Ma'aden Annual Report
$nnual 5eport 2010
Ma’aden I Saudi Arabian Mining Company
1
Chairman’s statement
Dear Stakeholder 2010 was a time of recovery for the world’s economies, following the collapse in global markets. The Gulf Cooperation Council (“GCC”) economies and particularly that of the Kingdom of Saudi Arabia have proved to be robust and this strength has been reinforced by continued government investment in infrastructure and development projects.
The year was an important one for Ma’aden. With increased visibility in the global economy and strengthening in commodity prices, we were able to focus on key growth initiatives. In line with our strategy to become a leading diversified mining company and supporting the growth and development of the economy of the Kingdom of Saudi Arabia, through the development of sustainable operations, we have focused on the development of our key projects. This will also significantly increase our presence in our key industries, most notably the global phosphate and aluminium markets, bringing with it commodity diversification.
A strong focus on improving operational efficiencies, robust cost control and maintaining a competitive position in the global mining and metals industry will be a central component of our business focus in 2011. This will continue to be driven through the addition of projects that offer cost advantages over competitors and also a continuous drive for production efficiency and effectiveness, enhanced asset management, business optimisation and cost control.
Significant progress has been made on mega projects during the year including MPC, our joint venture with SABIC, which finished the 2010 year at Al Jalamid and Ras Al-Khair in the pre-commissioning stage, with production scheduled for the third quarter of 2011. Our aluminium joint venture agreement with Alcoa was signed in late December 2009 and Phase 1 of the project for the smelter and rolling mill has been successfully financed with long lead items ordered and the first concrete poured at Ras Al-Khair.
Ma’aden has adopted a “Balanced Growth Strategy” and in line with this the gold exploration team has achieved notable success during the year by adding 1.76 million ounces of gold to our resource base, bringing Ma’aden’s overall Joint Ore Reserves Committee (“JORC”) compliant gold resources to 11.328 million ounces. This coupled with the progress made on the development of a water pipeline to supply the CAGR further underpins the long-term strategic expansion of Ma’aden’s gold operations.
Ma’aden’s net income for the year, from gold operations, increased by 30.7% over 2009 due to a more than 26% strengthening in the gold price. However, reduced production, as a result of lower than expected grades and recoveries, resulting from operational and technical problems experienced during 2010, has resulted in a number of steps being taken to improve operational efficiencies, increase production capabilities and reduce our cash costs. These steps will be implemented with no compromise to the health and safety of our people and the environments we operate in, which remain our highest priority.
$nnual 5eport 2010
Ma’aden I Saudi Arabian Mining Company
Highlights
> 2011 Business focus A strong focus on improving operational efficiencies will be implemented with no compromise to the health and safety of our people or the environment in which we operate.
> Ma’aden well positioned to deliver on its mandate in 2011 Continuing to grow our JORC compliant gold resources, currently standing at 11,328,000 ounces. Ma’aden’s phosphate and magnesite projects will begin commercial production during 2011 and the first ammonia shipment took place in March 2011. The smelter and rolling mill components of the fully integrated aluminium project are under construction and the project as a whole is progressing according to plan.
> New leader in 2011 Engr. Khalid Al Mudaifer was appointed as the new President and CEO at the start of 2011.
It has also been an exciting year for our industrial minerals team with considerable progress being made at the Al Zarghatt mine, which is expected to commence production to supply our new magnesite plant in Al Madinah Al Manawarah, and is currently in commissioning stage.
In 2011, Ma’aden is well positioned to deliver on its mandate. MPC will be in the first quartile of the production cost curve and enjoy significant logistical advantages being closer to the growth markets of Asia than any of its competitors. Ma’aden is continuing to grow its gold resource base and plans are in place to capitalise on this and expand our gold production. Ma’aden’s integrated aluminium project will be among the most competitive in the global industry with its fully integrated supply of bauxite and alumina, as well as one of the most advanced rolling mills in the world. Ma’aden is also embarking on an aggressive expansion of its exploration plans to unlock further value and support our long-term growth ambitions. While there are many challenges ahead, I am confident that Ma’aden is well positioned to meet and overcome these.
On a personal note, I would like to thank the founding President and CEO Dr. Abdullah Al-Dabbagh, who retired at the end of 2010. His dedication and leadership has contributed significantly to creating Ma’aden as it is today; a Group with a bright future built on firm foundations.
I would also like to extend a very warm welcome to our new President and CEO, Engr. Khalid Al Mudaifer, who was appointed at the start of 2011. We are extremely pleased to have him on board, where his skills, expertise and knowledge complement our team and will be invaluable to us as we look to position ourself for growth.
I would also like to thank Ma’aden’s shareholders for their continued support during our growth years and the Group’s employees who have helped us to achieve what we have and delivered much and I am confident they will continue to do so in the future.
Engr. Abdallah Bin Saif Al-Saif Chairman, Ma’aden
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
3
President and CEO’s statement
“ Ma’aden is investing for growth and focusing on delivering shareholder value through sustainable operations.”
Dear Stakeholder The expansion of our business and diversification of our product mix have driven our growth strategy over the last year, and to date we have been successful in delivering significant value in this regard. We have worked closely with government and private sector stakeholders to successfully lay the foundations for our phosphate and aluminium mega projects. The phosphate project is now almost completed and trial production is scheduled to commence during the second quarter of 2011, with commercial production expected in the third quarter of 2011. During 2010, we secured financing for the first phase of our aluminium project and construction has now begun with first production expected in the first quarter of 2013. This is significant progress following after the signing of our joint venture agreement with Alcoa in December 2009. These mega projects are very complex undertakings for which Ma’aden has been required to build significant capacities before new revenue streams can be realised. As a result, and despite increased operating profits achieved by Ma’aden Gold, the consolidated financial performance during the financial year for 2010 has resulted in a loss of SAR 14 million. We are, however, now better placed to maximise revenue streams into 2011 and beyond, having established an incredibly strong platform to bring new operations on line in both the near-term and mid-term. Commercial production of DAP fertiliser by MPC during 2011 will signify a turning point for Ma’aden as our reliance solely on gold production ends and our phosphate business becomes Ma’aden’s chief source of income until the aluminium project comes on stream. Genuine transformation took place during 2010 at both of the operational sites connected with MPC. Stripping of overburden and limited mining operations were under way at the Al Jalamid mine where the beneficiation plant has also been completed and was commissioned as the year came to an end. Commissioning was also under way at the fertiliser complex at Ras Al-Khair. These operations will deliver Ma’aden’s first significant direct impact into the global commodity markets. To maximise sales and ensure that key markets are effectively exploited, Ma’aden has worked hard to establish a world class sales and marketing function at the phosphate SBU, which has worked throughout the year to build relationships and gain access to core target markets, predominantly in Asia. Following the signing of our joint venture agreement with Alcoa in late December 2009, Ma’aden’s aluminium team has rapidly developed an exceptional working relationship with their Alcoa counterparts as they work towards the two phase delivery of the region’s first integrated aluminium project. The financing for the first phase, consisting of the smelter and rolling mill was completed and construction work at Ras Al-Khair is already under way. We anticipate closing the financing for phase two, the mine and refinery, in the second half of 2011. First production from the smelter and rolling mill is expected in 2013, with the mine and refinery coming on stream in 2014. The project will be among the world’s most technologically advanced aluminium complexes, as well as having one of the lowest production costs, which will enhance our global competitiveness and protect us against any potential weakening in aluminium prices.
Investing in growth
Annual Report 2010
4 Ma’aden was the winner of the following awards during the reporting period: >> BMG Transparency Award 2010 On January 16, 2011 Ma’aden was one of the ten Saudi companies that has received the 2010 Transparency Award. The Transparency Award is given to companies listed on the Saudi Stock Exchange that enjoy the highest level of transparency. >> Middle East Investor Relations Society Awards On October 21, 2010 Ma’aden was one of five Saudi companies that were selected as leading companies for Investor Relations in Saudi Arabia. This award recognise the efforts of regional companies and Investor Relations professionals to continuously raise standards to the levels required by investors around the globe. >> 2010 Euro Money Transactions of the Year The transaction securing the financing for phase 1 of the aluminium project was a big success with 16 banks participating. The transaction, comprising US$7.3 billion non-recourse financing was concluded at the unprecedented terms of LIBOR +5 bps, was awarded the 2010 Euro Money Transaction of the Year.
We have also made significant progress at Ma’aden’s Gold operations, which are set to deliver long-term growth. The projects at As Suq and Ad Duwaihi are in the final stages of feasibility study as is the water pipeline to supply those sites, carrying treated waste water from Taif. Other CAGR sites including Mansourah, Massarah and Ar Rjum will begin pre-feasibility study assessments in 2011. With these projects we are on track to expand gold production to over 400,000 ounces by 2015, from this year’s figure of 143,925 ounces, representing a very bright future for Ma’aden’s gold operations. The outlook for industrial minerals in the Kingdom remains very positive and through our low-grade bauxite and kaolin operation at Az Zabirah and the magnesite project, Ma’aden is well placed to benefit from robust prices and strong market fundamentals. Ma’aden’s exploration programme is an important part of our growth strategy to build a sustainable business with long-term upside and benefits. Our exploration teams have implemented extensive work programmes aimed at expanding our resource base across commodities at existing projects, whilst increasing confidence in our resource base with a view to providing long-term growth and supporting our plans to increase production across the business. As part of our exploration programme, we will continually be working to identify new prospects to expand Ma’aden’s mineral portfolio into new areas including base metals. Safety across Ma’aden is of paramount importance therefore, the significant reduction in lost time injuries frequency rate (“LTIFR”) amongst Ma’aden employees in 2010 was encouraging. Efforts will continue across the Group to improve our safety performance further through improved standards and policies and compliance audits. Ma’aden seeks to achieve growth, while maintaining and enhancing its standards relating to sustainable development practices and compliance reporting guidelines. In order to achieve this, our CSR Steering Committee is working to align the Group’s operations to the ten principles of the Sustainable Development Framework of the ICMM with a view to possible future membership. We see this as an important step towards ensuring adherence to international best practice throughout all areas of our business. To nurture its growth, Ma’aden will continue to prioritise the development of talent among existing employees and the creation of a wider minerals industry related skills base in the Kingdom of Saudi Arabia. Through initiatives such as the Mining Polytechnic in Arar, which Ma’aden is developing in conjunction with the Technical and Vocational Training Corporation (“TVTC”), we are committed to Saudisation and the development of the Kingdom’s best young talent to help us deliver the growth to make mining the third pillar of the Saudi economy. Engr. Khalid Bin Saleh Al-Mudaifer President and CEO
Annual Report 2010
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Corporate governance 6 Directors’ report 2010 12 Corporate governance 13 Chief Financial Officer’s review
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
6
Directors’ report 2010
The Board of Directors of Ma’aden is pleased to submit to the Company’s shareholders our integrated annual report for the year ended December 31, 2010, which highlights Ma’aden’s accomplishments and performance during 2010 in the areas of exploration, mining, production, marketing, and construction, as well as its endeavours to achieve its longer-term objectives to establish itself as a leading diversified mining Company. The Board would like to express its deep gratitude to the Custodian of the Two Holy Mosques and His Royal Highness the Crown Prince, for their continuous support and assistance in helping to develop the mining sector and industrial and economic development in our country. We also value the efforts of all the employees at Ma’aden and those of our business partners. Finally, we appreciate the support of our shareholders, trust of our customers, loyalty of our employees, and cooperation of all sectors with which we deal. Corporate information Saudi Arabian Mining Company (“Ma’aden”), a Saudi Arabian joint stock company, was established by Royal Decree No. M/17 dated 14 Zul Qaida, 1417 Hijri (corresponding to March 23, 1997). It is registered in the city of Riyadh under Commercial Record No. 1010164391 dated 10 Zul Qaida, 1421 Hijri (corresponding to February 4, 2001). Principal activities The principal activity of Ma’aden and its subsidiaries is to participate in various mining activities at all stages and related downstream industries. Currently, the Ma’aden’s principal activities focus on: Principal activities
Gold, base and precious metals Kaolin and low-grade bauxite Magnesite project Phosphate project
Aluminium project
Infrastructure project Caustic soda and ethylene dichloride
Current status of entity’s life cycle
Operational and commercial production Operational and commercial production In the final stages of construction, commenced start-up production and will commence commercial production in 2011 In the final stages of construction, will commence start-up production in the second quarter of 2011 and commercial production in the third quarter of 2011 In the early stages of construction and will commence commercial production in a two phased approach, with Phase 1 (smelter and rolling mill) in 2013 and Phase 2 (mine and refinery) in 2014 Under construction and meeting the time lines set for the phosphate and aluminium projects The mechanical completion of the project is expected to be in the third quarter of 2012 and the project is expected to be fully operational towards the end of the fourth quarter of 2012
Earnings available for distribution The Company’s Articles of Association requires the distribution of the annual net income after deducting all general expenses and other costs, in the following order/sequence:
>> First, set aside 10% of net annual income, as a statutory reserve. The General Assembly Meeting of shareholders may stop this when the statutory reserve has reached 50% of the Company’s issued share capital. This reserve is not available for distribution as a dividend >> Second, the holder of preference shares receives the profit percentages allocated for such shares. The Company does not have any preference shares at the moment; therefore this requirement is not applicable >> Third, based upon a Board of Directors’ recommendation, the General Assembly Meeting of shareholders may set aside a percentage of the annual net income for the year, to create any additional reserve and dedicate it for a specific purpose as determined by the General Assembly Meeting >> Fourth, from the remainder, a first payment can be distributed to the shareholders as a dividend. This payment should be equivalent to 5% of the paid-up share capital >> Fifth, the remuneration of the members of the Board of Directors is determined >> Sixth, the rest is then distributed to the shareholders as an additional share of the income After meeting the prescribed regulations established by the relevant authorities, the Company may distribute quarterly and/or semi-annual dividends. The distribution of earnings is the prerogative of the shareholders at the General Assembly Meeting, based on the recommendation received from the Board of Directors. The Board has recommended, in accordance with Article 27 b (9) of the Listing Rules, issued by the Board of the CMA based on the Capital Market Law issued under Royal Decree No. M/30m dated 2 Jamad Thani, 1424 Hijri (corresponding to November 12, 2006), that the General Assembly Meeting do not distribute any earnings, in the form of a dividend for 2010. This is in line with the Company’s stated strategy for growth as the Company is in the process of developing its mega projects and will thus require cash funds to finance the significant capital expenditure to bring these projects to commercial production. No dividend was distributed for 2009 either. Long-term borrowings In accordance with Article 27 b (12), of the Listing Rules issued by the Board of the CMA, the Board of Directors needs to disclose information relating to any borrowings of the Group and a statement of the aggregated indebtedness of the Group. MPC, a subsidiary of Ma’aden, who owned 70% and SABIC, who owned 30% as at December 31, 2010, entered into a Common Terms Financing Agreement (“CTFA”), with a consortium of financial institutions comprising of, the Public Investment Fund (“PIF”), a consortium of Islamic and commercial banks and the Saudi Industrial Development Fund (“SIDF”) amounting to SAR 14.956 billion.
