Norsk Hydro ASA

OSE:NHY

Earnings Call Transcript 2021-Q3

[Therese Rød Holm]

Good morning, and welcome to Hydro's Q3 2021 Presentation and Conference Call. My name is Therese Rød Holm, I'm Head of Communication and Public Affairs in Hydro. We will start off with the presentation followed by a Q&A session. Our CEO, Hilde Merete Aasheim, will start the presentation; followed by our CFO, Pal Kildemo. With that, I turn the microphone over to you, Hilde.

[Hilde Merete Aasheim]

Good morning, and welcome from me as well. It's really a pleasure to welcome you back to regular and that we finally have a chance to meet in physical. Also, welcome to all that are following us on the conference call. So let me go straight to the highlights for the quarter. We report a record EBITDA of NOK 7.2 billion, while free cash flow came in at NOK 2.8 billion. Free cash flow is influenced by a working capital buildup, mainly due to higher prices. We are pleased to see a positive trend in 12 months rolling ROACE from 9% in the last quarter to 13% in this quarter, exceeding our overall profitability goal of adjusted ROACE of 10% over the cycle. In the quarter, we see a tightening of the aluminum market with rising demand, but also supply constraints worldwide. These conditions have driven up the LME cash price for aluminum and premiums with LME at a record USD 3,000 per tonne levels. This has resulted in a record high result in aluminum metal of NOK 4.3 billion. I'm pleased with the development in the Bauxite & Alumina business area. Alunorte and Paragominas continue to deliver production at nameplate capacity in Q3 as they have done in the last 3 quarters. And as part of the focus on the increased robustness in Brazil, we are continuing in our effort with full force in the area of climate, environment and social responsibility, which is very important also for the Hydro total sustainability agenda. I'm extremely pleased to announce that as of Q3, we have already reached our full year 2021 improvement target of NOK 5.1 billion. In energy, dry hydrological conditions have resulted in lower production volumes for the quarter. Actually, in Q3, Hydro was a net purchaser of power. However, the negative effects of the spot purchases were mitigated by price area differences. We are continuing to execute on the 2025 strategy in the quarter. Later in the presentation, I will present key developments in the area of strengthening our low-carbon aluminum position as well as growing in the new energy areas. But let me start with what is the most important in Hydro, and that is health and safety. Health and safety is our top priority in Hydro, both for our employees and the communities where we operate. An injury-free environment is our ultimate goal, and we are continuously working to avoid any incident. There has been a slight uptick in incident in recent months if we compare to 2020, but due to much higher activity levels, although that can never be an excuse. In terms of COVID, we continue to follow national guidelines. In some countries where we operate, COVID is still prevalent, and we are operating accordingly. While in other countries, we are returning to normal. And I'm pleased to welcome colleagues back to their workplaces where restrictions now have been lifted. And let me use this opportunity to say that I'm very impressed with -- about how our organization have handled the COVID situation, a very special situation, during a long period of time. Now let's move to the market. We have seen a strong demand in 2021, driven by global recovery and fiscal stimulus. At the same time, we have seen supply chain bottlenecks with consequences spreading to all corners of the economy. In particular, we have seen supply constraints due to power rationing as well as policies limiting energy consumption in China. High energy prices in Europe have also forced smelters to curtail aluminum production. In addition, we are seeing higher raw material prices and looming shortages for key input materials. All these factors have driven aluminum prices up to record levels with LME prices, as I said, above USD 3,000 per tonne. Premiums has also been record high, indicating a very tight physical market, especially in U.S. and in Europe. Extrusion billets is the strongest product area, while foundry alloys is weaker due to softer automotive demand. The longer-term demand outlook for aluminum remains very positive due to increasing investment in infrastructure and renewable energy as well as electric vehicles. Let's now look at the global aluminum balances in light of these drivers that I just mentioned. If we look at the supply and demand balance to the left on this picture, both Worldex China and China are in deficit in Q3. On the supply side, we have seen production cuts mentioned earlier. In terms of demand in China, we are seeing now a cooling off also due to the power situation. But outside China, we still see strong demand, especially in building and construction and sectors like packaging. Automotive has, however, been weaker due to shortage of semiconductors. With this backdrop, the overall outlook for 2021, among the external consultancies, is a deficit, indicating an overall consensus that the market is tight also going forward. In this market and the conditions that we have seen over the last months, inventories has also been reduced, especially in Worldex China. And we are now, as you see to the right on the graph, we are now approaching the long-term equilibrium level for global stocks of around 50 days of consumption. Now let's take a look at the materials -- the raw material side of our products. As with the revenue drivers, cost elements are also impacted by the general market developments. As you see here, for all the key raw materials in producing alumina and aluminum, we have seen rising market prices actually since the second half of last year. Based on the current prices we see in the market for these material, this would negatively impact our cash cost in Q4. Due to the power rationing in China, we see supply constraints particularly for alloying materials, such as magnesium and silicon produced in China. These materials are important in our value-added metal products like in extrusion billets, in sheet ingot as well as in foundry alloys. For magnesium, we have current inventories in Hydro and current inventories and shipments on the way, which