When Riyadh launched Saudi Arabian Mining Company (Maaden) in 1997, its intention was to float the company as quickly as possible. Some 11 years later, in July 2008, it finally achieved its goal.
The stock market listing means that Abdallah Dabbagh, president and chief executive officer (CEO) of Maaden since its inception, is now free to concentrate on further building the business.
1976-79 Professor of geology at King Fahd University
1978-80 Director of Riyadh Chamber of Commerce
1985 Leader of the scientific team for planning, design and implementation for the first Arab astronaut on the US space shuttle
1989-1996 Served on the board of Saudi Aramco
1997-date President and chief executive officer of Maaden
In the past decade, under Dabbagh’s guidance, Maaden has been developing industrial expertise on several projects after a decision by its board to diversify its portfolio prior to listing, rather than follow the original plan to float Maaden as a small gold-mining business.
“The board decided it would be better for Maaden to develop as a diversified group and build expertise in the mining and industrial sectors, rather than float the first operational part of the business,” says Dabbagh.
As Maaden’s portfolio has diversified, several projects have ballooned into multi-billion- dollar developments. It became clear to Dabbagh that Maaden had to allow its projects to mature before approaching the public markets, to enable it to reap the maximum rewards from the listing.
In doing so, Maaden could raise equity financing for its projects at the same time as listing, expanding its capital base beyond the SR4bn ($1bn) at which it was initially capitalised by the government.
“Maaden was capitalised before we started looking at these mega-projects,” says Dabbagh. “Once these projects started to become a reality, it was clear we would have to raise substantially more equity.”
In late July, Maaden shares finally started trading on the Saudi stock market (Tadawul). But more remarkable than the length of time it has taken Maaden to fulfil its goal of becoming a publicly listed company is the fact that the management and advisers of the company convinced the government to allow Maaden to float at SR20 ($5.3) a share, rather than the standard privatisation price of SR10.
“The Capital Market Authority (CMA) appreciated the effort that was put into the valuation of Maaden and the projected cash flows for all our projects and the financial models we presented,” says Dabbagh. “This was what enabled us to add another SR10 onto the price of the shares we were floating.”
Despite the increased share price, Dabbagh insists that it undervalues Maaden. “The price is still less than the real value of the company because the government wants to redistribute wealth as part of its social responsibility,” he says.
Since debuting on the Tadawul on 28 July and rising in value by 60 per cent in the first few days of trading, the company’s shares have settled at about SR27, or 35 per cent above the initial value.
Dabbagh says the day before trading began, Maaden shares were trading on the informal market at up to SR37 a share. “I will not put a figure on where I see a proper valuation of Maaden’s shares,” he says.
Despite the increase in the offer price, the success of the listing shows that retail investors, which the government targets for its privatised companies, were still keen on the offering. Rupert Fane, head of equity capital markets for the Middle East at JP Morgan, which led the initial public offering (IPO), says 7 million people applied for shares.
“Maaden is a household name in Saudi Arabia, so people were keen to invest in what was seen to be a high-quality government company,” he says.
By increasing the listing price of Maaden shares, the company managed to raise SR9.25bn, twice as much as it would have raised otherwise.
The higher initial price also seems to have reduced the size of the rise and subsequent fall in the share price that normally follows privatisation. Alinma, the recently floated government bank, nearly doubled in value from its SR10 flotation price, and now trades about 60 per cent over its offer price.
When Maaden was created, JP Morgan was appointed as an adviser to the government, a relationship that the bank has maintained. Dabbagh says Maaden needed banking expertise that is unavailable in the kingdom.
“The valuation of Maaden required a lot of technical expertise of the mining sector, and the Saudi banks do not have that experience as we are the first mining company in Saudi Arabia,” he says.
JP Morgan helped Maaden to restructure into its gold, phosphate and aluminium divisions, and provided an individual valuation for each. “This process was done based on the regulations we would have to abide by if we were trying to list Maaden on the London Stock Exchange,” says Dabbagh.
The process also helped to give the CMA the necessary confidence that Maaden would be able to generate long-term cash flows – the CMA had to approve its application to list based on its ability to sustain revenues and protect public investors.
Dabbagh says despite Maaden’s limited track record, which includes a SR247m loss in 2007 partly related to IPO expenses, there were no concerns in the CMA about Maaden’s ability to generate profits from its projects under development.