Annual Report 2010
7
The following table shows the draw downs on the loans as at December 31, 2010 and 2009: 2010 Total facilities granted to Amount MPC utilised % of total (SAR million) (SAR million) borrowing
Consortium of financial institutions
Public Investment Fund Islamic and commercial banks Banque Saudi Fransi – procurement Al Rajhi Bank The Export Import Bank of Korea Korea Export Insurance Corporation Mizuho Corporate Bank Total Islamic and commercial banks Saudi Industrial Development Fund Total long-term borrowings
The long-term borrowing is to be utilised for the financing of the construction of MPC’s fertiliser production assets and operations. The CTFA imposed certain special conditions and financial covenants including: >> The limitation on the creation and/or obtaining additional liens and/or financing obligations by MPC, unless specifically allowed under the CTFA >> Maintaining certain prescribed financial ratios >> Limitation on the maximum capital expenditure allowed >> The restriction on dividend distribution to shareholders of MPC The maturity profile of the long-term borrowing outstanding as at December 31, 2010 is as follows:
Repayment of long-term borrowings
2010 (SAR million)
2009 (SAR million)
2012 2013 2014 2015 In years ending thereafter Total
793 844 925 999 9,956 13,517
485 501 711 775 6,311 8,783
Payments for any zakat, taxes, duties or other charges In accordance with Article 27:b. (20) of the Listing Rules, issued by the Board of the CMA, the Board of Directors needs to issue a statement of the amount of any outstanding statutory payments on account of any zakat, taxes, duties or other charges with a brief description and reasons.
2009 Amount utilised % of total (SAR million) borrowing
4,000
3,638
27
2,233
25
4,270 2,344 1,500 750 1,492 10,356 600 14,956
3,878 2,338 1,359 750 1,014 9,339 540 13,517
29 17 10 5.5 7.5 69 4 100
2,363 1,471 1,347 750 619 6,550 – 8,783
27 17 15 9 7 75 – 100
2010 (SAR million)
2009 (SAR million)
207 55 6 3 271
269 44 4 3 320
Zakat payable Severance fees payable Withholding taxes due on contracts Social insurance Total
In accordance with the mining code, based on the Royal Decree No.47/M, dated 20 Sha’aban, 1425 Hijri (corresponding to October 4, 2004), the Group is required to pay to the Government of Saudi Arabia severance fees, representing 25% of the annual net income, as defined, or the equivalent of the actual of a hypothetical tax, as defined, whichever is the lower. The zakat due to the Government shall be deducted in calculating the final severance fee amount. The operating mining companies are subject to zakat, in accordance with the regulations of the Department of Zakat and Income Tax (the DZIT) at 2.5% of the higher of the approximate zakat base or the adjusted net income for the year. Governance structures and Board responsibility The framework for Ma’aden’s Corporate Governance is set by the provisions of the Saudi Arabian Capital Market Law, the Company’s Articles of Association and the Corporate Governance Regulations in the Kingdom of Saudi Arabia, issued by the CMA. The Company has complied with the provisions of Articles 1 (c) and 9 (a) of the Corporate Governance Regulations issued by the CMA and they are all included in the Company’s Article of Association and policies.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
8
Directors’ report 2010
Manuals, charters and policies
Corporate Governance Ref#
Current status
Audit Committee Charter Executive Committee Charter Nomination and Remuneration Committee Charter Board of Directors Manual Conflict of Interest and Business Conduct Guidelines Suppliers Code of Conduct and Ethics Manual Shareholders Manual Corporate Governance Communication Policy Disclosure and Transparency Policy Corporate Social Responsibility Policies Corporate Social Responsibility Steering Committee Charter Compliance Policies and Procedures Manual Management Committee Charter
Article 14 None Article 15 Article 12 Article 18/Listing Rules Article 27 (17) None None None Article 8 Article 10 (c) and (e) None None None
Implemented Implemented Implemented Implemented Developed* Developed* Developed* Developed* Developed* Developed* Developed* Developed* Developed*
* The manuals, charters and policies have been developed by an external consultant and are currently being reviewed and comments are being received for discussion with the consultant before the final approval ahead of implementation.
As part of the implementation of a corporate governance structure various manuals, charters and policies have either been developed and approved or are currently under development. The table above shows the current status of the manuals, charters and policies: The primary responsibility of the Board is to provide effective oversight over Ma’aden’s affairs for the benefit of its shareholders and to balance the interests of its stakeholders, such as its customers, employees, suppliers and local communities. The Board is responsible for reviewing the development and execution of strategies, reviewing the selection, performance and compensation of the Chairman, President and Chief Executive Officer (“CEO”) and senior executives and ensuring transparency of communication and disclosure of financial and non-financial information, including establishing an effective audit process. The Board has set the vision for Ma’aden, provided direction and determined the most appropriate capital structure for Ma’aden. The Board will ensure that sufficient management resources are allocated to assure effective internal controls, appropriate policies and systems for managing risks, execution of the Company’s strategy, financial control and compliance. The Board will review succession plans and management development programmes for the President and CEO and senior management (Vice Presidents and Executive Directors). There were no removals, resignations or retirements of Directors in 2010. Board committees In accordance with Articles 9 (d) and 13 of the Corporate Governance Regulations issued by the Board of the CMA, the Board of Ma’aden has set-up the following sub-committees of the Board; Audit Committee The Audit Committee formed by the Board of Ma’aden, in accordance with Article 9(d) and 14 of the Corporate Governance Regulations issued by the Board of the CMA, consists of five members under the Chairmanship of H.E. Mohammed bin Abdullah Al-Kharashy. The other Board members on the committee are: >> Engr. Khalid Bin Hamad Al-Senani >> Dr. Ziad Bin Abdulrahman Al-Sudairy
The following non-Board members were co-opted onto the Audit Committee: >> Dr. Saad Al-Rouaita >> Engr. Abdullah Bin Mohammed Al-Fayez The Audit Committee has adopted a formal charter, which was approved by the Board of Directors, recommended by them to the General Assembly Meeting of shareholders and was approved in the General Assembly Meeting of shareholders. The Audit Committee charter meets the requirements of CMA and is reviewed annually and changes made, if required. To achieve its objectives, the Audit Committee performs its tasks, which include, but are not limited to, the following: >> Overseeing the Group’s internal audit department to ensure efficiency in performing its activities and tasks assigned by the Board of Directors >> Reviewing the internal audit plan and procedures, including the views and recommendations of the committee in this regard >> Reviewing internal audit reports and pursuing corrective procedures for the weaknesses identified >> Recommending to the Board of Directors the appointment or termination of services, and fees of external auditors, taking their independence into account >> Following-up on the external auditors’ engagement, and approving any activities beyond the audit scope of work assigned to them during the performance of their duty >> Reviewing the audit plan with the external auditor and commenting on it >> Reviewing the external auditor’s comments on the financial statements, and follow-up on the measures taken in this regard >> Reviewing the quarterly and annual financial statements before presenting them to the Board of Directors, along with the committee’s recommendations >> Reviewing the accounting policies adopted by the Group and submitting their recommendations thereon to the Board of Directors
Annual Report 2010
9
Members of the Audit Committee
H.E. Mohammed Bin Abdullah Al-Kharashi – Chairman Engr. Khalid Bin Hamad Al-Senani Dr. Ziad Bin Abdulrahman Al-Sudairy Dr. Saad Bin Saleh Al-Rouaite Engr. Abdullah Bin Mohammed Al-Fayez
Status
Meetings attended during 2010
Non-executive
9
Non-executive
8
Non-executive Non-Board member
7 8
Non-Board member
9
Nomination and Remuneration Committee The Nomination and Remuneration Committee formed by the Board, in accordance with Articles 9 (d) and 15 of the Corporate Governance Regulations issued by Board of the CMA consist of three members under the Chairmanship of Engr. Abdullah Bin Saif Al-Saif. The other Board members on the committee are: >> Mr. Mansour Bin Saleh Al-Maiman >> Dr. Abdulaziz Bin Saleh Al-Jarbou >> Dr. Abdallah Bin Essa Al-Dabbagh The Nomination and Remuneration Committee has adopted a formal charter, which was recommended by the Board of Directors, to the General Assembly and was approved in the General Assembly Meeting of shareholders. The Nomination and Remuneration Committee charter meets the requirements of CMA and is reviewed annually and changes made, if required. The Nomination and Remuneration Committee identifies screens and recommends candidates as members to the Board. The committee assists the Board in ensuring that the structure, size, effectiveness and composition of the Board and its committees: >> Are reviewed regularly >> Comprise of the requisite mix of skills, experience, diversity and other qualities >> Are aligned with the strategic direction and requirements of Ma’aden >> Meet the requirements of sound corporate governance Further the Nomination and Remuneration Committee: >> Approves policies on remuneration of members of the Board of Directors for their services >> Determines fixed and variable remuneration for Executive Directors and senior executives >> Ensures the implementation of policies and practices to attract and retain the best talent at executive level >> Ensures the provision of fair, equitable and competitive conditions of employment across Ma’aden >> Ensures the effectiveness of a comprehensive talent management process, encompassing employee development and succession planning >> Benchmarks remuneration practices against both local and international best practice >> Monitors retirement benefits >> Recommends fees for Non-executive directors to the Board for approval by shareholders at the General Assembly Meeting
The Nomination and Remuneration Committee ensures that: >> The Board, its Directors and its sub-committees are assessed regularly >> Proposing adjustments to the Board and its sub-committees, as appropriate >> Planning for the succession of President and CEO, Vice Presidents and Executive Directors >> Recommending appointments and re-elections of Directors >> Ensuring independence of the Board’s independent members >> Establishing a formal induction process and ensuring that a training and development programme is in place for Board members >> Ensuring that an assessment of the Board committees, the Chairman of the Board and the Chairmen of the sub -committees takes place during the year The Company’s remuneration policy is determined by this committee and it strives for competitive and fair compensation in recognising and rewarding individual and team achievements that contribute to attracting, retaining and motivating employees, organisational growth and prosperity. During the year under review, the committee’s performance and effectiveness were evaluated by the Board. As a result of that evaluation, the Board is satisfied that the committee has complied with its charter. The Committee is required to meet at least twice a year. Five meetings were held during the financial year ended December 31, 2010.
Members of the Nomination and Remuneration Committee
Status
Engr. Abdallah Bin Saif Al-Saif – Chairman Mr. Mansour Bin Saleh Al-Maiman Dr. Abdulaziz Bin Saleh Al-Jarbou Dr. Abdallah Bin Essa Al-Dabbagh
Non-executive Non-executive Non-executive Executive
Meetings attended during 2010
5 5 5 5
Executive Committee The Executive Committee is formed by the Board of Ma’aden, in accordance with Article 9 (d) and Article 12 of the Corporate Governance Regulations issued by the Board of the CMA and consists of three members under the Chairmanship of Engr. Abdallah Bin Saif Al-Saif. The other Board members on the committee are: >> Mr. Sultan Bin Jamal Shawli >> H.E. Soliman Bin Saad Al-Humayyd >> Dr. Abdullah Bin Essa Al-Dabbagh The Executive Committee has adopted a formal charter which was recommended by the Board of Directors, to the General Assembly and was approved in the General Assembly Meeting of shareholders. The charter is reviewed annually and changes made, if required. The Executive Committee has the rights to exercise all authorities delegated by the Board of Directors and substantially perform the role of the Board, within the defined constraints, between meetings of the full Board. The exercise of such authority does not prejudice the authority reserved for the full Board.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
10
Directors’ report 2010
The Executive Committee supports the development of policies and ensures the alignment and continuous implementation of key priorities and strategies across the organisation. The committee reviews and approves or recommends to the Board for approval: >> Ma’aden’s strategies and objectives >> Long-, medium- and short-term business, financial and operating plans >> Major projects/expansions in line with approved strategies and plans >> Policies and procedures (except for those related to accounting and compensation and benefits policies which shall be reviewed and approved by the Audit Committee and the Nomination and Remuneration Committee respectively) >> Prioritisation and allocation of resources The committee also monitors the operating and financial performance of the Group. During the year under review, the committee’s performance and effectiveness were evaluated by the Board. As a result of that evaluation, the Board is satisfied that the committee has complied with its charter.
Meetings attended during 2010
Members of the Executive Committee
Status
Engr. Abdallah Bin Saif Al-Saif – Chairman Engr. Sultan Bin Jamal Shawli H.E. Soliman Bin Saad Al-Humayyd Dr. Abdallah Bin Essa Al-Dabbagh – President and CEO
Non-executive Non-executive Non-executive
2 2 2
Executive
2
The Chairman and members of the Board of Directors
Salaries and remuneration Allowances Periodic and year bonus Remuneration due to achievements Any other remuneration paid on monthly/year basis Total
Top five executives who are receiving highest bonus and remuneration* SAR
– 57,000 200,000
– 396,000 1,520,000
6,734,712 2,357,149 3,840,185
–
–
–
– 257,000
300,000 2,216,000
8,662,133 21,594,179
* The CEO and CFO are included in the top five.
