. has been a very healthy market for us this year.

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Reem Asaad, Saudi Arabian Mining Company (Ma'aden) - Manager of IR [8]

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Eleven.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [9]

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The last question. Other comprehensive income is down much more than net income. Is this due to cash flow hedges? I'll hand over to the accountants here.

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Unidentified Company Representative, [10]

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Yes, the difference is coming from the cash flow hedge, which is related to Ma'aden aluminium company and Ma'aden Bauxite and Alumina company -- companies.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [11]

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Yes. So the answer to that is yes, it was impacted by the cash flow hedges. I think we still believe that was the right thing to do. We've locked in a low cost of debt and we still have enough floating that we enjoy the benefits when LIBOR and SIBOR drop.

Any other questions?

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Reem Asaad, Saudi Arabian Mining Company (Ma'aden) - Manager of IR [12]

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Yes, on SAMAPCO.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [13]

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How was the SAMAPCO contribution to margin in Q3 2019? And what is the business outlook for Q4 and 2020?

The guys will give us a number in a moment. SAMAPCO suffered from a prolonged shutdown in Q3, so Q3 is not really indicative of SAMAPCO's contribution. Of course, the important thing about SAMAPCO is they give us a captive supply of caustic soda.

So guys, what was the financial contribution in Q3?

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Unidentified Company Representative, [14]

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The total loss for SAMAPCO is SAR 24 million loss...

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [15]

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SAR 24 million. Yes.

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Unidentified Company Representative, [16]

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Making a loss which is a 50% share of Ma'aden.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [17]

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And that's our share of losses there.

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Unidentified Company Representative, [18]

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Yes, the losses.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [19]

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Well, as we said, that was very much impacted by the prolonged shutdown they had, which was a maintenance shutdown, but then the start-up was not smooth. So we lost a lot of production in Q3. Overall, that business has improved a lot over the last 12 months, both because of prices and also operations. So we're actually looking forward to hopefully a positive Q4 in SAMAPCO.

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Reem Asaad, Saudi Arabian Mining Company (Ma'aden) - Manager of IR [20]

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Any more questions, Ivana?

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Operator [21]

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(Operator Instructions) And there are currently no further phone questions.

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Darren C. Davis, Saudi Arabian Mining Company (Ma'aden) - President & CEO [22]

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Great. Then I think with that, thank you very much for the questions, and thanks to everyone for joining us again for this quarter. I look forward to talking to you if we meet before then. But otherwise, we'll see you in January for the full year and look forward to your questions then. Thank you, everyone. Have a good weekend.

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Reem Asaad, Saudi Arabian Mining Company (Ma'aden) - Manager of IR [23]

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Thank you.

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Operator [24]

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And this concludes today's conference. Thank you for your participation, and you may now disconnect.