Saudi Arabian Mining Company- Initiating Coverage Report

32 Pages·2015·0.67 MB·English

by  Asim Bukhtiar

Saudi Arabian Mining Company (Ma’aden)

Initiating Coverage Report
September 15, 2015
Rating Summary
Depressed Prices + Rising Rates = Cash Crunch

Recommendation Hold
12-Month Target price (SAR) 32.50
We initiate coverage on Saudi Arabian Mining Company (Ma’aden) with a Hold rating and a 12- Upside/(Downside) 7.3%
month target price of SAR 32.50, equating to 16.4x 2016E EV / EBITDA. We applied SOTP
valuation by assessing each key business on standalone basis. Phosphate comprises 43% of Stock Details
share value followed by aluminum and gold at 41% and 13%, respectively. Ma’aden’s portfolio
Last Close Price SAR 30.28
includes 5 producing gold mines and integrated (“mine-to-market”) phosphate and aluminum
Market Capitalization SAR mln 35,382
operations. Some 99% of revenues come from international customers with Asia as the primary
Shares Outstanding mln 1,168
destination. Ma’aden’s operations are entirely located in KSA with a headcount of 6,149.
52-Week High SAR 48.40

Weak commodities creating headwinds – debt servicing under pressure
52-Week Low SAR 23.20
Ma’aden is capital intensive with phosphate and aluminum businesses primarily funded by SAR
Price Change (YTD) % (1.0%)
36 bln debt on favorable rates and deferred payment terms. As these projects move into
12-Mth ADTV mln 8.1
production, debt repayment has commenced and will peak in 2023 to SAR 6.3 bln. With
aluminum and DAP down -18% and -6% from year ago levels, we believe debt servicing will be EPS 2015E SAR 1.16
strained particularly if prices fail to rebound to their long-term averages. Rising benchmark rates Reuters / Bloomberg 1211.SE MAADEN AB
will squeeze cash flows. We estimate zero residual cash for equity holders at least for the next 8 Source: Tadawul
years – which is reflected in our valuation. Further we believe Ma’aden will likely refinance its Key Shareholders (%)
aluminum debt in the footsteps of MPC at higher rates with tightening purse strings. Possibly the Public Investment Fund 50%
Company will once again tap equity markets through a rights issue and swap some debt portion.
GOSI 8%
Unlike the stress faced by other commodity producers, Ma’aden’s backstop is the PIF which
Public Pension Agency 7%
originally committed some SAR 23 bln. Whether future support continues will be tested by an
Free Float 35%
extended commodity downcycle.
Source: Tadawul

Wa’ad Al Shammal to reinvigorate topline growth
Price Multiples
We estimate Ma’aden will get a +23% Y/Y boost to topline when WAS comes online in 2017.
2015E 2016E
With the addition of 2.8 mt of DAP capacity, Ma’aden will climb up the ranking as one of the
P / E 26.1x 21.2x
largest phosphate producers in the world. Operational efficiencies are expected as WAS and
EV / EBITDA 17.8x 15.8x
MPC will share administrative functions and logistics. Over the next three years we project
revenues at +12% CAGR reaching some SAR 16.7 bln from SAR 10.8 bln last year. Although P / S 3.2x 2.9x
gold production is set to rise from As Suq and Ad Duwayhi taking the total to an estimated 170k Dividend Yield (%) - -
oz, we believe weak prices will impact total 2H15 revenues by -18% Y/Y. Source: SFC

Earnings drag from depreciation and financing charges 1-Year Share Performance
Depreciation and financing charges are set to rise in NTM as the refinery and rolling mill move 140
into commercial production. We estimate 2015 earnings to decline -22% Y/Y to SAR 1,356 mln,
120
however with operational startup of WAS in 2017, bottom line should improve on higher volumes.
The Company is focusing on cost control and could see some margin relief with the addition of 100
WAS. We are projecting 2% improvement in EBITDA margin through 2017.
80