May 18, 2010
Reasons for the penalty
Late notification of no dividend payment for the year ended December 31, 2009 January 30, Confidentiality breach by placing 2011 an announcement of the delay in the phosphate project on the Company’s website, without notifying the CMA in advance Total
2010 SAR
2009 SAR
100,000
–
100,000
–
200,000
–
The Internal Audit Department of the Group, in collaboration with the consulting firm Deloitte-Baker Abu Al-Khair, conducted ongoing internal audits during the year under review, to verify the efficiency and effectiveness of the internal control system in protecting Ma’aden’s assets, assessing business risks, and measuring performance adequacy. The audits, referred to above, did not show any fundamental or influential weakness in the internal control system. The external auditor was granted access to all the Audit committee’s records and the Internal Audit Department’s reports for the financial year ended December 31, 2010. The Audit Committee exercised its mandate in discussing the relevant observations by both external and internal audit as contained in their respective reports for establishing the corrective actions by the concerned departments, and developing the necessary time plan to implement and follow-up on the said corrective actions.
Compensation and remuneration paid In accordance with Article 9 (e) of the Corporate Governance Regulations issued by the CMA, details of compensation and remuneration paid to each of the following:
Classification
Date of penalty
Results of the annual audit of the effectiveness of the internal controls In terms of Article 9 (g) of the Corporate Governance Regulation issued by the CMA, Ma’aden must disclose the results of the annual audit of effectiveness of the internal control.
The committee meets when it is necessary to discharge its responsibilities. Two meetings were held during the financial year ended December 31, 2010.
NonExecutive executive member of member of the Board the Board of Directors of Directors SAR SAR
Penalties paid In terms of Article 9 (f) of the Corporate Governance Regulation issued by the CMA, Ma’aden must disclose any penalty or punishment imposed on Ma’aden by the CMA, or any other supervisory or regulatory or judiciary body. Provide a list and reasons for the penalty.
Annual Report 2010
11
Declaration of a conflict of interest by Board members Ma’aden has not signed any contract, in which any member of the Board of Directors, the CEO, the Chief Financial Officer, or any person related to them had a declared conflict of interest, as required in terms of Article 18 of the Corporate Governance Regulation and Article 27 (b) 17, of the Listing Rules issued by the CMA. If in rare cases a Director does have an interest in a contract to be concluded, he must declare his interest in advance of the meeting where it will be discussed, and excused himself from the Board meeting during the discussion of the contract.
Pursuant to the Corporate Governance Framework adopted by the General Assembly of Ma’aden and all its subsidiaries the Company has issued a “Conflict of Interest, Business Conduct and IT Guideline”, which outlines the general guiding principles and procedures to be followed by the Company’s personnel at all levels. Each employee, including the Directors, are required to sign an annual self-declaration of compliance with these guidelines.
Subsidiary companies incorporated and operating in the Kingdom of Saudi Arabia The information disclosed below is required by Article 27 (b) 7, of the Listing Rules, issued by the CMA. Name of subsidiary company
Ownership percentages
Headquarters
Main business
Ma’aden Gold and Base Metals Company Ma’aden Phosphate Company
100% owned by Ma’aden 70% owned by Ma’aden 30% owned by SABIC 100% owned by Ma’aden 100% owned by Ma’aden 74.9% owned by Ma’aden 25.1% owned by Alcoa 74.9% owned by Ma’aden 25.1% owned by Alcoa
Jeddah Jubail
Gold mining and exploration Phosphate mining and fertiliser producer
Riyadh Riyadh Khobar
Provider of supporting infrastructure services Mining and processing industrial minerals Production of aluminium products
Khobar
Production of aluminium sheets
Ma’aden Infrastructure Company Ma’aden Industrial Minerals Company Ma’aden Aluminium Company Ma’aden Rolling Company
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
12
Corporate governance Regulatory environment The Corporate Governance Regulations issued by the CMA of the Kingdom of Saudi Arabia includes the rules and standards that regulate the management of joint stock companies listed on the Saudi Arabian Stock Exchange. The objective is to ensure compliance by these joint stock companies with the best governance practices in order to protect of shareholders’ rights, as well as the rights of other stakeholders. The Company, in its Articles of Association and by-laws, creates the mechanism for the shareholders to exercise their rights during General Assembly Meetings. The shareholders at the General Assembly Meeting appoint the Board of Directors. The formation, composition and responsibilities of the Board of Directors, is clearly governed by the Company’s Articles of Association and the Corporate Governance Regulations in the Kingdom of Saudi Arabia. The ultimate responsibility for the management of the Company rests with the Board of Directors, which includes the drafting of a Corporate Governance Code for the Company that does not contradict the Corporate Governance Regulations. The Board of Directors has discharged their obligation by: >> Creating three sub-committees of the Board, i.e. the Audit Committee, the Nomination and Remuneration Committee and the Executive Committee >> Overseeing the developing, approving and implementing of manuals, charters and policies The Board of Directors is actively involved in implementing a Corporate Governance Framework in line with the Corporate Governance Regulations issued by the CMA and leading international Corporate Governance practices. Governance practices The Board is committed to the establishment of an effective and efficient Corporate Governance Framework in line with the Corporate Governance Regulations issued by the CMA. Management has contracted an international independent consultant to assist in the development of manuals, charters and policies that would ensure the establishment of an effective compliance framework and processes. The current Ma’aden Board members were elected at the June 7, 2008 Board meeting by the then sole shareholder, the Government of Saudi Arabia, in advance of the Company’s IPO. All nominees had extensive and varied industrial or government experience in the Kingdom at a senior level and were members of Boards of other prominent companies in the Kingdom. A Nomination and Compensation Committee reviewed all the candidates’ qualifications put forward for senior executive positions prior to their appointment. The current Ma’aden Board of Directors was formed in October 2008 for a three year term shortly after the IPO.
The Board reviews Ma’aden’s performance report every quarter and at the year end. The performance report covers all aspects of Ma’aden’s business, ranging from: financial, operational, projects development and construction, future growth and opportunities, health, safety and environment, corporate social responsibility, compliance performance and risks facing Ma’aden and mitigation plans in place. Ma’aden’s Internal Audit Department reports directly to the Audit Committee, on the internal audit activities carried out across the Group. All material internal audit findings and recommendations are discussed with the Audit Committee, and the implementation of recommendations are followed up. A CSR task force has been established at Ma’aden in September 2007 to develop and recommend Ma’aden’s CSR strategies and policies and an implementation plan. The overall objectives are to ensure Ma’aden is a good corporate citizen in all the communities it operates and to demonstrate Ma’aden’s leadership in CSR to all stakeholders and the wider international business community. The CSR pillars that Ma’aden based its strategy and approach on are ethics, health, safety and environment, commitment to employees and commitment to the community. The Investor Relations Department has continuous dialogue with the investor community at large, concerning their questions, suggestions and expectations of the Company. Sensitive feedback that is received is channelled to the President and CEO, who in turn, brings them to the attention of the Board for discussion and direction. Employees are encouraged to discuss their concerns and recommendations with their immediate supervisors. Feedback that is received is channelled to the President and CEO, who in turn, brings them to the attention of the Board for discussion and direction. Ethics related to the Board of Directors A Board member shall not, without the prior authorisation from the General Assembly, to be renewed each year, have any contractual interest (whether directly or indirectly) in Ma’aden’s business and contracts. A Board member should notify the Board in advance of any personal interest that he might have and such notification shall be recorded in the minutes of the meeting.
Annual Report 2010
13
Chief Financial Officer’s review Despite very challenging global market conditions, Ma’aden is in good shape to deliver on its balanced growth strategy. 2010 was a year of capacity building to deliver future mega projects and wealth creation through our phosphate and aluminium businesses. Ma’aden is currently undergoing a transformational stage, as future revenues will no longer be solely reliant on the gold business, as it will be driven by phosphate, in the short term, until aluminium revenues come on stream. Short-term negative cash flows are typical for a business in this growth stage and the resulting loss of SAR 14 million for the financial year of 2010 reflects the costs associated with a capacity building stage. Prudent cash management and financing initiatives will be required in 2011 and beyond, with Ma’aden likely to seek additional financing during 2011. This will be required to further drive Ma’aden’s mega projects, which will in turn drive future revenues to deliver Ma’aden’s balanced growth strategy.
Consolidated income statement for the year ended December 31, 2010
Consolidated income statement line items (in millions)
Sales Cost of sales Gross profit General and administrative expenses Technical, exploration and other operating expenses Operating profit Provision for severance fees Other income Income from short-term investments Net income before zakat Provision for zakat Net (loss)/income for the year Net (loss)/income attributable to shareholders of the parent company Non-controlling interest’s share of current year’s loss in a subsidiary company
Basic and diluted (loss)/earnings per share from continuing operations (SAR) Weighted average number of ordinary shares in issue during the year (in millions) Gross profit % EBITDA
Explanatory note
1 2 3
4 5 6 7
8
9
Variance % change SAR y-o-y
2010 SAR
2009 SAR
706 (321) 385 (214) (92) 79 (55) – 169 193 (207) (14) (9) (5) (14)
634 (306) 328 (160) (80) 88 (44) 300 315 659 (269) 390 395 (5) 390
72 (15) 57 (54) (12) (9) (11) (300) (146) (466) 62 (404) (404) – (404)
11 (5) 17 (34) (15) 10 (25) (100) (46) (70) 23 (104) (102) – (104)
(0.01) 925 54.5 121
0.43 925 51.7 151
(0.44) – 2.8 (30)
(102) – 5 (20)
The table above discloses the movement on a y-o-y basis, and only those movements that are significant in monetary terms (i.e. more than 10%) are being analysed and discussed in the corresponding footnotes.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
14
Chief Financial Officer’s review 1. Sales 2010
2009
Components of sales (in millions)
SAR
%
SAR
%
Gold sales Zinc sales Low-grade bauxite sales Total sales
642 34 30 706
91 5 4 100
589 11 34 634
93 2 5 100
Variance % change SAR y-o-y
53 23 (4) 72
9 209 (12) 11
Geographical analysis of total sales for the year ended December 31, 2010 In terms of Article 27: b. (4) of the Listing Rules issued by the CMA, Ma’aden needs to provide a geographical analysis of the consolidated turnover of the Group and the turnover of the subsidiaries outside of the Kingdom of Saudi Arabia. None of the consolidated turnover of the Group originates from the subsidiaries outside of the Kingdom of Saudi Arabia. Sales breakdown between international and domestic sales for the year ended December 31, 2010
Components of sales breakdown
International sales Gold (ounces) Zinc (tonnes) Total international sales Domestic sales Gold (ounces) Low-grade bauxite (tonnes) Total domestic sales Total sales Gold (ounces) Zinc (tonnes) Low-grade bauxite (tonnes) Total sales for the year
2010 Value SAR Quantity (in millions)
140,028 4,297 –
2009 Quantity
Variance Value SAR (in millions)
% change y-o-y
467 11 478
12,619 2,265 –
175 23 198
37 209 41
35,000 247,332 –
122 34 156
(35,000) 36,827 –
(122) (4) (126)
(100) (12) (81)
162,409 2,032 247,332 –
589 11 34 634
(22,381) 2,265 36,827 –
53 23 (4) 72
9 209 (12) 11
Quantity
Value SAR (in millions)
642 34 676
127,409 2,032 –
– 284,159 –
– 30 30
140,028 4,297 284,159 –
642 34 30 706
The table above discloses the movement on a y-o-y basis which is self explanatory. The actual gold sales for 2010 were 22,381 ounces less than in 2009; however the average realised price per ounce sold was US$1,223, an increase of US$256 compared to the realised price of US$967 for 2009. A 14% decrease in the physical quantities of gold sold, on a y-o-y basis, was off-set by the 26% increase in the average realised sales price, which resulted in an increase in gold sales revenue of 9% y-o-y. The implementation of programmes aimed at improving operational efficiencies and cost controls are expected to have a positive and material impact on gold sales volumes during 2011.
Annual Report 2010
15
Gold ounces and zinc tonnes sold by mine 2010 Steady state mines
Mahd Ad’ Dahab mine Al Amar mine Bulgah mine Sukhaybarat mine Al Hajar mine Total gold ounces sold Al Amar zinc sold
Ounces
49,556 46,236 23,133 11,911 9,192 140,028 4,297 (tonnes)
2009 %
Ounces
%
35 33 17 9 6 100 –
58,170 60,039 17,001 16,706 10,493 162,409 2,032 (tonnes)
36 37 11 10 6 100 –
Variance % change Ounces y-o-y
(8,614) (13,803) 6,132 (4,795) (1,301) (22,381) 2,265 (tonnes)
(15) (23) 36 (29) (12) (14) 111
The volume of zinc sales increased by 111% from 2,032 tonnes in 2009 to 4,297 tonnes in 2010, which when combined with an increase in the average realised price of US$560 (36%) per tonne to US$2,129 in 2010 (compared to US$1,569 per tonne in 2009), resulted in an increase in sales revenue of 209% y-o-y. The volume of low-grade bauxite sales increased by 15% or 36,827 tonnes during 2010, but sales revenue decreased by SAR 4 million (or 11%) due to a decrease in the selling price in order to be competitive in the market. However there was an increase in our portfolio of customers for low-grade bauxite. 2. Cost of sales 2010 Components of cost of sale (in millions)
SAR
Personnel cost Contracted services Repairs and maintenance Consumables Overheads Sale of by-products Total cash operating cost Depreciation Amortisation Total operating costs Increase in metal inventory Cost of sales
96 48 21 83 26 (36) 238 74 16 328 (7) 321
2009 %
30 15 6 26 8 (11) 74 23 5 102 (2) 100
SAR
%
83 44 20 69 25 (30) 211 82 23 316 (10) 306
27 14 7 23 9 (10) 70 26 7 103 (3) 100
Variance % change SAR y-o-y
13 4 1 14 1 (6) 27 (8) (7) 12 3 15
16 9 5 20 4 (20) 12 (10) (30) 4 30 5
Gold ounces and zinc tonnes produced by mine 2010 Steady state mines
Mahd Ad’Dahab mine Al Amar mine Bulgah mine Sukhaybarat mine Al Hajar mine Total gold ounces produced Al Amar zinc produced
Ounces
50,940 47,941 25,110 10,709 9,225 143,925 4,218 (tonnes)
2009 %
Ounces
%
35 33 18 8 6 100 –
53,697 58,208 17,781 16,139 10,344 156,169 4,952 (tonnes)
34 37 12 10 7 100 –
Variance % change Ounces y-o-y
(2,757) (10,267) 7,329 (5,430) (1,119) (12,244) (734) (tonnes)
(5) (18) 41 (34) (11) (8) (15)
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
16
Chief Financial Officer’s review Gold ounces produced in 2010 were 12,244 ounces, (which is 8%) lower than the 156,169 ounces produced in 2009, and mainly due to a lower recovery at the Sukhaybarat and Al Amar mines (of 26% and 3.4% respectively) and a lower gold grade of 1.30 g/t. At Al Hajar, heavy rains in February 2010 caused the flooding of the entire crushing section of the mine, which consequentially caused an electric power outage for three days and also damage the hydraulic system of the crusher and compressor, which had a material impact on production at the mine. Ma’aden was successful in managing its cost base at its gold operations during 2010, in line with expectations, as the average net cash cost per ounce produced in 2010 was US$382 per ounce, which was US$76 per ounce higher than the net cash cost per ounce produced in 2009 of $306 per ounce. This was due mainly to an increase in the overall net production cost of SAR 9.4 million y-o-y and an overall decrease in gold production of 8% or 12,244 ounces. Zinc production in 2010 was lower by 734 tonnes compared to 2009 due to a lower recovery of 4.81% (actual 2010: 57.6%; actual 2009: 62.4%) and a lower zinc feed grade of 0.39% (actual 2010: 4.38% in ore mined; actual 2009: 4.96% in ore mined). The decline in the zinc recovery rate is due to a number of technical and mechanical problems encountered during the year, which resulted in a loss of efficiency in the zinc flotation plant. These issues have now been identified and will be addressed as part of the Company’s focus on improving production and operating efficiencies in 2011. 3. General and administrative expenditure General and administrative expenses increased by SAR 54 million or 34% when compared with 2009, with SAR 34 million of the increase being attributable to an increase in salaries and staff related benefits as a direct result of the increase in the numbers of employees to facilitate the balanced growth strategy. SAR 6 million of the increase is as a result of an increase in depreciation and amortisation charges relating to assets that are not employed in the productive mining operations itself.
