Sasol Earnings Call NUGGETS: The Mine Issues, Synfuels
On Monday, Sasol (NYSE:SSL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.
The Mine Issues
Alex Comer – JPMorgan: Alex from JPMorgan. Couple of questions if I may. Just on your employee costs given with what’s going on with regard to the mines, are you seeing any impact from those problems in your own business and also one on the topic the 1.1 billion for I think future provisions, what exactly is that, that’s first question and then I’m just wondering with regard to Canada, you’ve got quite high levels of CapEx, but you haven’t seen drilling that many wells, what else is the money going into and then with regard to the polymers business, seems to be struggling without a great deal of confidence of a recovery, is it time to restructure that business, that’s my three questions.
David E. Constable – CEO: Thanks Alex. Let me just make sure I have got the first one, right. You asked about the current mine issues in the country and how that maybe affecting us?
Alex Comer – JPMorgan: Your comments on your rate inflation I think 7.5% to 8% is pretty good, are you happy, everybody is happy with that and there is not going to be any ongoing problems given obviously the strike last year?
David E. Constable – CEO: Then we’ll get into the future provisions and the Canada CapEx on polymers. Let me just start on the mine issue where we’ve successfully completed all of our agreements with our three collective bargaining units chemicals and mining and petroleum. That was completed in early August and with both sides very, very comfortable. Mining ended up in a range of I believable about 7.75 if you total it all up 7.75% over the FY ’13 and we have a very good relationship right now with all of our unions, I met with all the Sasol trade union representatives August 14 just before the Americana incidents and had great session with them talking about strategy and the way forward and what we’re trying to achieve with One Sasol approach and moving away from us and them and getting much more open dialog with all of our union representatives, including with the CEO office and getting good feedback, making sure everyone’s voices are heard and I think it’s going quite well and we’re certainly optimistic that we can continue that. We’re going to double up our focus on our stakeholder relationship and focus, so, positive there. The ZAR1.1 billion future provisions, I think I’ll ask possibly Christine to talk through that.
Christine Ramon – CFO: Yes. Thanks for the question, Alex. I just want to confirm are you referring to the one under One Source.
Alex Comer – JPMorgan: So, is that period end incentive provisions?
Christine Ramon – CFO: Yeah, period end incentive provisions, so these are clearly incentive provisions relating to the past financial year, that gets paid – clearly there is a cash flow difference because it gets paid in the new financial year, but it relates to the prior financial year 2012.
Alex Comer – JPMorgan: So that went through the P&L and if so (where is it)?
Christine Ramon – CFO: Yes, it would, under employee costs, that’s where the number sits.
David E. Constable – CEO: No, we’ve got some more answers first. Canada CapEx right we are drilling wells out there and we’ve got a few rigs out there. I think four rigs down to three right now or Lean, can you talk about where all that money is spent.
Giullean Johann Strauss – Senior Group Executive, New Business Development, Sasol Petroleum International, Sasol Synfuels Inte: Actually, quite correct. We’ve spent quite a lot of money which we referred to sort of midstream and downstream. Obviously we had to do land clearance and pad establishment. So, we build the site that approaches the facility for the gas also, refrigeration facility for future liquids production. We build a lot of internal pipelines. We had water pipeline supply system and we build a base camp and operation room, water treatment. So a lot of pre-establishment costs that were to put in and, but we also you obviously built it for a bigger size, they are not business related to production for today only, so there was a significant upfront investment.
Alex Comer – JPMorgan: So there should be a material cutting CapEx this year than…?
David E. Constable – CEO: We are looking forward for next year, this year’s CapEx has been fixed, we do this on an annual basis with Talisman, so that was fixed for calendar year 2012, but we are looking into reducing CapEx for next year.
Christine Ramon – CFO: I think just to note the point, Alex, is that, approximately 9% of the total CapEx estimates that I have given you for financial years ‘13 and ‘14 relates to Canada, so should we make any changes then it’s going to influence the numbers.