Agreement with an auto manufacturer could be a major price catalyst 60
Following the breakdown in negotiations with Jaguar Land Rover, the government is in talks with 40
four other manufacturers, believed to be Japanese and Korean (no names disclosed). If an S O N D J F M A M J J A S
agreement is reached to setup parts manufacturing and possibly assembly plants in KSA, MA'ADEN TASI TINDI

Ma’aden stands to substantially benefit by potentially locking-in long-term aluminum sales. This
Source: Bloomberg
can reduce exposure to international demand swings and ensure optimum capacity utilization.
Although a timeframe has not been announced, we believe some form of an agreement is Asim Bukhtiar, CFA
inevitable given the government’s motivation to expand revenue base. [email protected]
[phone]

AbdulAziz Jawdat
[email protected]
[phone]

Page 1 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Summary Financials

SAR mln, ending Dec-31st
Income Statement 2014 2015E 2016E 2017E 3Q14 3Q15E Y / Y Chg Ratios 2014 2015E 2016E 2017E
Revenues 10,792 11,211 12,414 15,272 3,152 2,842 (10%) Growth (Y/Y)
Cost of sales 7,677 8,319 9,087 11,103 2,215 2,106 Sales 78% 4% 11% 23%
Gross profit 3,115 2,892 3,327 4,169 937 736 (21%) EBITDA 112% 12% 13% 22%
S&M 483 505 509 634 90 95 Net income (4%) (22%) 23% 23%
G&A 446 448 521 626 120 119
Exploration 190 145 160 165 32 37 Margins
EBIT 1,997 1,794 2,137 2,744 694 485 (30%) Gross 29% 26% 27% 27%
Financial charges (303) (420) (489) (747) (75) (95) EBITDA 33% 36% 36% 36%
Other non-operating items 87 47 58 90 (13) 4 Operating 19% 16% 17% 18%
Provision for zakat (44) (65) (40) (39) (13) (14) Net 16% 12% 13% 13%
Net income 1,737 1,356 1,665 2,048 594 380 (36%)
Shares outstanding 1,168 1,168 1,168 1,168 1,168 1,168 Ratios
EPS 1.49 1.16 1.43 1.75 0.51 0.33 (36%) Current 2.5x 2.0x 2.0x 1.8x
EBITDA 3,593 4,019 4,526 5,535 1,057 1,065 1% Debt / Equity 1.3x 1.2x 1.2x 1.4x
Debt / Assets 53% 51% 49% 53%
SAR mln, ending Dec-31st Net debt / EBITDA 9.0x 8.3x 6.6x 7.0x
Balance Sheet 2014 2015E 2016E 2017E 3Q14 3Q15E Y / Y Chg Interest Cover 6.6x 4.3x 4.4x 3.7x
Cash & equivalents 12,497 10,049 11,974 12,852 5,813 9,032 ROAE 5.9% 4.0% 4.7% 5.5%
Receivables 1,245 1,233 1,390 1,665 1,009 1,285 ROAA 2.3% 1.6% 1.9% 2.2%
Other current items 2,674 3,686 3,155 2,753 2,948 3,730
Current assets 16,416 14,968 16,520 17,270 9,770 14,047 44% Valuation Multiples
PP&E and Capital WIP 65,459 68,900 67,500 79,300 62,349 69,200 P / E 20.4x 26.1x 21.2x 17.3x
Other assets 2,666 1,874 1,824 1,752 1,734 1,877 P / S 3.3x 3.2x 2.9x 2.3x
Total assets 84,541 85,742 85,844 98,322 73,854 85,125 15% P / B 1.1x 1.0x 1.0x 0.9x
Payables 2,436 2,242 2,483 3,207 2,456 1,785 EV / EBITDA 19.9x 17.8x 15.8x 12.9x
Accrued expenses 2,558 3,139 3,352 3,513 2,141 2,690
Current LT borrowing 1,574 2,131 2,160 2,597 1,508 2,085
Other current items 99 84 107 112 57 46
Current liabilities 6,668 7,597 8,102 9,429 6,163 6,606 7%
Other liabilities 1,019 1,799 1,772 1,778 627 1,788
LT borrowing 43,338 41,269 39,759 49,136 39,386 41,850
Total liabilities 51,025 50,664 49,633 60,343 46,177 50,244 9%
Total equity 33,517 35,078 36,211 37,979 27,677 34,880 26%
Total liabilities & equity 84,541 85,742 85,844 98,322 73,854 85,125 15%