4. Provision for severance fees In accordance with the Mining Investment Code, based on the Royal Decree No. 47/M dated 20 Sha’aban 1425 Hijri (corresponding to October 4, 2004), Ma’aden is required to pay to the Government of Saudi Arabia severance fees calculated at 25% of the annual net income, as defined, of each of the operating gold and low-grade bauxite mines. The provision for severance fees for 2010 amounted to SAR 55 million, compared to SAR 44 million for 2009, and is after the deduction of the provision for zakat payable for the same year. 5. Other income Ma’aden received a one-off fee of SAR 300 million in December 2009 following the signing of the joint venture agreement with Alcoa Inc, which comprised the entry payment receipt from Alcoa Inc. for the opportunity to participate in the aluminum joint venture project. 6. Income from short-term investments Income from short-term investments decreased by SAR 146 million or 46% when compared to 2009 and this is mainly due to the following: >> Investment income in 2009 includes investment income interest earned on time deposits placed in 2008, but with a maturity date in 2009, bearing an average commission rate of 5% per annum >> The average commission rate earned in 2010 was 0.971%, compare to an average commission rate of 2% per annum earned from time deposits in 2009 7. Provision for Zakat The provision for zakat for the 2010 financial year amounted to SAR 207 million and the same provision for the corresponding 2009 financial year amounted to SAR 269 million. Due to the decline in the taxable income from 2009 to 2010, the provision for zakat calculated at a rate of 2.5% of the taxable income has also declined by SAR 62 million compared to 2009. The 2009 provision was paid in full during 2010. 8. Basic and diluted (loss)/earnings per share from continuing operations The basic and diluted (loss)/earnings per share is calculated by dividing the (loss)/income attributable to the shareholders of the parent company by the weighted average number of ordinary shares in issue during the financial year under review.
9. EBITDA The non-recurring items – comprising of items that are of a non-recurring nature, is not sustainable and due to their significance have a distorted effect on the normal earnings pattern – are detailed in the table below.
EBITDA is calculated as follows:
Explanatory note
Net (loss)/income for the year
2010 SAR
2009 SAR
Variance % change SAR y-o-y
(14)
390
(404)
(104)
– (169) 207
– (315) 269
– 146 (62)
– 46 (23)
Depreciation
77
84
(7)
(8)
Amortisation Non-recurring items Once-off entry payment receipt from Alcoa for the opportunity to participate in the aluminum joint venture project with Ma’aden
20
23
(3)
(13)
–
(300)
300
100
121
151
(30)
(20)
Interest expense Interest income from short-term investments Provision for zakat
EBITDA
6 7
5
Annual Report 2010
17
Consolidated balance sheet as at December 31, 2010
Consolidated balance sheet line items (in millions)
Current assets Non-current assets Property, plant and equipment Pre-operating expenses and deferred charges Capital work-in-progress Total assets Current liabilities Other non-current liabilities Long-term borrowings Total liabilities Equity attributable to shareholders of the parent company Non-controlling interest Total shareholders’ equity Total liabilities and shareholders’ equity 10. Current assets, cash and cash equivalents Current assets comprise primarily of cash and cash equivalents of SAR 2,922 million (2009: SAR 3,371 million) and short-term investments with commercial banks totalling SAR 8,784 million (2009: SAR 8,170 million). The cash balances arose as a direct result of the IPO in July 2008, and will be utilised to fund the major capital projects that Ma’aden is involved with. 11. Capital work-in-progress The capital work-in-progress comprised of all the ongoing capital projects that the three strategic business units are involved with i.e. precious metals, phosphate and industrial minerals and aluminium. As at December 31, 2010, a total of SAR 17,645 million (2009: SAR 14,716 million) directly relates to MPC’s phosphate project.
Explanatory note
2010 SAR
2009 SAR
10
12,429 86 212 2,007 19,983 34,717 2,297 196 13,517 16,010 16,573 2,134 18,707 34,717
12,131 19 251 1,420 15,409 29,230 1,906 177 8,783 10,866 16,582 1,782 18,364 29,230
11 12 13
14
Variance % change SAR y-o-y
298 67 (39) 587 4,574 5,487 391 19 4,734 5,144 (9) 352 343 5,487
2 353 (16) 41 30 19 21 10 54 47 – 20 2 19
12. Current liabilities Current liabilities comprise predominantly of project payables and accrued expenses in respect of contractual liabilities and obligations arising from MPC and other capital projects. 13. Long-term borrowings The increase in the long-term borrowings is as a result of additional draw downs amounting to SAR 4,734 million, (from the approved facilities at the following institutions: PIF SAR 1,404 million, Islamic and commercial banks SAR 2,790 million and SIDF SAR 540 million) to finance the capital work-in-progress of MPC. These facilities are subject to very strict financial performance conditions and covenants.
14. Non-controlling interest The increase in non-controlling interest is as a result of the issuing of shares in the aluminium joint venture companies and Alcoa taking up their 25.1% share of the share capital amounting to SAR 357 million (2009: SAR 1,148 million relating to SABIC’s share in MPC), less their share of the current-year’s loss in the subsidiaries of SAR 5 million. Consolidated cash flows for the year ended December 31, 2010
Consolidated cash flow line items (in millions)
Cash and cash equivalents at the beginning of the year Net cash generated from operating activities Net cash (utilised in)/from investing activities Net cash generated from financing activities Net change in cash and cash equivalents for the year Cash and cash equivalents at the end of the year
Abdulah Bin Ibrahim Al-Fallaj Chief Financial Officer Riyadh, Kingdom of Saudi Arabia February 22, 2011
Explanatory note
10
10
2010 SAR
2009 SAR
3,371 122 (5,662) 5,091 (449) 2,922
4,145 135 (8,872) 7,963 (774) 3,371
Variance % change SAR y-o-y
(774) (13) 3,210 (2,872) 325 (449)
(18) (10) 36 36 42 (13)
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
18
Delivering growth...
through sound investment
Annual Report 2010
19
Financial statements Statement of Directors’ responsibilities Independent auditor’s report 22 Consolidated balance sheet 2 3 Consolidated statement of income Consolidated statement of changes in shareholder’s equity Consolidated statement of cash flows 27 Notes to the consolidated financial statements 5 0 Additional shareholder information 51 Company information
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
20
Statement of Directors’ responsibilities Statement of Directors’ responsibilities for the preparation and approval of the consolidated financial statements for the year ended December 31, 2010 The following statement, which should be read in conjunction with the independent auditors’ responsibilities stated in the independent auditors’ report, set out on page 87, is made with a view to distinguishing the responsibilities of the Board of Directors and those of the independent auditors in relation to the consolidated financial statements of Saudi Arabian Mining Company (Ma’aden) and its subsidiaries (the “Group”). In accordance with the Article 27(b) 22 of the Listing Rules, issued by the Capital Market Authority, applicable to companies listed on the Saudi Arabian Stock Exchange and all their subsidiary companies, the Directors need to discharge certain of their responsibilities by making these statements. The Directors are responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of the Group as at December 31, 2010, the results of its operations, changes in shareholders’ equity and cash flows for the year then ended, in accordance with accounting standards issued by the Saudi Organisation for Certified Public Accountants (“SOCPA”). In preparing the consolidated financial statements, the Board of Directors are responsible for: >> Selecting suitable accounting policies and applying them consistently >> Making judgements and estimates that are reasonable and prudent >> Stating whether SOCPA standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements >> Preparing and presenting the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future
Additional responsibilities of the Board of Directors include: >> Designing, implementing and maintaining an effective system of internal controls throughout the Group >> Maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions in which the Group operates >> Taking steps to safeguard the assets of the Group >> Detecting and preventing fraud and other irregularities The consolidated financial statements for the year ended December 31, 2010 set out on pages 88 to 115, were approved and authorised for issue by the Board of Directors on February 22, 2011 and signed on its behalf by: Engr. Khalid Bin Hamad Al-Senani Nominated by the Board Engr. Khalid Bin Saleh Al-Mudaifer President and Chief Executive Officer Mr. Abdullah Bin Ibrahim Al-Fallaj Chief Financial Officer Riyadh, Kingdom of Saudi Arabia February 22, 2011
Annual Report 2010
21
Independent auditor’s report To the shareholders of Saudi Arabian Mining Company (Ma’aden) (A Saudi joint stock company) Scope of audit We have audited the accompanying consolidated balance sheet of Saudi Arabian Mining Company (“Ma’aden” or the “Company”) and all its subsidiaries (Collectively the “Group”) as of December 31, 2010 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended, and the notes from 1 to 37 which form an integral part of the consolidated financial statements set out on pages 88 to 115. These consolidated financial statements, which were prepared by the Company in accordance with Article 123 of the Regulations for Companies and presented to us with all the information and explanations. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Saudi Arabia. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Unqualified opinion In our opinion, such consolidated financial statements taken as a whole: >> Present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2010 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in Saudi Arabia appropriate to the circumstances of the Group; and >> Comply, in all material respects, with the requirements of the Regulations for Companies and the Company’s Bylaws with respect to the preparation and presentation of consolidated financial statements PricewaterhouseCoopers By: Omar M. Al Sagga Licence Number 369 Riyadh, Kingdom of Saudi Arabia February 22, 2011
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
22
Consolidated balance sheet as at December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) Notes
2010
2009
Assets Current assets Cash and cash equivalents Short-term investments Trade and other receivables Inventories Advances and prepayments Due from Government
7 8 9 10 11 12
2,922,153,380 8,783,974,813 29,962,995 303,911,264 327,637,445 61,045,987 12,428,685,884
3,371,137,937 8,170,073,860 31,560,737 205,758,850 291,740,413 61,045,987 12,131,317,784
Non-current assets Advances and prepayments Property, plant and equipment Pre-operating expenses and deferred charges Capital work-in-progress
11 13 14 15
85,759,425 212,586,444 2,007,235,144 19,982,591,888 22,288,172,901 34,716,858,785
18,939,700 250,834,593 1,419,862,208 15,408,742,345 17,098,378,846 29,229,696,630
16 17 18.2 19
768,220,438 1,266,691,257 207,342,181 54,454,280 2,296,708,156
623,460,501 968,640,356 268,560,500 45,142,915 1,905,804,272
20 21 22
90,923,831 104,607,572 13,517,087,339 13,712,618,742 16,009,326,898
91,293,571 84,987,823 8,782,998,172 8,959,279,566 10,865,083,838
23
9,250,000,000
9,250,000,000
24 25
5,250,000,000 242,996,397 1,830,125,296 16,573,121,693 2,134,410,194 18,707,531,887 34,716,858,785
5,250,000,000 242,996,397 1,839,313,110 16,582,309,507 1,782,303,285 18,364,612,792 29,229,696,630
Total assets Liabilities Current liabilities Projects and other payables Accrued expenses Zakat payable Severance fees payable Non-current liabilities Provision for mine closure and reclamation Employee termination benefits Long-term borrowings Total liabilities Shareholders’ equity Share capital Statutory reserve Share premium Transfer of net income Retained earnings Equity attributable to shareholders of the parent company Non-controlling interest Total equity Total liabilities and equity Commitments and contingent liabilities
26
35
Annual Report 2010
23
Consolidated statement of income for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) Notes
Sales Cost of sales Gross profit Operating expenses General and administrative expenses Exploration expenses Technical services expenses Operating income Provision for severance fees Other income Income from short-term investments Income before zakat Provision for zakat Net (loss)/income for the year Net (loss)/income attributable to: Shareholders of the parent company Non-controlling interest’s share of current year’s loss in a subsidiary company Earnings per ordinary share (Saudi Riyals) Operating income per share Basic and diluted (loss)/earnings per share from continuing operations
