Boliden AB

STO:BOL

Earnings Call Transcript 2022-Q1

[Olof Grenmark, executive]

Ladies and gentlemen, I'd like to welcome you to Boliden's Q1 2022 Results Presentation. My name is Olof Grenmark, and I'm Head of Investor Relations.

Today, we will have a results presentation led by our President and CEO, Mikael Staffas; and our CFO, Håkan Gabrielsson.

Mr. Staffas, welcome.

[Mikael Staffas, executive]

Thank you, Olof. Thank you, [ Rofin ]. Hello, everybody. It's great to see you all out there. I'm talking to you from a very nice [indiscernible] here today with nice sunny weather, and we are going to have our AGM later today.

First of all, it's, of course, a big pleasure to stand here and present the biggest or the best results that Boliden has ever done in the history of the company. That was, of course, not surprising. Everybody knew that we've had price and terms that are the best ones that we've seen in a very, very long time or that we rather, ever have seen.

If you look at the key highlights of what we're going to talk about today, we had strong price and terms. But we also have strong price and terms in the other end, i.e., our suppliers are also increasing prices. We'll come and talk a little bit more detail around that. However, which is important for us, so far, we have a positive balance with better development of our prices than of our costs.

We have a higher mill volume in general. We have slightly lower grades in mines, which I think was very well communicated beforehand. And we have a stable and a good production quarter in the Smelter. We have, as we said, a record result of almost SEK 4.5 billion in EBIT, excluding the process inventory revaluation. We have a free cash flow, which is also good, given the consideration that when prices go up, also the amount of working capital goes up with it. So we're tying in reserves in our working capital. Håkan will come back and talk a little bit more about that. And we've also invested about SEK 1.5 billion in the first quarter, which is slightly lower than our growing rate, but that's typical. We're typically slow in the beginning of the year to get the investments going.

On the project side, well, the Aitik dam, we spoke about just 2 weeks ago that we have had -- we're going to have to do going forward has been announced. The Odda and Kristineberg expansions are going according to plan. The ramp-up in Harjavalta and the recovery in Tara after the incidents that happened back in Q4 has been slower in the quarter than we had initially hoped, but there is clearly progress, and we look very -- looks very good going forward.

In terms of the profit in the quarter, I mean, just looking at this graph tells you right away that we are looking at a very good quarter. In general, we've had good results in both of our business areas this quarter.

On the ESG side, let's start with the health side. We have had a higher absenteeism than we have ever seen before. COVID, in this quarter, was by no way, over, both January and February, but even March was very high sick leave quarters. And even though things went back to normality in the sense that people did not get extremely sick, we had a very high level of absenteeism, and that hurt us in places like Aitik, for example.

In terms of the LTI frequency, we have had a good development in this quarter. We had a better result both in the same quarter last year or in the Q4 last year. And we're having a good development, I think, in general. What you don't see here, but what I can tell you also that when we look at the severity of the injuries that we have, that is also going in the right direction. We have fewer average sick days for every injury that we do record. And the amount of what we call Risk Class 3 incidents, which are incidents, either somebody getting hurt or nobody getting hurt, but incidents that somebody could have gotten really hurt, those level of incidents are also going down significantly.

The CO2 intensity is going down, which is good. It's the right direction, and it's coming the way that we are, and our CO2 abatement program is moving on according to plan as well.

Well the big thing this quarter is what you see here on this exhibit is the, of course, the very good prices and terms, and it's driven by very good metal prices, which everybody will have known beforehand. It's also interesting enough, typically, when we have strong metal prices, we also have currencies going the other way. We don't have this at this time. The currencies are helpful to us, actually also, giving us a little push and helping us with the total index as it's seen here. But when you combine the metal prices and the exchange rates, we have a very good situation.

Now it's not only us who have a good situation. I think that you've seen this exhibits beforehand many times, but you can just, once again, make the notice around this that in zinc, copper and now also nickel, we have market prices, which are way above the cost level in the industry. Now these cost levels in the industry have a little bit of a lag. We'll talk about inflation for us, and of course, lots of our competitors also have inflation, and I'm pretty sure that we're going to see in these graphs as we move forward that the cost level in the industry will also go up because of this inflation. It hasn't shown yet in the numbers, but even with that, of course, it's a very nice profit level in the industry in copper, zinc and of course, in nickel, which has seen a very strong price increase during this quarter, which is, of course, very nice for us. Then, we had the issues during March where we didn't have -- even have an LME price for a certain day.

So it's difficult for us to make a point about what was actually the highest nickel price that might not be so important, but as you look in detail on this one, we have not stated an exact max price during the quarter for nickel as it was fluctuating on high levels but not really any trade.

On the mine side, well we've had a, I would say, a solid situation. I think the throughput is down a little bit, and of course, not quite where we want it to be. But given the fact that it is winter and also given the fact that we had so high sick leaves, especially in the beginning of the quarter, we are still pleased with the throughput that we had. And we've had a copper grade, which is even slightly above what we had guided for, for the whole year.

