Norsk Hydro ASA

OSE:NHY

Earnings Call Transcript 2022-Q3

[Therese Holm, executive]

Good morning, and welcome to Hydro's Q3 2022 Presentation and Conference Call. We will start off with a presentation by Hydro CEO, Hilde Merete Aasheim, followed by a financial update by CFO, Pal Kildemo. The presentations will be followed by a Q&A session for those physically in the room. We will have a digital conference call at 11:00.

And with that, I turn the microphone over to you, Hilde, please.

[Hilde Aasheim, executive]

Thank you, Therese, and good morning. It's good to see you here at Felix, some more people here than at Vakero last time.

Let me go straight to the highlights for the quarter. For Q3, we report an EBITDA of NOK 9.7 billion, while free cash flow came in at NOK 2 billion. The war in Ukraine, high energy prices and concern around inflation and increasing interest continues to add uncertainty in our markets. In these volatile markets, we are addressing the challenges with mitigating measures while also positioning the company according to Hydro 2025 strategy. In the third quarter, Aluminium Metal, Metal Markets and Extrusions continued to deliver strong results.

However, the overall results were down from the second quarter from lower realized all-in metal and alumina prices, as well as seasonally lower sales volume downstream. This was partly offset by CO2 compensation and positive currency effects. Our efforts to ensure robustness and competitiveness across the value chain continue at full pace. Hydro's 2025 improvement program is estimated to deliver on its 2022 target of NOK 7 billion and new improvement initiatives are being identified across the portfolio.

In the third quarter, a revised CO2 compensation scheme was proposed in Norway. The impact of the revised CO2 compensation scheme booked in third quarter was NOK 0.5 billion, which was the compensation for Q3 in addition to a catch-up effect of NOK 1.4 billion relating to previous quarters in 2021 and 2022. Despite the weaker market, we have continued to execute on the Hydro 2025 strategy during the quarter, strengthening our position in low-carbon aluminium and growing in new energy areas.

In the third quarter of 2022, sales of Hydro REDUXA and Hydro CIRCAL was 45% higher year-on-year, supporting Hydro's ambition to double sales of greener products by 2025. And finally, in third quarter an additional cash dividend for 2021 of NOK 3 billion were distributed corresponding to NOK 1.45 per share. And we also initiated a share buyback program of up to NOK 2 billion.

Before I continue, let me talk about what is the most important in Hydro, that is the health and safety of our people. After a challenging year in 2021, as the operations also was restarting fully after the pandemic, we have steadily improved our safety performance. In fact, in 2022, we have reduced the number of total recordable incidents by 20% since the end of 2021. An injury-free environment is our ultimate goal. All our employees in Hydro should be safe working in Hydro. We are continuously working throughout the whole Hydro organization to avoid any incidents to happen to our people.

Now, let's talk about the business environment. What we have experienced this year has been to say it madly an unprecedented development. The brutal invasion of Ukraine in February has introduced a great deal of uncertainty and unpredictability to all parts of the economy with the broader consequences becoming increasingly visible. The energy prices crisis in Europe has now -- until now led to 50% of continually Europe's aluminium smelter portfolio be curtailed due to high energy costs.

The current geopolitical tension and the energy crisis have, in particular, made us all more aware of the importance of security of supply and how vulnerable we are to unforeseen disruptions in our supply chain. Going forward, we see a lot of attention towards access to secure, affordable and sustainable energy sources, but also minerals, raw materials and other strategic materials.

Hydro is well positioned in this regard having the whole aluminium value chain in-house, including raw materials, but also own energy production and long-term power purchasing agreements. And this gives us a robust foundation, both for our own operations and our position as a reliable and stable supplier in the market.

On the European level, the regulatory agenda is now heavily oriented towards alleviating the energy crisis, while not losing sight of the green transition. In the short-term, the European Commission is looking deep into their toolbox to identify solutions to ease the strain on European citizens, business and industry. Just last week, the EU Commission presented their proposal on the gas market package, including a range of measures. We are monitoring this process closely, especially regarding possible mandatory gas demand reduction measures in the member states, which could affect our operations this upcoming winter.

As of now, we have not been notified of any such reductions. Then the ongoing revision of the EU-ETS is nearing completion with conclusions expected in -- for fourth quarter. As of now, CO2 compensation will remain in ETS following a provisional agreement in the EU trial. Regarding CBAM, there has been no conclusion yet, but it is expected to affect free allocation of emissions quotas from 2026.