2010
2009
27 28
706,512,774 (321,174,545) 385,338,229
634,446,351 (306,235,747) 328,210,604
29
(214,156,213) (78,156,089) (14,050,195) 78,975,732 (54,543,721) 247,295 168,259,012 192,938,318 (207,317,723) (14,379,405)
(159,673,187) (61,604,248) (18,918,597) 88,014,572 (43,550,489) 299,751,695 314,487,870 658,703,648 (268,560,500) 390,143,148
(9,187,814) (5,191,591) (14,379,405)
394,781,959 (4,638,811) 390,143,148
0.09 (0.01)
0.1 0.43
19 32 30 18.2
31
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
24
Consolidated statement of changes in shareholders’ equity for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated)
January 1, 2009 Increase in non-controlling interest Net income for the year Net income transferred to statutory reserve December 31, 2009 Net loss for the year Increase in non-controlling interest December 31, 2010
Equity attributable to shareholders of the parent company Statutory reserve Share Transfer of Retained premium net income earnings
Notes
Share capital
26
9,250,000,000 – –
5,250,000,000 – –
203,518,201 – –
1,484,009,347 – 394,781,959
16,187,527,548 – 394,781,959
– 9,250,000,000 – – 9,250,000,000
– 5,250,000,000 – – 5,250,000,000
39,478,196 242,996,397 – – 242,996,397
(39,478,196) 1,839,313,110 (9,187,814) – 1,830,125,296
– 16,582,309,507 (9,187,814) – 16,573,121,693
25
26
Total
Annual Report 2010
25
Non-controlling interest
Total
639,442,096 1,147,500,000 (4,638,811)
16,826,969,644 1,147,500,000 390,143,148
– 1,782,303,285 (5,191,591) 357,298,500 2,134,410,194
– 18,364,612,792 (14,379,405) 357,298,500 18,707,531,887
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
26
Consolidated statement of cash flows for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 2010
2009
192,938,318
658,703,648
8,447,524 77,850,130 17,566,221 54,543,721 27,413,350 (168,259,012) 106,432 1,165,457
(329,208) 84,359,012 23,223,614 43,550,489 18,333,948 (314,487,870) – –
9 10 11 16 17 18.2 19 21
1,597,742 (106,599,938) (102,716,757) 141,234,124 298,050,901 (268,536,042) (45,232,356) (7,793,601) 121,776,214
(10,505,193) (38,714,462) 508,331,807 (657,575,376) (113,973,793) – (60,135,944) (5,796,880) 134,983,792
8
(592,279,490) 146,637,549 (602,948,541) (4,613,557,956) (5,662,148,438)
(958,354,702) 385,768,709 (502,259,659) (7,796,848,308) (8,871,693,960)
4,734,089,167 357,298,500 5,091,387,667
7,962,997,916 – 7,962,997,916
(448,984,557) 3,371,137,937 2,922,153,380
(773,712,252) 4,144,850,189 3,371,137,937
Notes
Operating activities Income before zakat Adjustments for non-cash flow items: Increase/(reversal) of allowance for inventory obsolescence Depreciation Amortisation of pre-operating expenses and deferred charges (mine closure) Provision for severance fees Provision for employee termination benefits Income from short-term investments Adjustment/written-off property, plant and equipment Written-off pre-operating expenses and deferred charges Changes in working capital: Trade and other receivables Inventories Advances and prepayments Projects and other payables Accrued expenses Zakat paid Severance fee paid Employee termination benefits paid Net cash generated from operating activities Investing activities Short-term investments Income received from short-term investments Additions to pre-operating expenses and deferred charges Additions to capital work-in-progress Net cash utilised in investing activities Financing activities Proceeds from long-term borrowings received Changes in non-controlling interest Net cash generated from financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at the end of the year Non-cash flow transactions Pre-operating expenses and deferred charges transferred to capital work-in-progress Provision for mines closure charged to pre-operating expenses and deferred charges Transfer of liability to the share capital of MPC Utilisation of mines closure provision Transfer from capital work-in-progress to property, plant and equipment
10 13 14 19 21 13 14
14 15
22 26
7 7
14,15 14,20 26 20 13,15
– 3,156,073 – 3,525,813 39,708,413
9,421,793 25,148,176 1,147,500,000 – 92,597,797
Annual Report 2010
27
Notes to the consolidated financial statements for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 1. General information Saudi Arabian Mining Company (Ma’aden) (the “Company”) was formed as a Saudi joint stock company pursuant to Royal Decree No. M/17 dated 14 Zul Qaida, 1417 Hijri (corresponding to March 23, 1997) and the Council of Minister’s Resolution No. 179 dated 8 Zul Qaida, 1417 Hijri (corresponding to March 17, 1997), with Commercial Registration No. 1010164391 dated 10 Zul Qaida, 1421 Hijri (corresponding to February 4, 2001). The Company has an authorised share capital of SAR 9,250,000,000 (nine billion and two hundred fifty million Saudi Riyals) divided into 925,000,000 (nine hundred and twenty five million) ordinary shares with a nominal value of SAR 10 each. The objectives of the Company and its subsidiaries (the “Group”) are to engage in various projects related to all stages of the mining industry, including development, advancement and improvement of the mineral industry, mineral products and by-products. These activities exclude petroleum and natural gas and materials derived there from; any and all hydrocarbon substances, products, by-products and derivatives; and activities related to all stages of the oil industry and the industries associated therewith and supplementary thereto. The Group’s principal mining activities are at the Mahd Ad’ Dahab, Al Amar, Bulgah, Sukhaybarat, Al Hajar, and Az Zabira mines. Currently the Group mainly mines gold and low-grade bauxite. The Group’s major projects are phosphate, aluminium, and infrastructure and these are principally in the development stage. The objective of the phosphate project is to exploit the Al Jalamid phosphate deposits in the Kingdom of Saudi Arabia and to manufacture diammonium phosphate (“DAP”), monoammonium phosphate (“MAP”) fertiliser products and ammonia. The capital cost of the project is estimated to be SAR 21 billion. The objective of the aluminium project is to develop the bauxite mine, the aluminium refinery, smelter and rolling mill as well as a power plant for the production of aluminium and related products in the Kingdom of Saudi Arabia. In December 2009, the Company entered into an agreement with Alcoa for the development of the aluminium project. The Company has a 74.9% interest in the aluminium project, and Alcoa has a 25.1% interest. The total cost of the project is estimated to be SAR 40.5 billion, (see note 32). Alcoa also agreed to reimburse the Company for 25.1% of the aluminium project’s costs incurred by the Company before Alcoa’s participation. As of December 31, 2010, an amount of Saudi Riyals 127.5 million has been received from Alcoa in respect of its agreed portion of the aluminium project’s costs. The remaining portion of Alcoa’s share related to the aluminium project is currently under review. The infrastructure project relates to the development, construction and delivery of services in the Ras Al-Khair area, and other mining and industrial locations of the Company, as required. 2. Group structure The Company has the following subsidiaries, all incorporated in the Kingdom of Saudi Arabia: Effective ownership at December 31 Subsidiary
Type of company
2010
2009
Ma’aden Gold and Base Metals Company (“MGBM”)
Limited liability company
100%
100%
Ma’aden Phosphate Company (“MPC”)
Limited liability company
70%
70%
Ma’aden Infrastructure Company (“MIC”)
Limited liability company
100%
100%
Ma’aden Industrial Minerals Company (“MIMC”)
Limited liability company
100%
100%
Ma’aden Aluminium Company (“MAC”)
Limited liability company
74.9%
–
Ma’aden Rolling Company (“MRC”)
Limited liability company
74.9%
–
MGBM was incorporated on August 9, 1989, which was then managed by Petromin and thereafter its assets were transferred to Ma’aden as part of its capital. MGBM’s activities are mainly related to the production and exploration of gold and associated minerals existing within their leased area by way of drilling, mining, concentrating, smelting to then extract, refine, export and sell such minerals in their original or refined form. MPC was incorporated on January 1, 2008 to be a phosphate fertiliser producer and is currently in the development stage. Saudi Basic Industries Corporation (“SABIC”) holds a 30% interest in MPC, and it is accounted for as non-controlling interest in these consolidated financial statements. Accordingly, non-controlling interest in the consolidated balance sheet, and loss attributable to non-controlling interest in the consolidated statement of income, represent SABIC’s share in the net assets and loss of MPC. During March 2010, the shareholders of MPC passed a resolution to increase the share capital of MPC by issuing 24,598 ordinary shares at a nominal value of SAR 10,000 per ordinary share amounting to SAR 245,980,000. The Company and SABIC paid their proportion of the increase in share capital amounting to SAR 245,980,000 during the year ended December 31, 2010. MIC was incorporated on August 17, 2008 to manage the infrastructure project to develop, construct and operate the infrastructure and provide services to Ras Al-Khair Area, and other mining and industrial locations of the Group. MIMC was incorporated on March 31, 2009 to manage the industrial minerals sector of the Group. Its activities are mainly related to exploring and developing industrial minerals.
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
28
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 2. Group structure continued MAC was incorporated on October 10, 2010 and is currently in the development stage. Its activities are mainly related to production of aluminium ingots, t-bars, slabs and billets. Alcoa, through its subsidiary Alcoa Smelting Inversiones S.L. Company (“ASC”) holds a 25.1% interest in MAC, which is accounted for as non-controlling interest in these consolidated financial statements. MAC is a company incorporated in Saudi Arabia and is a subsidiary of Ma’aden. MRC was incorporated on October 10, 2010 and is currently in the development stage. Its activities are mainly related to the production of aluminium sheets for can body and lids. Alcoa, through its subsidiary Alcoa Saudi Rolling Inversiones S.L. Company (“ARC”) holds a 25.1% interest in MRC, which is accounted for as non-controlling interest in these consolidated financial statements. MRC is a company incorporated in Saudi Arabia and is a subsidiary of Ma’aden. The financial year end of all the subsidiaries coincide with that of the parent company. 3. Basis of preparation The accompanying consolidated financial statements have been prepared under the historic cost convention on the accrual basis of accounting, and in compliance with the accounting standards promulgated by the Saudi Organisation for Certified Public Accountants (“SOCPA”). The consolidated financial statements are presented in Saudi Riyals which is both the functional and reporting currency of the Group. 4. Summary of significant accounting policies The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 4.1 Basis of consolidation Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies to obtain an economic benefit generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given or liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Goodwill arising from acquisition of subsidiaries is reported under “intangible assets” in the accompanying consolidated balance sheet. Goodwill is tested annually for impairment and carried at cost, net of any accumulated amortisation and impairment losses, if any. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 4.2 Foreign currency translation Foreign currency transactions are translated into Saudi Riyals at the rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies at the consolidated balance sheet date are translated at the exchange rates prevailing at that date. Gains and losses from settlement and translation of foreign currency transactions are included in the consolidated statement of income. 4.3 Cash and cash equivalents Cash and cash equivalents balance includes cash on hand, cash in banks and time deposits with original maturity of three months or less at date of acquisition. 4.4 Short-term investments Short-term investments include placements with banks and other short-term highly liquid investments with original maturities of more than three months but not more than one year from the date of acquisition. 4.5 Trade receivables Trade receivables are carried at original sales invoice amount less an allowance for doubtful debts (if any). An allowance for doubtful debts is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original terms of the receivables. Such allowances are charged to the consolidated statement of income and reported under “General and administrative expenses”. When a trade receivable is uncollectible, it is written-off against the allowance for doubtful debts. Any subsequent recoveries of amounts previously written-off are credited against “General and administrative expenses” in the consolidated statement of income.