Garpenberg, also good, strong production, although you can see it's a little bit lower. We've had quite a lot of maintenance in Garpenberg -- sorry, during this quarter, both in the shaft and in other parts of the milling system, which has slowed us down a little bit, but we're likely to come back and recover those few lost tonnes as we move forward.

In Kevitsa, also good throughput. This is a 10 million per year speed that we're having in the first quarter, which is good. The grades are down, which I think was well communicated beforehand that that's what's happening right now in the Boliden area and also, in -- well, Boliden area is pretty strong production generally.

Tara, the recovery from the water event has been slightly slower than we had anticipated and slightly lower than I think we guided, but we're heading back again also in Tara towards fuller production.

Smelters, a strong production in general. The zinc smelters, if we start there, have a good traction in general. We've had also good production in Rönnskär. Harjavalta has had issues with the nickel line, but apart from the nickel line, basically, doing relatively good, apart from the fact that we had a 4-day strike in Harjavalta due to labor discussions in February that, of course, brought down the production coming with it.

In Bergsöe, we do have some challenges with the emissions of sulfur that has putting some constraints to production. We have actually, as we're speaking today, as of last week, managed to get an adjustment of the permit that we have there so that we will be able to start producing more relatively soon.

So with that, I leave it over to you, Håkan, to give comments through a little bit of the financial numbers.

[Håkan Gabrielsson, executive]

So good morning, and thank you, Mikael. I'm just going to start by echoing what Mikael just said. It's a pleasure to be here and to talk about what is, in fact, our strongest result in a quarter so far financially.

EBITDA reached SEK 6.5 billion, just shy of SEK 6.5 billion. EBIT, excluding process inventory revaluations, was SEK 4.5 billion. Both of these numbers are about SEK 2 billion up year-on-year. CapEx is SEK 1.5 billion in the quarter. That is slightly lower than our run rate for the full year that we expect. We do see both the other project and our investments in Aitik picking up over the later part of the year. Free cash flow of SEK 674 million, with this strong price development with tie some capital and working capital, and I'll come back to that shortly.

Looking by business area, we do see improvements in all areas. Mines are up to SEK 3.1 billion. Smelters, just shy of SEK 1.4 billion, and other/eliminations is about 0 in the quarter. Typically, when we have price increases, we see a negative number in internal profit adjustments. This is timing adjustment, as I think most of you know by now. We have been able to release some inventories to keep that number close to 0.

Looking then a bit deeper into the profit development year-on-year, quarter 1 this year compared quarter 2 -- to quarter 1 last year, we have been helped by very strong price development. We're up SEK 2.3 billion as a result of prices. It's mainly base metal prices that have had a strong development during the year, but we also see the currency situations with a stronger dollar helping us a good deal as well.

Volumes, the net effect is positive. There is a mixed picture there. We have, on the positive side, higher milled volume in our mines. And we've also been able to release some internal stock, that's primarily copper cons from Aitik, which means that we have a positive volume effect from the internal profit elimination. But on the negative side, lower grades in Kevitsa and lower volumes in Harjavalta connected to the issues that we talked about in Q4. So the net effect is plus SEK 176 million.

And then on the cost side, we do have the inflation that Mikael touched upon. This is about a 10% increase of costs. This is primarily energy and consumables, but there is clearly an inflation in the system. I'll come back to that in a while as well.

Looking at quarter 1 to comparing to quarter 4, again, the story is the same on prices and currencies, a good development. Volumes is again, slightly positive. There's a higher production in Smelters. We have been able to release inventory volumes that has a positive impact on the internal profit elimination, but we have lower mill volume and grades in the mines. And in particular, in the open pit mines, Q4 was a very strong quarter.

Costs, sequentially, is actually down. We have a positive SEK 147 million here. We did have some maintenance stops in Q4 in Smelters, and we also took SEK 60 million of one-offs connected to reclamation costs in Q4, which we haven't repeated in Q1.

Continuing then with the cash flow. Strong EBITDA of SEK 5.8 million and then, we have tied SEK 3 billion in working capital. Most of our working capital is very much connected to metals. There is inventories. There is accounts receivables and payables, which is fluctuating with the metal prices. And in a period of price increases, we have the weighted price increase in the quarter is about 20%. That has a direct impact that we initially tie working capital. So that explains the full number that we see here, SEK 3 billion.

Moving over then to our capital structure. Again, obviously, a strong balance sheet. We have a net cash position of SEK 1.5 billion and a net payment capacity of close to SEK 18 billion. We have done some financing activities in the quarter, and we added a slide just to give a brief update on that. We took a loan from the Nordic Investment Bank back in February. And in April, after the closing of the books, we refinanced our revolving credit facilities agreement. That's our liquidity reserve, if you like. We increased the amount from EUR 770 million to EUR 850 million. And you can see the details in the report. And of course, we're happy with our robust financing, and we're happy with the support of our core banking group.