The final timeline for phase out is not yet concluded. There has been a lot of discussion on the consequence of CBAM for the CO2 cost compensation scheme. As to from which year, this will be effected by CBAM, this is yet to be concluded, and we are following obviously this very closely.

Then to our home turf, Norway. Earlier this month, the Norwegian government presented their proposal for the 2023 state budget. With the war in Ukraine, inflation and high energy prices as a backdrop, the Norwegian government has communicated a need to finance increased costs with new streams of revenue. For Hydro, there are 2 significant development in this proposal. First, the government is proposing tax increases for renewable power.

Resource rent tax for hydropower is proposed to increase from 37% to 45% from 2022. We estimate this impact for Hydro to be in the range of NOK 250 million to NOK 300 million per year. To capture the windfall profits resulting from high energy prices, a 23% tax on price exceeding NOK 0.70 per kilowatt has been proposed as a temporary measure. We expect this new tax to have limited impact on Hydro as our power production is consumed for own use. Finally, a new resource rent tax at 40% is proposed for onshore wind.

Secondly, the government has proposed the CO2 compensation scheme that will continue. The proposal includes an expansion of the scope to include equity power, but also the introduction of the CO2 price floor of NOK 200 per tonne to be deducted from the total compensation amount. For Hydro, we estimate the compensation for 2022 to amount to NOK 2.2 billion and for 2021 NOK 1.7 billion. It should be noted that the government's proposal is subject to approval by the Parliament. Negotiations here have begun with a final vote expected in Parliament in December.

Then let's talk about the global economic outlook. At the end of last year, the world was on a recovery path after the pandemic, and most forecasters were anticipating steady growth across most major economies. However, growth prospects for this year and next look very different than anticipated. Global real GDP growth is forecasted to slow down from 5.8% in 2021 to 2.8% for this year and down to approximately 2% next year.

As COVID-related restrictions are eased, there has been some hope that the global economy will quickly rebound. But, however, there are several headwinds as we see it now. First, inflation, tightening monetary policies and fair recession have weekend overall demand. Second production in China is still negatively impacted as some COVID-19 related restrictions remain. And thirdly, the property sector in China has slowed down dramatically impacting both activity in this sector and the value of household savings.

In the U.S., the real GDP growth is projected to slow down from the 5.7% in 2021 to 1.7% in this year and just below 1% next year. The U.S. housing market is showing signs of stress, likely due to the tightening of the monetary policy that has significantly boosted the average mortgage interest rate.

Looking at Europe, the Russia-Ukraine war has had significant negative impact and real GDP growth in the Eurozone is predicted to slow until 2023, before seeing some growth in 2024. The prospects for further disruption to the energy supply, leading to higher prices remains on the downside.

Let's then see how this impacts the aluminium market. Demand in China has been weak due to problems in the property sector as I just mentioned and the zero COVID policy, while supply has come back quickly after smelters curtail in 2021. World ex. China demand is expected to be lower in second half 2022, dragging the overall yearly growth down as regions like Europe and U.S. are at risk of recession.

On the supply side, we have seen curtailments driven by high energy prices, particularly in Europe. So for next year, moderate demand growth is expected by CRU with the downside risk. There is also expected higher supply, however, with around 1 million to 1.5 million tonnes of capacity being at risk of curtailment in Europe on high energy prices. In sum, the next year, the expectation is that the market will be largely balanced due to weaker demand while production in China is expected to remain strong.

Then to prices, LME and premiums have dropped sharply due to the demand reduction, and weaker macro outlook, while weaker NOK has given support to prices in Norwegian kroner. Weak building and construction activity is negatively impacted by the -- impacting the extrusion industry, which also puts pressure on the billet premium. And the spread between billet premiums and standard ingot premiums is narrowing, but also between billet and scrap, which is tightening and which is putting further pressure on remelt margins.

Let us then move to the detailed cost situation for the upstream part. To the left, you see the cost curve for the global smelter, where around 45% of global capacity is expected to be loss-making at current price levels. Due to higher energy and raw material costs, elevated costs are also expected going into 2023. And this represents a risk of further curtailments of smelting capacity, which could impact the aluminium market balance, which I showed earlier.

