Boliden AB

STO:BOL

Earnings Call Transcript 2021-Q2

[Olof Grenmark, Director Investor Relations]

Ladies and gentlemen, I'd like to welcome you to Boliden's Q2 2021 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. There will also be a Q&A session. Mr. Staffas, the stage is yours.

[Mikael Staffas, President & CEO]

Thank you, Olof, and welcome, everybody, as well who's on the line. Welcome to a sunny Stockholm. Now you also only see the inside of a studio, but I can assure that we have nice weather on the outside. And just to start off with the highlights, you've seen that we've had a strong earnings, and that's, of course, on the back of very strong prices and terms. And this is nothing new, you know very well about this before. We had a stable production during the quarter, and we also have a record EBIT in the Mines. And we'll come back a little bit and talk more about the details on the results as such. The financial performance in total is good, and I especially like to point out that we had a good cash flow during the quarter. The projects that we have online are going according to plan. Both Aitik ramping up and Rävliden is initiated, and the Rönnskär investments, both in the copper expansion and the leach plant are ramping up as we're talking. We have also, and we'll come back to that and talk more in detail about the decision to invest EUR 700 million in the Green Zinc Odda 4.0, and we'll talk more about what that actually entails. So talking about the total development of the profits. You can see that we had group at SEK 2.6 billion, we had Mines at SEK 2.2 billion, and Smelters are close to SEK 800 million. And somebody will ask you, can't you add up? Well, Håkan will come back to you and talk to you about the internal profit elimination that is a timing instrument that comes into play and that's come into play in this quarter more than maybe most people would have anticipated. Starting to talk a little bit about the ESG situation. Just to be very clear, we've had a good quarter in terms of the LTE frequency -- or LTI frequency, I should say, at 3.5, which is a lower number than we've seen in the many times. We have also stretched for another quarter our fatality-free operation, which is now soon adding up to 14 years. The sick leave situation is still a little bit worse than what it would be in normal times. It's better than it was last year and it's better than it was in Q1. The COVID situation is getting better under control, but we're still not through the COVID situation in total. The CO2 intensity is slightly worse than last year. This is mainly driven by our lower grades. And of course, the lower grades, we get less metal to divide our CO2 over. Over time, we feel very good with the plans that we have in place to be able to get the CO2 to come down much further than this. Looking at the prices and terms at the markets, you all know that we have very high base metal prices, and you see that on the graph on the top to the right, where the prices have gone high basically for all metals and base metals as well as precious metals. We have a slight weakening on the currencies from our point of view. But when you multiply these 2 numbers together, you get the graph on the bottom to the right, you can see that we have prices and terms that are probably the best that we've seen in the history of the company. Now where does this come from? Well, there is, of course, fundamentally a very good situation for all the base metals with respect to future demand and with respect to the turnaround of society and changing the total economy away from the fossil society into a fossil-free society and the need for electrification, and thus the need for base metals. That has led to these very high prices. You can also see that the prices for all the metals, including now also nickel, has left the cost curves and prices are much above, meaning that lots of the future strong demand situation is, of course, already priced in into the metals as we're speaking today. You can also see from this graph that the copper mines in the world who have had a good situation for a while, now I should see slightly increased costs and there's inflation pressure, and I'll come back a little bit to that, that we see across the world. You can see that the zinc mines around the world seem to be doing much better. While here, the silver prices play quite a big role and the silver prices have come up recently, which makes it looks like there's a cost -- a positive cost situation going on, but it's probably more of an increased silver buy credit. On the nickel side, we have a slightly mixed picture in terms of the cost development. We can see that the high-cost mines who don't have so much buy credits are actually seeing increased costs, whereas the lower-cost mines will have more buy credits from PGMs, continue to keep their costs under control. But also here, as it has been for quite a while, the situation of copper and zinc, we see that the prices are lifting up from the cost curve, if you want to use that word. If you look into the production that we've had in the quarter, in Aitik, and those issues that we had in Q1 that we spoke quite a lot about when we spoke 3 months ago have been solved. They were solved at that stage, and we haven't had much issues on them apart from a little bit in the very first few days of the Q2. We still have an impact from COVID-19 even though it's less than it has been. The milled volume is almost up to where we were a year ago, and the grades ended up on 0.21, which I think is exactly what we have guided for. Garpenberg, another strong production quarter, stable zinc rates right around what we have guided for. In Kevitsa, we had slight availability issues for the primary crusher during the quarter, but we still had milled volume of 2.2 million. And things generally look good, and we don't have to change the guidance in any way for the full year. There is added -- or there is, I would say, enough capacity in the mill to be able to catch up a little bit that we're behind in terms of the 9.5 speed for the year. In the Boliden area, we have good throughput, but we also have higher grades compared to both the first quarter and the second quarter last year. You could argue that both those quarters were low in grades and then this quarter had more normal grades. In Tara, we've had some conveyor belt issues and we've had some lower grades. But all in all, Tara has produced relatively well. On the Smelters side, we've generally seen good production in Harjavalta, but we've had slightly lower grades in incoming material. And this product mix has led to less free materials -- or free metals, I should say, which slightly impacts the financials. Rönnskär has also had a strong feed but has slightly lower metal production, i.e., we built up some internal inventory during the planned time. And we've also taken -- come through a planned maintenance shutdown. On the zinc side and also lead, with Kokkola, Odda and Bergsöe, we basically had, had good productions in all these units. There's been a planned maintenance shutdown in Kokkola during the quarter. With that, we come into the financial summary, and I will let Håkan come in and talk about the financial numbers for you.