Just a few words on inflation before I hand over to Mikael again. We do see inflationary pressure in the system right now. I think many of our peers have talked about the same thing. The areas where we feel it the most is mainly energy, bulk, consumables and transports. And in here, you have, of course, the diesel cost that has a big impact on transport and so on.

Looking at our run rate year-on-year, we're slightly above 10% in inflation, and that is then excluding wage and salary costs. At the same time, we have also seen a tendency to get extended lead times on the incoming purchases. And we have managed so far without any impacts on production. And we see the inflation and the lead times also visible in the investment projects.

So with that, I hand over again to Mikael.

[Mikael Staffas, executive]

Thank you, Håkan. I will just wrap this up and before we take the questions. Just quickly circulating back on Aitik, for those of you who might not have seen the presentation that we had 2 weeks ago, but just reiterating what the situation in Aitik was. And just to be very clear, we have had, because of our application of the Global Tailings Standard management, we -- that has to be implemented by next year, that needs to include the phenomenon of static liquefaction, which is something that historically, we have not calculated with and something that is not part of our permits as of today. But we have them voluntary taking that on.

Taking that on, together with some new geotechnical information, has pointed out that we have a dam that is not stable enough to be able to construct on going forward. We need to reinforce the dam. The way that's going to be reinforced is that we will make a safer grounding of the dam on the outside and then continue to build it, so the dam will eventually move from being an upstream dam to being a downstream dam over time. But it's -- initially, it will be just a support tow that comes into dam on the outside.

Because the way Aitik is construction, the way the Aitik is done, this unfortunately requires quite a lot of moving of infrastructure. This was not foreseen when Aitik was planned 10 years ago, and therefore, lots of the infrastructure is placed very closely to the dam on the outside. Lots of that has to do with water management, which is very natural, because we have a draining dam and water comes out of the dam right outside.

That all has to be moved, and it has to be taken into account, and therefore, that is on the kind of utmost importance. And it's quite a lot of infrastructure, including water cleaning facilities, including pump stations and so on and so forth that needs to be moved. We also need to have new additional water storage area, as we'll need to take some of the water storage reservoirs that we have today as we need to use that area to reinforce the dams in as well.

We will be able to continue production. We have about 24 months to get to the kind of first step of this to make sure that we have a dam that is stable enough so that we can continue to raise it. And therefore, we need to start as soon as possible. And the investment is estimated at SEK 5 billion. We will come back more with details as we do the details going through, because as you understand, we have not been able to do the full procurement as we came up with this number.

Permits are needed for this, but we, I think, had talked to that when we had a discussion about 2 weeks ago that we have a legal right to do these things not waiting for the permit, but we give the permit while assessing the permit. We've also, in the meantime, have quite a lot of discussions with the authorities, and they totally agree on that conclusion that we can start doing these things, while in parallel, getting the detailed environmental permit in place, and that should not be any big issue.

Capital Markets Day, we are, once again, just reiterating, you all know this that we will have a Capital Markets Day in November. We have lots of interesting things to talk about. I think dams, I'm sure are going to be one of the topics that you will get more information about as we come into the Capital Market Day. It's November 15 in Stockholm, and then we'll have a site visit on November 16.

Just forward-looking guidance, we have basically no changes whatsoever. Still the same guidance for the grade for Aitik for the year, for Garpenberg for the year, and Kevitsa, also, the same, reiterating the same guidance as we gave a quarter ago. Tara, it was a little bit slower ramping up than we had initiated, but we should be able to ramp up here during Q2, up to the position that we are.

The maintenance shutdown here is a bigger number than you saw when we talked a quarter back, but it's now changed in the actual maintenance. It's just that we -- with the higher prices, we make more money. And when you make more money, it's more expensive to stop because there's a opportunity cost that becomes bigger. So there's no changes in the actual maintenance being done.

The inflationary pressure, we talked about 5%, I think, when we met last time. Now we're talking about 10%. We have a high cost inflation on the nonlabor side. The labor side, we are covered by long-term agreements. There, the situation is more than normal, 2% to 3% this year. However, longer term, we'll come back to that. That might be something also for the Capital Markets Day. Of course, also, the consumer price inflation is now taking off. And over time, it is not going to be possible for us to have negative wage -- real wage increases for our staff for longer term. But short term, there's not big issues around that.

CapEx, also no change in the guidance that came out after we had the announcement of Aitik 2 weeks ago.

With that, I invite you all to start the question session, and I will leave the word over to the operator. Please operator.

[Operator]

[Operator Instructions] So we have the first participant, Mr. Patrick from Deutsche Bank.

[Liam Fitzpatrick, analyst]

Can you hear me?

[Mikael Staffas, executive]

Yes.

[Liam Fitzpatrick, analyst]

Sorry, the line went a bit patchy there. I wasn't sure if it was me. It's Liam Fitzpatrick from Deutsche Bank.