David E. Constable – CEO: Thanks, Christine. So the last question is on polymers and the pressure that business is under, so we got some CapEx projects coming along to help with efficiency and more sales volume. Andre, could you talk about the polymers situation?
Andre De Ruyter – Senior Group Executive, Operations: Alex thanks. We are doing whatever we can to improve polymers profitability in some very challenging market conditions. Christine referenced the decline in polymer pricing compared to long-term price streams, but the real fundamental of the factors that’s squeezing our margins relates to the fact that in rand terms feedstock process have gone up by 30% and product prices have only gone up by 10% and that’s really put us under a lot of pressure in already challenging market condition for the polymer industry globally. What we are doing about it is we are regularly conducting a comprehensive molecule allocation exercise to confirm that placing our olefins into polymers are still the most appropriate way to go and the most profitable route from an overall Sasol bottom-line point of view and we regularly confirm that, that is in fact the case. We’ve also taken a long hard look at our customer portfolio and we’ve eliminated some learn it back customers and we have moved into higher netback regions. Then we are also continuously looking at cost optimization. So we are pulling the levers that we have at our disposal. If by restructuring you mean shutting down some of our South African plants that would not be in the best interest of the business and we have investigated those options and they don’t make business sense at this point of time.
Raj Naidu – Executive IR: Just raise your hands and then the mic will come around to you. Gerhard is up next.
Gerhard Engelbrecht – Renaissance BJM: Gerhard Engelbrecht, Renaissance Capital. I have got three questions around Synfuels and then just maybe another one. Especially your production guidance for Synfuels now puts us back to kind of where we were in 2010. My question is when do we see the growth program kick-in the additional 3% that you have invested in recent years? Secondly, when do you expect the additional and extraordinary maintenance that you are spending on Synfuels to come to an end? The last question on Synfuels is you are now extending the lives of your mines to what you are saying 2039, I think that’s much longer than the Synfuels depreciable life, do you have an estimate of how much capital you had need to spend in Synfuels to extend Synfuels life to match or exceed the lives of the mines? I have got a follow-up question.
David E. Constable – CEO: Production you saw 7.2 million achieve this year on a great second half. we are guiding 7.2 million to 7.4 million in FY ’13 and guiding I believe 7.3 million to 7.5 million in FY ’14 which will get up very close to – well that is we will get up to the increases that we are – for the growth program in end of FY ’14. Additional extraordinary maintenance, Bernard, why don’t you tell us how that’s going to play out?
Bernard Klingenberg – Group Executive, South African Energy businesses: As you know, in this year we actually made a conscious decision. It has been a little more many on maintenance just to improve our ability and availability, and we’ve seen that deliver good results. We anticipate that for this financial year ’13, the next year, we will continue with additional spend on maintenance, and then we expect that to come off going forward.
David E. Constable – CEO: On the life of Synfuels, we have an aspiration out there to look at Synfuels go into 2050 and that takes a lot of effort on our side as far as capital goes in. We are in that process right now of looking at the capital costs and working through that, will certainly take well into next year to evaluate and get a better handle on. But that’s the plan right now is to look at that type of extension and the related businesses to support that type of aspiration, so that’s in the strategy right now.
Gerhard Engelbrecht – Renaissance BJM: Then just the last question, you showed quite a bit currency translation gain in the first half, my think on forward exchange contracts related to Canada. Then you mentioned currency transaction losses of ZAR1.1 billion in the second half yet the rand weakened. Can you maybe explain why there were currency translation losses in the second half?
Christine Ramon – CFO: I think this talks to the realization of the unrealized profits that we actually booked relating to the Canadian forward exchange contracts and clearly those would have had sort of different exchange rates factored in from what actually transpired in the first half compared to the second half. So, I think clearly in the realization and the unwinding of that coming through that’s where we saw the reversal compared to the first half, but, I mean that clearly offset each other, so it was really a neutral effect. I think there is – clearly, I have to give more detail on that. I think in the analyst book, we actually do disclose what’s opened in terms of forward exchange contracts. Can I get back to you on the actual number? But do you have various expiry dates and their range right through to 2014. So clearly, one would have to take what exchange rates are applicable to the different years.