cover our production for the remainder of 2021 and early in 2022. We have teams working on the ground in China with our long-term supplier to secure shipments of these materials for the upcoming year. In silicon, we have the similar coverage as with magnesium. But with silicon, we are better positioned as there are more countries worldwide producing silicon and even some closer to home in Europe. Now I would like to briefly mention the alumina market where developments in late Q3 are pushing up prices. During Q3, we saw that alumina prices were rising from a level of USD 285 per tonne in the start of the quarter to USD 455 per tonne in September 30. And now the alumina price is currently around USD 480 driven by a concern on the supply side. In China, we see that alumina prices is at an all-time high. Power shortages, energy consumption limitations and also weather-related curtailments have disrupted the supply of alumina, even despite demand of smelters have come down. Outside China, production disruption in Brazil and in Jamaica have also tightened the market. The result is that in the Atlantic market, we see a deficit, and this is expected to continue in Q4 as we have seen now in Q3. Let's now move to the energy market. We understand that there has been plenty of interest in our energy sourcing platform recently as the global energy prices has spiked during 2021. As mentioned earlier, the rising energy prices throughout Europe have triggered several smelter curtailments. Our portfolio in Hydro is well hedged against volatile markets. In Norway, our smelter portfolio is essentially fully secured up to 2030, as you see in the middle of this graph. In our joint venture smelters to the right, we have a shorter position in Slovalco, the joint venture we have in Slovakia, which has a contract expiring next year. In anticipation of that, we have hedged both LME and power for the next year in Slovalco for 80% of the plant's capacity. When it comes to the rest of the portfolio, our recyclers in aluminum metal, they use gas and have a coverage ratio of between 80% to 100% for 2021 and have locked in 70% in 2022. Similarly, in Extrusion, 60% to 70% of gas and power volumes are locked in for 2022. Let's now move to the sales in Extrusion. We see continued strong demand in Extrusion. However, there are some signs of weakness in certain markets. For Hydro Extrusion, we saw a 13% increase in our sales volume in Q3 compared to Q3 last year, outperforming the market. The quarter saw growth in nearly all segments with the exception of automotive, which you see on the slide to the right -- to the, what is it, to the left, where general supply chain issues in the automotive segment has impacted the growth. For Q4, CRU expects a growth of 5% and 2% in Europe and North America, respectively, and we expect to grow in line with the market for the remainder of the year. Now let me give you an update on our execution of the Hydro 2025 strategy. As some of you would recall from our Capital Markets Day last year, we set out a clear strategic direction towards 2025, where we aim to strengthen our position in low-carbon aluminum, while also exploring opportunities in new energy, seizing opportunities where our capabilities match the mega trends. Strengthening our position starts with what we can influence ourselves, the improvement program. And here, I have to say that I'm really impressed about our organization's ability to continue to improve and focus on cost discipline even in today's very strong market. Continuous improvement is part of the way we work, always looking for ways to be better than the day before. With this mindset, we have been able to deliver on our accumulated improvement target for 2021 of NOK 5.1 billion compared to the 2018 baseline already at Q3. And all of our businesses are contributing. But the key enabler of the improvement program has been to secure robust operations in Brazil. And as I said, to start with, Alunorte and Paragominas is now on a good path and have delivered at nameplate capacity throughout 2021. In the improvement program in the business area, Bauxite & Alumina, we have also focused a lot on asset integrity and preventive maintenance management system in order to secure the integrity of the critical equipment in the plants as well as the pipeline, the 240-kilometer pipeline going from the mine to the refinery. And this has been a key to more robust operations in Brazil. In aluminum metal, I'm really pleased that Husnes has been ramped up to full capacity and are at full capacity in Q3. In Extrusions, we see continued effort in terms of positioning the portfolio. We see the effect of the restructuring efforts that we actually started in 2019 and also the SG&A focus throughout the whole portfolio, which has resulted that we have actually come ahead of the plan and enable us to reach our 2021 goal already in Q3. In addition to the improvement program, we focus on commercial excellence. And in addition to the improvement program, we have a commercial ambition of realizing NOK 1.5 billion in market and customer growth opportunities by 2025. And also here, I would say that we are on track. Through 2021, we have seen a strong traction and a sizable uptick of more than 200% in low-carbon aluminum sold relating to Hydro REDUXA and Hydro CIRCAL. If you compare that to what we -- the sale we had in -- at Q3 last year, we have increased the sale of 200%. And this is a good example of how these low-carbon aluminum products is in demand and also enable us to differentiate ourselves in the market. And both when it comes to REDUXA and Hydro CIRCAL, aluminum metal get a premium on these low-carbon products. Our commercial ambition is also about how we go to market and about our positioning in key market segments. Let me give you one example from the automotive segment. Currently, around 15% of the Extrusion business is in automotive, where 30% of aluminum metal business supports the automotive sector. And here, we have ambition to grow our share. For years, we have talked about a lot about a lot of -- about aluminum in vehicles, and there was at a point a goal of seeking to reach 100-kilo aluminum per vehicle. Now we are actually seeing a doubling of aluminum in modern electric vehicles. Aluminum lightweight make it good fit here, both in structural part as well as the battery case and the charging stations, where