Two questions, one on Aitik and then secondly, just on inventories. On Aitik, I mean, look, you just covered it, but I have to ask. I mean, the SEK 5 billion number, how preliminary is that? And how confident are you that, that will be kind of the more or less final number, particularly in the context of the inflation that you're flagging, the fact that it wasn't a particularly planned project and also, some of the supply chain issues that you're talking about? And are you still confident that the project is not really going to impact production rates and the mine plan at Aitik, including the Liikavaara pits? That's the first question.

Secondly, perhaps for Håkan, a more detailed one, just on the inventories. You mentioned that the quarter has benefited from inventory release, and I assume you're talking about the Smelters division. Can you give us an idea of how much that benefited the numbers, the EBIT in Q1, just as we think about the run rates as we're heading into Q2?

[Mikael Staffas, executive]

Okay. Thank you, Liam. Let me start with Aitik. You are, of course, absolutely right that the way that we have planned these actions is the way that we would normally like to plan things, to have a very good detailed feasibility study in place before we announced things we had to rush it a little bit. Now, having said that, it was not that much rushed because we had worked on these kind of assessment for a long time because we were fully aware for quite some time that over time, [ we have to ] do something similar to this. So what changed our mind was that we needed to do it faster than we thought.

There are risks, of course, regarding this one. But given all the fact that we did think about what to do longer term for a long time, still feel relatively confident, but as you also point out, there is an inflation risk. Of course, we announced this 2 weeks ago. And of course, we took into account the inflation as we see it. Will inflation get even worse? Of course, we will have a problem. But as long as it stays where it is right now, I feel comfortable with this number.

And then Håkan, I'll give it to you with the inventories.

[Håkan Gabrielsson, executive]

Okay. Well, the inventories, what I refer to is the internal profit side. Typically, when we have price increases, we've said earlier that a 10% price increase means SEK 300 million negative impact on the internal profit side. We've had a steep price increase in the quarter and the internal profit was flat. So basically, if we hadn't been able to get the internal inventory levels, we would have had a few hundred million negative on this line.

Going forward though, this all depends on prices. Then also, on working capital and cash flow, I'm not sure if that was perhaps what you were referring to. Inventory volumes are down, prices are up, but we are currently at about, let's say, SEK 0.5 billion, higher inventory than we -- than our target levels. We're a bit lower in zinc and higher on nickel, but the net effect is that we're about SEK 0.5 billion high. That will have an impact on cash flow rather than profit though.

[Liam Fitzpatrick, analyst]

Maybe just to briefly follow up on the inventory point. Just on -- when we're looking at the Smelter result, so the number that's been reported, there was no -- it wasn't flatted by higher sales in the quarter over and above production rates?

[Håkan Gabrielsson, executive]

Smelters is comparable. That's -- there is no inventory impact there.

[Operator]

Next, we have Amos Fletcher from Barclays.

[Amos Fletcher, analyst]

My question, there were a couple of them. Firstly, around -- what's your confidence level in being able to spend the whole of that remaining SEK 4 billion potentially in 2023 on the Aitik dam? And then secondly, can I ask, is there any risk from the global standard on tailings management requiring you to make any adjustments to any of your other tailings dams?

[Mikael Staffas, executive]

Well, we'll first start with the second one. I think we announced already that we will need to do something with the Garpenberg dam, but, there's a big but with that one. It's a much smaller scale. It's going to be much, much less money and there is no infrastructure that needs to be moved in that particular case. But there is one section of the Garpenberg dam that we know that we're going to have to change from an upstream dam to a downstream dam construction method that we also will start working on.

Those of you who read Swedish will know that we have an environmental application for that one. We have much more time. We can do the application and get the permit to change and everything else before we need to do any action. It's much more longer term and much, much less money.

Now, the other thing on Aitik, you said will we be able to spend the SEK 4 billion in '23? No, we will not because we will also spend things in '24. So we need to spend the SEK 4 billion over '23 and '24. But you're pointing out, it's a tall task to be able to get all the things done that we need to get done, but we'll get back to you with details over time, but we are confident that we'll get the full thing done in time so that we can start raising the dams again.

[Operator]

Next, we have Mr. Luke from JPMorgan.

[Luke Nelson, analyst]

It's Luke Nelson from JPMorgan. Firstly, can I just maybe drill in a bit on the cost side? Just trying to square your comment on the 10% inflation year-on-year. Correct me if I'm wrong, but this is up relative to your comments in Q4, where I think you commented on 5% year-on-year inflationary effect. But if I look at the mines quarter-on-quarter waterfall, there's actually a cost or a sequential cost benefit. And I know within that, there's around SEK 50 million, SEK 60 million benefit from the revaluation effect that wasn't in Q1.

But it still looks like it was a fairly strong result quarter-on-quarter despite these quite gloomy cost or inflationary comments. So firstly, can you just maybe give a bit more color or granularity around the cost effect? And then also, I suppose the next part of that is what should we be expecting in Q2? What's the sequential effect that is yet to come through that is not reflected in the cost base?

[Mikael Staffas, executive]

Will you take that, Håkan?

