JEDDAH – Saudi Arabian Mining Co. (Ma'aden)'s gold production is expected to rise 30 percent by 2014 because of the output of two new mines, even as it is set to diversify into aluminum business slated in 2014 with an initial investment of SR40 billion, said Al Rajhi Capital in its report on Ma'aden released Wednesday. Ma'aden' gold business hasn't experienced any significant production growth since achieving its highest level of 203,665 ounces in 2005, the bank said in a report on Ma'aden Wednesday. "Since then, the company has maintained production at steady levels in a bid to increase the lifespan of its existing mines," it said. Ma'aden is developing two new mines, Ad Duwayhi and As Suq, according to the bank, and they are crucial for the gold business of the company as "the existing mines are on the verge of exhaustion." Al Rajhi said it "conservatively" expects output of about 240,000-260,000 ounces of gold by the end of 2015, compared with Ma'aden's own forecast of 400,000 ounces. "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," it said. Moreover, the report said Ma'aden's aluminum business is slated to start by 2014 with an estimated investment of SR40 billion, after it has successfully commenced its phosphate operations earlier this year in a move to diversify away from gold. The project is a JV with Alcoa, which owns a 25 percent stake in the venture. The 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 percent 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 $1,750-$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 $2,000-$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. 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. 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 SR20 billion for phosphate and SR40 billion for aluminum), the company will require some time to achieve decent return on these investments. Ma'aden's aluminum business is estimated to have conservative 25 percent capacity utilization for producing aluminum ingots, when it starts operations in Q4 2014 and $1,955 per ton price realization. In terms of valuation, aluminum contributes a small but essential part to Ma'aden's overall valuation. This is because of the risks associated with the launch of such a large-scale project. Al Rajhi valued Ma'aden's aluminum business based on comparative valuation and thus arrived at SR7.7 per share, contributing to 14 percent of the appraised enterprise value of the company. Al Rajhi remained bullish though on the performance of the phosphate segment and expected 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. Ma'aden commenced commercial production of DAP in Q1 2012. Al Rajhi estimates phosphate revenue to reach SR3.5 billion in 2012 and SR5 billion in 2013 (76 percent and 82 percent, respectively of the total revenue). Phosphate will remain the key value generator for Ma'aden, with a contribution of over 60 percent 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. – SG/QJM