The low-cost smelters, what do they have in common? They have secured power at low-cost and are mainly in Canada, Middle East, India and Norway. Our current position is at the 17-percentile, a very robust position in the current uncertain market. To the right, you see the global cost curve for the alumina industry. The global alumina industry's profitability is also under pressure because of high raw material costs from increasing caustic soda and energy prices.

In China, new refineries are ramping up production, despite weakening demand following smelter production costs, especially in the Yunnan province. Lower alumina prices had led to some capacity curtailments, however, we doubt that these curtailments are sufficient to balance the market in light of new Chinese production.

In the world ex. China, very high gas prices have pushed cost at most European refiners to unprecedented level and they are now at the highest cost producers in the world. Going forward, alumina price trends will largely depend on the magnitude of curtailments, both in China and outside required to balance the market. Also within the global aluminium market, we are well positioned at the 30% percentile on the cost curve.

Now, moving to the downstream to the Extrusion market and our Extrusion sales. Total Extrusion sales have decreased by 4% in the third quarter of 2022 compared to last year with 8% in Europe and 2% in North America, reflecting the general weakening market environment. In Europe, demand for the industrial and the building and construction segment has weakened the most, while growth in automotive demand is improving slightly as supply chain issues are easening.

And what is interesting to follow is that, the renewable energy sector is also driving demand for aluminium now. In North America, demand has continued to remain fairly strong across key segments, particularly in non-residential building and construction, automotive and transportation.

Looking into the fourth quarter, CRU estimates that the European demand will decrease by roughly 15% compared to the same quarter last year. Overall, European Extrusion demand is estimated to decrease by 4% in 2022 compared to the year before and 7% in 2023 compared to 2022. For North America, CRU estimates demand will be flat in the fourth quarter of this year compared to the same quarter last year. Overall, Extrusion demand in North America is estimated to increase by 4% in 2022 compared to the year before and be stable in 2023 compared to this year. I would, however, like to stress that there is a high market uncertainty out there and that there is a further downside risk to these estimates.

Let me then move to the energy area and talk about the higher energy prices and price area differences in Norway. A lot of focus has been on the gas market during Q3. European gas prices increased in the first half of Q3 as gas flow from Russia was gradually curtailed. After the peak in August, prices started to correct down following a combination of gradually improved fundamentals and the uncertainty related to the EU's market intervention scheme.

In Norway, we saw a record high system prices in Q3 as weaker hydrology today triggered a gradual change from net export to net import in Q3 as the spot prices in the Southern Norway increased above prices in Continental Europe. Nordic future prices have come down since the peak in August due to gradually lower European gas prices, corresponding to lower European power prices and further reduction due to the weather change in October with higher precipitation and wind.

Looking back at Q3, the Nordic hydrological balance ended the quarter around 10 terawatts below normal compared to around 5 terawatt below normal at the end of previous quarter and as much as 19 terawatt below normal at the end of the same quarter last year. Hydropower reservoirs in Norway were at 70% at full capacity at the end of the quarter, which is 13% below the normal level. However, in the Southwestern Norway, the NO2, the reservoirs were only 53% full at the end of September, which is 30 percentage points below the normal level.

The recent weather shift and imports have increased the reservoir levels in NO2 above the levels seen at the same time last year, but the reservoir levels are still below normal. The Norwegian transmission system operator, Statnett, still consider the situation to be press and maintains that securing energy in the Southern Norway may be a concern during the winter. Statnett has also proposed mitigating measures to the press power situation, including close monitoring of reservoir levels and the system for energy options if the risk of rationing increases throughout the winter.

Let me then comment on our business and response in this unprecedented business environment. And let me first start by saying that for several years, we have worked systematically on securing long-term power contracts at competitive price level, which is a great advantage in the current volatile market. We have robust power coverage across the smelter portfolio with the Norwegian smelters well covered until 2030, and with Albras well underway with sourcing strategy for 2025 and beyond.

In addition to the strong power coverage across our global smelter portfolio, we have also hedged part of the gas and electricity need that we have in the Extrusion and metal markets for 2022 and 2023. So we are well covered on the power side in the Nordics financially and physically. And for our European operations, we have also good financial coverage. However, we could face regional limitations or physical availability of gas or power in Europe this winter. In this scenario, it is a strength to have a large Extrusion and remelt system in Hydro, which could allow for the movement of production between Hydro facilities.