[Håkan Gabrielsson, executive]

Okay. You're right that it is -- that we do not see the same development Q4 compared to Q1. The one-offs that I talked about specifically for mines were about SEK 60 million. But then typically, I guess there is some part of seasonality in there. We do normally have a bit higher spend in Q4. We spent a bit more on exploration, for example, in Q4 than in Q1, that will start to be caught up. So I think going forward, our best guess for now is just about 10% inflation run rate quarter-on-quarter. Then individual quarters, it may vary depending on exploration spend and maintenance stops, et cetera. But our best assumption for now is the 10% increase.

[Mikael Staffas, executive]

Yes, but the 10% is year-on-year, sorry.

[Håkan Gabrielsson, executive]

It's year-on-year, and it excludes -- it is on everything except, I mean, the non-labor part. The labor part is lower.

[Luke Nelson, analyst]

Okay. And then, just so I'm clear on that comment on 10%. Should we -- when you say that, is that sort of taking the year-on-year absolute cost and then just 10% of that, and that's the delta that we should be thinking on a quarterly basis?

[Mikael Staffas, executive]

Yes. If you take our costs, take out the labor part and then start with adding -- taking the rest up 10%, you have a good starting point. Then, of course, you have to adjust for different volumes compared to last year because, of course, there's a -- especially with diesel costs and so on, there is a -- what you say, it has a volume effect as well in there.

[Luke Nelson, analyst]

No, okay. That's clear. Thanks for clarifying. And then secondly, just again on costs and more on the project side. Maybe you sort of answered very clearly on Aitik, but Odda 4.0 is obviously coming on stream or being spent over the next couple of years. Can you maybe just talk about the risks around the EUR 700 million CapEx there? How much of that is sort of locked in pricing versus open to spot? And can you remind us of what the contingencies are around that CapEx budget?

[Mikael Staffas, executive]

We typically never go into detail. So contingency, that's up to us how we do that. But of course, there are contingencies involved in it. I would say that there is a whole slate of things in there. There are certain CapEx that is not yet locked because it hasn't been procured. There is CapEx that is locked but has indices, typically, the steel price. And with steel prices going up, of course, then the cost will go up.

There is also some challenging on lead times. I think Håkan mentioned that, that we have some suppliers who are, right now, due to different reasons and semiconductor might be one, are actually indicating longer lead times. Having said all this, so far, all these changes, both timing-wise and CapEx-wise, are within our contingency or within our planning. But yes, of course, there's a higher risk. We have, on purpose, not done any update at this quarter because we need another quarter to kind of add up the sums, but we feel relatively confident. But we need to come back with that once we've gone through and done the detailed planning over the next quarter and get a little bit more visibility around where this inflation will run from here, regarding steel prices, especially.

[Operator]

Next, we have Ioannis from Morgan Stanley.

[Ioannis Masvoulas, analyst]

The first question is around supply chain issues in the wake of the Russia-Ukraine conflict, especially around the nickel feed for Harjavalta nickel expansion and on consumables. Could you provide a bit of color there, please?

[Mikael Staffas, executive]

Yes. Generally speaking, we don't procure that much out of the Russia or Ukraine situation. There is more on the CapEx side because there's quite a lot of steel coming out of Ukraine. But on the OpEx side, there is not so much, but there are some. And there are things that we are -- if you want to say so, there are some yellow flags up there, but we have not come into a situation yet where there's been any risk of not being able to produce.

Regarding the nickel situation for Harjavalta, we don't really comment, and we don't really go into detail exactly how we supply. That will depend over time. But I will say, so far, we are very well positioned in terms of supplying the Harjavalta smelter, both given that we've had some production issues. So we -- as you know, we have record inventories right now, our nickel concentrate. And also, the fact that we have our own mine, Kevitsa, as a baseload makes things much easier than it would be otherwise.

[Ioannis Masvoulas, analyst]

Sounds great. And I guess, in terms of the expansion, are you still comfortable that you will be able to procure sufficient feedstock to run the expanded footprint?

[Mikael Staffas, executive]

We are, for the short term, we are very confident. Over longer term, we are also confident. But of course, there are other things, not just Russia, everything else plays into this as well. But given that the world will need more nickel, they will also need to mine more nickel, and we have a nickel smelter that we are not really nervous that we're not going to be able to fill it over time. But of course, life is full of dangers. But I would put it this way, I was much more nervous about filling the nickel line in Harjavalta 5 years ago than I am today.

[Ioannis Masvoulas, analyst]

Understood. That's very helpful. And maybe just sticking with Harjavalta. You mentioned the strike action during the quarter. I thought that negotiations, labor negotiations were due next year. Can you perhaps give us an update on the progress there and how close you are to signing an agreement?

[Mikael Staffas, executive]

Well, in Finland, it is a 1-year agreement. So we have a 1-year central agreement. We had some discontent with that central agreement and thus, we had the local industrial action for us in Harjavalta. But I think that the negotiations are up again for next year. In Sweden, we're in a longer-term contract, a 3-year contract that is also up for negotiation again next year. And Tara, I think we're towards the end of a 4-year contract, which is up for negotiation. So we do have labor negotiations coming up. Every country has its own specific dynamics around this that we need to play with, and we'll see where those come out.

