Good afternoon, ladies and gentlemen. Welcome to Maaden's second quarter of 2023 earnings call, and thank you for joining us. My name is Faris Al Gahtani, and I have recently joined Maaden as the Investor Relations Director. For those who don't know me, I was working in the IR field in different capacities for the last 12 years. My most recent role prior to joining Maaden was the Head of Investor Relations at Arabian Centres . I look forward to working closely with everyone in the future. All participants on today's call will be in listen-only mode. Once today's call has concluded, the presentation and all relevant materials will be available on our website and on Ma'aden's app. Please refer to our disclaimer on all disclosures made in today's presentation in front of you. I am joined today by our CEO, Robert Wilt, and our CFO, Louis Irvine.
They will take us through the company's performance in the second quarter of 2023. As usual, we will open the floor to your questions at the end of the presentation. Please feel free to start posting your questions in the chat section during the call. We hope to get through as much as possible today, but if you have any follow-up questions or clarifications, please email us. With that, let me hand over to Bob.
Thank you, Faris. Thank you to everyone for joining today's call. I continue to be very proud of our team's performance in executing on all levels required for Ma'aden's transformation and growth. This quarter saw significant accomplishments across a broad swath of initiatives. We increased production and sales volumes across the business. We delivered a record quarter of phosphate production, completed our aluminum pot relining program, and continued commissioning of our Mansourah-Massarah gold mine. On the financials, revenue was nearly SAR 7 billion, and adjusted EBITDA stood at SAR 2.3 billion. Our low-cost operations continue to generate strong cash flow, generating roughly SAR 4.5 billion this quarter. Financial discipline remains a key element of our strategy, and we have continued to deleverage the business, including a proactive early repayment of SAR 3 billion in debt to reduce net debt by 9%.
This disciplined approach to capital allocation was recognized just last week when we were awarded inaugural investment grade credit ratings by both Moody's and Fitch. Looking to the future, we concluded the previously announced partnership with Ivanhoe Electric to accelerate our exploration efforts in the kingdom. Secondly, we reached agreement to purchase 10% stake in Vale Base Metals, our first global investment through Manara Minerals, our joint venture with the PIF. I will talk more about this later in the presentation. This chart illustrates the market backdrop in which we operate. Commodity prices have fallen compared to historically high levels last year. However, as you can see, we are still above the five-year averages in all of our commodities. We will discuss the impact on our financials further in the presentation.
It's important to remember that Maaden benefits from a diversified low-cost operations, thus de-risking our exposure to individual commodities and ensuring we can remain profitable across the cycle. Following the tragic fatality in the first quarter, we have accelerated our safety transformation efforts across the business. We're emphasizing leadership and culture, contractor safety, risk identification, and work permitting process. Our AIFR is an all-time low. We are focusing on proactive measures such as predict and prevent, rather than lagging indicators to measure our safety performance. We will not stand for anything less than excellence when it comes to safety. Let's look at our progress on growth strategy, starting with operations. As mentioned, we had a record quarter of phosphate production, delivering double-digit growth year-over-year. The aluminum pot relining was completed ahead of schedule.
We are now implementing the final phase of our new operating model, which includes delegating downward responsibility across the organization, empowering the business units, and accelerating decision-making. On the exploration front, our team has drilled nearly 200 km year to date, more than all of last year. Meanwhile, Mansourah-Massarah remains on schedule, and Phosphate 3 is progressing towards a final investment decision later this year. There's also been several significant strategic developments. As mentioned, we completed the acquisition of 9.9% of Ivanhoe Electric and formally established the exploration joint venture. We have since commenced mobilization. Post-period, we made our first major investment into the global mining sector by signing terms to acquire 10% of Vale Base Metals through Manara Minerals, our joint venture with the PIF. Last week we announced we have been assigned investment-grade credit ratings by Moody's and Fitch.
Maaden remains committed to building a sustainability champion in the kingdom. We're decarbonizing our supply chain and remain committed to being carbon neutral by 2050. To that end, we have early-stage agreements and partnerships with Gulf Cryo and GlassPoint to reduce carbon emissions from our operations. Furthermore, we are proud to now be the world's largest exporter of certified blue ammonia. We ship more than 138,000 tons to major markets worldwide, from Korea, Japan, India, China, and the EU. This is an excellent example of how we are helping to cut industrial carbon emissions and power the global energy transition. I'll now hand it over to Louis to take us through the financials.