aluminum has become a key component. In the plug-in vehicles, we see nearly 1.5 -- or 1.5 increase in the aluminum content compared to standard combustion engine cars. Going forward, we see a rising mix of electrical vehicles versus standard combustion vehicles being sold and will be a key driver for aluminum demand going forward. By 2035, we actually expect that more than half of vehicles sold worldwide will be electric. Regulation will also drive the sale of electrical vehicles. EU, for example, is planning to ban all nonzero emission cars from 2035 onwards. And in line with these trends and in line with the rest of the world, EVs are also increasing its market share in China, and that is why we have recently decided to add a new large-sized automotive press in our extrusion plant in Suzhou in China. The press in Suzhou will produce advanced safety critical components to serve the fast-growing mobility sector in China, strengthening our position in the sector and region as well as growing with global customers also entering the Chinese market. The investment in Suzhou comes in addition to an expansion that we announced in second quarter, an investment in Cressona, our facility in New York in North America, to support the growing transportation market there. In aluminum metal, we are also strengthening position in automotive. The expansion of Rackwitz recycling plant will enable the site to produce high-forged billets. And this can be forged straight after delivery at the customer into high-quality automotive components like wheel suspension parts without further steps like extrusion or homogenization, and this is really an exciting products that we also grow in our Husnes plant. The car producers are not just interested in lightweight, but we see also now more and more focus on low carbon aluminum. And this creates opportunities for Hydro in terms of our production of low-carbon aluminum. One example is aluminum metals' long-standing Italian customer, Cromodora Wheels, which where we provide -- where they provide aluminum wheels to premium European car makers such as Mercedes, BMW, Audi and Ferrari. During 2021, Cromodora Wheels made Hydro REDUXA a significant part of their aluminum supply for wheel production. And what they say to us is that they are only not focusing on lightweighting the car, but now also this will help to reduce the vehicle's carbon footprint in the production phase. And we are proud to serve Cromodora Wheels with Hydro REDUXA produced our Årdal and Sunndal plant. Now keeping on the topic of low carbon, I would like to revert to recycling. Recycling will play a vital role in both the low-carbon economy and by keeping more materials in the loop. It will actually promote and defend aluminum. We believe that recycling has a great potential, both in terms of profitability and sustainability. We have an ambitions, as we have reported earlier, to grow the current recycling business substantially; to double our use of post-consumer scrap; lifting EBITDA between NOK 700 million to NOK 1.1 billion by 2025 at attractive returns. So far in 2021, we have announced 75,000 tonnes of additional post-consumer scrap capacity with both investments decision and a letter of intent. In Extrusion, we have made 3 investments decisions in North America and Europe lately, totaling 25,000 tonnes of post-consumer scrap capacity. The newest investments from Q3 is in the Dallas in the U.S., which allow us to increase post-consumer consumption by 10,000 tonnes and help us also to reduce or to use less energy, secure our internal billet supply and also reduce metal costs. And that's what is good with recycling, it both support profitability and sustainability. In aluminum metal, we have signed a letter of intent to build a recycling plant in Michigan in the U.S., 120,000 tonnes, which will make the first large-scale production of low-carbon Hydro CIRCAL in North America. And the expansion that I mentioned in Rackwitz will significantly increase also the use of post-consumer scrap at that facility. So I'm excited on this journey, and we will continue to mature the attractive pipeline of profitable investments that will help us to achieve the 2025 goal. So far, we are well on track to meet that target. In fact, we see further opportunities beyond our 2025 target, such as closed-loop recycling of customer scrap with customers in an ecosystem as well as opportunities going into more advanced sorting and shredding in order to dig even deeper into the scrap pile and to be able to bring the aluminum back and increase our PCS content further in our products. Now let me move on to the status in our sustainability program, which is a very important part of Hydro 2025 and our positioning going forward. The last report from the UN panel on climate change and the upcoming COP26 in Glasgow underline the time has come to turn words into action on climate, but also on sustainability overall. We have set clear ambitions for 3 sustainability areas in Hydro: climate, environment and social. Let me start with climate. Our target is to reduce our CO2 footprint with 30% by 2030. This will strengthen our low-carbon aluminum position further. Today, we are in the market with primary products produced with renewable energy with a carbon footprint of less than 4-kilo per produced kilo aluminum. The world average is 16.5. With the 30% reduction -- with the 30% CO2 reduction by 2030, we will be able to be in the market with aluminum produced on renewable energy at the CO2 footprint of 2. A key enabler for the 30% reduction is the change in the energy mix in Brazil. By 2025, we will replace oil with gas on the calciners in Alunorte, and we will replace coal on all boilers in Alunorte with electricity by 2030. We are on track to deliver on this target. During Q3, we executed a definitive commercial term with New Fortress Energy, which is a company that will supply us with natural gas to Alunorte. New Fortress Energy is now building the terminal to get the gas onshore and produce the LNG. And then we have started our preparation on the infrastructure in Alunorte to receive the gas. But we are also working beyond the 2030 target in order to move us towards net zero carbon emission and net zero carbon products by 2050. Currently, our technologies are busy working on several paths on how we can get the carbon out of the electrolysis process, which is really