SOTP Valuation SAR
IM Gold Cop
Gold 4.10 2% 13% 1%
Copper 0.19
Phosphate 9.48
Alum Phos
Wa'ad Al Shammal 4.57 41% 29%
Aluminum 13.33
Industrial Minerals 0.75
WAS
Value per share 32.42 14%

Page 2 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Investment Thesis

Strong government support in the form of access to crucial infrastructure, cheap energy and favorable
funding, position Ma’aden as one of the lowest cost commodity producers in the world. The Company
enjoys hidden, high barriers to entry despite transparent licensing regime aimed at promoting investment
and mineral development in the country. The stock has large institutional holding and offers unique
exposure to mining in Saudi Arabia.
Over 99% of revenues are derived from international markets in Asia, Europe and Africa from sales of
gold, phosphate and aluminum totaling some SAR 10.8 billion. As such, the Company is highly dependent
on global economic health, in particular growth in China. Latest estimates from IMF show an encouraging
+3.8% global growth in 2016 up from +3.3% in 2015. Although the U.S. is expected to improve to +3.0%
from +2.5%, Chinese economic growth will further slow to +6.3% in 2016 from +6.8% in the current year.
In effect, outlook for commodities appears murky. We note that while China is the largest consumer of
aluminum, most of it is sourced domestically. Weaker domestic demand could lead to Chinese metal
competing with international exporters and pulling aluminum prices lower. Conversely, India is the largest
importer of phosphate fertilizer (DAP) and may show an uptick in demand from lower fuel costs.
With this in mind, we modeled our average aluminum selling price at $2,110 per tonne (LME + premium)
versus current LME price of $1,640. Key demand driver for aluminum will be increased automotive
content projected to reach 35 bln pounds globally by 2025. Aluminum can reduce vehicle weight by two-
thirds versus steel and dramatically improve fuel efficiency. In addition, we project an average DAP price
of $472/t versus 2014 realized selling price of $458. We believe long-term demand fundamentals for
fertilizer will remain intact on rising population, declining plantable land and urbanization. At the group
level, we estimate +12% CAGR in revenues between 2014 and 2018, reaching some SAR 16.7 bln.
Wa’ad Al Shammal is expected to catalyze revenues by +23% Y/Y in 2017 when it comes online. Our
outlook for the remainder of 2015 is subdued. We estimate -18% Y/Y decline in revenues in the back half
of the year – rising gold output from Ad Duwayhi and As Suq will not be sufficient to counter sliding gold
prices.
Further, with the smelter already in commercial production and refinery and rolling mill expected to be
commercially ready by early-2016, depreciation and associated financing charges will create drag on
earnings. We estimate -22% Y/Y decline in 2015 net income to some SAR 1.4 bln. However, over the
next three years, earnings are expected to rise at +8% CAGR driven by WAS. For now dividends are not
on the horizon as debt servicing takes precedence.
On the heels of MPC debt refinancing announcement, we believe Ma’aden will look to replace aluminum’s
debt facilities with a longer-term loan, possibly sukuk, to ease servicing burden. Our projections indicate
that on an individual project basis, insufficient cash will be generated for debt servicing, creating an acute
liquidity crunch in the coming years, unless commodity prices rebound. Possibly equity financing will be
tapped to rebalance capital structure. Clearly, we preclude cash flows accruing to equity holders in the
present scenario.
We initiate coverage on Saudi Arabian Mining Company (Ma’aden) with a Hold recommendation and a 12-
month target price of SAR 32.50. We applied sum-of-the-parts (SOTP) valuation by individually assessing
Ma’aden’s key businesses including Gold, Phosphate, Aluminum and Industrial Minerals. Phosphate,
inclusive of WAS, comprises 43% of share value while Aluminum and Gold contribute 41% and 13%,
respectively. We believe Ma’aden is suited for longer-term investors seeking diversification with tolerance
for share price volatility. Key near-term catalysts include sharp rebound in commodities and/or signing
auto manufacturers to setup production facilities in Saudi Arabia.