Thank you, Bob, and welcome everyone. As was the case in the first quarter, we are coming off a peak year for commodity prices. The softer pricing environment was reflected in our revenue of SAR 7 billion for the quarter and just over SAR 15 billion for the first half. This was partially offset by higher sales volumes across our business units, except for aluminum, due to the expensive pot relining program over the past six months. We have seen an easing in raw material prices. However, our profitability was impacted by one-offs in the aluminum business unit and a severance fee charge. I will elaborate on this later in the presentation. EBITDA margins were up quarter- on- quarter, and cash generation remains strong, which has enabled us to continue paying down long-term borrowings and de-leveraging the business. Let me now take you through some additional details.
Turning to the EBITDA bridge, showing our year-on-year first half performance. Firstly, lower prices had a SAR 7.3 billion real effect, which was partially offset by SAR 1.5 billion in increased volumes as we delivered record fertilizer and ammonia production. The lower raw material prices, the function of the market and our procurement efforts, have partially offset the lower commodity prices. In terms of cost of sales, SAR 726 million was as a direct result of running off inventories during the period. Adjusted EBITDA reflects SAR 777 million of one-offs in the first half relating to pot relining and restart costs, as well as industrial utility charges under the finalized terms of our settlement agreement. This will be detailed further in the aluminum section of the presentation. We generated healthy cash flows from operations of just over SAR 4.5 billion year to date.
SAR 1.5 billion was generated by the rundown of inventories, which I referred to earlier, and other initiatives to optimize working capital. SAR 1.3 billion was invested into the business through growth and sustaining CapEx. The largest contributor to this was base metals and new minerals, which accounted for SAR 475 million. A total of SAR 4.7 billion of debt was repaid, including the SAR 3 billion that Bob referred to earlier. Overall, the cash balance was down, however, net debt reduced as a result of the debt prepayment. As I touched on earlier, we've made significant progress in paying down long-term borrowings and reducing our debt. During the quarter, we made a SAR 6 billion debt prepayment, which is the largest in our corporate history, representing approximately 7% of Maaden's consolidated debt.
Overall, net debt is down 9% compared to 2022, and our net debt EBITDA ratio remains below our previous guidance of 2x-3x . As Bob mentioned at the start, we have been assigned an investment grade rating from both Moody's and Fitch based on our sustainable, leading low-cost base and robust financial profile. Our objective remains to be financially disciplined in the execution of our strategy and in accordance with our capital allocation framework. We now move on to the business units. Starting as usual with our largest segment. As mentioned by Bob, we achieved record phosphate production in the second quarter. Ammonia production was up 19% quarter-on-quarter, and DAP production was up 6% to 1.6 million metric tons. Year-on-year, DAP production was up 28% and ammonia was up 12%.
The phosphate business is starting to show the benefits of our operating model and the renewed emphasis on operational excellence. This translated into double-digit increases in sales volumes year-on-year. This bridge breaks down phosphate year-on-year EBITDA performance in the first half. The lower ammonia and DAP prices came off the highs of 2022, and this has weighed significantly on profitability. As I mentioned earlier, this was partially offset by higher sales and an easing in raw material prices. As mentioned, the higher cost of sales relates to inventory runoff as well as higher production volumes. The same story is mirrored in the quarter-on-quarter EBITDA bridge. A softer pricing, higher production volumes, and lower raw material prices were the main drivers. Turning to aluminum. Production has ramped up following the operational challenges over the past six months.
In particular, the pot relining program at Ras Al Khair was completed ahead of schedule, adding 52,000 metric tons to production on the previous quarter, and we expect production to ramp up further in the third quarter. Faced with a temporarily weaker demand for flat-rolled products, primarily in can sheet, they increased production of cast house products. This, in combination with the smelter ramping up ahead of schedule, resulted in a 21% quarter-on-quarter improvement in aluminum production. Sales volumes were impacted by lower realized prices year-on-year versus the peak cycle we experienced in 2022. Turning to the breakdown of the half-year EBITDA. There are three main factors at play here.