what is left when we talk about 2. And we're working on different parts. We are looking into carbon storage and capture, to capture the CO2 from the cell, from the electrolysis cell. That's one path. But then we're also looking on a complete new process to produce aluminum, what we call a chloride process. This, we will come back on to give you more insight on the Capital Markets Day. At the same time, as we're working on the carbon emissions from the processes, we will continue to focus on the power source, which is really what differentiates the low-carbon products today in order to be able to produce aluminum with the lowest footprint also going forward. And here, both REIN and our new hydrogen company, will be important in order to develop more renewable energy and hydrogen available for our plants. In environment, our main focus is reforestation of mined areas as well as reducing landfills and waste from our processes. We can simply not leave anything behind anymore. Also here, we have a lot of focus in Brazil. We continue to see positive results from our rehabilitation efforts at our bauxite mine in Paragominas. We have the target of 1:1 rehabilitation, and that is about rehabilitating mined areas within 2 years. This quarter, our biodiversity research consortium, which is a combination of the University of Oslo and University of Pará, together with our own people. They have reported returns of native bird species to our rehabilitation areas, which we see as a very positive indicator of the rehabilitation quality. In terms of reducing landfills and reducing waste from our processes, the focus of last year has been to execute on the new technology, the tailings dry backfill at our bauxite mine. This technology eliminates the need for permanent tailings storage facilities, which is a huge step forward in terms of sustainability, but also CapEx avoidance going forward. The next step then is to focus on bauxite residue generated by from our alumina refinery in Alunorte. And here, we have also now have an extensive program both with the universities in Brazil, but also with commercial companies, where we look to -- for options to utilize the bauxite residue into other products. This program underpins our target to utilize 10% of our bauxite residue annual output by 2030. Finally, we have an active social responsibility agenda in Hydro with the ambition to make a positive difference in all communities where we operate. We have a special focus in Brazil, when we have made good progress and we noted the strengthened dialogue was key to successfully mobilizing and supporting local communities during the COVID pandemic. But let me share a few examples from our latest initiatives. Recently, we have committed BRL 25 million to support a technical school in Barcarena. The school has a space of 1,500 students and is a building block for us hiring locally, which is to build that society as well as supporting our overall corporate goal of empowering 500,000 people with skill and education by 2030. We have also recently committed BRL 160 million to construct 3 community centers in the city of Belém. These community centers will be basic support and recreation spaces for some of the most under development -- underdeveloped areas in the city. Finally, before I give the word to you, Pal, let me give a short update on progress in the new energy areas. Hydro REIN's ambition is to take an active developer role of renewable energy, and our focus is on building a robust and profitable project portfolio together with partners. The team has screened more than 20 gigawatts of projects in Brazil and 7 gigawatts in the Nordic during the last year. A number of promising projects are now being matured together with partners. One example is the 260-megawatt wind power project Stor-Skalsjön, developed together with Eolus. On this project, we expect to make the formal investment decision in Q4. In REIN, the timing of a potential IPO depends on multiple considerations, including operational milestones, project readiness, capital requirements and market sentiment. We will further mature REIN internally before initiating a listing process, which we expect now in 2022. Moving to our battery area. Here, our ambition is to build profitable battery business by being an active industrial developer and owner. We will leverage on Hydro's core capabilities to industrialize on scale innovations. Here, we aim for early entries in companies to ensure impact and value creation and have spent time to learn and understand the battery value chain. So far, we have succeeded in creating significant uplift on invested capital. We have achieved a value uplift of 4.5x of invested equity based on valuation in third-party transactions driven by early investment in Northvolt and Corvus. This corresponds to an internal rate of return of 75% to 80%. We are also excited to see Hydro Volt commence operation later this year. Hydro Volt is a joint venture with Northvolt and will recycle electrical vehicle batteries. I'm pleased to hear that their order book for 2022 is already full. Finally, on our [ JVI ] with Panasonic and Equinor, we intend to produce batteries for electrical vehicles in Norway, the work to explore this opportunity continues. And finally, to our third new energy area, hydrogen. We have named our green hydrogen company, Hydro Havrand, and are currently ramping up our organization and capabilities. For Hydro and aluminum, green hydrogen can play a role across the value chain and help reduce the carbon footprint of our metal. Hydro has a substantial long-term potential for using green hydrogen at some 80 sites worldwide, and this is a powerful starting point for Hydro Havrand. But Havrand will work closely with industrial customers like Hydro, but also other industrial customers to supply both hydrogen and the needed fuel switch solutions, and they will also offer green hydrogen to the maritime and transport sectors. The company is now maturing a pipeline of project and also a strong partnership in order to expand the reach and size of the coming hydrogen production. Finally, I could mention that I'm pleased to see that the draft guidelines for CO2 compensation in Norway include green hydrogen, and this is an important step in increasing competitiveness in this industry. And with that, I give the microphone to our CFO, Pal Kildemo, for a financial update.