Page 3 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Table of Contents

Investment Risks …………………………………………………………….. 5
Background …………………………………………………………………… 6
Gold …………………………………………………………………………….. 9
Phosphate …………………………………………………………………...… 14
Aluminum ……………………………………………………………………… 21
Industrial Minerals …………………………………………………………… 27
Financial Analysis …………………………………………………………… 28
Recommendation and Conclusion ……………………………………….. 30

Page 4 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Investment Risks

The following risk factors can significantly affect our earnings projections for Ma’aden and consequently
share price performance. Investors should carefully assess each risk prior to making an investment
decision. Further, some factors are beyond the Company’s control and may affect the operating
environment over an extended period.
Depressed commodity prices
Ma’aden’s core business is the production and sale of gold, phosphate and aluminum. As such the
Company is highly dependent on commodity prices and the economic health of its key export markets.
Volatile commodity prices can materially impact Ma’aden’s margins on a quarter-over-quarter basis which
in turn can add price swings to share performance. Investors should take a longer-term view when
assessing Ma’aden shares. Further, commodity cycles can last over a decade with substantially
depressed product prices as a result of weaker economic activity. In distressed scenarios, production is
cutback, investment plans are deferred and financial projections are revised.
Rising interest rates and foreign exchange risk
Although Ma’aden benefits from long-term debt on favorable basis, its SAR 44 billion funding is pegged to
either SAIBOR or LIBOR. In a rising rate environment, debt servicing requirements can substantially
escalate. For instance, 25 basis point shift in benchmark rates can add SAR 110 million in financial
charges. The prevailing low rate environment is expected to reverse beginning 2015. As such, we have
modeled gradual increases in benchmark rates over the next fifteen years. However, the pace and
magnitude of increase may be substantially higher than projected and inflate debt servicing burden beyond
tolerance. In addition, lower commodity prices raise the risk of breaching debt covenants. Over 99% of
the Company’s sales are derived from exports which raises exposure to foreign exchange risk.
Pullback in state support and discounts
With Brent below $50 per barrel, state finances will be tested. Cuts in government expenditure appear on
the horizon. One possible area under scrutiny maybe support to state-backed entities. Ma’aden enjoys
strong government support in the form of soft loans, railroad network, power plants and various other
infrastructure development. As a cash conservation measure, timelines on some projects such as Wa’ad
Al Shammal may be extended. We view this as a lower probability scenario versus the introduction of
corporate taxes as a means to raise state revenues.
Industrial accidents resulting in plant shutdowns
Ma’aden has a commendable safety record with low and improving lost time injury frequency rates.
Although remote, an industrial accident can result in injuries, plant shutdowns and reevaluation of
processes and technology. Further, environmental safety and tightening regulations could impact future
development plans and potentially raise reclamation costs.
Regional competitive threat
Aluminum producers in the GCC, for example EGA and ALBA, enjoy similar low cost advantages as
Ma’aden in terms of energy, manpower and transportation. Often these competitors sell into the same
markets as Ma’aden. With low production costs, regional competitors are well-positioned to withstand
depressed aluminum prices. In addition, they are capable of selling aluminum at lower premiums to
maintain market share. We see low probability of price war and deep discounts, however such a scenario
could deteriorate margins.