Commodity markets are volatile and cyclical by nature and following many years of challenging earnings in our industry, we have looked for ways to make our cash flows more robust over the cycle. One of the initiatives we started a few years ago was to implement an integrated margin strategic hedging program for aluminium. At that time, we said that we could -- would rather have a more robust financial position in the lower part of the cycle than a very robust position in the higher part of the cycle.

And in the current market environment, this will support our robustness if margins should further decline. We now have an integrated margin aluminium hedge in place for around 20% of our 2023 positions and around 20% for 2024. And we are also about now to roll the position into 2025, securing part of earnings if markets to become more challenging.

We are also progressing to plan according to the plan on our ambitious improvement program, which aims to deliver NOK 8.5 billion by end of 2025. And I'm very happy to report that, again, we are on track to deliver on our target for this year in total accumulated NOK 7 billion, an impressive effort from the whole organization. However, our NOK 2.5 billion commercial ambitions looks a bit more challenging in the current market environment, but we are working on the levers we can pull also here.

On the top of this, we are now working on new improvement initiatives to strengthen the program, including amongst other energy efficiency measures throughout the company, which is a really good return on these kind of activities in the energy market we see now, strengthening procurement efforts and optimization across the BAs. And then, of course, adjusting the indirect spend to the overall business sentiment.

Finally, I should mention that the biggest contributor to improved earnings in bauxite, alumina is the effect of the ongoing fuel switch projects and implementation of the first electric boiler, which in total will contribute with around $80 million, respectively, each quarter at current market prices and will be effective in the second half of 2023.

Then to address the short-term market deterioration, especially for Extrusion ingot in Europe. We have adjusted our capacity accordingly in aluminium Metal and Metal Markets. First, through shifting volumes between product segments where we have flexibility. Next, through lower coal metal remelting and finally, through some curtailments of recyclers in total, adding up to 45,000 tonnes. But this has also been followed by even stronger measures to payments of electrolysis capacity at Karmøy and Husnes in total, 110,000 to 130,000 tonnes.

In these instances, the excess power has been sold in the market at high power prices more than offsetting the negative effect of lower aluminium production. We are continuously evaluating further measures in line with the development in the market. In Extrusions, we have also reduced European recycling capacity by 20,000 tonnes, and we continually now adapt Extrusion capacity to demand with reduced number of shifts.

While addressing the short-term challenges in the market, we have also made progress on the 2025 strategy. An important foundation for strengthening our position in low-carbon aluminium is through targeted investments, supporting our strategic ambition to double recycling of post-consumer scrap by 2025. In the U.S., we have decided in Q3 to invest NOK 500 million to expand our recycling capabilities at the Cressona plant in Pennsylvania. We expect the project to be fully operational by the end of 2024, expanding Cressona's casting capacity by 50,000 tonnes. In Europe, construction started just last month at a new recycling plant in Szekesfehervar in Hungary. When completed in Q1 2024, the new facility will have an annual capacity of 90,000 tonnes.

In Q2, in the second quarter, we announced an acquisition to buy the shares in the Polish recycler Alumetal. The acquisition will add substantial capacity to recycle our post-consumer scrap and an important part to reach our target of doubling the use of post-consumer scrap. On October 6 in this month, the European Commission decided to open a Phase II review of the proposed acquisition of Alumetal. We remain committed to this transaction and will continue to work closely with the European Commission over the coming months on the Phase II review.

Extrusions remained a key growth area in Hydro's 2025 strategy. And in the third quarter, Hydro made the decision to invest in 12,000 tonnes of additional capacity at our Extrusion plant in Rackwitz in Germany. Then to the second pillar of our 2025 strategy, which is to diversify and grow in new energy. This quarter, we have finalized the acquisition of 30% of the shares in Vianode, a joint venture together with Elkem and Altor. Following this, Vianode announced that we will invest in NOK 2 million to produce low-carbon synthetic graphite for about 20,000 electrical vehicles per year by 2024 at the pilot plant -- first pilot plant at Herøya in Norway.

Hydro Rein continues to develop a robust portfolio of renewable energy projects. Last quarter, Hydro Rein announced 2 major renewable projects in Brazil, the 586 megawatt combined wind and solar power project, Feijão and 531 megawatt solar project, Mendubim. Both projects are important for Hydro to reach its climate ambitions and to secure renewable power for both Albras as well as Alunorte. Given the uncertain capital markets, alternatives to an initial public offering are still being considered to raise the capital required for further growth, and we are still targeting a capital raise in the current quarter.