[Håkan Gabrielsson, Chief Financial Officer]

Thank you, Mikael, and good morning. Well, as Mikael said, we've presented a result with a strong EBIT and a strong cash flow. Looking at the EBIT, excluding process inventory, we are up about SEK 1 billion compared to last year. And free cash flow is up SEK 800 million. Sequentially, the profit is up SEK 167 million, while the cash flow is down about SEK 150 million. Earnings per share just above the Q1 level. Looking then by our segments divisions. Mines is significantly up to SEK 2.2 billion. We've had a stable production during the quarter. The production issues that we saw in Q1 have all been solved. And in addition, we have a favorable metal price movement during the quarter, which has helped Mines to achieve a record EBIT in the quarter. Smelters is slightly down due to lower free metals and higher maintenance. And then we have the timing adjustment in other/eliminations. As you're well aware, the moving part here is the internal profit elimination. That's a timing adjustment that we are required to do according to IFRS standards. Typically, that amount is negative when prices increase or when inventory increase, and both of those 2 have happened during the quarter. As you might recall, at the end of Q1, we were very low on copper concentrates due to the production issues in Aitik, and that situation has normalized, which then will have a negative impact on this amount. Again, purely a prioritization adjustment. Diving into a bit more detail and comparing Q2 to Q2 last year and going into the components of the SEK 1 billion increase in profits. We have been helped by higher metal prices. We are in commodities that have a strong fundamental demand and metal prices altogether added SEK 2.8 billion to the result compared to last year. That was then offset by a weaker dollar and, to some extent, also a lower TC. But all in all, a very good development of prices. And in particular, copper is the metal that makes up most of the difference. Volumes are down SEK 584 million. The grades in Aitik is a significant part of that, about SEK 270 million, which explains the entire change in the mining side. We've talked about that for some time. So I don't think it will be a surprise to anyone. Throughput-wise, we see an impact from Kylylahti being closed, but that's pretty much all covered by better production in the other mines. On the smelting side, we have maintenance shutdowns and lower free metals due a different feed mix. And then this is also the line where the timing adjustments for profit elimination comes in due to the higher copper concentrate. Costs are up by SEK 118 million. There is a normal labor inflation. We have a quite steady pace in there over the years. We've also taken some additional costs due to profit-sharing programs in line with our profit development. We have seen some inflation in energy then, that included diesel. But all in all, inflation in the other parts are still low in this quarter. We have slightly higher maintenance than the comparison quarter, and then we have a positive cost impact from Kylylahti being closed. Comparing then Q2 to Q1, again, a favorable movement of prices, mainly copper and zinc. Volumes, all in all, flat. Higher milled volume and grades in Mines, slightly lower volumes in Smelters. And again, the internal profit elimination has a negative impact on this line. Costs up due to higher production in Mines and higher maintenance in the quarter. And we've also taken a higher depreciation on stripping in Kevitsa as production have been higher. Cash flow, we're happy about the number, second quarter above SEK 2 billion, stable level. Slightly higher investments than last quarter, although a bit down from last year. But what I think stands out here is the working capital. This is typically a quarter or the first half year when we build some working capital and, in particular, when prices are increasing. But that has been managed well in the organization over the last 2 quarters, and we've had a negligible negative impact from working capital. So we're happy about that. And that, of course, leads to a strong balance sheet. We paid SEK 4 billion dividends, almost SEK 4 billion dividends in the quarter. We have a net debt of SEK 2 billion after that, and a net debt to equity of 4%. As in the previous quarters, we are happy with the financing, a very robust financing that is in place with a competitive interest rate. So that's a brief summary of the financials. And with that, Mikael, do you want to continue?

[Mikael Staffas, President & CEO]

