Management Discussion & Analysis Full Year 2014
Toba Bara Sejahtra Tbk and Subsidiaries
SUMMARY
Continued global coal supply and demand imbalances mainly attributable to China’s slowing import demand growth and lack of supply discipline from major producers caused further deterioration in global coal prices throughout 2014. From 2013 to 2014, the average Newcastle (NEWC) Index price declined by 17.0% from US$ 85.3/ton in 2013 to US$ 70.8/ton in 2014. Furthermore, the NEWC Index price in 4Q14 was recorded at a low US$ 63.8, the lowest fourth quarter NEWC Index price in the last six years.
Given that the global coal market has been under pressure for the past two years, PT Toba Bara Sejahtra Tbk (The Company) continues to be well positioned in maintaining its costs structure relatively stable for the year post a series of cost efficiency initiatives conducted over 2013 period. This has enabled the Company to focus on profitable production growth. In 2014, the Company has continued on the positive momentum of its operational performance by successfully maintaining an average quarterly production run-rate of 2.0 million tons, while generating full year EBITDA/ton of around US$ 8-10/ton.
As the Company’s three concessions are located adjacent to each other, for the past year, the Company has been able to maximize cost efficiency initiatives through joint mine plan and infrastructure sharing. This has allowed the Company to successfully boost production volume and sales volume by 24.6% to 8.1 million tons and by 23.4% to 7.9 million tons in 2014 respectively. Throughout 2014, on average, the Company has successfully maintained a quarterly production volume run rate of 2.0 million tons and was able to achieve its highest production volume in history of 2.3 million tons in 3Q14.
Financially, the Company increased its top line sales by 18.5% from 2013 to 2014. Despite a 17.0% correction in the NEWC Index price, the Company posted a decline of 4.4% in its average selling price (ASP) over the same period. On the cost side, the Company lowered its FOB (Free on Board) cash cost by 3.0% over the same period. A combination of stronger sales efforts through higher sales volume backed by higher quality buyers and lower overall costs resulted in a 14.7% higher EBITDA in 2014 at US$ 67.3 million. This, in turn, translated to a more favorable income of US$ 35.8 million for 2014.
Special Note: The following discussion on the Company’s performance is based on the Consolidated Financial
PRODUCTION & OPERATION
The Company’s coal production volume expanded 24.6% from 6.5 million tons in 2013 to 8.1 million tons in 2014 on the back of significantly higher volume contributions from TMU and IM. The production volume of 8.1 million tons in 2014 resulted from operations of all three operating subsidiaries with the following respective contributions: ~4.4 million tons from ABN, ~2.3 million tons from IM, and ~1.4 million tons from TMU. The Company’s production growth of 24.6% was mainly from TMU’s substantial production ramp up post the earlier-than-expected completion of its hauling road in 2Q13 connecting TMU and IM via ABN. While as of December 2014, ABN remains to be the Company’s main production volume contributor, its contribution has fallen from 64.6% in 2013 to 54.3% in 2014. On the other hand, the contribution of TMU to total Company production has surged from 13.8% in 2013 to 17.3% in 2014. On stand-alone basis, the contributions of IM and TMU were crucial as they posted annual production volume growth of around 64.3% and 55.6% in 2014 respectively.
Changes in Production and SR at ABN, IM and TMU
ABN IM TMU
As compared to 2013 SR of 13.4x, SR in 2014 had stabilized at 13.3x reflecting the Company’s continued efforts in improving its operational performance amidst the low coal price environment. However, in anticipation of continued weak coal prices ahead, SR increased by 10.4% from 12.5x in 3Q14 to 13.8x in 4Q14 due to pre-stripping activities to allow for better coal extraction in subsequent periods. Over the same period, production volume fell from 2.3 million tons to 1.7 million tons due to adverse weather conditions resulting from higher than expected rainfall.