Raj Naidu – Executive IR: Next up Nishal and we’ll be followed by our last question from the floor. Nishal?
Nishal Ramloutan – UBS: It’s Nishal from UBS. Just a couple of things from my side. Though one is, can you may be just give an update in terms of what’s your plans in terms of upstream exploration and maybe linked to that would your acreage that you actually had in the crew was stopping exploration, have you given up that acreage? Do you need to reapply for that or do you already hold that? Just, maybe in Arya, could you maybe just give an update in terms of the difficulty in doing business in Arya? As you say volumes of production is quite strong, but are you able to ship that product quite easily out and are you able to actually sell it at global prices or are you just pricing that at a bit of a discount? Maybe just one CapEx, for your CapEx profile for FY’13 and FY’14, can you may be just indicate how much is for the growth projects and I see you make mentioned of some possible acquisition of gas assets, is that included in those figures?
David E. Constable – CEO: Let’s see. Starting with Lean, if you can tell us about the plans for some of the exploration and I will take in Karoo and then we will hit it from there?
Giullean Johann Strauss – Senior Group Executive, New Business Development, Sasol Petroleum International, Sasol Synfuels Inte: Our focus on the upstream is firstly in Mozambique. We are currently busy drilling a well in M10. We hope to reach the target depth in this month. We’re also doing seismic on Block A in Mozambique. We continue to drill in (indiscernible) where we have our oil production to sustain the production and obviously we focus on Canada to further produce and derisk at Montney. We have one more asset in Australia, (AC52) but at this stage we are still doing seismic and we will take the decision on drilling there, probably only next year.
David E. Constable – CEO: On the crew acreage, that was technical cooperation permit we had between November 2010 and November 2011 with Chesapeake Energy and Statoil which we did desktop studies on for that acreage, that block and from technical reasons and economic viability that we decide to let that acreage laps, so that’s wasn’t right in the crew and crew basin, but as I said earlier we are extremely interested in getting involved in crew shale gas if we see that we can get the right best practices in place in the country and we will be looking at that very seriously going forward. Our area difficulties, I’ll ask Andre to talk to that.
Andre De Ruyter – Senior Group Executive, Operations: I think the first point to make is that Sasol is very serious about compliance with sanctions legislation U.S, EU and UN and we regularly consult with regulatory authorities in the U.S. to ensure that we do in main compliant. We haven’t had serious challenges in terms of shipping our polymer products. We are still able to move out that product and sell it at market related prices and you will see that profitability of this plant is still, or this complex of plants rather is still pretty good. On ethylene shipping there are some time challenges in terms of insurance on vessels, but that is as a consequence of sanctions being enforced against both insurers as well as ship owners. But all in all I think we are managing the situation. We are making progress on the divestiture process and that’s about all that we can say at this stage and further announcements will hopefully follow in due course.
Nishal Ramloutan – UBS: Then on CapEx ZAR32 billion and ZAR34 billion in FY ’13, FY ’14 that does not include any gas acquisitions upstream, but from a growth prospective Christine can you break that down for us please?
Christine Ramon – CFO: Yes, I think just off the top for FY ’13 approximately about ZAR19 billion worth of growth and for FY ’14 ZAR22 billion worth of growth projects and some of the big projects that does relate to is, clearly some of the Secunda growth program CapEx that needs to be spent under the South African energy cluster, under international clearly it includes the Canada CapEx and about 9% of the total, for both financial years. So per financial year approximately ZAR3 billion relating to Canada and then clearly driven by investment decisions Uzbekistan GTL and Canada GTL and USA GTL and cracker projects included in the balance I think quite importantly these expansion project that was also included in this capital spend here.