[Ioannis Masvoulas, analyst]

Understood. And maybe, just for Harjavalta, and last question for me. I think you've been mentioning 2% to 2.5% wage cost inflation. Has there been a step-up in the 1-year agreement you signed at Harjavalta?

[Mikael Staffas, executive]

The agreement Harjavalta that is signed is the national agreement in Finland, which is roughly 2%, which is true for everybody in the kind of industries actually in Finland. So it's around 2% or more than 2%.

[Operator]

Next, we have Mr. Daniel Major from UBS.

[Daniel Major, analyst]

Yes, thanks. A couple of questions. Firstly, on sort of revisiting the cost inflation dynamic. You previously highlighted 80% of your power costs are under long-term contracts. Is part of the guidance upgrade on costs associated with that additional 20% either hedges rolling off or the impact of an assumption of higher for longer power pricing?

[Mikael Staffas, executive]

I can take that one very quickly. You're absolutely right. We're roughly 80% fixed. The 20% that we buy on spot has, of course, gotten lots expensive. I mean, there, 10% is not enough. When you take that mix, our inflation on power is actually less than the average inflation. So it's kind of less than 10%. But that's the whole block, including the kind of fixed part in the bottom or the index part that we have in the bottom.

We have also -- when we look for this year, 2022, and the rest of the year, there are not anything major rolling off, so we don't see any changes in that going forward. As we move to '23, things might get slightly more complicated but not much because we have quite a lot of contracts that are actually much longer than just the next 2 years.

[Daniel Major, analyst]

Okay. So you're basically largely fixed even on the -- through to 2023, even on the additional 20%. Okay.

Next question is on -- just on smelters. Can you remind us on the time lag with realizing the higher treatment charges? Copper and zinc, I guess, that will provide an earnings tailwind into Q2. Can you give any quantification on that?

[Håkan Gabrielsson, executive]

You're right. Not so much for copper though because copper, we've had -- I mean, there's a relatively small change in -- and we've had that a while. But the zinc side, we have a positive impact in the EBIT bridge of Q1 of SEK 80 million. That reflects -- in the smelting side, that reflects about half of the quarter, which was produced on this year's terms and half that was produced on last year's term. So I think we're looking at an additional impact on the P&L of something in the same magnitude, about SEK 70 million to SEK 80 million for Q2.

[Daniel Major, analyst]

Okay. And just to kind of push on that a little bit. If you look at the run rate of Smelting earnings, it's quite volatile, but you mentioned, to Liam's question, there's no sort of material inventory impacts, et cetera. If we look through the rest of the year, is it fair? And after adjusting for your guidance on maintenance, I mean, all else equal, would it be fair to assume a run rate of EBIT north of SEK 1 billion all else equal?

[Håkan Gabrielsson, executive]

Well, it is very much connected to prices though because a big part of the P&L in Smelting is free metals. In the copper smelters, more than half of the gross profit comes from free metals in copper and precious metals. And in zinc it's not quite half of the gross profit, but a big part of that is free metals in zinc. So the recoveries are important. The grade content of the material coming in is important. And of course, the prices are important.

So there will be some variations, but I mean, the number you say in the current price environment and in current recoveries seem reasonable.

[Daniel Major, analyst]

Okay. And then just a final quick one for me. On Tara Deep, the statement suggested the timeline with respect to starting exploration could be end 2022 at best. Is it fair to assume the decision on the project may slip from 2024 to 2025?

[Mikael Staffas, executive]

I mean, we have lost a year at Tara Deep from the flooding, you can say. And of course, then it's kind of fair to say that '23 will become -- so '24 will become '25. But we haven't gotten into those details yet because, of course, lots of things that need to be factored into a decision like that, including when exactly is the present tailing dam getting full. And we would have to make an investment in the new tailing dam and that we are unlikely to make an investment in new tailing dam unless we can, at the same time, see that we have a profitable Tara Deep project. So lots of things that come in around this. We will provide more update as we go forward.

[Operator]

Next, we have Patrick from Deutsche Bank.

[Liam Fitzpatrick, analyst]

I'm back again just with a couple of questions, having looked through the detail. Just on the Smelters, I see that there's a big -- a reasonably big positive from higher premiums, which we can all see through kind of zinc premiums that we're hearing about in Europe. Should that go higher again into Q2? Or are you largely fixed in terms of annual contracts?

And then the second question just on Kevitsa. I know you don't guide specifically on the grades, but the grades were quite low in Q1. Should we expect similar levels through the year? Or could there be a degree of improvement later in 2022?

[Mikael Staffas, executive]

Well, regarding the grade guidance in Kevitsa, I think I will not dwell more into it than what we are guiding in the -- that we will remain below the reserve grade, which is what we have indicated. Now, on smelters -- the question was...

[Håkan Gabrielsson, executive]

The question was about the premiums.