I will continue and I would start talking about what maybe most of you have been mainly interested in terms of this quarter, and that is the big investment that we have announced in Odda. The Odda zinc smelter is almost 100 years old. It has 200,000 tonnes of capacity of cast zinc. It doesn't have any capacity today of any bimetals coming out of it. It is already today, and I'll come back to a slide of that, one of the most climate-friendly zinc smelters globally due to 2 things: due to the feed mix of the electricity coming in but also due to the fact that we can use the Jarosite process in a very intelligent way because of the mountain cavern handling of the waste. It's today, basically, a third quartile cash margin position according to Wood Mackenzie. Now why are we so excited about this project? Well, there are 2 reasons for it. And if you start with the right, this is clearly -- already today, Odda is world-class in terms of the CO2 footprint, and of course producing more zinc coming out of that. And having more zinc coming out with a global CO2 footprint of basically 0 from the smelting stage is, of course, very interesting, and we think it's going exactly the right direction strategically. On top of that, we will try -- or we'll be able to move Odda to a first -- clear first quartile position in terms of cash margin. And this comes from 2 or 3 main sources. One is the new products that we're getting out. So we're getting a new leach product coming out with lead, silver and gold that helps the cash margin. But we're very much getting a high efficiency. We're lowering some 35% the unit cost. This is both because of using scale but also using the latest technologies that are available in terms of automation and digitization.So that's why we like this. It has a world-leading CO2 footprint. By the way, the lower footprint that you almost can't see on the scale is actually going to get slightly better because of this as well, but that's not the main point. The main point, of course, is that we're getting more zinc to the market with such a good CO2 footprint. We have a long-term sustainable waste solution here that we can work with the mountain caverns. That has been the long discussion in terms of getting permits. That's why we've been postponing this for a while to make sure that we really got these permits in place. We have a 20-year -- basically a 20-year permit for this storage, which is well enough to depreciate the investment, and we are very hopeful that we will continue also after that. It's not the end of the mountain in Odda, and the technology of storing Jarosite in the mountain caverns is probably one of the most environmentally best ways of handling the situation. It will have state-of-the-art efficiency. They will have new metal recoveries and the byproducts coming out of that. It will also have high capability of handling complex concentrates, which also will make the feeding and buying the -- sourcing the raw material to the smelter relatively easy. And as I said before, we use the scale of the new facility together with digitization and automation to get world-class productivity in all sense. All of this is, of course, all in vain if there wouldn't be a market for the product. But we see a very stable increase in zinc demand. There's a favorable market outlook for that, where they come to. And there's also a relatively limited new zinc smelting capacity coming around in the world. It's not 0. There are some things being built here and there, but it's not what we've seen in other metals where there's been an oversupply of different parts of the value chain. This one is a relatively balanced development in the world. And the financial terms are -- financial returns are well above Boliden targets. You know that our cutoff rate is 10% for these kind of investments that we can really don't do if we don't want to do them. Exactly what the number is, you're not going to get from me because it all depends on how you calculate. But I can put it this way, that we've done all kinds of scenarios regarding development of prices, development of other terms. We've looked at some technical risks involved with this. We looked at the CO2 footprint and so on. And however we model this thing going forward, there is a clearly above 10% return. We also have a strong local support, which is important. I think this might be one of the key things for anybody going forward. We've gotten the environmental permits. It's been a tough process. I'm not going to say that it's easy to get environmental permits in Norway, but it's been a fair process and it's been a good process. And we've gotten the permits that we wanted, and we've gotten them that we consider a reasonable terms. There's a strong local support in the city of Odda itself and in the region around but also on the national level. And we've been granted EUR 39 million as an investment grant from the Norwegian governmental bodies. This has, by the way, also been cleared by the EU. It's not being counted as state aid or illegal state aid in any sense, so this one is already clear. We will be able to produce full in the existing Odda facility during the project. This has been one of the key aspects we've been looking at. If you'll -- now that there is relatively limited space and we're going to need to do lots of work, very close to existing operations. But this has been gone through all in detail in the project to make sure that this is going to be able to do that and we're going to be able to do that in a safe way, both safe in terms of saving production but also safe for the people involved. So what are we building? Well, we're building a new roaster, a new world-class roaster. We're building a new acid plant, sulfuric acid plant connected to that. We're expanding and modernizing the leaching and purification plant that we have. We're building a brand-new cellhouse. We're also shutting down one of the old cellhouses in this. We're expanding the foundry. We're upgrading the loading equipment at the quay side. There is also a new quay for the acid loading. We need to build [ according ] to this. And there will be new storage facilities, and there's both concentrate storage but also finished product storage facilities. It will be commissioned in the end of 2024, and the ramp-up will be during 2025. The total investment is EUR 700 million. The major cash flow -- outflow is in '22 and '23. As I said before, this gives an improved cash margin. And where does the cash margin come from? Well, we have 35% reduction in the unit cost or the operating cost per tonne of zinc. That's economies of scale that helps with that but also automation, digitalization. There will be a -- there is also a new hydropower agreement in the back of this as all plays into this. We also have the new byproduct. It's 40,000 tonnes of the leach product itself, which will have a metal content of about 10,000 tonnes of lead, 50 tonnes of silver and 400 kilos of gold. This, on the kind of Boliden's long-term prices and terms, gives roughly EUR 25 million in additional contribution. There is also into this calculation, a number that's, of course, very difficult to get your arms around because it varies from year-to-year. But it's clearly so that there's some of the equipments that we will take away that we're looking into relatively high maintenance CapEx outlays, maybe not next year but if you're looking towards the end of the '20s, that we are now replacing. So there's a CapEx avoidance involved in this one as well. So that's the project. I'm sure I'm going to get lots of questions about it in a little while. I just want to talk a little bit about going forward. Regarding Aitik, there is no change in guidance. We have the point -- the 21% -- 0.21% grade that we guided for before. Garpenberg, 3.8% and 110 silver. Also no change from the previous guidance. Maintenance shutdowns, SEK 510 million. That used to be SEK 500 million. There's a SEK 10 million added to this one, and it's basically the higher prices and terms that makes it more expensive to maintain when prices are good. What is new is the increase in inflation pressure. We haven't seen that yet. If you go through the numbers and if you look at Q2 compared to last year and so on, we do have somewhat of a labor cost inflation that is easy to control, but other parts of the -- what we purchased, we haven't seen much pressure. That's quite a long -- big difference from what the actions have been. And starting now from Q3 and into Q4, we will have new contracts coming into play which will have some inflationary pressure in them. Some of you who have looked at some of our suppliers and seen how bullish they are in increasing prices will know that we are sitting on the other end of that stick. But we're also sitting on the other end of our own stick in the terms of the very high copper and other metal prices, also high steel prices, for that matter, that is also pushing through into inflationary pressure. Exactly what numbers, we don't really know. But it's not going to be 0 for the next few quarters as it's been previously. We've also had -- it's already kind of a done deal. We're actually today starting up Harjavalta after a fire that we had, which caused almost a week of stop. This one will have roughly EUR 6 million EBIT effect for Q3. We also have -- and this one, those of you who are in Sweden will know this very well. Those of you who are not will not know about this one. But cement that was the -- who has -- the Cementa Slite site, which is 75% of cement in Sweden produced at that one site, they have been denied a continued environmental permits. So their permit, I think, expires in -- somewhere during Q4. And this is a clear issue for us if it really goes ahead. I think that everybody is working to make sure that this environmental permit could come in place, that it wouldn't happen. And of course if it were to happen, we were looking at alternative sources, which not too easy because that's 75% of concrete in Sweden, and we're not the only one who were looking outside to try to source from other places. But we're working on those kind of plans as well. I just want to highlight that this is, of course, in theory, a big problem. It could, in theory, shut all the underground mines in Sweden down because without concrete, we cannot operate. But let's hope that we're not going to end up there, but we're highlighting it as an issue. Regarding CapEx, this is basically unchanged. The difference from the kind of slightly above SEK 7 billion that we said before to the SEK 7.5 billion is the fact that a few hundred of -- a few hundred million of the Odda investment actually happened already this year. With that, I think I will open the floor and see whether we have any questions from anybody.