[Pal Kildemo]

Thank you, Hilde. A warm welcome from my side as well. I will walk you through our financial results for this quarter, where we are pleased to report the highest quarterly results we've ever had since becoming a pure-play aluminum company and it looks like we will have several such good quarters to come if we look at the current market prices. Let's start with the high-level result overview. Adjusted EBITDA for the third quarter was NOK 7.2 billion. This is up from NOK 3.1 billion in the same quarter last year. On the positive side, we have experienced higher all-in metal prices and volumes within aluminum metal with realized LME price up by 52% compared to Q3, while realized premium is up 113% compared to what we experienced last year. Realized alumina prices also contributed positively as they are up 16% compared to last year. This results in NOK 6.2 billion positive effect from positive aluminum and alumina prices. Upstream volumes are now on nameplate production at Alunorte and close to full production in aluminum metal, and this contributes another NOK 0.8 billion. We also have NOK 0.8 billion increase from margins and volumes in Extrusions. Here, the positive margin development is also impacted by metal effects from the sharp increase we've seen in the billet premium. Lastly, on the positive side, we have higher results in energy mainly driven by a large positive impact from area price differences in Norway. These positive developments are partly offset by higher raw material and fixed costs across the business areas, negative currency impacts, mainly driven by a weaker dollar against the NOK and BRL, and lower other and eliminations. And we will dive into these details per business area as we move forward. If we then move over to the key financials for the quarter. The year-over-year revenues increased by about 33% to NOK 36.7 billion for the third quarter. Compared to the second quarter, the increase was 6%. Developments are mainly related to higher prices for both periods of comparison. Adjusted EBITDA came in at NOK 7.2 billion. For the quarter, there was around NOK 2.6 billion in adjustments to EBITDA, and this includes NOK 3 billion on adjustments from unrealized losses on LME-related contracts mainly related to our strategic hedging positions entered into in recent quarters. Other sizable adjusting items in the quarter worth mentioning include around NOK 300 million from unrealized losses on power and raw material contracts, unrealized gain status, NOK 250 million related to the sale of a property in Germany and NOK 200 million in adjustments to earlier community contributions in Brazil. Moving on, we had adjusted depreciation and amortization of around NOK 1.9 billion in the quarter, resulted in adjusted EBIT amounting to NOK 5.3 billion. Financial expenses of NOK 913 million for the third quarter included a net foreign exchange loss of NOK 622 million, and this primarily reflects a loss from a weaker BRL versus dollar affecting dollar-denominated debt in Brazil. Our tax expense amounted to NOK 494 million, and that is quite in line with our 30% guiding over the cycle. Overall, this provides a net income from continuing operations of NOK 1.1 billion, up from negative NOK 111 million in the same quarter last year. And this is down from NOK 2.4 billion in the second quarter. Adjusted net income was positive NOK 3.5 billion compared to NOK 607 million last year in Q3 and NOK 3.2 billion in the second quarter. Consequently, adjusting earnings per share was NOK 1.6, up from NOK 0.28 in Q3 '20 and NOK 1.45 in the second quarter. Let's then move into the business areas. Adjusted EBITDA for Bauxite & Alumina increased from NOK 578 million in the third quarter last year to NOK 1.06 billion in the third quarter this year. The higher alumina sales price by $42 and increased production volumes were partly offset by increased prices in all raw materials compared to the third quarter of 2020. The third quarter saw positive effects from volumes and realized alumina price with Alunorte producing around nameplate capacity in Q3 with an annualized rate of 6.32 million tonnes compared to an annualized rate of 4.3 million tonnes in Q3 last year. Compared to the second quarter of 2021, the adjusted EBITDA increased by NOK 200 billion. Higher alumina sales prices lifted the results by around SEK 300 million, but this was fully offset by higher costs, driven mainly by energy cost and also including the maintenance of coal boilers we had in the quarter. Lower costs related to our decommissioned crane used for unloading bauxite from ships and a positive effect from booked tax credits contributed positively with NOK 200 million in the period. If we look into Q4, Alunorte production is expected to remain around nameplate capacity. In addition, compared to the third quarter, current alumina prices indicate a significant earnings uplift, but which we currently expect to be partly offset by around NOK 100 million in higher raw material costs given current market prices, and this is mainly caustic soda as well as a larger similar amount for partly seasonally higher fixed cost. Although we are seeing an Atlantic premium in the marketplace right now, we expect to see limited benefit from this until our contract structure changes in the years to come. Moving to aluminum metal. This quarter, adjusted EBITDA for aluminum metal increased from NOK 404 million in the third quarter last year to NOK 4.3 billion in Q3 '21, a 10x increase. The increase was mainly due to higher all-in metal prices and volumes, partly offset by negative currency effects and higher raw material costs, and these are mainly alumina, energy and carbon. Compared to the second quarter of 2021, adjusted EBITDA for aluminum metal increased by NOK 1.5 billion with NOK 1.5 billion due to higher all-in metal prices, and then positive currency effects and lower fixed costs were offset by higher energy and carbon costs of around NOK 500 million. This is mainly driven by LME index contracts and higher coke and pitch prices. For Q4, 72% of our primary production is priced at $2,646 per tonne and 59% of premiums affecting Q4 is booked at around $680 per tonne. And in total, Q4 realized premium is expected to be in the range of $535 to $585 per tonne. Compared to the third quarter, we also expect increased raw material prices in Q4 '21, around NOK 1.3 billion at current market prices, where the majority comes from the higher alumina prices, which we benefit from in Bauxite & Alumina, given our net long position and also carbon costs. In addition, we expect seasonally higher fixed cost. When it comes to the CO2 compensation of NOK 180 million that we're currently booking per quarter for the Norwegian smelters, Hydro is pleased that the government has suggested a compensation scheme for ETS phase 4 from '21 to 2030, that to a large degree, reflects the ETS guidelines and utilizes the upper threshold of 75% compensation provided for under the ETS guidelines. This also seems to be reflected in the proposed