Annual Report 2010
29
4. Summary of significant accounting policies continued 4.6 Inventories Refined metals Refined gold is measured at the lower of net cost of production or net realisable value. The net cost of production is determined as the total cost of production divided by the saleable unit output. Production costs include: >> labour costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore >> the depreciation of mining properties and leases of property, plant and equipment used in the extraction and processing of ore; and >> production overheads Work-in-process The cost of work-in-process is determined using weighted average basis. Ore stockpiles Ore stockpiles represent ore that has been extracted and is available for further processing. If there is significant uncertainty as to when the stockpiled ore will be processed it is expensed as incurred. Where the future processing of this ore can be predicted with confidence because it exceeds the mine’s cut-off grade and due to economic viability, it is valued at the lower of net cost of production or net realisable value. Quantities of stockpiles and work-in-process are assessed primarily through surveys and assays. Stores and materials Stores and spares are valued at the weighted average cost basis less an allowance for obsolete and slow moving items. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. 4.7 Financial assets and liabilities Financial assets and liabilities carried on the consolidated balance sheet principally include cash and cash equivalents, short-term investments, trade and other receivables, projects and other payables, accrued expenses and borrowings. A financial asset and liability is offset and net amounts reported in the consolidated financial statements, when the Group has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and liability simultaneously. 4.8 Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation. Depreciation is provided over the shorter of estimated useful lives of the applicable assets or the estimated life-of-mine using the straight-line method. The estimated useful lives of the principal classes of assets are as follows: Classes of assets
Buildings Heavy equipment Office equipment Furniture and fixtures Fixed plant and heap leach facilities Motor vehicles Civil works Other equipment
Number of years
9–20 5–13 4–10 4–10 4–6 4 4 4
Maintenance and normal repairs which do not materially extend the estimated useful life of an asset are charged to the consolidated statement of income as and when incurred. Major renewals and improvements, if any, are capitalised. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the consolidated statement of income. Borrowing costs related to qualifying assets are capitalised as part of the cost of the related assets. 4.9 Pre-operating expenses and deferred charges Exploration, evaluation, development and pre-operating expenses are expensed in the year incurred until a prospective exploration project or mine is identified as having economical development potential. Once a prospective exploration project or mine has been determined to have economical development potential, the subsequent development and pre-operating expenses incurred on the project or mine are deferred net of proceeds from the sale of any production during the development period and then amortised over the expected life-of-mine or a period of seven years whichever is lower. If a project or mine is no longer considered economical, the accumulated project costs are charged to consolidated statement of income in the year in which the determination is made.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
30
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 4. Summary of significant accounting policies continued Deferred charges on the infrastructure projects consist of consultancy and other costs with respect to the site preparation at MPC and aluminium project, the costs will be recovered from these projects (note 14). 4.10 Stripping ratio The Group also defers waste mining costs and has estimated the average of the waste-to-ore ratio for the quantities contained within the final pit design of the mine. This average is used to calculate the annual waste mining costs to be expensed as follows: Average ratio of waste to ore mined
X
Quantity of ore mined
X
Average cost of total tonnes mined
In periods when the actual costs of waste are higher than the costs expensed according to this formula, the difference is deferred to be amortised in a future period when the actual costs are less than the amount to be expensed. 4.11 Capital work-in-progress Assets in the course of construction are capitalised in the capital work-in-progress account. On completion, the cost of the related asset is transferred to the appropriate category of property, plant and equipment. The cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use. Costs associated with a start-up period are capitalised where the asset is available for use but incapable of operating at normal levels including the commissioning period. Capital work-inprogress is not depreciated. 4.12 Asset impairment The Group assesses its assets at each reporting date for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or value-in-use. Assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. When it becomes evident that the circumstances which resulted in the impairment no longer exist, the impairment amount is reversed (in exception of goodwill) and recorded as income in the consolidated statement of income in the year in which such reversal is determined. 4.13 Trade payable and accruals Liabilities are recognised for amounts to be paid for goods and services received, whether or not billed to the Company. 4.14 Zakat The Company is subject to zakat in accordance with the regulations of the Department of Zakat and Income Tax (the “DZIT”). A provision for zakat for the Company and zakat related to the Company’s subsidiaries is charged to the consolidated statement of income. Additional amounts payable, if any, at the finalisation of final assessments are accounted for when such amounts are determined. 4.15 Severance fees Effective from year 2005 onwards, as per the Mining Investment Code issued, based on the Royal Decree No. 47/M dated 20 Sha’aban, 1425 Hijri (corresponding to October 4, 2004), the Company is required to pay to the Government of Saudi Arabia severance fee representing 25% of the annual net income or the equivalent of the hypothetical income tax, whichever is lower. Severance fee is charged to income on a monthly basis and is adjusted at the end of each quarter. The zakat due shall be deducted from the amount. 4.16 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic resources will be required to settle the obligation in the future; and the amount can be reliably estimated. 4.17 Mine closure and reclamation The mining, extraction and processing activities of the Group normally give rise to obligations for site closure or rehabilitation. Mine closure and rehabilitation works can include facility decommissioning and dismantling; removal or treatment of waste materials; site and land rehabilitation. The extent of work required and the associated costs are dependent on the requirements of current laws and regulations. Provisions for the cost of each closure and rehabilitation programme are recognised at the time the mining activities occur. When the extent of the mining activities increases over the life-of-mine, the provision is increased accordingly. Costs included in the provision encompass all closure and rehabilitation activity expected to occur progressively over the life-of-mine and at the time of closure in connection with the mining activities at the reporting date. Costs arising from unforeseen circumstances, such as the contamination caused by unplanned discharges, are recognised as an expense and liability when the event gives rise to an obligation which is probable and capable of reliable estimation. The timing of the actual closure and rehabilitation expenditure is dependent upon a number of factors such as: >> the life-of-mine >> the operating licence conditions; and >> the environment in which the mine operates
Annual Report 2010
31
4. Summary of significant accounting policies continued The full estimated costs capitalised are deferred and then amortised to expense over the expected life-of-mine on straight-line basis but not exceeding seven years. Adjustments to the estimated amount and timing of future closure and rehabilitation cash flows are a normal occurrence in light of the significant judgements and estimates involved. Factors influencing those changes include: >> revisions to estimated reserves, resources and lives of operations >> developments in technology >> regulatory requirements and environmental management strategies; and >> changes in the estimated extent and costs of anticipated activities, including the effects of inflation 4.18 Employees’ termination benefits Employees’ end-of-service benefits are payable as a lump sum to all employees employed under the terms and conditions of Saudi Labour and Workman Law on termination of their employment contracts. The liability is calculated as the current value of the vested benefits to which the employee is entitled, should the employee leave at the balance sheet date. Termination payments are based on employees’ final salaries and allowances and their cumulative years of service, as defined by the conditions stated in the laws of the Kingdom of Saudi Arabia. 4.19 Borrowings Borrowings are recognised at the proceeds received, net of transaction costs incurred, if any. Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets are capitalised as part of the cost of those assets. Other borrowing costs are charged to consolidated statement of income. 4.20 Revenue recognition Revenue is recognised when all the following conditions are met: >> the significant risks and rewards of ownership of the product have been transferred to the buyer >> neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold, has been retained >> the amount of revenue can be measured reliably >> it is probable that the economic benefits associated with the sale will flow to the Company; and >> the costs incurred or to be incurred in respect of the sale can be measured reliably Revenues are shown net of discounts and transportation expenses, and after eliminating sales within the Group. Sales revenue is commonly subject to adjustment based on an inspection of the product by the customer. In such cases, sales revenue is initially recognised on a provisional basis using the Company’s best estimate of contained metal, and adjusted subsequently. Investment income consists of earnings on bank deposits and is recognised on accrual basis. 4.21 General and administrative expenses General and administrative expenses include direct and indirect costs not specifically part of cost of sales as required under generally accepted accounting standards. Allocations between general and administrative expenses and cost of sales, when required, are made on a consistent basis. 4.22 Savings plan programme In accordance with clause 137 of the Labour Regulations, and in furtherance to clause 76 of the Company’s Internal Work Regulation approved by resolution No. 424 dated 6 Radi Thani, 1420 Hijri (corresponding to July 19, 1999) issued by H.H. Minister of Labour and Social Affairs, a Savings Plan Programme was introduced to encourage Saudi employees of the Company to save and invest their savings in areas more beneficial to them, to secure their future and as an incentive for them to continue working with the Company. Participation in the Savings Plan Programme is restricted to Saudi nationals and optional with employees required to contribute a monthly minimum instalment of 1% to a maximum of 15% of their basic salary subject to a minimum of SAR 300. The Company will contribute an amount equaling 10% of the monthly savings of each member per annum for the first year and increase it by 10% in the year after it reaches 100% at the tenth year, which will in turn be credited to the savings accounts of the member. The Company’s portion is charged to the consolidated statement of income on a monthly basis. The Company’s portion will only be paid upon termination or resignation of the employee. 4.23 Leasing Leases are classified as capital leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to consolidated statement of income on a straight-line basis over the term of the operating lease.
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
32
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 5. Critical accounting estimates, assumptions and judgements The preparation of consolidated financial statements in conformity with generally accepted accounting standards requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The accounting estimates will, by definition, seldom equal the related actual results. The most significant areas requiring the use of management’s assumptions, estimates and judgements relate to: >> reserve and resource estimates >> economic useful lives of property, plant and equipment >> impairment and reversal of impairment of assets >> allowances >> mine closure and environmental obligations >> zakat; and >> contingencies. Reserve and resource estimates There is a degree of uncertainty involved in the estimation and classification of ore reserves and mineral resources and corresponding grades being mined or dedicated to future production. Until ore reserves or mineral resources are actually mined and processed, the quantity of mineral resource and ore reserve grades must be considered as estimates only. What is more, the quantity of ore reserves and mineral resources may vary depending on, among other things, metal prices and currency exchange rates. The ore reserve estimates of the Company have been determined based on assumed gold prices, cut-off grades and costs that may prove to be inaccurate. Any material change in the quantity of mineral reserves, mineral resources, grade or stripping ratio may affect the economic viability of the properties. In addition, there can be no assurance that gold recoveries or other metal recoveries in small scale laboratory tests will give the same result in larger scale tests under on-site conditions or during production. Fluctuation in gold prices, the results of drilling, metallurgical testing and production, and the evaluation of mine plans subsequent to the date of any estimate may require estimates to be revised. The volume and grade of ore reserves mined and processed and recovery rates may not be the same as currently anticipated. Any material reductions in estimates of ore reserves and mineral resources, or of the Company’s ability to extract these ore reserves, could have a material adverse effect on the Company’s business, prospects, financial condition and operating results. Economic useful lives of property, plant and equipment The Group’s mining assets, classified within property, plant and equipment, are depreciated on a straight-line basis over the lesser of their economic useful lives or the life-of-mine. When determining the life of a mine, assumptions that were valid at the time of estimation, may change when new information becomes available. The factors that could affect estimation of the life-of-mine include the following: >> changes in proven and probable ore reserves >> the grade of mineral reserves varying significantly from time to time >> differences between actual commodity prices and commodity price assumptions used in the estimation and classification of ore reserves >> unforeseen operational issues at mine sites; and >> changes in capital, operating, mining, processing and reclamation costs, discount rates could possibly adversely affect the economic viability of ore reserves Any of these changes could affect prospective depreciation of mining assets and their carrying value. The economic useful lives of non-mining property, plant and equipment is reviewed by management periodically. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group. Impairment and reversal of impairment of assets The Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets are impaired or whether there is any indicator that an impairment loss recognised in previous years may no longer exist or may have decreased. Allowances The Group also creates an allowance for obsolete and slow-moving spare parts. At December 31, 2010, the allowance for obsolete slow-moving items amounted to SAR 23,044,672 (2009: SAR 14,597,148). These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the consolidated balance sheet date to the extent that such events confirm conditions existing at the end of the year.
Annual Report 2010
33
5. Critical accounting estimates, assumptions and judgements continued Mine closure and environmental obligations The Group’s mining and exploration activities are subject to various environmental laws and regulations. The Group estimates environmental obligations based on management’s understanding of the current legal requirements in the various jurisdictions in which it operates, terms of the licence agreements and engineering estimates. Provision is made, for decommissioning and land restoration costs as soon as the obligation arises. Actual costs incurred in future periods could differ materially from the amounts provided. Additionally, future changes to environmental laws and regulations and life-of-mine estimates could affect the carrying amount of this provision. Zakat During the year ended December 31, 2010, an amount of SAR 269 million was paid to DZIT but no zakat assessments were finalised by the DZIT. Where the final zakat outcome of these matters is different from the amounts that were initially recorded, such differences will impact the zakat provisions in the period in which such determinations are made. Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events. 6. Segmental information Segment reporting a) Business segment A business segment is group of assets, operations or entities: i) engaged in revenue producing activities; ii) results of its operations are continuously analysed by management in order to make decisions related to resource allocation and performance assessment; and iii) financial information is separately available. The Group’s operations consist of the following business segments: >> The corporate segment, includes the corporate operations and projects under development >> The gold segment, consists of operations related to the mining of gold and is carried out through MGBM. This segment currently operates Mahd Ad’ Dahab, Al Amar, Bulgah, Sukhaybarat and Al Hajar mines which are located in different geographical areas in the Kingdom of Saudi Arabia >> The phosphate segment, consists of operations related to mining of phosphate and utilisation of national resources of natural gas and sulphur to manufacture DAP, MAP fertiliser products and ammonia and is carried out through MPC. This segment is currently in its development stage and has commenced trial run testing in the last quarter of 2010 and is expected to start commercial operation during 2011 >> The aluminium segment, consists of the operations related to the development of an aluminium mine, refinery, smelter, rolling mill and power plant for the production of aluminium and related products. This segment is currently in the development stage and is expected to commence commercial operation during 2013 and 2014 >> The industrial minerals segment, consists of operations related to the mining of industrial minerals carried out through MIMC, which currently operates a kaolin and low-grade bauxite mine in the Central Zone of Az Zabirah and is in the final stage of developing a high grade magnesite mine and processing plant at Al Madinah Al Munawarah and is expected to commence operations during 2011 >> The infrastructure segment, relates to the development, construction and delivery of services in the Ras Al-Khair Area, and other mining and industrial locations of the Group as required. This segment is currently in its development stage
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
34
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 6. Segmental information continued There are no significant inter-segment revenues. Corporate
December 31, 2010 Sales Gross profit Income from short-term investments Net income/(loss) attributable to shareholders of the parent company Property, plant and equipment Pre-operating expenses and deferred charges Capital work-in-progress Total assets December 31, 2009 Sales Gross profit Income from short-term investments Net income/(loss) attributable to shareholders of the parent company Property, plant and equipment Pre-operating expenses and deferred charges Capital work-in-progress Total assets
– – 166,276,472 (220,848,539)
Gold
676,381,347 371,255,322 1,982,540 215,837,507
Phosphate
– – – (17,305,305)
70,506,067 110,519,401 138,566,421 8,376,451,446
138,316,059 105,530,174 21,792,745 871,745,514
3,764,318 545,862,988 17,645,426,158 20,543,658,203
– – 312,469,698 242,799,300
600,606,808 303,866,778 1,874,371 167,445,361
– – 143,801 (15,462,702)
60,555,728 75,506,919 60,095,300 10,807,828,494
178,143,953 89,071,056 21,295,817 866,964,548
803,160 387,213,674 14,716,231,636 16,064,103,608
The net income amount of the corporate segment excludes share in earnings of subsidiary companies. Also, the total assets amount in this segment excludes investment balances with respect to subsidiary companies. b) Geographical segment A geographical segment is a group of assets, operations or entities engaged in revenue producing activities within a particular economic environment that are subject to risks and returns different from those operating in other economic environments. The Group’s operation is conducted only in Saudi Arabia.