Page 5 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Background

Mining dates back 4,000 years on the Arabian peninsula with increased activity between 750 and 1150 AD
during which time some 1,000 mines were developed to produce gold, silver and copper. The Saudi
Geological Survey has identified metallic mineral deposits (gold, zinc, copper, tin) in the Arabian Shield
located in western part of the country stretching from southern Jordan to northern Yemen. While non-
metallic resources such as phosphate and kaolin are located in the central and northern areas.
Sedimentary rocks covering eastern Saudi Arabia host the oil and gas reserves.
Last revised in 2004, the Mining Code governs mining industry in Saudi Arabia and is administered by the
Ministry of Petroleum and Mineral Resources and its affiliate Deputy Ministry for Mineral Resources.
Latest figures from the Saudi Arabian Monetary Agency (SAMA) indicate some 2,094 licenses have been
issued for various mining activities including exploration. Although non-oil and gas related mining activity
comprises a modest 0.4% of the GDP, it has increased +3% Y/Y in each of the last two years.
Company Overview
Established as a joint stock company in 1997, Saudi Arabian Mining Company (Ma’aden) has been
Key Management exploring and extracting gold since 1989. With headquarters in Riyadh, Ma’aden employees 6,149
Eng Abdallah Al-Saif Chairman personnel across its various sites in Saudi Arabia. Headcount is projected to reach 13,000 by 2022 as the
Khalid Al-Mudaifer CEO Company continues to expand its operations. Main products include gold, aluminum and phosphate
Khalid Al-Rowais CFO fertilizer yielding annual revenues of nearly SAR 10.8 billion in 2014.
Shares were listed on the Saudi stock exchange (Tadawul) in 2008 through an initial public offering of
462.5 million shares, representing 50% of the total share capital, at SAR 20 each. In 2014, SAR 5.6 bln
were raised through a rights offering of some 243.5 million shares taking the total share count to 1,168
million. The Public Investment Fund (PIF) is the largest shareholder with slightly below 50% ownership.
Share price hit a 52-week and low of SAR 48.40 and SAR 23.20, respectively while average daily trading
volume reached some 8.1 mln shares suggesting high liquidity.
Fig 1: Share Ownership and 2014 Sales Composition
Other
2%
Free
Float
35% PIF Alum
50% Phos 42%
50%
PPA
7% GOSI Gold
8% 7%
Source: Company Reports, Tadawul

Diversified product mix
Ma’aden started primarily as a gold developer focused on extraction at the Mahd Ad’Dahab site in the late
1980s. Over the subsequent decade gold operations were expanded and by 2009 production exceeded
Targeting to raise 160,000 ounces per year. Currently the Company has five producing mines and an additional three under
gold production to feasibility study. Ma’aden is targeting to increase gold output to 500,000 ounces annually while continuing
500,000 oz / yr
to expand its mineral resources from 16.3 million gold ounces through further exploration.
In 2007 Ma’aden signed an agreement with SABIC (TASI: 2010, Buy, TP: SAR 112) to develop its large
phosphate deposits estimated at 380 million tonne contained resources (P O ) and established the
2 5
Ma’aden Phosphate Company (MPC). Ma’aden holds 70% stake in MPC and the remaining 30% is held
by SABIC. MPC is an integrated phosphate complex linking Al Jalamid mine in the north to processing

Page 6 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
plants in Ras Al Khair on the eastern coast. Primary product is diammonium phosphate (DAP) with
nameplate capacity of 3.0 million tonnes per annum (mtpa). In 2013, Ma’aden sought to further expand
the phosphate business and add downstream products. As a result, an agreement was signed with one of
the largest phosphate producers in the world Mosaic to develop the Wa’ad Al Shammal project (WAS).
WAS will add 2.8 Ownership of WAS will be jointly held by Ma’aden:60%, Mosaic:25% and SABIC:15%. WAS is projected
mtpa DAP capacity
to come onstream in 2017 and will add another 2.8 mtpa DAP capacity, placing Ma’aden firmly in the top
in 2017
five global phosphate producers.
Fig 2: Site Locations
Source: Company Reports