Average Production, SR, and Dump Distance
Financial and Operational Highlights All figures are in million US$ unless
otherwise stated 2013 2014 Changes
Operation
Sales Volume mn ton 6.4 7.9 23.4%
Production Volume mn ton 6.5 8.1 24.6%
Stripping Ratio (SR) X 13.4 13.3 (0.7)%
FOB Cash Cost* US$/ton 52.9 51.3 (3.0)%
NEWC Index Price US$/ton 85.3 70.8 (17.0)%
Average Selling Price (ASP) US$/ton 66.6 63.7 (4.4)%
Financial Performance
Profit (Loss) 2013 2014 Changes
Sales US$ mn 421.9 500.0 18.5%
Cost of Goods Sold US$ mn 342.3 413.8 20.9%
Gross Profit US$ mn 79.6 86.2 8.3%
Operating Profit US$ mn 50.0 56.0 12.0%
EBITDA** US$ mn 58.7 67.3 14.7%
Profit for the Period US$ mn 34.6 35.8 3.5%
EBITDA/ton US$/ton 9.2 8.6 (6.5)%
Capex US$ mn 23.3 11.8 (49.4)%
Balance Sheet 2013 2014 Changes
Interest Bearing Debt US$ mn 55.9 58.1 3.9%
Cash and Cash Equivalents US$ mn 63.3 47.8 (24.5)%
Net Debt*** US$ mn Net Cash 10.3 N/A
Total Assets US$ mn 311.7 300.6 (3.6)%
Total Liabilities US$ mn 181.2 158.3 (12.6)%
Total Equity US$ mn 130.5 142.4 9.1%
Financial Ratios
Gross Profit Margin % 18.9% 17.2% (9.0)%
EBITDA Margin % 13.9% 13.5% (2.9)%
Operating Profit Margin % 11.9% 11.2% (5.9)%
Notes:
*FOB Cash Cost = COGS including royalty and selling expense – depreciation and amortization **EBITDA = Gross profit – selling expenses – G&A + depreciation and amortization
PROFIT (LOSS)
SALES
Although the weaker NEWC Index price impacted the Company’s overall ASP by 4.4% from US$ 66.6/ton in 2013 to US$ 63.7/ton in 2014, the Company booked an 18.5% rise in sales from US$ 421.9 million in 2013 to US$ 500.0 million in 2014 on the back of a solid 23.4% increase in sales volume over the same period.
COST OF GOODS SOLD
A 20.9% rise in cost of goods sold from US$ 342.3 million in 2013 to US$ 413.8 million in 2014 stemmed from the Company’s significant increase in production volume by 24.6%, despite a decrease in FOB cash cost. Higher production volume typically increases mining costs such as OB removal, overhaul distances, coal extraction, and fuel, which account for the largest components of production costs. A y-o-y decline in FOB cash cost to US$ 51.3/ton in 2014 from US$ 52.9/ton in 2013 resulted from better execution of mine plan and lower fuel costs.
EBITDA
EBITDA surged by 14.7% from US$ 58.7 million in 2013 to US$ 67.3 million in 2014, resulting from predominantly higher sales volume and better mine plan execution amidst the weaker ASP, while lowering mining costs in the process. However, the weaker ASP had slightly lowered EBITDA margin by 2.9%.
The first graph below depicts the EBITDA evolution on q-o-q basis from US$ 9.4 million in 1Q13 to US$ 9.5 million in 4Q14 and the NEWC Index price from US$ 93.2/ton to US$ 63.8/ton over the same period. From 1Q13 to 3Q14, the Company successfully maintained strong EBITDA and stable cash margin during continued weaker coal price environment. However, due to lower sales and production volume in addition to pre-stripping activities, EBITDA decreased from US$ 19.5 million in 3Q14 to US$ 9.5 million in 4Q14.
Quarterly EBITDA vs NEWC Index 1Q13 – 4Q14
ASP vs FOB Cash Cost 1Q13 – 4Q14
PROFIT FOR THE PERIOD
The Company booked total profit for the period (before minority interest) of US$ 35.8 million in 2014, up by 3.5% from US$ 34.6 million in 2013.
BALANCE SHEET
ASSETS
34%
18%
16%
15%
4%
3%
2% 8%
ChinaKorea
India
Taiwan
Philippines
Vietnam
Thailand
Others
LIABILITIES
Total liabilities as at 31st December 2014 decreased by 12.6% to US$ 158.3 million from US$ 181.2 million as per end-December 2013 and interest bearing debt increased by 3.9% to US$ 58.1 million from US$ 55.9 million over the same period. Meanwhile, leverage metrics such as Net Debt to EBITDA ratios have constantly recorded stability from quarter to quarter at way below 2x.
