Boliden AB

STO:BOL

Earnings Call Transcript 2018-Q3

[Olof Grenmark, Director Investor Relations]

Ladies and gentlemen, I'd like to welcome you to Boliden's Q3 2018 results presentation. My name is Olof Grenmark, and I'm Head of Investor Relations. Today, we will have the results presentation led by our President and CEO, Mikael Staffas; and our CFO, Håkan Gabrielsson. After that, we will have a Q&A session, which I will lead.Mr. Staffas, the stage is yours.

[Mikael Staffas, President & CEO]

Thank you, Olof. Good morning, everybody. First of all, before going into the real presentation, I hope that you all see what is now presented on the screen, and we'll come back a little, talking about it later in the presentation. As you see, the trolley line that we have built in our Aitik mine, which is the first step that we are taking now towards electrification of our open pit mines, which is also linked to the announcement we had the other day of a new -- a renewal of our truck freight. I'll come to that later.If we start about the Q3 and about the quarter we have just finished, we've had a good quarter in terms of production. We've had lower metal prices, and you all know about that; that's no news. And we'll come a little bit into also -- that we have a lagging effect in terms of the final pricing that we always get from deliveries in previous quarters that affects us negatively when the prices go down.In terms of production, it's been well. The new crusher in Aitik is running well. We talked about that already in the last quarter, but it has proven that it's now, hopefully, the last time -- or hopefully, we'll never again talk about crushers being a bottleneck in Aitik. We have lower grades in Aitik and Tara. I think that should be well communicated and well assumed. I think we're in line with what we have guided. The same thing with the higher grades in Garpenberg, also in line what we guided. Before this, we have been in low-grade areas there in the previous comparison quarters.Smelters are doing well. We've had increased production, which we are feeling very good about. We still have some production issues especially in the zinc smelters. But all in all, the smelters' performance has been good in the quarter. We do have a cost inflation. We talked about that already last quarter, and this is still prevalent. We are in a situation where we have inflation overall in the system of roughly 4%, very much driven by oil prices and consumables linked to that, which is driving most of that. And actually in terms of all the other things we buy, inflations are more at normal levels. Now let's see if I can manage to get this one the right way. In terms of the market, there's been lots of discussions in the market around trade barriers, and that has probably, in some way, affected the world market. It's a little bit difficult to judge, a little bit difficult to know exactly what has happened. What we know is that prices went down sharply in June, July and early August. They've been relatively flat in September and October. We can say that it's not due to fundamentals in that sense. We do have still a strong industrial demand. We see that, and I think we see that in statistics from around the world. Supply is also -- is under control, and inventories are relatively low. But I would say lower assumptions on future growth has led to lower metal prices. We have been pretty well-off in terms of the currencies, especially with the relatively weak Swedish krona. We'll come back to that. On the concentrate side, we can see that the spot concentrate TCs are going up, which is good for us. And I think it also put in the market more into normal terms where we have probably see end of the very low spot TCs that we've seen in the last couple of years. The metal prices, I spoke about them. You can see here very clearly, they have gone down in terms of zinc from very high levels. In terms -- from copper, maybe not so high levels but still down. You also see clearly in these graphs that the official inventories of all our main -- 3 main metals are clearly down in the period. We should normally indicate that the prices should be able to have a support and not being affected so much further down.What is special this time around is that we have been not been held by pressures. Normally, when we have prices going down, we typically see -- or prices of base metals going down, we typically see that precious metal go the other way around. We've had normal negative correlation. That has not been true this time. We've had also negative price development for the precious metals, which is, of course, also affecting us negatively.If you look in the total price in the markets and compare that to the cost levels, you can see on zinc that even though the price has gone down, the price is still roughly high compared to the cost curves but, as I said, also low inventories. We feel that there's some support in these numbers anyway.You can also see that the costs are going up for the high cost mines, not so much for the lower cost mines. The question, why is that? And our analysis, the way that we see it, is that everybody is affected by cost inflation similar to we are, maybe some even more than we are. However, the ones on the lower cost of the -- low cost part of the cost curve are usually having advantageous currencies that take them down. And this compares also maybe positive developments of -- by metals because you should be aware that these numbers have a little bit of a lag. So what you see here on cost is more reflecting the cost maybe in Q2 on the world markets with the lag of the consultancies that put these kind of numbers together. You can see also in copper, costs are going up. In the world market, prices are still a bit above. And on nickel, yes, the costs are going up, and the prices are going up. Here, we are thus in a better situation before, and we still think that there's lots of things that can happen in the nickel price going forward.Overall, in terms of the Boliden situation, you can see to the right here that the Boliden price term index has gone down. That should all be known to you, being able to read exactly what's going on with our respective sensitivities.If we go and talk about the mines, on the mine side, we've had a good production development. Here, of course, you see this final pricing from previous periods in previous deliveries -- deliveries in previous periods, I should say, is hitting pretty hard. We're roughly minus SEK 200 million in the quarter alone, which, of course, hampers the result as we do here. But when you look at actual production, I think that's been going very well. The 10.8 million tonnes is a record for a quarter, linked to the new crusher that's working well. We have grades according to our guidance. Garpenberg, stable production. We have an increase of grades. In Kevitsa, also a stable production and strong grades. And in Tara, we've had some planned maintenance. And on top of that, there is also some unplanned maintenance that has led to lower zinc production that we've had in previous quarters. But I will still say, according to our own measures, according to our plans.So when we sum this up, yes, the copper production is down from the very high levels that we had. And Aitik was in the very high grades, but still on a very nice level, the copper production. Zinc production, a little bit low with a lower output in Tara, and nickel production very healthy.On the smelter side, we've had a roughly good quarter. It doesn't mean that we're totally free from issues, but we've had it good. We have lower metal prices that hits the -- also here the results, TCs that are lower because of the takes and a little time to get the full effect of the lower benchmark terms that came in with this year. And also, we also buy a little bit spot with low TCs, but we have a stronger dollar making that up. And we've had -- there's an increase in production compared to the comparison periods despite that we haven't had perfect production. And the maintenance has been according to what we've planned and what we have communicated. So when you look at that, we have a stable production level. Copper production looking relatively good. Zinc production in terms of metal, a little bit down. We are not really where we want to be in terms of recoveries, especially in Kokkola, but that's something they're working on, and I think we're gaining more stability as we're talking. The nickel in matte production is also on a healthy level.Now regarding financials, I will give it over to you, Håkan.