[Olof Grenmark, Director Investor Relations]

Ladies and gentlemen, that opens up our Q2 2021 Q&A session. Operator, we will start with the questions that you handle, and then we also get questions over the web, which I will take at the end if we have time. Operator, please go ahead.

[Operator]

Okay. So we have a first question coming from Ioannis Masvoulas from Morgan Stanley.

[Ioannis Masvoulas, Equity Analyst]

Three questions from my side, all on the Odda expansion. The first question is around the CapEx guidance. Have you already secured a large ticket capital equipment items, giving you visibility on any potential CapEx risks?Second, the average feed drives some of the assumptions on metal output, especially when it comes to the leach material. Is there an embedded assumption that the Tara Deep project goes ahead? Or is there some risk if you need to procure more third-party concentrates where you don't know the composition of that material? And lastly, in terms of the environmental credentials of the method you will be producing, is there greener zinc product coming up once the expansion completes?

[Mikael Staffas, President & CEO]

Yes. Let me take those, and I'll start with the backwards order. Number one, will we -- based on this or even without based on this, will -- is there a chance that we will try to have a 0 zinc or low CO2 zinc product launch. And I will say that the answer to that is that we are clearly looking into that option of getting such a product going. If we then go backwards upward and saying, is this depending on Tara Deep? The answer is it's not dependent on Tara Deep. We can source into Tara from very many different sources. Tara -- I'm sorry, we can source into Odda from many different sources. Odda is, as you've seen or as I pointed out already today, has a good potential to take very many different qualities of concentrate, and that will may be get even higher as we move forward. And therefore, we don't see any risk in being able to supply Odda with or without Tara. So Tara Deep or potential Tara Deep is clearly standing on its own merits and not linked to hit this one. And I would just say as a kind of by-thing that in terms of getting good leach products, actually Tara might not be the greatest because Tara is a relatively clean concentrate that does not contain so much silver and so much gold, and therefore, there might be other products who will -- or other suppliers who'll give more free metals on that side. In terms of the CapEx side, that's always, of course, a tricky one. We will not reveal all the commercial stages that we have. We have everything from certain pieces being fixed, some pieces being a fixed price list, but we're starting -- still working on engineering to make sure that we get exactly the right number of meters or number of whatever we need. And then there are certain things that are still open based on budget estimates. They are not fixed. I'm not going to go into the exact details, but at the end of the day, we, of course, feel very confident with the EUR 700 million number. Otherwise, we wouldn't have communicated it.

[Operator]

So we have the next question coming from Gustaf Schwerin from Handelsbanken.

[Gustaf Schwerin, Research Analyst]

Yes. I have also 3 questions on Odda. I'll take them one by one. If we start on the concentrate sourcing, when you say you think it's going to be quite easy to get that, is that based on current zinc production today or sort of ramp-up until 2025? And do you have that secured already? My first one.

[Mikael Staffas, President & CEO]

Well, we never really comment on the exact detail, but I would say that without this expansion, we are basically fully supplied in the combination of our own production and those long-term contracts we have in place. With this expansion, we will need to, up until 2025 when we're ramping up here, need to find additional sources. And as I said, we don't think that's going to be any major challenge.

[Gustaf Schwerin, Research Analyst]

Okay. Very good. And then secondly, I'll try on the return levels. I mean if you just look at last year's profitability for Odda and the terms we had for zinc back then, if you run the numbers now, is it fair to assume sort of a 20% return on investment like this?

[Mikael Staffas, President & CEO]

I'm not going to give you a number. But of course, if it were 20%, that's, of course, a very, very high number.

[Gustaf Schwerin, Research Analyst]

Okay. And lastly on CapEx as well, just a split there. You said there would be some in 2021. Is that a majority of those EUR 500 million increase? And then if you can say anything about the split in '22, '23, '24. And should we view this EUR 700 million minus the grants you announced?

[Mikael Staffas, President & CEO]

Yes. We said EUR 700 million. That's -- and when it's going to be come in to the details, you can put it this way, that EUR 700 million is a gross number that the investment is going to cost. From that, you can draw and take away the EUR 39 million, but then you will also have to add the capitalized interest, which is not really a cash outlay, but that will come sometimes into the calculations which we're still getting our arms around exactly how to do that. And you can say that the capitalized interest, which is not a cash item, might be similar or in the same order of magnitude as the grant. So then you're back to EUR 700 million.