Net Debt to EBITDA
EQUITY
Total equity at the end of December 2014 slightly increased 9.1% to US$ 142.4 million from US$ 130.5 million as of 31st December 2013, and this was attributable to additional profit for the period.
CAPITAL EXPENDITURE (CAPEX)
Until 31st December 2014, the Company had realized total CAPEX of around US$ 11.8 million, which is mainly allocated for land compensation and operational facilities and equipment.
MARKETING
In 2014, the Company sold its coal mainly to Asian countries, such as China, Korea, India, and Taiwan. Some of the large reputable international traders and end-users such as power generation companies make up the Company’s main customers. Through 2014, the Company has successfully maintained its 2013 marketing milestone achievement by growing a more diversified and higher quality customer base, expanding export market coverage, while maximizing its pricing mechanism through various hedging strategies. The Company also utilized its own in-house marketing team to tap into high quality end users such as in Japan without incurring any significant marketing costs.
2015 BRIEF OUTLOOK
Entering 2015, the global seaborne coal market is expected to remain under pressure from continued excess supply due to major producers’ on-going output not being met by the predominantly lackluster Chinese import demands. Such weak import demands stem from China’s weaker economic growth in an already oversupplied domestic market as well as its much improved access to renewable energy sources. Meanwhile, continued supply contributions from the major producers/exporters remain a major concern on the supply side. As such, global coal prices are expected to remain restrained over the short-medium term until the market finds ground to rebalance.
Given the above factors, in 2015, the Company is expected to focus its resources and efforts in maintaining business sustainability and resilience. For the past few years, the Company has been continuously improving cost efficiencies by running executable mine plans that meet the combined objective of achieving profitable targets and sustaining long term reserves. In line with this objective, the Company is expected to target production output of 6-8 million tons in 2015.
While on the marketing front, the Company plans to continue with its on-going combined strategy of building a well-diversified customer base (increasing more sales exposure to end user customers), securing good quality sales backed by quality buyers, engaging in favorable terms of payment, and improving quality control on product delivery. To date, the Company has secured more than 60% of its 2015 sales volume target.
After completing its 2013 program of undergoing infrastructure capacity upgrade from the then 13 million tpa (tons per annum) to become 16 million tpa, the Company plans to allocate CAPEX of US$ 10-14 million for 2015 to support its on-going sustainability strategy. The planned CAPEX is expected to mainly strengthen operational facilities and equipment (conveyor and heavy equipment) and partially, for land compensation.
SNAPSHOT OF PT TOBA BARA SEJAHTRA TBK
PT Toba Bara Sejahtra Tbk (“The Company”) is one of the major competitive producers of thermal coal in Indonesia. The Company has grown into a major coal producer operating 3 (three) coal mine concessions in East Kalimantan. These adjacent coal mining concessions, which are held through various operating companies, all enjoy highly favorable mine locations, with close proximity to local river ports. The Company’s concession areas total approximately 7,087 hectares.
The Company currently has four operating subsidiaries, three in coal mining namely PT Adimitra Baratama Nusantara (ABN), PT Indomining (IM), PT Trisensa Mineral Utama (TMU) and one in palm oil namely PT Perkebunan Kaltim Utama I (PKU). The Company’s ownerships in ABN, IM, TMU and PKU are 51.00%, 99.99%, 99.99% and 90.00% respectively.
Loc
ations of Toba Bara’s Concessions
ABN is located in Sanga-Sanga, Kutai Kartanegara, East Kalimantan and is operated under the IUPOP permit. It started operations in September 2008. ABN covers an area reaching 2,990 hectares and has estimated coal resources of around 156 million tons.
IM is located in Sanga-Sanga, Kutai Kartanegara, East Kalimantan and is operated under the IUPOP permit. It started operations in August 2007. IM covers 683 hectares of land and has estimated coal resources of 37 million tons.
Meanwhile, TMU is located in Loa Janan, Muara Jawa and Sanga-Sanga, Kutai Kartanegara, East Kalimantan. With IUPOP permit, TMU started operations in October 2011. TMU covers 3,414 hectares of land and has estimated coal resources of 43 million tons.
Altogether, the total coal resources of the Company are currently estimated at 236 million tons.