To further diversify the revenue base, a joint venture was agreed with Alcoa in 2009 to develop an
integrated aluminum complex with Ma’aden holding 74.9% interest and Alcoa retaining the remaining
25.1%. The “mine-to-market” vision will capitalize on low cost energy, infrastructure and access to key
“Mine-to-market”
markets. Bauxite will be mined and processed at Al Baitha, transported by rail to the refinery at Ras Al
aluminum operation
Khair to be converted to alumina which will feed the onsite smelter yielding aluminum ingot. The smelter is
expected to be one of the lowest cost producers in the world with nameplate capacity of 740,000 tonnes
per annum. Further downstream, the smelter will supply the adjacent rolling mill producing sheet metal for
the can beverage industry. In addition, the complex houses a recycling facility to reprocess aluminum
cans. The entire chain is presently operational however commercial production is yet to be announced for
the refinery and rolling mill.
Although considerably smaller in scale, the industrial minerals segment adds a steady revenue stream for
Ma’aden. Low grade bauxite (LGB) mined at Az Zabirah is primarily supplied to local cement producers
while kaolin and magnesite is used by the ceramic and steel industry. During 2014, Ma’aden signed a
50:50 joint venture with Canada’s Barrick Gold Corp to further the Jabal Sayid copper project. Production
is expected to commence in 2016 pending final regulatory permissions. The Company estimates peak

Page 7 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
copper concentrate output at 51,000 tonnes per annum which will be exported to smelters in international
markets.
Fig 3: Subsidiaries
Ma'aden
783 employees
IndustrialMinerals Ma'aden Phosphate Ma'aden Gold and Ma'aden Aluminum
Company(IMC) Company(MPC) Base Metals (MGBM) Company(MAC)
1,0469 Employees 1,081employees 2,785 Employees
Ma'aden Barrick Ma'aden Wa'ad Al Ma'aden Rolling
Company Shamal Phosphate Company(MRC)
Company
58 Employees
Ma'aden Infrastructure Ma'aden Bauxite and
Company(MIC) Alumina Company
(MBAC)
SAMAPCO
Source: Company Reports
We highlight that over 99% of group revenues are derived from international markets, primarily Asia.
Although this is not expected to shift in the near future, there is potential for greater domestic sales if
99% of revenues
homegrown auto manufacturing takes hold. Geographic location provides an advantage to Ma’aden in
from international
customers supplying key customers in China, India and Pakistan from a cost perspective. Simultaneously, new
clients can be developed in Africa and South America.
Strong government support
Raised as the third pillar of the Saudi economy, Ma’aden enjoys strong government support in the form of
crucial infrastructure, energy supply and soft loans. The 1,500 kilometer railway linking the phosphate
mines in the north to Ras Al Khair industrial city on the east coast, the sea port and Wa’ad Al Shammal
city are some examples of infrastructure without which phosphate development would be near impossible
in addition to cost prohibitive. Further, the 2,400 MW power plant in Ras Al Khair supplies low cost energy
to the aluminum smelter. Saudi Aramco supplies natural gas and sulfur at discounted rates. But most
importantly, the Company has access to low cost funding. The end result of these combined factors is that
Ma’aden can withstand volatility in commodity prices better than majority of its competitors. The Company
can continue to develop new projects in a cyclical downturn.
Worth mentioning here is that Ma’aden does not have local competition with similar reach or scale.
No local Although mining licenses are awarded and competition is encouraged, in reality mining in remote areas of
competition with
Saudi Arabia requires substantial investment and commitment. Not surprisingly global mining companies
same scale
prefer to partner rather than direct entry. In terms of domestic competition, we see other state-backed
entities vying for cheap energy as more pressing threat. Allocation to petrochemical, cement and
electricity producers has exhausted discounted gas, raising the prospect of higher energy costs in the
future.