The positive trend in demand for low-carbon aluminium continued also this quarter. Sales of Hydro CIRCAL and Hydro REDUXA were 45% higher year-on-year in the third quarter, supporting our ambition to double the use of our sales of greener products by 2025. We are constantly working with customers to help them reduce their environmental impact through choice of solutions and materials. The building on the right side here on the picture is one of Hydro's Building Systems latest project, the Senckenberg Quartier in Frankfurt.

Completed in 2021 with the facade from WICONA by Hydro. The building stands out, not only aesthetically, but also in terms of its direct and indirect environmental impact. By using our end-of-life aluminium, Hydro CIRCAL 75, the project saved more than 2,000 tonnes of CO2 emissions from this project compared with the European aluminium average. This supports a trend that we are seeing in the market that customers are not only looking at the qualities of the materials they source, but also how they -- these materials are made.

On that note, let me also comment on our sustainability program, which is a very important part of Hydro 2025 strategy and our positioning going forward. This increased focus on how materials are made and the traction in the market for our low-carbon brands also underlines the role of sustainability as a basis for our future positioning and profitability. As we say in Hydro, profitability and sustainability go hand in hand. I'm happy to report that we are on track on reaching important milestones on our sustainability agenda.

I already mentioned the Alunorte fuel switch project, replacing heavy fuel oil with natural gas is progressing according to plan, and is expected to be finalized by the second half of 2023. This is an important benefit for our ambition to reduce our climate footprint by 30% by 2030, but also an important contributor to becoming net 0 in terms of Scope 1 and 2 in 2050 or earlier.

As mentioned earlier, in addition to lowering emission, the fuel switch project will deliver a significant reduction in raw material costs at current market prices. In addition to climate target, Hydro is also -- has also made a lot of progress on the ambition to protect biodiversity, where we are on track to deliver on the 1:1 rehabilitation targets for mined areas.

Moving towards the social dimension of the sustainability agenda, we are proud to report that the brand-new technical school, a school called The School of Work and Production of Para was completed and handed over to the municipality of Barcarena this quarter in Brazil. With the capacity of around 1,000 students, the technical school will contribute to education and skilling of the workforce in Barcarena and the surrounding communities. And this is very much in line with our ambition to contributing to quality education and strengthening our local communities and institution through capacity building.

And here, I will end my presentation and hand over the microphone to our CFO, Pal Kildemo, for the financial update.

[Pål Kildemo, executive]

Thank you, Hilde, and good morning from my side also. Let's start directly with this quarter's EBITDA bridge. Adjusted EBITDA for the third quarter was NOK 9.7 billion. This is NOK 1.9 billion down from the NOK 11.6 billion in the previous quarter. And the main drivers are 15% lower realized alumina prices and 15% lower realized all-in aluminium prices. Lower volumes, mainly seasonal and margins contributed negatively with NOK 1.2 billion and a short position in our energy area added another NOK 0.4 billion negatively despite record high area price contributions within the quarter. These negative elements were partly offset by lower raw material and fixed costs of a total of NOK 0.7 billion.

Positive currency effects on the stronger dollar, NOK 1.4 billion CO2 compensation catch-up effect and also NOK 0.6 billion larger gains on power sales, mainly from Slovalco. And finally, we have NOK 0.8 billion higher elimination than last quarter, mainly related to lower margins in bauxite, alumina and aluminium metal. We will dive into more details on these elements as we move through the business areas.

If we move to the key financials for the quarter, then year-over-year, revenues increased by 43% to NOK 52.4 billion. Higher realized prices is the main driver here. However, compared to the last quarter, revenues have decreased, driven primarily by lower realized prices. The adjusted EBITDA at NOK 9.7 billion excluded a positive effect of NOK 108 million, which increases the reported EBITDA to NOK 9.8 billion. Adjusting items for the quarter are largely driven by around NOK 100 million in net foreign exchange gain as the positive effect of unrealized derivative effects on LME-related contracts related to our strategic hedging activity offset the negative unrealized derivative effects on power and raw material costs.

Moving on, we had adjusted depreciation and amortization of around NOK 2.1 billion, which results in adjusted EBIT around NOK 7.6 billion. The financial gain we have in this period of NOK 500 million for the third quarter consists of a net foreign exchange gain of around NOK 600 million, primarily reflecting the gain on euro-embedded derivatives on the back of a tightening euro-NOK interest differential. This is partly offset by around NOK 100 million in net interest expenses.