national budget for 2022.For this quarter, Metal Markets delivered an adjusted EBITDA of NOK 170 million compared to NOK 233 million in Q3 last year. The decrease is due to reduced results from the commercial activities and negative inventory valuation effects on the sharply increases prices that we've seen. This is partly offset by improved results from the recyclers on higher premiums in Europe and positive currency effects. Excluding the currency and inventory valuation effects to go to performance EBIT, the result for the quarter was NOK 212 million, which is down from NOK 297 million in the third quarter last year. If we look into the next quarter, as always, remember that trading results and currency effects in Metal Markets are, by nature, volatile. If we move to Extrusions. The adjusted EBITDA was roughly stable at NOK 1.46 billion in this quarter versus NOK 1.41 billion last year. Comparing the Q3 results to the previous year, we see a positive impact from higher volume and margins, but this is partly offset by somewhat higher variable and fixed costs. The margins are also positively impacted by a positive metal effect due to the strong increase that we've seen in premiums, which will be neutral if premiums flatten out or negative if premiums start declining. It is also important to note that the results for the third quarter in 2020 were impacted by around NOK 260 million in positive one-offs, including insurance compensation related to the cyberattack, whereas the results in this year have NOK 60 million in negative one-offs. Compared to the second quarter of '21, the adjusted EBITDA was lower, mainly due to seasonally lower volumes and higher fixed costs and variable costs were partly mitigated by higher margins. In Q2, we expect seasonally lower volumes as the fourth quarter typically has the lower activity levels of the year due to planned maintenance. In addition, if we compare to the fourth quarter last year, we expect higher volumes, but we expect lower margins driven by short-term margin pressure from increasing inflation and also negative effects from supply chain volatility. And this includes the negative impact of the ongoing chip shortage. As mentioned during Q2, we expect a gradual normalization of the cost base post COVID and some further fixed costs are expected to return in the fourth quarter. And this is in line with our earlier guidance of around 30% of costs coming back compared to the lowest level in the COVID period. If we move to Energy, then adjusted EBITDA for Energy increased from NOK 200 million in the third quarter of '20 to NOK 465 million in the third quarter of '21. The increase was mainly due to a change in the power contract portfolio, including positive effects from the expiration of a legacy purchase contract, increased gains from price area differences and improved commercial results. This is partly offset by a negative impact from significantly lower production, which resulted in net spot purchases in the third quarter at higher prices. The gain from price area differences arises mainly due to production sold in Southwest Norway at higher prices than in Mid-Norway, where a significant share of our delivery commitments are. Compared to last quarter, the adjusted EBITDA decreased mainly due to lower production, partly offset by an increased gain from price area differences, which amounted to NOK 300 million in the quarter. If we look into the fourth quarter, then the price and volume uncertainty are, as always, large. And production and prices will depend on hydrological conditions going forward. Current market conditions could lead to a low or even negative spot position in the fourth quarter, but we could also have a positive spot position. The average NO2 price as of the 22nd of October is NOK 1,024 per megawatt hour, with a price difference spread between NO2 and NO3 at NOK 746 per megawatt hours. If you use this price area spread differential quarter-to-date for the full quarter, this will give an effect of approximately NOK 730 million positive based on current estimated production levels. But if the price differential moves together again, that figure could become much lower. Now let's conclude the financial part with the development in net debt during the quarter. Based on the starting point of NOK 3.6 billion in net debt from Q2, our overall net debt position decreased by NOK 2.4 billion quarter-on-quarter to NOK 1.2 billion based on the following. In Q3, we generated NOK 7.2 billion in adjusted EBITDA. Net operating capital increased by NOK 3.4 billion, mainly driven by increased prices. Q4 development at current spot prices is expected relatively flat on operating capital as seasonal release is offset by further price and FX effects. And this ends a full year estimated build of around NOK 7 billion in operating capital. Out of this, changes in price and effect, including CO2 compensation, explains NOK 6.5 billion of the build. We also see some inventories across the value chain increasing somewhat compared to the very low levels at the end of last year, but these are desired increases to ensure we have robustness to deliver on the products that we need to get out in this very tight market. Other operating cash flow adjustments amounted to NOK 600 million negative, driven mainly by tax expenses and interest. Net investments were NOK 0.5 billion for the quarter. This includes NOK 1.5 billion in investments, but this is offset by cash inflow related to divestments of NOK 0.3 billion and a NOK 0.5 billion received as part of optimization of the capital structure of the Hydro pension fund. As a result, we generated free cash flow from operations excluding collateral of a positive NOK 2.8 billion in Q3. This number also excludes cash optimization effects related to purchases of money market funds reported as part of operating cash flow and included in short-term investments. In addition, we had NOK 0.4 billion in other, which are mainly FX effects, new leases and cash from discontinued operations. At the end of Q3, net debt was NOK 1.2 billion, and this is significantly down from the NOK 7.8 billion at the end of Q4 2020. If we move to adjusted net debt, we start by adjusting for the NOK 6.3 billion in collateral included in the net debt for Q3 mainly related to strategic and operational hedging positions. The next adjustment of NOK 3.6 billion reflects, among else, asset retirement obligations as well as assets in Hydro's captive insurance company that are not available to service Hydro that. And we have a small pension net asset of NOK 0.6 billion. With these adjustments, we end up with an adjusted net debt position of NOK 10.5 billion at the end of the third quarter. And finally, we would also like to give an update on the CapEx forecast for 2021. We have now reduced the forecast from NOK 8.5 billion to NOK 7.5 billion, and we will revert with our long-term CapEx update on the Capital Markets Day, which is coming up in December. Then I would like to give the word back to you, Hilde, for final remarks.