[Håkan Gabrielsson, Chief Financial Officer]

Thank you, Mikael. So let's see. To sum it up then, I think, Mikael, you've covered a lot that it -- that is in the slide. We did an EBIT, excluding process inventory revaluations, of just above SEK 2 billion in the quarter. That is close to SEK 300 million up compared to Q3 of last year, but it is SEK 300 million down compared to Q2.The quarter has been influenced by lower prices. The SEK 200 million negative lagging effect of final pricing has been covered. So that's in there. Looking at CapEx, we are at SEK 1.5 billion in the quarter. Running -- rolling 4 quarters, we are trending now at SEK 6 billion. This is well in line with what we have guided for.Free cash flow was influenced by a high level of paid tax. We've been talking about that in earlier calls that there is a timing -- that there is a time lag between when taxes are charged to the P&L and when they are paid. And this quarter, we have been catching up. And this obviously largely relates to the earnings level of last year.By segment, we are down in mines to SEK 1.1 billion. This is much related to the lower metal prices. Smelters, stable, and other and eliminations is positive. This is primarily then the internal profit elimination where we've been able to reduce internal stock and realize the profits. This is also something that we indicated what happened in the last quarterly call.If we then dive in to some more details comparing quarters to quarters, this is, on the first slide, Q3 of '18 compared to Q3 of '17. We are SEK 276 million up.Prices and terms, the net effect is fairly limited. We see the negative correlation in play. We have stronger currency, some weaker metal prices. Volumes are clearly up. We've got high production in both mines and smelters. On the mining sides, the mill volume in Aitik is clearly above last year's. And in the smelters, generally good production, but on top of that, good free metals. Costs are up by about SEK 200 million. That is, to a very large extent, due to inflation. We have a cost inflation of about 4%, excluding then the personnel cost, which is obviously on a lower level. In those 4%, that's primarily driven by bulk, energy and consumables where we see a higher inflation, for example, in caustic soda and similar.If we instead look at sequentially comparing Q3 to Q2, we're down SEK 300 million. The main effect, of course, is the SEK 600 million negative impact from prices and terms. Lower metal prices were not fully compensated by currencies. Volume-wise, fairly stable. We have lower volumes in mines. Primarily in Tara and the Boliden area, much is related to grades. Mikael covered part of it as well.Cost side is clearly lower than last year. There is an element of seasonality. We have lower maintenance as well. But in essence, the difference compared to previous quarter is lower prices whereas the net effect of volumes and costs is positive.Cash flow. I think the main news in this slide is the tax payments where we've been catching up. Again, the timing effect. Apart from that, it's -- I mean, we have the EBITDA, which is up compared to Q3 of last year and a positive impact from working capital.Balance sheet, still strong. We are at a net debt, just shy of SEK 4 billion, at SEK 3.8 billion. Net debt-to-equity ratio of 10%, and the average interest rate has been coming down further to 1.1% comparing to the slightly higher levels in the comparison periods.This is again a financing cost that we're happy about. It's a competitive financing, especially considering -- comparing to other peers in the sector. So we're happy about that.With that, Mikael, do you want to continue?