[Mikael Staffas, executive]

The premiums -- sorry, premiums. We are, to a large extent, setting premiums on annual contracts. There is some spot involved as well, but you could maybe safely assume that these premium levels will continue for a while.

[Operator]

Next, we have Christian.

[Christian Kopfer, analyst]

Sorry, I didn't hear. Maybe it was me then.

[Mikael Staffas, executive]

Yes, it's you.

[Christian Kopfer, analyst]

Yes. Yes, just a few follow-ups from my side. Firstly, I guess, the [ walk-in ] and then on the cost inflation side. Sorry if I missed it the -- look, you're talking about approximately 10% cost inflation. And if I understood it correctly, did you already see this magnitude of 10% already full effect in Q1?

[Mikael Staffas, executive]

I can answer. Yes, if you look at Q1 of '22 over Q1 of '21, there's roughly 10% cost inflation. And as we can see, as we look forward for the future Qs, that we see a roughly 10% -- continued 10% over the relevant Q from last year.

[Christian Kopfer, analyst]

You're right. Okay. That's great. And then on the eliminations, what you talked about on that you had some underlying positive numbers, right? So if we just assume the metal prices will stay exactly the same, just for -- to understand the elimination, how much left are you to realize on the internal elimination?

[Håkan Gabrielsson, executive]

So just to repeat your question there, assuming that the prices are constant and that we take out all the excess inventory from the system, how much is the P&L impact?

Well, let's see now, that should be somewhere in the vicinity of SEK 200 million to SEK 300 million.

[Christian Kopfer, analyst]

Okay. That's great. And then maybe finally on Kevitsa. You talked about a little bit there, Mikael. Is that much more hard to forecast given the volatility on rates?

[Mikael Staffas, executive]

In Kevitsa, you said?

[Christian Kopfer, analyst]

Yes.

[Mikael Staffas, executive]

Yes. Kevitsa is more difficult than other mines because the mineralization in Kevitsa is not homogenous. It's -- the ore is more lumped in certain areas, and therefore, you're not quite as sure as you would be in a place like Aitik where the averages will make things easier. In Kevitsa, sometimes, you hit the higher grades and sometimes, you hit the lower grades and you're more uncertain. So there's a higher uncertainty of grades in Kevitsa. The answer is yes.

[Christian Kopfer, analyst]

Okay. Got it. And then finally, if I understood you correctly, on the smelting side, talking about byproducts and the metal premiums going into Q2. So did you expect further tailwind quarter-over-quarter on byproducts and metal premiums?

[Mikael Staffas, executive]

Now maybe I'll take that. On metal premiums, I do not expect necessarily a further tailwind. We do have a good situation, and it's likely to stay as we have lots of annual contracts here. On byproducts, there, you could argue, because those of you who backed this through on sulfuric acid, we have quite a delay with many customers on how market terms come through in our contracts. So you will find that our prices are quite a lot lower than the present spot.

If you believe that the present spot will prevail for a while on sulfuric acid, then our revenues will -- from byproducts will increase over time as these spot terms kind of slowly eat their way into some of these long-term contracts that we have.

[Christian Kopfer, analyst]

Right. And those figures that you showed for the last couple of quarters, that was around SEK 80 million, SEK 90 million per quarter. So is that also relevant if you look in the near future?

[Mikael Staffas, executive]

I don't have those numbers clear enough, so I will not comment on the actual numbers, Christian.

[Operator]

Next, we have Mr. [ John ] from [ BMS ].

[Unknown Analyst]

Yes. It's [ Johannes ] here. Can you hear me?

[Mikael Staffas, executive]

Yes.

[Unknown Analyst]

Perfect. Great. Well, most of my questions have been taken out or already asked, but I have still one left. It's about Liikavaara. When do you think you will start mining that sort of satellite pit, if you could indicate? We are talking about that -- and will that have an instant impact on rates?

[Mikael Staffas, executive]

We have indicated Q4 of 2023. Whether it will have an instant impact, I will -- hesitant to say. We know that Liikavaara is a higher average grade, but which end of Liikavaara we will start, I don't know. So whether that will have an immediate impact, I cannot answer. So yes, that's as far as we can go. It's Q4 '23, and it's good because the average is better. Whether it comes right away, I don't know.

[Operator]

Next, we have Mr. Jatinder from BNP.

[Jatinder Goel, analyst]

I've got 2 questions as well. First one on inventory at Aitik. You said you have taken out some inventory on the concentrate side. What drove the decision? And generally, what are you seeing on your concentrate procurement, especially for copper concentrate during first quarter and so far into second quarter with all the disruptions that we have seen in Latin America and spot TC/RCs going higher?

And second question's just on CapEx? For 2023, I know you'll probably give a formal guidance at Capital Markets Day. But any early indication if you could hold the CapEx line flat year-on-year, including that Aitik extent? Or could it be higher in '23 versus '22?