[Gustaf Schwerin, Research Analyst]

And the timing in the coming years?

[Mikael Staffas, President & CEO]

Well, there will be a little bit this year and a little bit in '24 and whatever you have left. Say that you have EUR 600 million left that is not in '21 or '24, and that will come 50-50 in '22 and '23, if you want to just have some kind of numbers. By the way, we should highlight that both this year, but of course also next year, there could be movement of CapEx from 1 year to another because there's quite a lot of activities that will happen around new year. Whether things will come in before or after will, of course, matter for the timing.

[Operator]

So we have the next question coming from [ Patrick ] coming from Deutsche Bank.

[Liam Fitzpatrick, Head of European Metals and Mining]

This is Liam Fitzpatrick from Deutsche Bank. Two or three questions for you. Just to change it up, first one on Aitik. Can you just give some color or guidance on when you think you can get sustainably to the 45 million tonne throughput level?Secondly, on Odda. I'm struggling a little bit to get much above your cost of capital or 10% target. So with that 35% reduction in costs that you're giving us in the presentation, can you say what that will do to EBITDA per tonne for the Odda operation? Are we looking at a 50% increase? Are we looking at a 100% increase? Some sort of guidance there would help. And then final question on group CapEx in 2022, '23. I know you don't guide on that this early in the year, but if we're trying to approximate or get something close, should we be taking a sort of group level of SEK 6 billion to SEK 7 billion, and then adding on Odda CapEx for '22 and '23 on top of that to get to a reasonable number? Those are my questions.

[Mikael Staffas, President & CEO]

Let me see if I get them all right and take them in order. Regarding Aitik 45, this is clearly the ambition that towards the end of the year, we'll get up to speed in Aitik once we're through COVID and once we are back to normal operations again. So that's an ambition to get there, 45 million. Now regarding CapEx, I will not guide you more than what I said just to the previous question that if you want to have the timing of the EUR 700 million, you can -- if you take EUR 50 million this year and then you take EUR 300 million and EUR 300 million for the next 2 years, so then you add another EUR 50 million or leave another EUR 50 million for '24, that could be a way of looking at it. But we'll guide that much more detail as we move forward as we will with the rest of the CapEx. Now you had also one more question, which was regarding -- help me, the...

[Liam Fitzpatrick, Head of European Metals and Mining]

Yes, it was just the -- in terms of what this does to margin.

[Mikael Staffas, President & CEO]

Oh, yes. That's right, margins. Yes, of course, you would like to have all kind of numbers. But what I will give you as a hint, if you want to have a sense of what the margins give, I mean there is a slide that talks about the cash margin. And of course, you can see that, that entails kind of a doubling and you can work a little bit around what that really means in terms of if you have that doubling of cash margin in that sense. I'm not going to give you any more detailed numbers than that. Now what you also have to remember when you talk about returns is, of course, that's all kind of looking to where we are today. We're not talking about the future. And it is so that if we were to continue to move work -- operate Odda without doing these kind of investments or something like the investment like this, we would also increase the cost level over time, especially due to maintenance CapEx which is -- you can argue that cash margin that you have today will probably be lower in the future. We will not do this.

[Operator]

We have a question from Luke Nelson from JPMorgan.

[Luke Nelson, Research Analyst]

A couple from me. Firstly, just following on from the Odda theme and the last question from me. On the operating cost, the 35% reduction, can you just give us a sense of what the base is for that? Is that sort of a 2019 or 2020 level or an average over the last couple of years? Sort of what are we basing on? And then second one on Odda is just, again, on CapEx. And you indicated that some parts of the budget were still subject to inflation and raw material inflation. Can you give an indication of what proportion of that budget is still open to sort of raw material pricing variability? And what is being factored into guidance for those? For example, what steel price is being factored in for the EUR 700 million budget there? That's the first one, and I've got one follow-up on [ wider ] inflation after that.

[Mikael Staffas, President & CEO]

Okay. Well, on the Odda CapEx, we can say that this is a whole mix of different stages of negotiations and agreements with the suppliers. And some of them do have a fixed cost in the contract but subject to some index on, for example, steel price. We, of course, based the EUR 700 million on the best estimate of the steel prices as of today or as of a week ago when we were doing the final numbers and adding them together. So that's one set of things, where there is an index. And once we will actually do the firm negotiation and actually do the firm ordering into the first down payment, that's when the index is set. So you can say that it's a fair chunk that is open, both up and down in terms of raw materials. But it's based on the best guess as of these last few weeks and where we're standing in terms of all the procurements going on. Some part, and I don't know exactly myself what the number is, it's a relatively small part, you can say it's 100% fixed. That is absolutely not subject to any kind of indices for any raw material parts on the part of the supplier. So that's that. In terms of the OpEx, you could say that you can base that on the cost per tonne OpEx over the last year or last few years. I don't think it's going to make a big difference. I think it's been relatively stable, and use that as a basis for the 35% reduction.

