• Operational earnings rise marginally, as expected Maaden reported its 2Q16 results yesterday with net income falling 22% Q-o-Q (-51% Y-o-Y) to SAR132mn, 8% above our forecast as minority interest was lower-than-expected. Revenues jumped 12% Q-o-Q to SAR2.55bn (+3% vs EFGe) on i) higher gold and DAP volumes (+58% and 18%, respectively); and ii) improvement in gold (+5%) and aluminium prices (+4%). Operating income of SAR326mn was in line with our SAR324mn forecast and was 8% higher than the previous quarter driven by the higher aluminium and gold prices as well as the surge in gold volumes following the commercial start-up of Ad Duwayhi gold mine. We remain sellers of Maaden as we continue to view the current valuation level as excessive.
• Rising interest rate environment in Saudi weighs on bottom line As we previously highlighted, the rising interest rate environment in Saudi has started to take a toll on Maaden given its highly leveraged balance sheet. Despite the improved operational earnings Q-o-Q, a 28% surge in interest expenses weighed down the bottom line and was the main driver behind the weaker numbers Q-o-Q. The SAIBOR has surged 150bps Y-o-Y and c70bps YTD as liquidity has dried up in Saudi following the crash in oil prices at the end of 2014 and this has driven an 80% increase in interest expenses from a year ago. We reiterate our view that earnings are likely to continue to be weighed down by rising interest rates in Saudi.
• Price outlook outside of gold is not encouraging Both aluminium and DAP prices have been under pressure on the back of volatile demand levels globally as well as oversupplied markets, mainly driven by excessive capacity growth in China over the past few years. We expect this to continue in the medium term as it will take time for demand to catch up and for the market to work off the excessive inventories in the system. Gold prices have so far outperformed our expectations as global uncertainties have encouraged safe haven investment in gold, but this is unlikely to add much value to Maaden given its limited gold exposure.

Yousef Husseini