[Mikael Staffas, executive]

I will start on the second one. I will not give you any extra flavor. We'll come back to it probably in Q3, and then maybe little more point on the Capital Markets Day. What we have said, and that's still true, is that it's a little bit tricky and it come to '22 and '23 numbers as the older project will be right in its midst of its bigger spending around that changing or the new year's between '22 and '23. And lot of that CapEx could come in, in '22 or '23. So we'll have to see how that all plays out.

Now, regarding -- the other question, I didn't quite hear, but if I understood you right, you were asking whether we have had an issue to procure copper concentrates given this situation in Latin America. And I would say we have not had any issue securing copper concentrate. So far, we are -- with our long-term suppliers, we have been able to fill it well.

I will speculate now because I don't know exactly why this could be different from others, but you do know that given the fact that we can take more complex material than others, it means that when -- for as long as our suppliers are okay, they have difficulty finding other destinations. And we have not had any issues supplying our copper -- or we have not really had any issue supplying any of our smelters. If there's been any issues for us, it's been more on the zinc side, but I think that's more related to the fact that we've been producing very well. And we've had some high situations and so on, but we've been managing to supply -- to secure supply for zinc smelters throughout the winter.

[Håkan Gabrielsson, executive]

And you asked also about the change in inventory compared to Q4, I believe, whether that was a conscious decision or not. I think the reason that we had a bit extra inventory in Q4 was very much internal factors. We had a very good production in Aitik, good grades and high throughput and weaker production in Rönnskär. So we had a bit more copper cons internally in the flow due to that fact, and we worked our way out of that during the quarter. So that is the reason. It's not connected to external supply issues.

[Operator]

Next we have Mr. Broda from RBC.

[Tyler Broda, analyst]

I think that might be me. It's Tyler from RBC. One last final question. Just on Aitik, just to follow up on Amos' question earlier. The -- you've got a lot to do over the next couple of years. What are the contingency plans if there is some form of delay in getting the dam to spec? Are there any contingencies you can do to keep the operations going beyond that 24-month period?

[Mikael Staffas, executive]

Well, we're, of course, always looking at all kind of different plans, but I will say that we need to get that done or at least, most of it done within the 24 months. We need to get enough done so that we can start raising the dams again within 24 months or production will be impacted.

[Tyler Broda, analyst]

No, I appreciate it's still a moving target. So thanks very much.

[Operator]

Next, we have Mr. Daniel Major from UBS.

[Mikael Staffas, executive]

Daniel from UBS.

[Daniel Major, analyst]

Yes, a very quick follow-up sorry to labor the point on working capital and inventory. But is it right to assume that if we assume prices and everything else remains constant, you're carrying SEK 0.5 billion of extra inventory and that would reverse? Is there any other major moving parts sort of into next quarter on the working capital?

[Håkan Gabrielsson, executive]

Before I answer, I just need to make a distinction. If we talk about cash flow, and this is perhaps, a complexity. If we talk about cash flow, then we talk about our entire inventory, our entire working capital, in fact. And there, we talk about SEK 0.5 billion, which at constant prices is there to release. Much connected to Harjavalta. Whether we'll release all of that in Q2, I cannot guarantee, but at least that's our ambition.

If we look at the P&L impact, then we go to the internal profit, and then that is only the concentrate stock that comes from our internal mines, that is the question mark or that is relevant. And then we talk about half of that amount, roughly, which I think somebody earlier talked about a couple of hundred million Swedish krona to release maybe up to SEK 300 million.

[Daniel Major, analyst]

Okay. But I guess, the point is if prices stay at this sort of level, you won't be reversing the SEK 3 billion free cash flow drag in the first quarter in its entirety through the remainder of the year if prices stay at the same level? Is that the right assumption?

[Håkan Gabrielsson, executive]

Correct. That's the right assumption.

[Mikael Staffas, executive]

Absolutely correct. I mean, with the higher prices, we do tie higher working capital. There is no way that we can get around that.

[Operator]

Next, we have Mr. Krishan from JPMorgan.

[Mikael Staffas, executive]

Krishan, JPMorgan.

[Krishan Agarwal, analyst]

Krishan from Citigroup. Most of my questions have been asked. If I can ask the last question on Aitik. The milling volumes have been weaker in Q1 while the grade have been higher. How should we think about your visibility on taking the milling volume to 45 million tonnes [indiscernible]?

[Mikael Staffas, executive]

The milling volume has been lower, and you're right with that. There is somewhat of a winter effect into that. We typically have a slower Q1, but this one was slower than it should be. There is a clear COVID effect into this number, with the higher -- very high sick rates that we had, especially in the earlier parts of the quarter. We should be reverting to a 45 pace quickly.

If I see it right now, if I hear right, there is no further questions. If that is so, then I would like to -- there's one more out there?

[Operator]

I don't have any questions.

[Mikael Staffas, executive]

Okay. Thank you all very much for participating in this presentation. It's always very good to stand here in front of you. I think we've had a great quarter. We produced the best results ever in the history of the group, and it looks very interesting and very good going forward. Thank you all very much.

[Håkan Gabrielsson, executive]

Thank you.