Our tax expense amounted to NOK 1.5 billion or about 18% of income before tax. And this rate reflects the mainly high proportion of income of earnings in Norway, as well as a positive effect from a historical tax settlement. Overall, this results in a reported net income from continuing operation of NOK 6.7 billion, up NOK 1.1 billion from last quarter, but down from NOK 11.1 billion in the second quarter. Adjusted net income was NOK 6.3 billion compared to NOK 3.5 billion last year and NOK 7.7 billion in the second quarter. And this brings us to an adjusted earnings per share of NOK 2.91, up from NOK 1.6 in Q3 last year and down from NOK 3.63 in the second quarter.

If we then move over to the business areas and start with bauxite and alumina. Then adjusted EBITDA decreased from NOK 1.055 billion in Q3 '21 to NOK 633 million in Q3 '22, mainly driven by higher raw material costs. The higher raw material costs amounted to around NOK 1.5 billion on the lower results and included 100% higher caustic prices, 230% higher coal prices and 35% increase in fuel oil costs. And together with the higher bauxite costs and fixed costs, this contributed significantly to the $104 increase in cash cost from $233 to $337 per tonne. This was partly offset by higher realized alumina prices, which increased by around $80 per tonne.

If we compare results to the second quarter of 2022, the adjusted EBITDA decreased by around NOK 500 million. The main driver was $66 lower realized alumina prices, but also slightly higher cost, which contributed with around NOK 50 million to NOK 100 million negatively. This is slightly lower than what we expected last quarter on lower energy and caustic prices. Partly offsetting this was a positive deviation of negative one-offs in Q2, around NOK 100 million that we don't have in Q3 and positive one-offs related to tax credits in Q3 of around NOK 100 million, which contributes in one-off deviations of around NOK 200 million positive in total. We also had positive currency effects of around NOK 300 million on weaker BRL and NOK in the period.

Looking into the fourth quarter, Alunorte production is expected to continue at around nameplate capacity. And in addition, compared to the third quarter, current raw material prices, based on market pricing, indicates an increase of around NOK 250 million to NOK 300 million from increases in caustic soda, but also energy prices, which dipped in the third quarter. If the current alumina price remains at the $310 level, this will also represent a sizable downside from the price levels realized this quarter, further negatively impacted by the current spot currencies.

Moving on to the strongest contributor for this quarter, aluminium metal where adjusted EBITDA increased from NOK 4.3 billion in Q3 '21 to NOK 6.5 billion. The results were mainly driven by higher all-in metal prices, positive currency effects, CO2 compensation and power sales, partly offset by higher raw material and fixed costs. The book CO2 compensation of NOK 1.9 billion is a combination of current but also historical CO2 compensation effects.

In line with the new proposed CO2 compensation framework communicated as part of the Norwegian state budget proposal, around NOK 550 million relates to compensation for the actual period, Q3 '22. This includes both the inclusion of the CO2 compensation on own production, but also the newly introduced price floor of NOK 200 per tonne. The remaining NOK 1.35 billion relates to catch-up effects from 2021 and year-to-date 2022, in line with the current state budget proposal.

If we compare results to the second quarter of '23, then results have decreased by NOK 0.5 billion, mainly driven by lower all-in metal prices and lower sales volumes, reflecting lower casthouse production in line with the falling market demand. This was partly offset by positive currency effects, higher CO2 compensation, NOK 600 million higher effects from sale of power from Slovalco and also lower fixed costs.

On raw materials, the net effect was NOK 400 million lower for the quarter with positive contributions from alumina on energy, on LME index contracts, partly offset by higher carbon and other raw material costs. The overall figure is higher than our guidance from last quarter in the negative direction, driven by the new higher rate of continuous CO2 compensation amounting to around NOK 2 million of the total amount. Excluding this, this is quite in line with our last quarter's guidance.

If we were to exclude one-offs and look at the underlying figures for the quarter, we see that the all-in implied primary cost would have been around $2,350 per tonne and the underlying margin around $950 per tonne. I'm also pleased to say that the ramp-up at Albras was finalized in Q3 following the power outage that caused 1 of the 3 lines to be stopped earlier this year.