Dabbagh draws a contrast between Maaden, which has made some income from its gold business for the past few years, with other companies with an even shorter track record that have been allowed to list.
“The CMA has put in the market these insurance companies that have zero track record,” he says. “I think we have a strong track record in our gold business and have demonstrated our ability to explore, develop and finance our projects with major international partners.”
Despite this confidence, it will be 2012 before Maaden is expected to start reporting stable cashflows from all three of its main operations: the gold, phosphate and aluminium divisions.
“We have some cashflow from the gold business, in mid-2010 the phosphate project will start generating cash, and then in 2012 the aluminium project will be operational,” says Dabbagh. “By then, it should help us start to look at the next megaproject as well.”
With the IPO now complete, Dabbagh can get back to focusing on Maaden’s existing slate of projects. The cash raised from the float will be used to take equity stakes in its two major projects: Maaden Phosphate Company and Maaden Aluminium Company.
The aluminium firm will develop a $10.5bn project including a bauxite mine, alumina refinery, aluminium smelter and power plant. This will require an equity investment of $3-4bn, depending on how much debt is included in the financing package. The financing is currently being worked on by Maaden and its financial advisers.
With the credit crunch hitting debt margins around the world, Dabbagh is undeterred by either this or rising construction costs as he prepares to raise about $6-7bn in debt by mid-2009 for the aluminium project. “I doubt that current market conditions will impact us,” he says. “When we started the feasibility on this project, the price of aluminium was about $1,500 a tonne; now it is closer to $3,000 a tonne. So although costs for the project may be rising, we can still move on with it.”
“The debt market is getting more expensive and construction costs are going higher, but luckily all the products we are looking to produce are rising in price as well. We also signed a deal on the phosphate project to freeze the cost on about 85 per cent of the project, so we are sheltered from rising construction costs.”
Dabbagh also says that Maaden is sheltered from commodity price inflation because its products rely entirely on domestic raw materials, so it does not have to import alumina from elsewhere. “We are not at risk of increasing raw material prices because all our inputs are local. Even the oil to fuel our power station is local,” he says, before denying that using oil is more expensive than using gas.
Riyadh has allocated gas for use in the petrochemicals industry, but has been allocating heavy oil for power plants.
Dabbagh also sees no need to shift some of Maaden’s debt financing to Saudi riyals to achieve cheaper funding. “We looked at the riyal versus the dollar when we financed our phosphate project [in late 2007] and we found we needed to stick to the dollar because all our commitments are in dollars, although all the Saudi banks were trying to give us riyals,” says Dabbagh. “So for the aluminium project, it is very likely we will use just dollars.”
For the aluminium project, Maaden will put in about half the equity, with Canada’s Rio-Tinto Alcan, a 49 per cent stakeholder in the project, providing the remainder. Although a full joint venture agreement has yet to be signed with RioTinto Alcan, Dabbagh insists it will be finalised by the end of the year.
What remains of the IPO proceeds will be invested in Maaden Phosphate Company, which is already under construction. Dabbagh says this project, a 70:30 joint venture with Saudi Arabian Basic Industries Corporation (Sabic), will require about $1bn in equity investment from Maaden.
Although there is still much to be done to get Maaden’s first wave of projects off the ground, Dabbagh says Maaden is already working on a three-pronged development strategy.
The strategy is split between expanding its current exploration programme to find new mineral and precious metal deposits, seeking expansion at existing projects, or joining with new partners for downstream projects that enhance Maaden’s existing production.
Ultimately, Dabbagh’s vision for Maaden is that the listed company becomes the third pillar of the Saudi economy. “Along with Aramco and Sabic, that is what we aspire to be,” he says.
Because of this ambition, Maaden has concentrated on expanding its portfolio inside the kingdom, although Dabbagh concedes this may change as it enters a new era as a private sector firm.
“Now we are privatised, the private sector may have a different approach,” he says. “So far, the government has wanted us to focus on Saudi Arabia, so the bulk of our operations have been domestic. However, if there is an opportunity outside Saudi Arabia that makes sense, we will look at it.”
Dabbagh forecasts that the private sector Maaden will create 3,000 direct jobs, with four times that many indirect jobs created in the coming years. By contrast, state energy company Saudi Aramco employs more than 50,000 people.
Dabbagh will have a lot to do before Maaden can truly claim to be the third pillar of the Saudi economy.