Firstly, lower realized prices had an impact of nearly SAR 1 billion, partially offset by a slight improvement in raw material prices. Secondly, we saw lower volumes across primary aluminum, primarily due to the extensive pot relining program. Thirdly, we incurred SAR 777 million of one-off charges in the first half, the majority of which relate to the industrial utility and associated charges. I've previously talked about the change in regulation introduced January 2021, which impacts how transmission use of systems costs are calculated. As a result, we booked an additional charge of SAR 493 million for 2021 and 2022 in the first quarter under the finalized terms of the settlement. Maaden has now also agreed terms for 2023, incurring a gross charge of SAR 102 million for each quarter of this financial year.
Based on our forecasted power requirements for next year, we expect to move to a lower cross-net tariff in 2024. The remaining SAR 96 million of one-off costs relate to the pot restart, which completed in Q2 and they will therefore not repeat. Encouragingly, looking at the quarter-on-quarter bridge, excluding the one-off adjustments, we can see the effect of prices stabilizing. Completion of the smelter pot relining ahead of schedule boosted production and sales volumes in the second quarter. Finally, the improving trend in inlet raw material prices had a positive effect on costs. Base metals and new minerals continue to perform well. Production increased by 35% quarter-on-quarter, and when combined with a slight improvement in realized gold prices, this led to a 36% increase in sales and 76% increase in EBITDA quarter-on-quarter.
The increase in EBITDA is attributable to higher gold prices and the positive volume effect from increased production. This was partially offset by slightly higher exploration costs. The recent quarter has shown a significant boost in volume, primarily driven by the pre-commercial production from Mansourah-Massarah. This quarter-on-quarter volume increase is even more pronounced compared to the year-on-year bridge. Consequently, EBITDA for the quarter increased from SAR 250 million to SAR 379 million. Finally, our OpEx and CapEx spend is underpinned by our capital allocation framework as we previously presented to you. As previously outlined, this takes the form of three pillars, commitment to Saudi Arabia through exploration and development, investing in global mining assets with a focus on securing critical minerals, and strengthening our balance sheet.
We are confident that on the back of the investment-grade credit rating, we can explore multiple forms of funding, enhancing liquidity, and lowering our overall cost of capital to pursue our growth strategy. I will now hand back to Bob to take us through the outlook.
Thanks, Louis. Now turning to the outlook. Let me remind you that we have a pipeline of projects in both execution and study phases. Mansourah-Massarah will be our seventh and largest gold mine, producing 250,000 ounces annually. Initial commercial production remains on schedule to commence in the second half. The third expansion of our phosphate business is progressing towards final investment decisions this year, which will add another 3 million tons by 2027. Looking further out, we're exploring the brownfield expansion of our aluminum smelter by 90,000 tons, and we continue to review two additional gold mines at Mahd Ad Dhahab and Ar Rjum. We previously talked about the estimated $1.3 trillion mineral endowment in the Kingdom of Saudi Arabia. The country remains vastly underexplored, and we are embarking on the world's largest single jurisdiction exploration program.
We have ramped up exploration drilling to nearly 200,000 meters so far this year and expect to drill over 400,000 meters by year-end. This is translating to resource and reserve additions. We have added 3.5 million ounces of gold resources in 2021 and 2022, and this year we've identified an additional 1 million ounces. We have a strong partnership with Barrick centered around Jabal Sayid, our underground copper mine. This quarter, it produced approximately 18 million pounds of copper. Additionally, this venture has kicked off an extensive exploration program near the existing mine as part of our effort to expand copper production in the kingdom. As mentioned previously, the joint venture with Ivanhoe Electric is mobilizing, with the first Typhoon geophysical surveying system expected to arrive in the kingdom by September. Surveying programs will commence with us in the second half.
Globally, we are also seeking opportunities to support the downstream development of the Kingdom, diversify our operations, and enhance our earnings profile. Since the first half closed, we have announced our first major investment in the global mining sector under our joint venture with the PIF, Manara Minerals. We have agreed to acquire 10% of Vale Base Metals, which covers critical minerals for the green energy transition, particularly copper and nickel. This secures supply for the Kingdom's midstream and downstream industries, as well as raises our profile internationally. The strategic transition will give us access to a quality asset base that will grow in value over time. We expect the deal to complete in the first quarter of 2024 following regulatory approvals. We are excited to pursue other transactions to build our exposures to critical minerals globally. On to our production and CapEx guidance.