For the fourth quarter, 70% of primary production is priced at $2,257 per ton, while 44% of premiums affecting Q4 is booked at $811 in total. But Q4 realized premium is expected to be in the range of $550 to $600 per tonne, somewhat lower than what we indicated last quarter on the continuous falling of market premiums.

Compared to the third quarter, we expect lower raw material prices in aluminium metal in Q4 '22. And if we use expectations based on current market prices, that accounts for around NOK 400 million to NOK 500 million. This is mainly driven by lower alumina and energy costs. This will partly be offset by seasonally higher fixed costs of around NOK 100 million to NOK 200 million. In addition, it's important to remember that due to the curtailment of Slovalco, Karmøy and Husnes, we expect to book around NOK 1.6 billion in higher results on power sales in the fourth quarter compared to the third quarter.

This quarter, Metal Markets delivered an adjusted EBITDA of NOK 534 million compared to NOK 170 million in Q3 last year. The improvement this quarter is driven by recycling on the back of increased sales premiums, lifting results with NOK 269 million compared to Q3 last year. In addition, positive currency and inventory valuation effects contribute with around NOK 178 million. This is partly offset by NOK 77 million lower commercial results on falling ingot premiums. And if we exclude the currency and inventory valuation effects, the result for the quarter was NOK 398 million.

Looking into the next quarter, sales premiums are declining and further curtailment of recycling capacity of around 20,000 tonnes is currently planned on top of the seasonally lower production, and we will continuously adjust this to market demand. And as the market currently stands, that means that we expect a light reduction in the recycled results compared to the fourth quarter of 2021. But as always, remember that trading results and currency effects in Metal Markets are, by nature, volatile.

If we then move to the financial results of Extrusions, then adjusted EBITDA is slightly lower from NOK 1.5 billion in Q3 '21 to NOK 1.4 billion this quarter. Increased gross margins were offset by increased variable and fixed costs with energy costs amounting to a significant share. In addition, the falling premiums contributed with a negative metal effect this quarter of around NOK 300 million.

Volumes are also declining on falling demand, as Hilde went through earlier, which contributes negatively. Partly offsetting this, as in the previous quarter, is the integrated recycling operations, which contributed positively year-over-year based on the higher billet sales premium than last year. But if we compare results to Q2 of '22, then the adjusted EBITDA decreased from NOK 2.4 billion to NOK 1.4 billion on seasonally lower volumes and margins in addition to the general market weakening.

Looking into Q4, we expect lower volumes than last year on the lower market demand. And as it stands now, given high uncertainty, we expect to be largely in line with CRU expectations for the fourth quarter.

In the current inflationary environment, we also expect continued margin pressure. And in addition, we have seen premiums come further down, which will impact recycled profitability in addition to also 20,000 tonnes of planned curtailments of remelt capacity in Extrusion. And as in the last quarter, we would like to stress test that we are back to a period with high market uncertainty, both into Q4 and first half of 2023 and guiding is becoming more challenging in Extrusion.

The last business area I walk through is Energy, where results decreased from NOK 464 million in Q3 last year to NOK 321 million this year. Record high energy price differences and higher gains from participation in physical balancing markets in Norway were more than offset by 300 gigawatt hours lower spot sales, which needed to be covered in the market at very high prices in the NO2 area. In addition, we also had higher tax cost in our equity accounted investment company, Lyse Kraft, which brings tax above the line due to the accounting methodology. Compared to the previous quarter, the adjusted EBITDA decreased by NOK 1.4 billion due to the same items that I've just mentioned.

If we look into the fourth quarter, then price and volume uncertainty is always large and production prices will depend on hydrological conditions. However, we do expect production to be higher than in the third quarter, but with the absolute amount being highly dependent on the shift of production between Q4 and first quarter of 2023. As of yesterday, the quarter-to-date difference between mid-Norway prices NO3 and Southwest Norway NO2 were around NOK 1,000 per megawatt hours compared to NOK 3,200 for the third quarter, still implying that earnings from price area difference will continue at a high level in Q4, but potentially somewhat lower than in Q3.

Let's then finish the financial part with the developments in our net cash position. Based on the starting point of NOK 1.7 billion in net debt from Q2, our overall debt position increased by NOK 1.4 billion quarter-on-quarter to NOK 3.1 billion in net debt position. This was based on the following: we start with the NOK 9.7 billion in adjusted EBITDA; we then had a net operating capital build of NOK 3.3 billion, which can be broken down as follows: price effects on inventories are largely stable with raw material increases being offset by general decreases on inventory pricing of finished goods.