[Luke Nelson, Research Analyst]

Okay. That's very clear. And then just more broadly, your comment around inflationary pressures. And it was interesting that you said that you haven't -- or Q2 hadn't yet really seen the full effect from inflation yet, something coming through in labor, but likely Q3 and into Q4. If I look at the waterfall within Mines and Smelters, there is -- it does appear that there is a fair chunk of increase in cost inflation in local currency terms in both divisions. It looks like it's around sort of almost SEK 700 million to SEK 800 million annualized. So I'm just trying to get a sense of what more can we expect if we think going into Q3 relative to Q2 and maybe Q4 relative to Q3, what's the potential inflationary effects that we should be expecting in the waterfall.

[Mikael Staffas, President & CEO]

I'm not going to give you any number. I'm just going to give you the numbers that I have, and I'm not going to be able to maybe redo your analysis, and I think Olof or somebody can help you with that to do it. But I will say that what we've seen in Q2 compared to Q2 last year, there is an inflation in terms of labor inflation. That one was relatively stable at 2% or a little more than 2%, and that one has been there all the time. In terms of inflation on procured materials, it is very close to 0. Now there is -- there could be an FX thing to this on top of that. But if you look at the procurement in the currencies that are done, it is very close to 0. That, we've been a little bit lucky because we've had quite a few contracts that have been in place and it has not been possible for the suppliers to increase their prices. But as we're now coming into the second half of the year, lots of these price changes from the suppliers have or we see that they're starting to make their way in. It comes a little bit different with all different suppliers and they come at different speeds. And I'm not going to give you an exact number. I'm just going to give you a heads up that there is now inflation in the system also for what we're procuring.

[Operator]

Our next question is coming from Jatinder Goel from BNP Paribas.

[Jatinder Goel, Research Analyst]

A couple of questions, starting with Odda. What's your benchmark zinc TC assumption to make this decision? And how much premium above that benchmark have you baked in to reflect on the complex concentrate that you alluded to?

[Mikael Staffas, President & CEO]

I'm looking at Håkan. We published our zinc TC and it's $210, is it?

[Håkan Gabrielsson, Chief Financial Officer]

I think when it comes to long-term assumptions, which we have used, the main ones for metals and TCs, they're all in our annual report. You'll have to look for it a bit. It's in the note about impairment test and fixed assets. But there, you have a table including also the TCs.

[Mikael Staffas, President & CEO]

So that one you can say, I think it's $210. What is then the next part of your question is what have we factored in as the effective TC given also the penalties that comes in. And that's why I say we can do lots of different scenarios on this one. In the base case, we have factored in the penalties that we have today on the same level, which I think a conservative one. But also with that, it looks relatively good, because I think that over time, we will be able to take more complex materials with this investment that should increase the TCs over the kind of benchmark TC of $210 that we have in the calculations. And you can also have a totally separate discussion whether there will be an increased general penalty level on TCs given what the capabilities are of our dear competitors to take care of complex materials. But that leads us into a totally different discussion. But I think that the $210 is the base number we used.

[Operator]

So our next question is coming from Daniel Major from UBS.

[Daniel Edward Major, Director and Analyst]

Your first question on Odda around the sort of CapEx decision. I guess we're in a situation, and if we look back at the last cycle that projects that are approved, when you have record input costs typically generate suboptimal internal rates of return. When you were considering this project, first question I think is what would CapEx be if you put in a more normalized input cost as opposed to very high input costs for things like steel currently? And is there another concern that by executing this project now, you're basically locking in a higher CapEx number and a suboptimal return? That's my first question.

[Mikael Staffas, President & CEO]

Well, the answer is that we can have lots of discussions about timing back and forth. I will put it rather this way that you can, in hindsight, say could we have done this last year, would we have done it last year. We couldn't because we didn't have the environmental permit. But could we have done it, would we have done it? Yes, in some way, it would have been better. On the other hand, we would have had a COVID. So we might have had a big problem to get the project off the ground. Now of course, the COVID situation looks better and we could do it efficiently. The other question is should we then kind of wait and see whether we will get a better situation going forward on a speculative way and getting cheaper supplies. And we put the answer to that, that the project is interestingly enough, the way that it's standing, has enough returns. You could argue that maybe it will get even worse going forward if you just look on the kind of Scandinavian basis and all the green steel projects and whatever else they're called that have been talked about. They're about to launch. It looks like there might be a big wave of investments. And we think we're actually doing something good by being ahead of that wave, both from a kind of cycle point of view but also in terms of getting our products onto the market as soon as possible. The other point is what would the number have been? I'm not going to go into details of that. But it would have been -- it would have mattered, but it's not going to be an enormously different number.

[Daniel Edward Major, Director and Analyst]

Okay. And then second question outside of Odda. I see you got the permit to lift the throughput at Garpenberg to 3.5%. When would you expect to be able to achieve that throughput rate?

[Mikael Staffas, President & CEO]

I don't think -- you're right that it's actually, from a formal point of view, is 3.5%. We have talked about 3.3%, which we think is a more appropriate level because if you're exactly on the limit of your permit, that means that you can never go over. You can only go under if you're not producing. So that not a sustainable level. So the 3.3% is what we're aiming for. We'll come back to that, exactly how fast that can be done. But we've said before and we'll repeat that we think that's doable with relatively minor investments. There might be some debottlenecking that we do, but the main equipment is already ready for 3.3%. And we'll see exactly how fast that can happen. But I think that, hopefully, it can happen, quite a lot of that, already during next year. But it is dependent on getting the final permit. We've gotten a, you can say, temporary permit that in the way that we are allowed to do a higher production while we're waiting for this to go through the appeal court system, which is good, and we can -- don't have to stop right before New Year, say if we were up over 3 million. But of course, we're not going to base any investment decisions in debottlenecking until we have the real final permit in place.