We are guiding one slight shift on production mix relating to the temporary pivot from flat rolled products to cast house production in aluminum. As a result, our full year alumina and primary aluminum production is expected to be at the upper end of the guidance, while FRP is expected to be at the lower end. Otherwise, we'll maintain full year production and CapEx guidance as previously outlined. The near-term outlook looks positive as commodity prices have stabilized and are now improving slightly. Longer term, copper and markets continue to be supported by very strong fundamentals. We have a growth mandate, and our strategic decisions are not taken or will be taken on a long-term basis to generate returns through the peaks and the troughs of the cycle. With that, I'll hand it back to Faris for Q&A.
Thank you, Bob and Louis, for the valuable insights. Now we will open the floor for questions from the analysts. You can either type your questions in the chat box or raise your hand if you wanna speak it out. Okay, we'll start with Faisal AlAzmeh. You can unmute yourself, Faisal, and you can start to ask your question.
Hi. Thank you for the opportunity to ask questions. This is Faisal AlAzmeh from Goldman Sachs. Just maybe two questions on my end. The first is on Manara asset. How much capital are you likely to commit to this JV over time? Is there kind of an earmarked amount that you think Maaden will commit to this? Or is it just on a case-by-case basis and depending on what you effectively evaluate in the market, and maybe some color there would be helpful. Then my second question is on the investment grade rating.
If you can provide us with a bit more color on how you can maintain that over time and what levels do you expect you would need to keep your leverage out in order to maintain that investment grade rating. Thank you.
Okay. I'll take the first part. We have some general ideas on what we think we wanna spend over the next three to four years, but our board has authorized only about as much as is required for this first acquisition. Then we'll go back to the board for further funding of Manara as the next opportunities come along.
I'm with you. Faisal, thank you for your question. With regards to maintaining the investment-grade rating, from a ratings agency perspective, we need to aim to maintain our net debt EBITDA ratio between 2.5x and 3.5x through the cycle, so on a sustainable basis. It could, you know, there could be periods where we might go slightly above that, but the intention is always to come back within that range. However, having said that, we are still have an aspiration to manage with this within our own guidance. As I said on previous calls, business is cyclical, but our target range is 2x-3x .
That's all clear, Faisal? Or do you have any follow-up question on that?
No, sir.
Okay. We'll move to the next. Nour El-Din Suleiman from EFG Hermes. I'll unmute you. Please unmute yourself.
Just a question on the Vale Base Metals acquisition. Can you shed some light on what should we expect in terms of investment income for 2024? What's the upside from there? Thank you.
Okay. Thanks for the question. I'll take it. I think the investment will be accounted for on an investment basis. That would be in the accounts of Manara. In the case of Maaden will account for its investment in Manara on an equity accounted basis. As the investment should revalue on a quarterly basis, and you'll see that go through, come through the results, on a frequent basis.
Good, Nour El-Din?
Yeah. Is there any quantification regarding how much of, I understand it should come through investment income and equity methods. Can we have any quantifiable number there?
No.
Okay. We move to Shashank. Shashank, unmute yourself, please.
Few questions on my side. The first one is on the industrial utility charge. I think you've given us some guidance of SAR 76 million run rate for the year to quarter. How does this compare with the previous years? You know, you paid almost SAR 420 million, SAR 490 million, sorry, in Q1 related to 2021, 2022. So is it on a declining trend? That's the first question. The second one is in relation to the Vale Base Metals acquisition, obviously it's a minority stake now, and if you look at your press release back in January when you did say that eventually you will have the option to acquire a majority stake. So could you give us some guidelines on timing for that?
Should we expect more minority stake acquisitions in various global assets before that happens? The third one is on the blue ammonia production and exports. How is the CO2 being sequestered here, and who's doing it for you? Thank you.
On the blue ammonia, it's not sequestration. It's a certification on power production. On Vale Base Metals, we do not anticipate trying to acquire a majority, so I don't know where you got that. We're looking for minority investments globally, and we continue to look at opportunities. We have a mandate to look for copper, nickel, iron ore and lithium globally, taking minority interest in mines, assets or companies, have offtake agreements to fuel the downstream development in the kingdom. We continue to look and you can look for further announcements. Wouldn't wanna put a timeline on them, but, you know, we're very active in the market. I'll let Louis talk about the utility charge.