[Hilde Merete Aasheim]

Thank you, Pal. Our key priorities is straight. It's about health and safety first. We will continue to capture opportunities from a very strong market and to grow both volumes and margin. Robust operations throughout the company will be an important enabler to continue to deliver on the strong customer demand. The improvement program is crucial to deliver on our strategic direction and will continue with full force. Our cost program and commercial ambitions have strong momentum and is well anchored in the whole organization. We will continue to execute on our 2025 strategy to strengthen our position in the low-carbon aluminum segment and grow in the area of renewable growth, batteries and hydrogen. And I look forward to give you further update when we meet, hopefully at the Capital Markets Day in December. So by that, thank you very much.

[Therese Rød Holm]

Thank you, Hilde and Pal. Then we will start with the Q&A. Please note that you will need to dial in to the conference call if you're joining us digitally or be physically present here in order to ask questions. It will not be possible to ask questions over the webcast. And we will start with the ones joining us digitally today. So operator, we're ready for that session. Thank you.

[Operator]

[Operator Instructions] So the first question comes from the line of Ioannis Masvoulas from Morgan Stanley.

[Ioannis Masvoulas, Equity Analyst]

I've got 3 questions. The first on Bauxite & Alumina. If we look at unit costs in Q3, they were probably a bit lower than I was expecting at least, as you have previously guided around input costs and maintenance that could lead to up to $17 increase, and that wasn't really the case when we look at the results today. Could you talk about the mitigating factors here? Is there any catch-up on maintenance in Q4? Second question, you talked about aluminum metal in Q4 in terms of raw material costs in the order, I think, of NOK 1.3 billion, which feels a bit higher than I was expecting. Again, can you split it between alumina and carbon costs? And also, is that including the seasonal fixed costs? Or does that come on top? And lastly, on magnesium, given your discussions with Chinese partners, how comfortable are you that the supply risks for 2022 can be mitigated at this stage? And what is actually the risk here? Is it about switching to standard [ ingot ] material if you're not able to procure magnesium? Or is there a risk to some of your smelting either primary or secondary operations?

[Pal Kildemo]

Want to start with the last one?

[Hilde Merete Aasheim]

Yes, I can take the magnesium. Thanks for that question. We are following the situation very cautiously. And as I said in my presentation, up to now, we have supplies during the first quarter next year. But our people are working very close with the magnesium suppliers. It's very much about how China now developed in terms of their energy situation. We have also seen that they will bring in more coal in terms of supporting the supply of energy in general. And that remains to be seen how that will affect the current production of 50% of magnesium in China. Let's say the mitigating actions we have is obviously to convert to other products could be also to -- for a certain period of time to produce the standard. But we have to sort of follow the situation closely to -- and to use these measures as we see how the situation evolves.

[Pal Kildemo]

And if we move on to the raw material side, you are correct that the raw material cost in B&A ended up a bit lower than what we expected a quarter ago, where we said that cost on the energy side would be around $12 higher, quite a lot influenced by maintenance on coal boilers. We were able to run our operations more efficiently from an energy matrix perspective than what we have planned for, and that reduced the cost somewhat. And we do not expect to have a large negative from that in the fourth quarter. If you look at aluminum metal, yes, it is a large increase into the fourth quarter on the raw material costs. We were a bit lower than what we were expecting in this quarter, mainly on the coke and pitch and carbon side. That moves more forward into next quarter. So of the NOK 1.3 billion or so, 50% plus, let's say, 50% to 60% is driven by alumina. The rest is mainly carbon and a small element on energy.

[Ioannis Masvoulas, Equity Analyst]

Okay. And sorry, just to clarify on magnesium. So you don't foresee a potential shutdown if any of your facilities is more about switching the mix to accommodate the material that you have available? Is that the case?

[Hilde Merete Aasheim]

Well, we look at all the alternatives. And obviously, if there would be a long shutdown in terms of magnesium and silicon metal, there will be, let's say, consequences. But we hope that to see that the production will come back in China, and we are consciously evaluating all alternatives, obviously.

[Operator]

The next question comes from the line of Liam Fitzpatrick from DB.

[Liam Fitzpatrick, Head of European Metals and Mining]

I'll take 3 questions as well. Sorry there's a bit of an echo. Firstly, on REIN, so you pushed the IPO back. Just wanted you to confirm if the plan is still not to use the Hydro balance sheet to fund those growth plans. That's the first question.

[Hilde Merete Aasheim]

That's right. That's right.

[Liam Fitzpatrick, Head of European Metals and Mining]

Number two on Extrusions. It's still a very good performance there in terms of margins, and you've been messaging this return of costs for some time. So how much -- that 30% that you mentioned, how much of that is already back in the Q3 numbers? And when do you expect all of these costs to fully return? And then final one for Pal, just on power. I maybe missed slightly what you were saying in terms of this NOK 730 million positive spread. Could you just clarify that and how we should think of that in terms of impact on Q4?

[Hilde Merete Aasheim]

Well, I think on the first question, on REIN. The question is yes. We will work on the IPO when time is right, but that we will not -- this will be capital light from the Hydro side. When it comes to cost in Extrusion, that's also the question that we asked the Extrusion people. But obviously, they have done a lot of good work during the 2 last years. And I think the statement we have said before is that 1/3 will -- of the fixed cost will come back, and that they will sustain the rest in terms of sustaining, let's say, improvements.

[Pal Kildemo]

And just to add on to Hilde there, Liam. Not a lot has come back yet. So Q4 is one of the periods where we see this materializing in our internal forecasting also. So of those, the 30% coming back, a minor element has come in so far. On the power side, it is technical. But basically, if you look at current volumes and the fourth quarter, we have around the terawatt hour or so exposed to the price differential between NO2 or NO3 or NO5 even, where part of our facilities are situated. And if you look at the realized price in the market as quarter-to-date between NO2 and NO3 and N05, then that price level, if it were to continue during the quarter, if our estimated production now was to be the same as we see now, then you get the negative effect that we refer to. And the reason why we're bringing it forward is that it's such a huge element in our potential earnings for the fourth quarter.

[Liam Fitzpatrick, Head of European Metals and Mining]

So that -- sorry, Pal, just the NOK 730 million you mentioned. Is that like comparable with Q3? Like for like?

[Pal Kildemo]

No. I think the total over Q3 was more around NOK 300 million. So the delta is then around NOK 450 million.

[Operator]

The next question comes from Christopher Minora from Hydro. As there is no response, we move to the next question, and this comes from the line of Jatinder Goel from Exane BNP Paribas.

[Jatinder Goel, Research Analyst]

Just a couple of questions. Are you able to comment anything on Brazilian electricity situation? There's been some market chatter and also some response from your competitors about reducing production maybe during peak hours. If you could share anything from your side, how you are seeing the power situation given the grid is connected? And if there is any impact from a cost perspective or availability perspective? And secondly, on Slovakia, what are your options on renewing that contract? And is there a renewable power option available as well because it's quite close. So where are we in that process? And what is plan B? How comfortable do you think you've got a power deal planned?