[Daniel Edward Major, Director and Analyst]

Okay. So just to summarize that, fair working assumption, that sort of 2022, 2023 you'll see throughput in a reasonable amount above the 3 million level.

[Mikael Staffas, President & CEO]

Yes. Just hoping that we actually get the permit for real also.

[Daniel Edward Major, Director and Analyst]

Okay. Cool. And then final question, if I may. The balance sheet is going to be in an increasingly strong position below -- well below your net gearing target by the end of the year. But CapEx is clearly going to be lifting for a number of years. Will this have any impact on your decision around the special dividend? Or will you stick to the rigid formula of paying the special pro forma net gearings below the target?

[Mikael Staffas, President & CEO]

Yes. There is no change of any dividend policy announced. And we're not intending to change the dividend policy.

[Operator]

We have next question coming from Amos Fletcher from Barclays.

[Amos Charles Fletcher, Director]

Just had a few questions from my side. I guess adding to the Odda theme, Mike, sort of zooming out slightly from that. Does it tie up to your project management resources and limit the CapEx available for other projects over the next 3 years? And can I ask what level would you consider a potential ceiling for CapEx for the group?

[Mikael Staffas, President & CEO]

It's a good question. And it's good that you're asking it that way. I would say that the answer is, of course, yes. And the key constraint here is, as you mentioned, our project resources and engineering resources. And this will, in some way, I don't say put a lid on, but makes it difficult to launch any large projects in the next 2- to 3-year time frame. That is absolutely so. We have the Rävliden project, although it's much smaller, also running in parallel. That one is already decided and also getting on its way. But in terms of other bigger projects, and it's good that you asked the question, for example, Tara Deep that has been spoken about, Tara Deep is at least 3 years out. It wouldn't compete with this one anyway, could theoretically timing-wise fit very well right after, although we'll see when it happens. As I said before, Tara Deep stands on its own merits. And we also have other projects in our portfolio that could potentially be bigger. We have the potential prolongation with a Pushback #5 in Kevitsa, also anyway a few years out. So we're in a relatively good position in the sense that we have, to some extent, stretched our management resources and our project management resources, but also we don't really have anything big that it's competing against right now. The only kind of wildcard that will play in this one will be the Laver project. But as you all know, that one is well embedded in a political situation in Sweden, and it's unlikely to pop up very soon.

[Amos Charles Fletcher, Director]

Okay. And then is there a number in terms of potential CapEx ceiling that you could point us to?

[Mikael Staffas, President & CEO]

No. I -- to me, if we have good projects and we have good resources to carry through the projects, we are not going to be hesitant to carry through the projects. I think that the financial resources is probably the one that we are, I'm going to say a little bit arrogantly, saying that we're less worried about. That, of course, is not totally true. We will worry about that as well. But as I said right now, that's not a limiting factor. And the limiting factor is the availability of projects and the availability of project management resources.

[Amos Charles Fletcher, Director]

Okay. And then next question was just on working capital. Should we expect a further build in the second half, given the step-up in maintenance activity you've guided for?

[Håkan Gabrielsson, Chief Financial Officer]

We're on a pretty much normal level right now. There might be some build in Q3 for the maintenance stop, as you point out, followed by a reduction in Q4. That's the typical pattern.

[Amos Charles Fletcher, Director]

Okay. And then my last question is just following the EU CBAM proposals last week. I just wanted to ask what potential benefits you might see as a result. For example, does it push you to grow your footprint in metal recycling?

[Mikael Staffas, President & CEO]

Well, regarding CBAM, as of itself, is right now not affecting the base metals at all into other sectors. So short term, it's not really doing any difference. You can say that the Fit for 55 package -- now I'm asking a question that you didn't ask, but I'll answer it anyway. You can say that the thing there that will impact our industry the most is the potential inclusion of transport -- sea transport into the trading system of the emission rights, and that's something that could have a negative effect of all the sea transport accounts in South America. I think here the devil is in the detail, and nobody really know how it's going to play out. In the end of the day, that's something that could be negative for us because it's something that, in the end of the day, we would have to pay. Even though in the first instance, I think our suppliers need to pay. But at the end of the day, the customer always pay. And you can say, in the end of the day, the customer, i.e. our customer, also have to pay a potential extra cost due to these emission rights. And given that we have 50% self-sufficiency in supply, we are still better off than many of our competitors.

[Operator]

Our next question is coming from Tyler Broda from RBC.

[Tyler Anson Broda, Director, Global Mining Research]

It's Tyler Broda from RBC. Two questions from my side. Just in terms of the calculation to get that north of 10% number. Did that include the savings you're going to make from the existing auto, i.e., does it include any sort of gain on the opportunity cost of a higher cost going through? Or is that just a pure kind of this capital and the returns that come from this project? And then secondly, just in terms of sustaining CapEx, obviously, going to be new versus a 100-year-old smelter. How -- what does that CapEx on a sustaining basis look like, say, versus the rest of your kind of smelting per-unit sustaining CapEx numbers over the course of the cycle?