Yeah. Thanks, Shashank. This year basically mirrors the settlement reached for 2021 and 2022. It's basically SAR 400 per annum. 2021, 2022 and 2023. Going forward in 2024, we expect a reduction of approximately 50% on that. In 2025 a further reduction of 50% on that. It is gonna come down as we expect cost on a net demand basis.
Thank you. If I can just follow up on another question on the severance charges which were there in the quarter, what was that related to?
It's fairly complicated and I think there's very good disclosure in the financials. Let me just deal with that very briefly and try and explain this. The Mining Investment Law changed towards the end of 2020, and a new law came into effect. This new law introduced a new component to severance fees, and that is a royalty. A royalty is being charged of 1.5% on gold mineral extraction and 4% on phosphate rock extraction. That is a royalty. Then there's an income tax component to it, where you calculate the income derived from the beneficiation of ore.
There weren't clear guidelines as to how that would be interpreted or should be interpreted and applied. We received a clarification in June this year. In a nutshell, essentially you calculate income tax on the entire beneficiation of ore extracted. Whereas in the past you were able to deduct full Zakat payments made, you are only able to deduct a proportionate share relating to that revenue stream of the Zakat paid. This is more akin to an income tax. Whereas previously the severance fee was disclosed in cost of sales, because we now have a true royalty, that stays in cost of sales, and this severance fee calculation moves to the income tax expenditure line.
There's good disclosure in the financials, and I'm more than happy to field any further questions after that, and you can come back to Faris and the team.
Yeah. Thank you. Thanks very much.
Thank you, Shashank. I still see Faisal AlAzmeh, your hands still raised. So do you have any follow-up questions?
No, sorry. Apologies. I'm lowering. Thank you.
Yeah, please. Please lower your hand. We have Neetika Gupta. So I'll unmute you. Can you please unmute yourself?
Yeah.
Yeah.
Hi. Good afternoon, and thank you for taking my questions. This is Neetika Gupta from Ubhar Capital. My question is regarding the Mansourah-Massarah gold mine. You say that the commissioning activities have started. Could you give us a sense of contribution that we can anticipate in the remaining half of the year from this mine, assuming the prices stay where they are? The ongoing run rate maybe from the next year.
One moment.
Go for it.
I think we produced about 32,000 ounces last quarter.
Yep.
On a run rate, full run rate basis, we'll be producing 250,000 ounces. We're running at about half production rate. We'll ramp that up and reach commercial production once we've finalized all certifications, warranty work, final test out this quarter. I don't think. I don't know what the number is for this quarter. We'll have to get back to you for the forecast on the second half. We've got a ways to go before we're at full production by the end of the year. By next year we'll be at 250,000 ounces annually.
Okay. Thank you.
Thank you, Neetika. We have two questions in the chat box. One from Mohammed Al-Theera. He's asking, "When do you expect to tap the bond market? What will be the tenor and type, sukuk or conventional?
One minute. Yep. Okay, thank you for the question. There's no definitive timeframe on that. That's definitely one of the options we're currently working through in terms of our funding plan. One of the benefits of the investment-grade rating is that we will be able to access the debt capital markets internationally. You know, that provides us with more liquidity and as I said earlier, a lower cost of funding. There's no definitive timetable. Yeah, we are putting the wheels in motion so to speak.
Thank you, Louis. There is another question from Anna Antonova from JPMorgan: Can we expect Maaden to start offtake any physical volumes of metals from Vale Base Metals after completion of the deal, for example, in 2024?
That's not our intention at the time. Down the line, the future acquisitions and equity positions where there's offtake that we could process potentially, but there's no, we haven't considered that on the Vale Base Metals acquisition of copper and nickel.
Thank you, Bob. Another follow-up question from Anna. She's saying, "I recall that FY 2023 alumina and aluminum production are now expected to be at the upper end, and flat rolled products FRP at the lower end of guidance ranges as a result of short-term pivot from FRP into cast house production.
Yep.
Can you please shed more light on where do you expect this mix to evolve in 2024?
We actually expect the can sheet markets to recover in 2024 because most of the drop-off in flat roll products is a result of destocking can sheets industry-wide. We actually expect the flat roll products volumes to recover in the first quarter of next year.
All right. If there's no, any, further questions, I think we will end it here. Thank you all for attending today's earnings call. All materials will shortly be uploaded to our website and to Maaden IR app. If you have any call questions, please contact us via invest@maaden.com.sa. With that, I will conclude today's call. Thank you for your time and goodbye.