We have metal inventory build in Aluminium Metal and Extrusion on the falling demand, which we are seeking to mitigate through the ongoing curtailment of recyclers and smelters. But for this period, it amounts to around NOK 1 billion. And finally, we have around NOK 1.9 billion, which is driven by the CO2 compensation receivables in Aluminium Metal, which I mentioned earlier.

If we look at the full year estimate, we now expect around NOK 6 billion in full year build of operating capital, implying a release of around NOK 5 billion in the coming quarter. This build is around NOK 200 billion higher than what we expected last quarter due to NOK 1 billion higher CO2 compensation after we received the payment for this year or for last year and around NOK 1 billion in higher finished goods in Aluminium Metal and Metal Markets in light of the ongoing weakening demand. We are still looking into ways to further reduce this figure, revisiting safety stocks, looking at portfolio adjustments and other initiatives, which could represent further downside. On the other side, if the market falls more aggressively than we foresee that could pull in the other direction.

As I mentioned in the last quarter, if currency and prices remains at or below the levels that we observed in the end of last year, we should be able to reduce this NOK 6 billion further into next year by around another at least NOK 3 billion to NOK 4 billion, all else equal, remaining with CO2 compensation and higher safety stocks on, for example, anode inventories as the main deviating factors compared to the end of last year.

Other operating cash flow adjustments amounted to NOK 1 billion, driven mainly by NOK 0.6 billion in taxes paid and other smaller effects. And net investments were NOK 3.4 billion for the quarter. And we're still keeping our guidance on CapEx that we updated last quarter. However, I would like to indicate that there is a downside from this figure as we are evaluating spend in the current market environment, and we will most likely push more projects into 2023 and beyond as we see how the coming winter and expectations for 2023 materialize. As a result of all this, we generated free cash flow from operations of around NOK 2 billion in Q3. And in addition, we paid NOK 3 billion in shareholder dividend, NOK 1.45 per share at the end of September.

If we finish up with adjusted net debt, then we start by adjusting for the NOK 1.2 billion in collateral per Q3, mainly related to strategic and operational hedging activity, which has decreased by NOK 0.5 billion from last quarter on the declining LME prices. The next adjustment of NOK 4.4 billion reflect cash and short-term investments in our captive insurance company and asset retirement obligations.

And we also have a net pension asset of NOK 1 billion, which is down by around NOK 0.4 billion from last quarter, mainly driven by changes to the Norwegian interest rate path. With these adjustments, we end up with an adjusted net debt position of NOK 7.8 billion at the end of Q3, an increase of NOK 1.5 billion from NOK 6.3 billion at the end of Q2.

And with that, I give the word back to you, our CEO, Hilde Merete Aasheim, for our final priorities.

[Hilde Aasheim, executive]

Thank you, Pal. Let me then round off with the priorities going forward. Health and safety will always be our top priority. We are well positioned in a challenging market. This enables us to combine short-term measures, maneuvering in the short-term, while also, at the same time, making progress on our positioning for the long-term opportunities. 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 organization. As I've said several times during my presentation, we will continue to execute on our 2025 strategy, which is to strengthen our position in low-carbon aluminium, but then also grow in new energy solutions, which includes renewable growth, batteries and hydrogen.

And with that, I say thank you for the attention.

[Therese Holm, executive]

Thank you very much, Hilde, and Pal. Then we will move to a Q&A from the audience. [Operator Instructions].

[Morten Normann, analyst]

Morten Normann, Carnegie. You mentioned NOK 1.6 billion higher EBITDA from power sales in Q4. What electricity price is that based on?

[Pål Kildemo, executive]

Well, for the power sales from Slovalco, this is based on the power we locked in those power sales up. So that won't move. It's secured in the marketplace. On the power from the Norwegian smelters, that's based on right below EUR300 per megawatt hour, I would say. This is locked in between Aluminium Metal and Energy. However, Energy take this in as part of the total portfolio and hedge in the marketplace. So there's still a risk to the movement in the value of that figure, but that will then be in Energy results and not Aluminium Metal results.

[Therese Holm, executive]

Thank you, Morten. Any other questions from the audience?

No. Then I would like to thank you very much for joining us today, and please join our conference call that will be digital Q&A at 11:00 today. Thank you very much.