[Mikael Staffas, President & CEO]

Yes, I will continue. Let me talk a little bit about investments. I will come back to that, but let's start with the investment that you see in front of you, which is the haul trucks in Kevitsa that we came out with at the end of last week. Why are we doing this investment close to SEK 1 billion or SEK 900 million in haul truck? Well, part of it is the expansion. We need more haul trucking capacity for the expansion of both Aitik and Kevitsa. Part of it is insourcing. Part of it is deeper pits that will include the average transportation needed for every tonne coming out, and part of it is replacement. So those are the main parts. And maybe you can say that 1/3 is expansion and maybe 1/3 or a little bit less than 1/3 is insourcing and then deeper pits and replacement makes up the last 1/3.What is also important with this thing, all the trucks are prepared for electrification. Even though we so far have only decided to go ahead with a test trolley lane, the one I showed you in the beginning, that we need to run now through the winter to get a full season try-out and see how this works in Arctic conditions. It is clearly an ambition that we have to be able to continue to work on our carbon footprint and financial statement of being able to reduce the dependency on oil and diesel by moving over to electricity. And as I said, all these -- the new trucks that we're now putting in are prepared for electrification, and they're also prepared for autonomous driving once that becomes a reality all the way out.It also -- having a new fleet and a fleet that is -- a single fleet makes it possible to work, especially in Kevitsa, with the pit design for further cost reductions. And this will over time be able to work on the slope angles and work on the added ramp with -- that will make it quite positive. And this is, all in all, a very positive investment the way that we see it and the way that we calculate. The -- as I said, we talked about the electric trolley. We do have the first line in place; it's only 700 meters. In itself, it's a small investment, and it in itself is a good investment as such. But we decided not to move ahead with further electrification until we get a full test run out to this one to make sure that it works in all kind of parts of the year in the climate that we're operating in where there is so far very few experiences around the world in similar climate conditions.Now going forward, just to make the obvious point that also Q3 production is above reserve grade average, which is -- and of course, when you're working on this long time, we cannot continue to mine over reserve grade. We are reiterating there's new -- no new guidance in terms of the short-term grade in Aitik of 0.25% for the rest of this year and next year. And we also are reminding you again that we aim to be up for 45 million tonnes by 2020.Kevitsa, the plants are still going on. Here, we assume to get to pace of 9.5 million by the end of 2020. So it is almost a year different between these things, just to be very clear about how we do the semantics. It's full speed in Aitik, and in Kevitsa, it's speed at the end of the year. Garpenberg, 3 million tonnes volume by the end of the year. And here, we're also reiterating the guidance for zinc for the rest of this year and next year.Planned maintenance. We don't have any planned maintenance in the smelters for Q4. That should not be any part of that. Now let's talk a little about the CapEx point and about -- and I'm sure that this will -- I will get plenty of questions on it as we move into the Q&A session. First of 2018, we are reiterating the guidance that we put in place of SEK 6 billion or slightly above SEK 6 billion. That is still the guidance for this year. So there's nothing changing that. What you should be aware of is that there is a pretty big currency effect in this. And the fact that we have a weaker Swedish krona and lots of our investments are in Europe, this means that actually investments are less than they were when we planned this in the beginning of the year.Does it look like that? Looks like we're perfect on plan, but we're actually missing a little bit less. But money-wise, with the translation difference, it becomes the same.For next year, we are now guiding close to SEK 8 billion. And why is that? Well, number one, we do have a currency effect. And with the weak Swedish krona that we'll have in many other places, of course, the number in Swedish krona, as we're having so many operations that are euro based, of course, becomes bigger. That's part of it. But it's also part that we are doing lots of exciting things, and we talked about this. We are expanding Aitik. We are expanding Kevitsa. We are expanding Garpenberg. With the trucks that we just put in place and that we have announced, it's a large part of why we're having big investments. Then we're also having the big investments, as previously announced, in Harjavalta, the expansion both with a new sulfuric acid plant and the expansion of the copper refinery. We're having the leach plant that we've talked about last quarter that's coming into Rönnskär. And we're also having big dam expansions, we talked about at Capital Market Day, in Aitik and in Tara and in the Boliden area. All of these things come together in 2018.We are having -- the way that we define maintenance CapEx is not a big difference from this year. It's slightly more than SEK 4 billion, and it's maybe slightly more than SEK 4 billion next year as well. But all these other investments, which are expansions or prolongations that are not year-to-year, for example, we take these dams that are happening every 7 years. It goes every year. Those we can't get into the nonmaintenance CapEx category. So with that, we, ourselves, are feeling very good about our investment levels. We're having good projects -- good return projects that are in these numbers, and we feel good about it. So with that, a conclusion. You've seen these things as well. We feel once again that we're having a good mixture of mines and smelters that is helping us. The mixture of base metal and precious metals, we still think, is very good, even though in this particular quarter, it did not help us with the negative correlation as we typically see. We do have a high productivity and a stable production. I think we've proven that, and we think we have good production in the quarter. We have a long life of mine over the key mines, and we have stable jurisdictions where we are working. We have a strong balance sheet, and we have several growth opportunities that we're still working around. Smelters are well positioned generally for the circle economy. There are many interesting things that can happen around that. Mill volume expansion in the key mines that we spoke about, that we already promised to get. We have other options that we have not yet -- got them far enough to be able to define, well, good projects around, which is Tara Deep, which is the Rävliden expansion in Kristineberg, which is not on this one here. And we have the Kylylahti prolongation, which is linked very much to the cobalt that we feel very good about. And exploration is moving on in a good sense.So that's the conclusion of my talk. And with that, I will invite you back, Håkan, and we will take questions.

