Saudi Arabian Mining Co. -Equity Report -09-08-2012

Phosphate drives valuation

Diversifying away from gold, Ma’aden has successfully commenced its phosphate operations earlier this year while the aluminum business is slated to start by 2014. We remain bullish on the performance of the phosphate segment and expect it to stabilize by 2013, contributing substantially to the company’s bottom-line. The demand outlook for DAP appears positive despite a slowdown in the global economy. We have kept conservative near-term production forecasts for the gold segment, though we have increased our terminal growth rates for the phosphate and gold segments to account for the long-term projects that Ma’aden is currently investing into. We feel investors should look at the long-term growth prospects of the company. We maintain our Overweight rating on Ma’aden and increase our target price to SAR37.

Valuation: We remain Overweight on Ma’aden and have raised our target price to SAR37 (from SAR31) mainly based on the visibility of the phosphate segment, which we believe will become stable in a year’s time. Our analysis suggests that phosphate is indeed a major source of Ma’aden’s valuation. While on peer valuation, Ma’aden is trading at higher multiples (2013 PE of 27.5 and EV/EBITDA of 10.0), which we believe will substantially come down once the new businesses gets stabilized.