[Mikael Staffas, President & CEO]

Well, all numbers that we talk about is, of course, always the kind of what will happen with the investment and what happened without the investments. So there's always a base case or a 0 case or whatever you want to call it that we're comparing against which entails things because these things are not stable and things move going forward. And of course, we've had -- in the kind of investment case, you always include not just the effect from the investment itself but also the indirect effects. There are some indirect effects on the existing parts as well. Now the reason why we get to a 35% cost reduction, that is, of course, for every tonne, both the old tonnes and the new tonnes, is that we are getting productivity gains also in the kind of old tonnes, if you want to call it that. Some of the automation and digitization that comes into play here will not just help the new tonnes but the old tonnes. I don't know if I'm answering your question, but that's the way that the numbers have been built up, and that's why we're getting such a big benefit that some of the investment actually is also into the old tonnes.

[Tyler Anson Broda, Director, Global Mining Research]

Okay. And then on sustaining CapEx?

[Mikael Staffas, President & CEO]

Sustaining CapEx, that's a good question. That's also been included in this one. I don't think we have a guidance for that, but sustaining CapEx will, of course, for the first foreseeable future, the first 10 or 50 years after investment, this will be on a relatively low level. Then it will come up. We have all those numbers into our calculations, but it's a relatively low number for the first years.

[Tyler Anson Broda, Director, Global Mining Research]

Can you give us a sense of like how much different than the current -- the rest of your smelting contracts at all?

[Mikael Staffas, President & CEO]

No, but it's significantly lower.

[Olof Grenmark, Director Investor Relations]

Ladies and gentlemen, we're running out of time for our Q&A session this time. Operator, please, we have time for one more questions over the phone, and then we will have a final question from the web. Operator, last question, please.

[Operator]

So our next question is coming from Viktor Trollsten from DNB Bank.

[Viktor Trollsten, Analyst]

Just in terms of the Cementa environmental permit issues, could you remind us how much of Boliden Area is underground production? And I guess that you would, in such a scenario, maybe prioritize Garpenberg before Boliden Area if you do not get enough material. So just what is the action plan in such a scenario? Could you just now discuss a bit on that?

[Mikael Staffas, President & CEO]

Well, I can answer your first question. 100% of Boliden is underground. All the 3 mines that we are operating, they're now underground. The only thing that's not underground is that we are still using a little bit of old waste material that is above ground, but that's not going to sustain any kind of operations. You're absolutely right that, of course, it doesn't take a genius to figure out that if we're short of concrete, we will prioritize Garpenberg over the underground mines in the Boliden Area. Otherwise, I don't want to go into the details. We're, of course, looking at all kind of plans, B, C, D, E and F regarding this, where the main focus is going to be on trying to find supply. Trying to help Cementa to get permit is one thing but also trying to find alternative supplies. And we have absolutely not given up even though this is a relatively strange or difficult situation, and we are, of course, not the only ones who are looking for all kind of options for alternative supplies. And then, of course, we have plans for how to direct the resources if it were to come to that we would have to prioritize.

[Viktor Trollsten, Analyst]

Okay. And then just my interpretation was that you sort of indicated that in a scenario where they close down, you would quite drastically need to shut down both mines? Is that how we should think about it?

[Mikael Staffas, President & CEO]

If we don't get any concrete to our Swedish mining operations, we will have to shut down all 3 mines in the Boliden Area and the Garpenberg mine relatively soon. Without shotcrete, you cannot operate an underground mine.

[Olof Grenmark, Director Investor Relations]

Okay. Ladies and gentlemen, we have had many questions both over the phone and via the web, which, unfortunately, we do not have time to answer. I'll take one though from the web, and it's from [ Andy Melinta ] at ExodusPoint, and it's also regarding this concrete situation. The question goes like this. Can you please expand on your comment about concrete shortages in Sweden? Are you already seeing an impact? Or was the purpose of the comment to signal to the authorities that this might be a major problem going forward?

[Mikael Staffas, President & CEO]

The purpose of the -- I can answer it 2 ways. Number one, we don't see any impact as of yet. The suppliers are still full, and they're going to be full all through Q3. So there is no threat in Q3. If this were to go ahead, we've gotten force majeure notice from our suppliers that will affect Q4. The reason why we're telling this to you is because we think you should know it. We're, of course, also telling the Swedish government about this in totally separate channels, and we have done for a while. So they also know about it. And we're not alone. I mean you can understand that -- or put it the other way, we are about 1% of the production -- or 1% and 1.5% of the production at the Slite site goes to us. The other 98.5% are, of course, in equally difficult situation. And this is impacting, in a very severe way, all the infrastructure projects in Sweden, all construction in Sweden, all other mines in Sweden, including LKAB and so on and so forth. So this is a major thing. And you can understand that the government is actually dealing with this one on a very high level. I will not give any percentages of what the risks are that this will happen or will not happen and what will happen. Just say that there is a risk, and we're working on all kind of plans to make sure that this thing either doesn't happen, or if it happens, that we get as low impact as possible.

[Olof Grenmark, Director Investor Relations]

Once again, we're quite sorry that we don't have time for all your questions. But you know where to reach us, please reach out and we'll do our best to answer the questions you have during the day or as soon as we can. Mr. Staffas, I'll leave it over to you to give some final words from this Q2 2021 session.

[Mikael Staffas, President & CEO]

Well, thank you, everybody. I wish you all a very good summer. I just want to leave you with the sense that we are extremely happy about the Odda project. We're extremely happy about putting what we feel is a new benchmark into the zinc industry both in terms of productivity, cost efficiency but not the least or even most important, a new benchmark in terms of energy efficiency and CO2 footprint. Thank you all.