[Hilde Merete Aasheim]

Will you take the Brazil?

[Pal Kildemo]

Yes. If I start with Brazil, Jatinder, then you are correct. There's been quite a strained hydrological situation there where we and other producers have been bidding in to reduce consumption in peak hours, without out impacting production. That has now been mitigated to some extent. There's been quite a good development in hydrological balance over the latter period. So risk picture is seen as lower than what it was when we reported our Q2 figures. So I guess most external analyzers do not see this becoming a 2021 issue anymore. Then you have the rain period, and then we see how much rain comes in, in the rain period. And if it's very dry, we might be back at a somewhat lower level in 2022. If it's a normal rain period, external analyzers believes that the hydrological situation should be fine.

[Hilde Merete Aasheim]

I can comment on the Slovalco situation. Obviously, when you have a contract that expires, it's -- the -- you do have a more short-term outlook before you have a better situation with an affordable power contract as a basis for continuing operation, right now, and this has been worked on for many years with the -- in the Board of Slovalco. We have -- as you know, we have this joint venture with the Penta local -- a local investor. So it is a challenging situation for Slovalco to see how we can enter into an affordable power contract. That's why we have sort of a more short-term outlook and that we have been able to secure Slovalco for the next year. That's what we have at hand today. And then we have to continue to work to see the long-term, let's say, basis for Slovalco going forward.

[Jatinder Goel, Research Analyst]

If I could ask just quickly on CapEx. You mentioned you'll provide more details during Capital Markets Day. But does the NOK 1 billion effectively get deferred from this year into next year? Or is there more into it?

[Pal Kildemo]

If you look at the split of lower CapEx then guided for at our last Capital Markets Day, then quite an amount of that sits in the return-seeking and growth part, especially related to the new energy operations. So most of that, you should expect to be pushed forward into next year. But most of that, you should also expect to come at an attractive return rate. There are some CapEx savings, especially in Bauxite & Alumina, where we managed to run some of the larger integrity projects at a lower cost, but majority pushed forward.

[Operator]

We currently have no questions on the line. [Operator Instructions] And the next question comes from the line of Christopher Minora from Hydro.

[Unknown Executive]

Hello?

[Pal Kildemo]

Hello, [ Dan ] we hear you.

[Unknown Executive]

Sorry, it's coming through with the wrong person's name. Yes, a couple of questions. The first one is you mentioned around the outlook for the CO2 compensation for 2022. Can you give us any indication of the quarterly run rate relative to the NOK 180 million this year that you might expect into next year? Two just very small follow-ups. I didn't quite catch it from the call. What is your expected volume growth year-on-year in Extrusions in fourth quarter and the full year expected build-in in working capital? That's the, I guess, the initial questions.

[Hilde Merete Aasheim]

I guess for you.

[Pal Kildemo]

I'll start backwards. On operating capital, around NOK 7 billion, if we use the prices that we had when we closed the third quarter. And as I said, NOK 6.5 billion of this is related purely to price movements, LME ingot premiums. The last NOK 0.5 billion or so is related actually to bringing inventories more to a level which allows us to satisfy our customers in a good way and also to have robustness as we were very low in inventory in Q4 '20 coming out of the COVID period. If you look at the Extrusion volumes, we showed the external market forecast for growth in the fourth quarter. We expect to be mainly in line with that. We have over delivered compared to market growth for some quarters now. But as I mentioned earlier, we are seeing some impacts on, for example, automotive, which is not as easy to compensate with other volume as it has been so far. So that makes us guide more in line with the market. The last one on CO2 compensation. I don't have the figure exactly in my head. But if I were you, I would take the CO2 price, the normal [ EUA ] traded quota for 2020, take the price level there, and then take the year-to-date pricing in 2021, subtract these 2 and then multiply by our volumes, and that should give you an indication of the increase. When we looked at it earlier, it was close at least to double levels, but I would have to double check those figures then.

[Unknown Executive]

Great. And then just a final question, if I may, on the balance sheet and on the dividend. Obviously, next time you report will be the sort of decision on the annual dividend. Balance sheet is clearly very strong if we net out the adjustments. Are we -- and I guess, given the price environment, you should be able to comfortably cover NOK 9 billion to NOK 10 billion of CapEx. Should we be expecting a distribution above the regular dividend in Q4?

[Pal Kildemo]

I think on that one, I do not want to front run the Board's decision. This is an annual process where they review outlook for CapEx, market and the rest, as part of our 5-year business planning process, and then we will get back to the whole market at the same time if we decide to allocate anything on top of the ordinary dividend.

[Operator]

Your next question comes from the line of Liam Fitzpatrick from DB.

[Liam Fitzpatrick, Head of European Metals and Mining]

Pal, just coming back to energy, and apologies for laboring the point. I just wanted to get it correct. The NOK 450 million delta that you mentioned, is that versus Q3? Will that be a positive or a negative in Q4?

[Pal Kildemo]

Positive. Positive, Liam.

[Liam Fitzpatrick, Head of European Metals and Mining]

Positive? Okay. Big difference.

[Pal Kildemo]

Makes a big difference.

[Operator]

There are no further questions on the phone lines. So I'll hand the call back over to your host.

[Therese Rød Holm]

Thank you. Then we'll take questions from the audience. We also have a microphone here that can be used. Is there any questions? No questions. Thank you.

[Hilde Merete Aasheim]

Then I think with that, we round off the presentation for today. Thank you all for joining. We will now have one-to-one interviews here in the room. Thank you.