[Olof Grenmark, Director Investor Relations]

Yes. Ladies and gentleman, then we start our Q&A session, and we will start here in Stockholm. Johannes?

[Johannes Grunselius, Research Analyst]

Johannes Grunselius, Handelsbanken here. Two questions. First one on Aitik here and how you feel about the crusher. Obviously very good numbers. I think on an annual basis, it was 43 million tonnes or something like that. Has that been like a smooth volume throughout the quarter? Or has there been deviation? And I mean, have you become sort of more confident now than you were 3 months ago when you presented last time on the crushing station?

[Mikael Staffas, President & CEO]

I would say the crushing station has not been a bottleneck for the whole quarter. Then there are other bottlenecks in an operation like this. And as we push up towards SEK 45 million, those bottlenecks in terms of mills and in terms of trucking and in terms of shoveling, it will, of course, comes more apparent and we've seen some of that in this quarter. But the crusher, I would say, is not anymore a bottleneck.

[Johannes Grunselius, Research Analyst]

And I know that obviously, the crusher is sort of sensitive to the Arctic climate. Would we see less of that impact going forward now and when you have -- when that is not the bottleneck anymore, the crusher?

[Mikael Staffas, President & CEO]

Yes. With the new design that we have, the crusher, it is, as you -- it is called indoor crusher. Maybe not quite the right term. It is less sensitive to climate than the previous crushers have been.

[Johannes Grunselius, Research Analyst]

And have -- are there further benefits to come out from this investment, thinking about lower, for instance, maintenance cost to consultants and so forth? I mean, did we see the full benefit in this quarter? Or is it more to come?

[Mikael Staffas, President & CEO]

We're still ramping up, so that is not really kind of easy to see. So there might be something more coming on that. But it's -- that would be too early to tell, but of course, that's the clear ambition: to get the maintenance cost down.

[Johannes Grunselius, Research Analyst]

And then I'm also curious about Tara. It was both lower ore volumes and very low grades. How should we see that one in the next quarters?

[Mikael Staffas, President & CEO]

Not sure if I'd agree with very low grades. I mean, we have lower grades but then great point average, but it's -- average, but it's not that much, right? The lower volumes, we had quite a lot of maintenance in Q3 that's in Tara. That's a typical month when we have typical quarter where we have maintenance. On top of that, we've had some unplanned maintenance as well. So regarding Tara, we should be coming back. There's a volume...