Page 8 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Gold

Gold is widely regarded as a standard of tangible value spanning across time, boundaries and cultures.
During turbulent and uncertain economic conditions, demand for gold rises given its safe haven status.
Global demand in 2014 declined -4% Y/Y to 3,924 tonnes of which jewelry comprised 55%. On the supply
side, China, Russia and Australia are the largest gold producing countries comprising nearly a quarter of
total global supply of 4,278 tonnes. Some 26% of the total available supply comes from recycled gold
while the remaining is mined.
Fig 4: Gold Uses and Suppliers
Tech- China
nology 15%
10%
Russia
Invest- 9%
Je5w5e%lry m23e%nt O4th5e%rs Australia
9%
Central U.S.
Bank Canada 6%
12% 5% Peru
RSA 5%
5%
Source: World Gold Council, GFMS, Thomson Reuters
Over the trailing twelve months, spot gold price has been volatile on improving U.S. economic picture
driving investors to shift into riskier assets. Strengthening USD has exerted downward pressure on gold
Strengthening USD
prices particularly during the late summer of 2015 as anticipation of an interest rate hike gained
pushing gold lower
momentum pushing gold below $1,100 per ounce. In our view, gold will likely trend downward as gradual
increases in U.S. interest rates take shape in 2016. However, if uncertainty obscures global economic
outlook, gold may rebound.
Fig 5: Spot Gold ($ / oz) and USD Movement
1400 110
1300
100
1200
90
1100
80
1000
900 70
S O N D J F M A M J J A S
Gold (LHS) Dollar Index (DXY)
Source: Bloomberg
Price decline exacting toll
Declining gold prices are impacting production metrics as companies are increasingly looking to cut costs.
According to gold consultancy Metals Focus, at $1,100 an ounce, 25% of global production is loss making.
Sustaining costs
While lower oil prices have contributed to some cost reduction, GFMS estimates nearly a -25% Y/Y decline
dropped 25% in
2014 in all-in sustaining costs (AISC) in 2014. At these price levels mine closures on a significant scale have
not taken hold given the associated costs. In most instances, operating a loss making mine may be more
cost effective than closure. However, if prices continue to decline, for example on average by $100,
producers may be compelled to shutter mines with AISC in excess of $1,200 an ounce.

Page 9 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Saudi Arabian Mining Company (Ma’aden)

September 15, 2015
Other areas being affected by declining prices include capital expenditure plans and access to funding
which are spurring asset sales. Companies on firmer financial footing may acquire quality assets at
comparatively reasonable valuations.
Table 1: Global Major Gold Producers
Production 2P Reserves Operating
Company (000s oz) (mln oz) Mines AISC ($ / oz)
Barrick Gold 6,249 93.0 20 864
Newmont 5,231 82.2 14 1,002
AngloGold 4,436 57.5 22 1,026
Goldcorp 2,871 67.1 12 949
Kinross 2,669 34.4 9 973
Newcrest 2,396 78.0 6 717
Gold Fields 2,219 48.1 6 1,053
Polyus Gold 1,696 65.8 6 825
Sibanye Gold 1,590 28.4 4 1,071
Source: Company Reports, GFMS, mineweb.com

Ma’aden Gold Projects
Ma’aden’s current gold portfolio includes five operating mines: Mahd Ad Dhahab, Al Amar, Bulghah, As
Suq and Ad Duwayhi. Mansourah, Massarah and Ar Rjum are in feasibility stage. The 450 km treated
water pipeline, completed in 2014, will allow further expansion of gold operations in the Arabian Shield.
Gold production increased to nearly 154,000 oz in 2014 up from 134,000 oz in the prior year. The
Company aims to take total production to 500,000 oz as Ad Duwayhi ramps up. Average cash cost for
Avg cash cost of 2014 was $566 which by our estimate scales up to $993 AISC versus global peer average $942. Ma’aden
$566 / oz in 2014 boasts proven and probable (2P) gold reserves totaling 3.7 mln oz and resources of 16.3 mln oz. Gold
revenues declined to SAR 715 million in 2014 from SAR 1,002 million in 2012, mainly due to -24% price
decline over the two-year period.
Fig 6: Ma'aden Gold Production and Revenues
700 1,800
600 1,600
5 9 1,400
500 2 4
882 392 20 2,1 2,1 1,200
0
831 431 451 071 400 ,1 907 517 347 1,000
300 800
2012 2013 2014 2015E 2016E 2017E 2012 2013 2014 2015E 2016E 2017E
Production (000s oz) Avg Cash Cost ($ / oz) Revenues (SAR mln) Avg Price ($ / oz)
Source: Company Reports, SFC
Mahd Ad Dhahab
Production started in 1988 at this underground mine in Madinah Province. By current estimates the mine
is expected to close in 2019, although life-of-mine (LOM) has been extended in the past due to extensive
drilling. The mine is estimated to contain 197,000 ounces of reserves and 847,000 ounces of resources.
In 2014, Mahd produced 34,280 oz.

Page 10 Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)