Annual Report 2010
35
Aluminium
Industrial minerals
Infrastructure
– – – –
30,131,427 14,082,907 – 13,128,523
– – – –
– 978,831,887 1,482,747,334 3,897,783,507
– 115,383,041 206,972,833 361,730,427
– 151,107,653 487,086,397 665,489,688
212,586,444 2,007,235,144 19,982,591,888 34,716,858,785
– – – –
33,839,543 24,343,826 – –
– – – –
634,446,351 328,210,604 314,487,870 394,781,959
847,170 620,045,426 251,641,334 871,101,383
10,482,104 82,382,435 101,492,387 195,789,475
2,478 165,642,698 257,985,871 423,909,122
250,834,593 1,419,862,208 15,408,742,345 29,229,696,630
Total
706,512,774 385,338,229 168,259,012 (9,187,814)
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
36
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 7. Cash and cash equivalents Term deposits with original maturities equal to or less than three months Cash and bank balances Total
2010
2009
2,248,600,000 673,553,380 2,922,153,380
3,254,250,000 116,887,937 3,371,137,937
2010
2009
8,783,974,813
8,170,073,860
8. Short-term investments Short-term deposits placed with commercial banks Short-term investments yield financial income at prevailing market rates. 9. Trade and other receivables Trade receivables Other receivables Total
2010
2009
20,469,398 9,493,597 29,962,995
23,265,438 8,295,299 31,560,737
10. Inventories 2010
Finished goods – ready for sale By-products Work-in-process at net production cost Raw materials Mined phosphate ore Total metal inventories Total spare parts and consumables materials Allowance for obsolete slow-moving spare parts and consumable materials Total spare parts and consumables Total
86,296,731 21,002,116 97,132,154 11,459,884 8,066,838 223,957,723 102,998,213 (23,044,672) 79,953,541 303,911,264
2009
77,546,520 12,953,145 42,408,149 – – 132,907,814 87,448,184 (14,597,148) 72,851,036 205,758,850
The spare parts inventory primarily relates to plant and machinery and, accordingly, this inventory is expected to be utilised over a period not exceeding one year. Movement in the allowance for inventory obsolescence is as follows: January 1 Increase (reversal) of allowance for obsolescence December 31
2010
2009
14,597,148 8,447,524 23,044,672
14,926,356 (329,208) 14,597,148
Annual Report 2010
37
11. Advances and prepayments Current portion: Advances to contractors Advances to employees Other prepayments Total Non-current portion: Advances to contractors Other prepayments Total
2010
2009
295,361,176 2,074,284 30,201,985 327,637,445
278,263,142 2,204,900 11,272,371 291,740,413
81,009,425 4,750,000 85,759,425
– 18,939,700 18,939,700
Advances and prepaid expenses mainly represent advances paid by MAC and MPC in relation to the development of its site. 12. Due from Government The balance represents cost incurred to finance the required feasibility studies for the Railway Line Project, linking the Northern Area (Al Jalamid) with the fertiliser plant at Ras Al-Khair (note 33). During 2006 and pursuant to the Council of Ministers resolution Number 72 dated 2 Rabi Al Thani, 1427 Hijri (corresponding to April 30, 2006), the amount incurred is to be returned to the Company from the Public Investment Fund. It was agreed that such amounts will be recovered from the future mineral transportation fees arising from the transportation of phosphate and bauxite through Saudi Railways Company.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
38
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 13. Property, plant and equipment
Note
Cost January 1, 2009 Transfer from capital work-in-progress Disposals/write-off December 31, 2009 Transfer from capital work-in-progress Transfer to pre-operating expenses and deferred charges Disposals/write-off December 31, 2010 Accumulated depreciation January 1, 2009 Charge for the year Disposals/write-off December 31, 2009 Charge for the year Transfer to pre-operating expenses and deferred charges Disposals/write-off December 31, 2010
15
15 14
14
Net book value December 31, 2009 December 31, 2010
Allocation of depreciation charge for the year To cost of sales To general and administration expenses Total
28 29
Land
Motor vehicles
Heavy equipment
Fixed plant and heap leaching
– 22,550,000 – 22,550,000 – – – 22,550,000
23,448,141 485,246 – 23,933,387 1,044,925 – (138,300) 24,840,012
37,192,997 18,654,673 – 55,847,670 10,356,076 – – 66,203,746
352,571,303 386,041 – 352,957,344 3,095,260 – – 356,052,604
– – – – – – – –
19,596,334 3,548,852 – 23,145,186 1,414,359 – (43,219) 24,516,326
21,775,114 6,621,997 – 28,397,111 7,314,035 – – 35,711,146
224,015,816 44,558,160 – 268,573,976 39,453,444 – – 308,027,420
22,550,000 22,550,000
788,201 323,686
27,450,559 30,492,600
84,383,368 48,025,184
Annual Report 2010
39
Buildings
Civil works
Other equipment
Office equipment
Furniture and fittings
64,467,844 37,214,100 – 101,681,944 4,666,604 – – 106,348,548
209,749,110 6,629,679 – 216,378,789 5,432,363 – – 221,811,152
22,351,008 2,540,208 – 24,891,216 6,513,207 – – 31,404,423
22,581,592 1,250,875 (5,795) 23,826,672 5,155,013 (318,648) (11,351) 28,651,686
9,558,472 2,886,975 – 12,445,447 3,444,965 – – 15,890,412
30,522,660 6,768,473 – 37,291,133 8,620,760 – – 45,911,893
166,771,083 15,812,552 – 182,583,635 14,045,233 – – 196,628,868
9,937,780 3,342,168 – 13,279,948 4,143,641 – – 17,423,589
19,773,131 1,718,648 (5,795) 21,485,984 2,056,196 (318,648) – 23,223,532
6,932,741 1,988,162 – 8,920,903 802,462 – – 9,723,365
64,390,811 60,436,655
33,795,154 25,182,284
11,611,268 13,980,834
2,340,688 5,428,154
3,524,544 6,167,047
212,586,444
2010
2009
73,779,722 4,070,408 77,850,130
81,601,495 2,757,517 84,359,012
Total
741,920,467 92,597,797 (5,795)
834,512,469 39,708,413 (318,648) (149,651)
873,752,583 499,324,659 84,359,012 (5,795)
583,677,876 77,850,130 (318,648) (43,219) 661,166,139
250,834,593
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
40
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 14. Pre-operating expenses and deferred charges Note
Cost January 1, 2009 Additions during the year Deferred cost of mine closure and reclamation Transfer to capital work-in-progress Adjustments December 31, 2009 Additions during the year Deferred cost of mine closure and reclamation Adjustments/write-off December 31, 2010 Amortisation January 1, 2009 Charge for the year December 31, 2009 Charge for the year Reversal of provision December 31, 2010
20 15
20
Gold
Phosphate
72,615,025 22,153,207 – – – 94,768,232 39,498,304 – – 134,266,536
151,511,625 1,115,991 25,148,176 – – 177,775,792 25,393,490 3,156,073 – 206,325,355
278,046,326 106,428,481 – – – 384,474,807 158,649,314 – – 543,124,121
18,194,633 1,066,680 19,261,313 4,485,822 23,747,135
64,340,318 21,625,551 85,965,869 15,172,791 (3,082,346) 98,056,314
– – – – – –
75,506,919 110,519,401
91,809,923 108,269,041
384,474,807 543,124,121
Corporate
Gold
Phosphate
12,483,601 40,329,278 (31,517,062) – 21,295,817 30,548,406 (30,051,478) – 21,792,745
7,451,075,935 7,266,448,872 (1,293,171) – 14,716,231,636 2,933,235,826 (4,041,304) – 17,645,426,158
20
Net book value December 31, 2009 December 31, 2010
Allocation of amortisation charge for the year To cost of sales To general and administration expenses Total
Corporate
28 29
15. Capital work-in-progress Note
Cost January 1, 2009 Additions during the year Transfer to property, plant and equipment Transfer from pre-operating and deferred charges December 31, 2009 Additions during the year Transfer to property, plant and equipment Adjustments December 31, 2010
13 14
13
92,670,559 27,188,841 (59,764,100) – 60,095,300 83,832,052 (5,360,931) – 138,566,421
During the year ended December 31, 2010, MPC and aluminium project capitalised an additional SAR 401 million (2009: SAR 238 million) of finance costs, and SAR 3 million (2009: SAR 1.2 million) of legal and advisory costs related to finance facility.
Annual Report 2010
41
Aluminium
Industrial minerals
265,602,405 354,443,021 – – – 620,045,426 473,536,461 – (114,750,000) 978,831,887
61,833,093 21,479,262 – – – 83,312,355 35,156,017 – (1,165,457) 117,302,915
178,424,794 32,055,589 – (9,421,793) (35,415,892) 165,642,698 81,781,282 – (96,316,327) 151,107,653
1,008,033,268 537,675,551 25,148,176 (9,421,793) (35,415,892) 1,526,019,310 814,014,868 3,156,073 (212,231,784) 2,130,958,467
– – – – – –
398,537 531,383 929,920 989,954 – 1,919,874
– – – – – –
82,933,488 23,223,614 106,157,102 20,648,567 (3,082,346) 123,723,323
620,045,426 978,831,887
82,382,435 115,383,041
165,642,698 151,107,653
1,419,862,208 2,007,235,144
2010
2009
16,134,349 4,514,218 20,648,567
23,223,614 – 23,223,614
Infrastructure
Total
Aluminium
Industrial minerals
Infrastructure
Total
188,681 251,469,117 (16,464) – 251,641,334 1,244,043,900 (49,600) (12,888,300) 1,482,747,334
62,866,433 38,632,954 (7,000) – 101,492,387 105,685,546 (205,100) – 206,972,833
75,784,832 172,779,246 – 9,421,793 257,985,871 229,100,526 – – 487,086,397
7,695,070,041 7,796,848,308 (92,597,797) 9,421,793 15,408,742,345 4,626,446,256 (39,708,413) (12,888,300) 19,982,591,888
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
42
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 16. Projects and other payables Projects Trade payables Savings plan Due to a related party – SABIC (note 33) Other Total
2010
2009
677,921,490 61,803,994 4,979,880 – 23,515,074 768,220,438
531,198,527 85,173,560 2,164,935 2,369,406 2,554,073 623,460,501
Projects payable mainly represents the liability in respect of contracts costs arising from MPC and other capital projects. 17. Accrued expenses Projects Trade payables Employees Other Total
2010
2009
1,191,342,890 36,113,922 39,234,445 – 1,266,691,257
813,474,015 124,541,228 28,847,113 1,778,000 968,640,356
Accrued expenses for projects mainly represents the contract cost accruals in relation to MPC and aluminium project. 18. Zakat payable 18.1 Components of zakat base The significant components of the zakat base of each company under the zakat and income tax regulation are comprised of: >> shareholders’ equity >> provisions at the beginning of the year >> long-term borrowings >> adjusted net income >> net book value of property, plant and equipment >> net book value of pre-operating expenses and deferred charges, and >> certain other items 18.2 Zakat payable 2010
January 1 Provision for zakat for the year Over provision of the previous year Paid during the year December 31
268,560,500 207,342,181 (24,458) (268,536,042) 207,342,181
2009
– 268,560,500 – – 268,560,500
The provision for zakat as at December 31, consist of: Zakat for Saudi Arabian Mining Company Zakat for Ma’aden Gold and Base Metals Company (note 19) Total
2010
2009
196,834,815 10,507,366 207,342,181
257,958,672 10,601,828 268,560,500
18.3 Status of final assessments On 15 Rabi Al Awal, 1429 Hijri (corresponding to March 23, 2008) the Company obtained a clearance from the Ministry of Finance which confirmed that the Company has no zakat or tax liabilities due to the DZIT from the date of incorporation up to the IPO date of 2 Rajab, 1429 Hijri (corresponding to July 5, 2008). The Company and its subsidiaries received provisional zakat certificates for the year ended December 2009, however, no zakat assessments were finalised by the DZIT.
Annual Report 2010
43
19. Severance fees payable 2010
January 1 Provision for the year Under/(over) provision of the previous year Payments made to the authorities December 31
45,142,915 54,364,970 178,751 (45,232,356) 54,454,280
2009
61,728,370 45,142,915 (1,592,426) (60,135,944) 45,142,915
In accordance with the Mining Investment Code, based on the Royal Decree No. 47/M dated 20 Sha’aban, 1425 Hijri (corresponding to October 4, 2004), the Group is required to pay to the Government of Saudi Arabia severance fees, representing 25% of the annual net income, as defined, or the equivalent of the actual of a hypothetical income tax, based on the annual net income, whichever is lower. The zakat due shall be deducted from this amount. As a result of the above, the income from the gold mines and kaolin mine is subject to severance fees. Provision for severance fees during the year consists of: Gold mines Low-grade bauxite and kaolin mines Total
2010
2009
53,849,796 515,174 54,364,970
44,682,484 460,431 45,142,915
The additional provision of severance fees payable by gold mines is calculated as follows: 2010
281,127,318 70,281,830 64,357,162 64,357,162 (10,507,366) 53,849,796
Annual net income from operating mines before severance fee 25% of the annual net income as defined Hypothetical income tax based on annual taxable net income Provision based on the lower of the above two computations Provision for zakat (note 18.2) Net severance fee provision
2009
221,137,247 55,284,312 59,171,601 55,284,312 (10,601,828) 44,682,484
20. Provision for mine closure and reclamation Note
January 1, 2009 Provision for the year December 31, 2009 Provision/(reversal) for the year Utilisation of provision December 31, 2010 Commenced commercial production in Expected closure date in
14 14
Mahd mine
Al Amar mine
Bulgah mine
23,761,530 3,961,619 27,723,149 – (3,525,813) 24,197,336
10,000,000 3,249,340 13,249,340 (32,296) – 13,217,044
9,437,500 5,220,602 14,658,102 7,003,305 – 21,661,407
14,983,165 5,484,056 20,467,221 – – 20,467,221
7,963,200 7,232,559 15,195,759 (3,814,936) – 11,380,823
1988 2016
2008
2001 2017
1991 2015
2001 2011
2018
Sukhaybarat mine*
Al Hajar mine
Total 66,145,395 25,148,176 91,293,571
3,156,073 (3,525,813)
90,923,831
* The Sukhaybarat mine ceased its mining activities and current operations are limited to the carbon-in-leach processing of ore transferred from Bulgah mine.
The provision for mine closure and reclamation represents the full amount of the estimated future closure and reclamation costs for the various operational mining properties, based on information currently available including closure plans and applicable regulations. Future changes, if any, in regulations and cost assumptions may be significant and will be recognised when determined. The provision for mine closure and reclamation relates to the Group’s gold mining activity only, as MPC and the aluminium project are currently in the development stage.
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
44
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 21. Employee termination benefits 2010
January 1 Provision for the year Utilisation of provision December 31
84,987,823 27,413,350 (7,793,601) 104,607,572
2009
72,450,755 18,333,948 (5,796,880) 84,987,823
22. Long-term borrowings a) Facilities approved: On June 15, 2008 MPC entered into a Common Terms Financing Agreement (“CTFA”) with a consortium of financial institutions, comprising of: Facilities granted
Public Investment Funds Islamic and commercial banks Banque Saudi Fransi – as agent for the procurement facility participants Al-Rajhi Bank The Export Import Bank of Korea Korea Export Insurance Corporation Mizuho Corporate Bank – as agent for the commercial lenders participants Saudi Industrial Development Fund (“SIDF”) Total facilities granted
4,000,000,000 4,269,892,500 2,343,750,000 1,500,000,000 750,000,000 1,491,562,500 10,355,205,000 600,000,000 14,955,205,000
The financing agreement imposed special conditions and covenants and if the conditions are met, the financial institution will provide long-term loan totalling to SAR 14,955 million for financing the construction and operation of MPC. Special covenants imposed include the limit of creation of additional liens and/or financing obligations by MPC, unless specifically allowed under the CTFA. Other covenants include financial ratio maintenance, maximum capital expenditures allowed and restriction on dividend distribution to shareholders. The above mentioned CTFA facilities are secured by a pledge of all the assets of MPC.