[Johannes Grunselius, Research Analyst]

Is it more like representative to look back a few quarters and take the average of, let's say, the last 4 quarters or something?

[Mikael Staffas, President & CEO]

I would say so, yes.

[Olof Grenmark, Director Investor Relations]

Okay. Next question. Gustaf?

[Gustaf Schwerin, Analyst]

Gustaf Schwerin from Pareto. Two questions from my side. First one, on smelters. You talked a little bit about some production issues in the report. Just if you could clarify a bit more on that. I think it was in Rönnskär and Bergsöe, if those have been sold and if we can get any sort qualification on volume loss or a financial impact.

[Mikael Staffas, President & CEO]

It's difficult to give exact numbers regarding financial impact. Unfortunately, around that, I would say that the minor issue that we're still struggling with is the recoveries in Kokkola. Even though they're better, they're still not where they should be. Then we've had some minor issues in Rönnskär connected to electricity supply and some other things, but I wouldn't make too big a deal of that. I mean, these things happen now and then.

[Gustaf Schwerin, Analyst]

All right. And then just to clarify on your new CapEx guidance. So the SEK 8 billion, does that include anything new except for the new fleet of trucks that you came out with a few days back?

[Mikael Staffas, President & CEO]

No, the SEK 8 billion or close -- a little bit less than SEK 8 billion is, of course, the total guidance. It includes all the things that we've said we're going to do. It's in there. And of course, there's also provision that's some minor things we haven't said but we have planned will be in there, but it's basically reflecting what we have said we're going to do.

[Olof Grenmark, Director Investor Relations]

Any more questions here from Stockholm? Okay. Operator, please, can we now open up for questions via the web?

[Operator]

[Operator Instructions] And our first question comes from Alain Gabriel from Morgan Stanley.

[Alain Gabriel, Equity Analyst]

Two questions from my side. Firstly, on the CapEx, the SEK 8 billion guidance for next year. Around half of that is classified as maintenance. The other half, we can disagree on the terminology, but that's SEK 4 billion extra above maintenance. Can you link directly to that earnings growth or volume growth? And how much of that portion will fall away in 2020? And the second question is on your [ exported ] electricity prices. Can you remind us about your contract structure for electricity and what proportion of your energy costs are electricity?

[Mikael Staffas, President & CEO]

We, unfortunately, have some problems in the technology, but I think I got your questions. Number one, how much of the SEK 8 billion will fall away, and what you're really asking for is what will be our guidance. A clean sheet out of 2020, we will come back to that. I said the other ones. Of course, if we were to not announce anything more during 2019, then 2020 will go down. But we have other things in the pipeline, so who knows what we're going to announce? But we will only do investments that are profitable, and we will talk about the total number once we have the sum there. There was a question, I think, regarding energy prices and our contract structure. Håkan, can you take that?

[Håkan Gabrielsson, Chief Financial Officer]

Yes. I assume that you were referring to how much is locked in and how much is not. We typically lock in the pricing for a couple of years. In some areas, we have longer contracts that has a fixed price structure.

[Mikael Staffas, President & CEO]

But we have an open part which is roughly 20%.

[Håkan Gabrielsson, Chief Financial Officer]

20%. 20% is open.

[Mikael Staffas, President & CEO]

20% of electricity goes on spot. And as you know, in Scandinavia, the spot prices went up quite a lot during the summer.

[Alain Gabriel, Equity Analyst]

And what proportion of your energy costs are electricity?

[Mikael Staffas, President & CEO]

That's a good question. Håkan?

[Håkan Gabrielsson, Chief Financial Officer]

Yes. It's -- let's see now. I mean, for the smelting side, the vast majority is -- I think you can look at it by business area. For the smelting side, the vast majority is electricity, and it's the lower part for the mines.

[Operator]

[Operator Instructions] And since we have no more telephone questions registered, I now hand back to our speakers in the room.

[Olof Grenmark, Director Investor Relations]

Okay. If there are no more questions here from Stockholm, just double-check that, maybe we should do some advertising for our big event in March.

[Mikael Staffas, President & CEO]

Yes. As you can see here, we have the Capital Markets Days here in Stockholm on March 13 and then going up in the evening of 13 and then spending March 14 in Aitik. A chance for you to see both the new crusher and a chance to see the trolley line that we're working on and see that more for yourself. There's more information available on the website.

[Olof Grenmark, Director Investor Relations]

Okay. Ladies and gentlemen, that concludes our Q3 2018 conference call. Thank you for listening.