Annual Report 2010
45
22. Long-term borrowings contined b) Facilities utilised under the CTFA; is: Public Investment Fund July 14, 2008 commitment fees charged in respect of the loan facility November 18, 2008 first draw down January 15, 2009 second draw down April 30, 2009 third draw down March 8, 2010 fourth draw down December 29, 2010 fifth draw down Sub-total
2010
2009
20,000,000 800,000,256 870,000,000 543,483,656 928,188,694 475,761,503 3,637,434,109
20,000,000 800,000,256 870,000,000 543,483,656 – – 2,233,483,912
3,878,480,095 2,338,094,785 1,358,868,876 750,000,000 1,014,209,474 9,339,653,230
2,363,000,000 1,471,000,000 1,347,000,000 750,000,000 618,514,260 6,549,514,260
300,000,000 240,000,000 540,000,000
– – –
13,517,087,339
8,782,998,172
793,401,273 843,759,108 925,127,583 998,612,718 9,956,186,657 13,517,087,339
485,116,194 501,106,131 711,001,537 774,506,209 6,311,268,101 8,782,998,172
The rate of commission on the principal amount of the loan draw down and outstanding for each commission period, is LIBOR plus 0.5% per annum. Loan repayments will start from June 30, 2012, on a six monthly basis, in equal principal repayments of SAR 166.4 million, with the final repayment on December 31, 2023. Islamic and commercial banks Banque Saudi Fransi – as agent for the procurement facility participants Al-Rajhi Bank The Export Import Bank of Korea Korea Export Insurance Corporation Mizuho Corporate Bank – as agent for the commercial lenders participants Sub-total The rate of commission on the principal amount of the loan draw down and outstanding for each commission period is in the range of LIBOR plus 0.5% to 1.15% per annum. The repayment of the Al-Rajhi Bank facility will start from December 31, 2011 and for the other facilities above will start from June 30, 2012. All the repayments for the above facilities will be on a six monthly basis, with the final repayments during 2023. Saudi Industrial Development Fund April 26, 2010 first draw down December 10, 2010 second draw down Sub-total The annual fee paid during the draw down amounted to SAR 4 million. Repayment of this facility will start on February 26, 2013, on a six monthly basis, with the final payment on June 19, 2019. Total borrowings c) Maturity profile of long-term borrowings 2012 2013 2014 2015 Thereafter Total
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
46
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 22. Long-term borrowings continued d) Facilities’ currency denomination Essentially all of the Company’s facilities have been contracted in US$ and the draw down balances in US$ are shown below:
Public Investment Fund Banque Saudi Fransi – as agent for the procurement facility participants Al-Rajhi Bank The Export Import Bank of Korea Korea Export Insurance Corporation Mizuho Corporate Bank – as agent for the commercial lenders participants Saudi Industrial Development Fund Total
2010 US$
2009 US$
969,982,429 1,034,261,358 623,491,943 362,365,034 200,000,000 270,455,860 144,000,000 3,604,556,624
595,595,710 630,089,025 392,381,266 359,300,688 200,000,000 164,766,157 – 2,342,132,846
e) Facilities approved but not withdrawn On November 30, 2010, the consortium of financial institutions and PIF, subject to certain conditions precedent, approved a facility totalling SAR 11 billion and SAR 4.1 billion for MAC and MRC respectively. This facility was not utilised as at December 31, 2010. 23. Share capital Authorised, issued and fully paid 925,000,000 ordinary shares, with a nominal value of SAR 10 per share (note 31)
2010
2009
9,250,000,000
9,250,000,000
24. Share premium Share premium balance
2010
2009
5,250,000,000
5,250,000,000
25. Transfer of net income January 1 Transfer of 10% of net income for the year December 31
2010
2009
242,996,397 – 242,996,397
203,518,201 39,478,196 242,996,397
In accordance with Regulations for Companies in Saudi Arabia, the Company has established a statutory reserve by the appropriation of 10% of net income until such reserve equals 50% of the share capital. As the Company incurred a net loss for the year ended December 31, 2010, therefore, a transfer to statutory reserve is not made. This reserve is not available for dividend distribution. 26. Non-controlling interest 2010
January 1 Increase in non-controlling interest (note 2) Share of current year’s loss December 31
1,782,303,285 357,298,500 (5,191,591) 2,134,410,194
2009
639,442,096 1,147,500,000 (4,638,811) 1,782,303,285
Annual Report 2010
47
27. Sales Gold revenue Low-grade bauxite revenue Zinc revenue Total Gold sales analysis Quantity of gold sold in ounces Average realised price per oz in: US$ SAR – equivalent
2010
2009
642,068,377 30,131,427 34,312,970 706,512,774
588,653,897 33,839,543 11,952,911 634,446,351
140,028
162,409
1,223 4,586
967 3,625
28. Cost of sales 2010
Personnel cost Contracted services Repairs and maintenance Consumables Overheads Sale of by-products Total cash operating costs Depreciation (note 13) Amortisation (note 14) Total operating costs Increase in metal inventory on hand Cost of sales
95,628,545 48,461,887 21,352,866 82,778,560 26,170,092 (36,180,302) 238,211,648 73,779,722 16,134,349 328,125,719 (6,951,174) 321,174,545
2009
82,541,478 44,114,797 20,014,103 69,174,080 25,241,962 (29,808,754) 211,277,666 81,601,495 23,223,614 316,102,775 (9,867,028) 306,235,747
29. General and administrative expenses Salaries and staff related benefits Contracted services Overheads and other Consumables Directors’ remuneration and allowances Repair parts Depreciation (note 13) Amortisation (note 14) Total
2010
2009
144,076,752 33,120,717 19,410,012 5,445,589 3,269,368 249,149 4,010,408 4,514,218 214,156,213
117,393,213 19,567,948 15,718,813 2,261,721 1,884,000 89,975 2,757,517 – 159,673,187
The Board of Directors’ remuneration represents an accrual based on management’s estimate and will be finalised upon approval by the Company’s shareholders in the General Assembly Meeting. 30. Income from short-term investment Income received and accrued on short-term investment
2010
2009
168,259,012
314,487,870
Ma’aden I Saudi Arabian Mining Company
Annual Report 2010
48
Notes to the consolidated financial statements continued for the year ended December 31, 2010
(all amounts in Saudi Riyals unless otherwise stated) 31. Earnings per ordinary share 2010
Net (loss)/income attributable to the shareholders of the parent company Weighted average number of ordinary shares in issue during the year (note 23) Basic and diluted (loss)/earnings per ordinary share from continuing operations
(9,187,814) 925,000,000 (0.01)
2009
394,781,959 925,000,000 0.43
Basic (loss)/earnings per ordinary share is calculated by dividing the (loss)/income attributable to the shareholders of the parent company by the weighted average number of ordinary shares in issue during the year. 32. Other income During 2009, the Company entered into a agreement with Alcoa for the development of an aluminium project (see note 1). As per the terms of the agreement, the Company received a fee of SAR 300 million during the year ended December 31, 2009 comprising the entry payment receipt from Alcoa for the opportunity to participate in the project. Such payment is included in other income. 33. Related party transactions and balances Significant year-end balances arising from transactions with related parties are as follows: Receivable from related party Due from Government (note 12) Payable to a related party Due to SABIC (note 16) Long-term borrowings from a shareholder Long-term borrowings from PIF (note 22)
2010
2009
61,045,987
61,045,987
–
2,369,406
3,637,434,109
2,233,483,912
2010
2009
7,285,000
1,522,612
34. Operating lease agreements Payments under operating leases recognised as an expense during the year
Operating lease payments represent mainly rentals payable by the Company for mining lease areas. Leases are negotiated for an average term of 15 to 30 years. 35. Commitments and contingent liabilities Capital expenditures: Contracted for Guarantees: Guarantees in favour of Saudi Aramco, for future diesel and gas feedstock supplies Letters of credit: For the development of aluminium project
2010
2009
10,246,508,913
7,900,000,000
170,962,000
33,962,000
1,726,046,285
1,700,000,000
Annual Report 2010
49
36. Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value risk commission rate risks and commodity price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. 36.1 Currency risk Is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group transactions are principally in SAR and US$. Management monitors the fluctuations in currency exchange rates and believes that the currency risk is not significant. 36.2 Fair value Is the amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arm’s length transaction. As the Group’s financial instruments are compiled under the historical cost convention, differences can arise between the book values and fair value estimates. Management believes that the fair values of the Company’s financial assets and liabilities are not materially different from their carrying values. 36.3 Commission rate risk Is the exposure to various risks associated with the effect of fluctuations in the prevailing commission rates on the Group’s financial position and cash flows. The Group’s commission rate risks arise mainly from its short-term investments and long-term borrowings, which are at floating rate of commission and are subject to re-pricing on a regular basis. The Group monitors the fluctuations in commission rates and believes that the effect of the commission rate risk is not significant, also see note 22. 36.4 Commodity price risk Gold is priced in an active market in which prices respond to daily changes in quantities. The Group’s normal policy is to sell its products at prevailing market prices. The Group does not generally believe commodity price hedging would provide long-term benefit to shareholders. 36.5 Credit risk Credit risk is the risk that one party will fail to discharge an obligation and cause the other party to incur a financial loss. The Group is exposed to credit risk from its operating activities (pertaining to trade receivables mainly). However, the cash collection is made at time of sales delivery and from its financing activities, including deposits with banks and financial institutions. Credit limits are established for all customers based on internal rating criteria. Outstanding trade receivables are regularly monitored and any credit concerns highlighted to senior management. Cash and short-term investments are substantially placed with commercial banks with sound credit ratings. The Group currently has two major customers which account for sales of approximately SAR 636 million, representing 90% of the Group’s sales for the year ended December 31, 2010 (2009: SAR 586 million representing 92% of Group’s sales from three major customers). Trade receivables are carried net of provision for doubtful debts, if needed. 36.6 Liquidity risk Is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at an amount close to its fair value. Liquidity risk is managed by monitoring on a regular basis that sufficient funds are available to meet any future commitments. 37. Comparative figures Certain comparative figures of the previous year have been reclassified, wherever necessary, to conform with the current year’s presentation. Such reclassifications did not affect either the net worth or the net income of the Company for the year ended December 31, 2009.
Annual Report 2010
Ma’aden I Saudi Arabian Mining Company
50
Additional shareholder information In terms of Article 27: b (11) of the Listing Rules, issued by the CMA, the Board of Directors needs to provide a description of the shareholdings in the Company, held by Directors, senior executives and their spouses and minor children, together with any changes to such during 2010. Distribution of shareholders as at December 31, 2010 2010 Number of shareholdings
%
2009 Number of shareholdings
%
Change in shareholding
% change
Shareholders Public Investment Fund General Organisation for Social Insurance Public Pension Agency General public Total
462,500,000 77,876,995 55,728,789 328,894,216 925,000,000
50.0 8.4 6.0 35.6 100.0
462,500,000 71,889,943 55,728,879 334,881,178 925,000,000
50.0 7.8 6.0 36.2 100.0
0 5,987,052 (90) (5,986,962) 0
0 8.3 0 (1.8) 0
Non-public/public shareholders Non-public shareholders Public shareholders Total
596,105,784 328,894,216 925,000,000
64.4 35.6 100.0
590,118,822 334,881,178 925,000,000
63.8 36.2 100.0
5,986,962 (5,986,962) 0
1.0 (1.8) 0
Strategic shareholdings (more than 10%) Other than Public Investment Fund with a share holding of 50% there are no other shareholders with an individual share holding in excess of 10%. Shareholdings by members of the Board of Directors, as well as their spouses and minor children as at December 31, 2010
Name
Engr. Abdallah Bin Saif Al-Saif Mr. Mansour Bin Saleh Al-Maiman H.E. Soliman Bin Saad Al-Humayyd H.E. Mohammed Bin Abdullah Al-Kharashi Mr. Sultan Bin Jamal Shawli Dr. Ziad Bin Abdulrahman Al-Sudairy Dr. Abdulaziz Bin Saleh Al-Jarbou Engr. Khalid Bin Hamad Al-Senani Dr. Abdallah Bin Essa Al-Dabbagh Total
2010 Number of shareholdings
2009 Number of shareholdings
Change in shareholding
154 308 230,464 – – 48,429 2 500 – 152 016 433,871
154 385 464 – – 36,800 2,500 – 117 380 157,683
– (77) 230,000 – – 11,629 – – 34,639 276,188
% change
– (20) 49,569 – – 32 – – 30 175
Shareholdings by the Company’s senior executives, as well as their spouses and minor children as at December 31, 2010
Name
Engr. Khalid Bin Saleh Al-Mudaifer Engr. Abdullah Salim Busfar Dr. Mansour Othman Nazer Dr. Mohammed Hany Bin Kamil Al-Dabbagh Mr. Abdullah Bin Ibrahim Al-Fallaj Total
2010 Number of shareholdings
2009 Number of shareholdings
Change in shareholdings
Change in %
6,000 3,232 710 – – 9,942
4,000 3,232 1.060 – – 8,292
2,000 – (350) – – 1,650
50 0 (33) – – 20
Annual Report 2010
51
Company information Commercial registration number: 1010164391 Directors Engr. Abdallah Bin Saif Al-Saif (Chairman) Mr. Mansour Bin Saleh Al-Maiman H.E. Soliman Bin Saad Al-Humayyd H.E. Mohammed Bin Abdullah Al-Kharashi Mr. Sultan Bin Jamal Shawli Dr. Ziad Bin Abdulrahman Al-Sudairy Dr. Abdulaziz Bin Saleh Al-Jarbou Engr. Khalid Bin Hamad Al-Senani Dr. Abdallah Bin Essa Al-Dabbagh Registered address Building number 395 Abobakr Al Siddiqui Road, South, Northern ring, Exit 6, Riyadh Kingdom of Saudi Arabia Telephone number: +966 -1- 874-8000 Fax number: +966-1-874-8300 Email: investor@maaden.com.sa Saudi Arabian Stock Exchange Symbol: 1211 Reuters code: 1211.SE Bloomberg code: MAADEN AB Website: http://www.maaden.com.sa Postal address P.O. Box 68861 Riyadh 11537 Kingdom of Saudi Arabia Corporate communications: Aqeel Al Onazi Email: alonaziam@maaden.com.sa Bankers
The Saudi British Bank (SABB)
Auditors PricewaterhouseCoopers