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Boliden AB
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Good morning, and a very warm welcome to Stockholm and the conference call for the Boliden's year-end report and the Q1 results.First of all, we'll have the security procedures. We have 2 emergency exits in this conference room, one up here and one in the back of the conference room. The assembly point is just outside the building. So if any alarm or anything happens, please just follow the standard procedures. Thank you very much.Good morning, everybody, and a very warm welcome to Stockholm and Boliden's quarterly report for Q4 and the year-end report presentation here at the webcast taking place this morning. I hope everyone is well. We will welcome both Lennart Evrell and Håkan Gabrielsson to make a presentation in quite a while -- in a short while. My name is Klas Nilsson, I'm the Director of Group Communications at Boliden. And our CEO, Lennart; and CFO, Håkan, will now begin the presentation. Very warm welcome.
Thank you. Yes, it's a pleasure to present the full year report, has been a good year, obviously, and a very strong finish of a good year.If we look at the trend lines, you can see here and see Q4 in view of what we have done in several quarters before. As you can see here, we have a very steep curve up. We remember, certainly, Q3 when there was -- there were some disappointments, which were basically explained by a lot of maintenance. We have come back strongly in the fourth quarter, and everything is going as it should, if not better, in a few places.Revenues were SEK 13.6 billion, and earnings were SEK 2.9 billion, so short of SEK 3 billion. We had very good production in the Mines, driven by the high grades in both Garpenberg and Aitik.We had continued instabilities in Kokkola. And we had maintenance work in Odda, so the zinc smelters had a quite weak quarter. But the action plans we have been doing in Kokkola have been paying off and stability improved towards the end of the year or in the later part of the quarter.The maintenance of SEK 105 million is an unusual one. We normally don't do that. But as you remember, we had -- we put in an extra maintenance, which was planned for the spring of 2018, but we had to do it earlier. It was announced well in advance, so it didn't come as a surprise. But it's unusual to do a smelter maintenance in Q4.We had very, very strong cash flows, and we were pushing very much to send out all inventories and reduce the balance sheet and get good cash flows. So it's -- it was successful.If we take the full year, we ended up close to SEK 50 billion in sales. We had earnings of close to SEK 9 billion, which is a record year for us. The free cash flow was SEK 7.3 billion, which is a big number given that we invest more than SEK 5.5 billion, which is a big CapEx year. But still, we delivered SEK 7.3 billion in free cash flow. Strong production, obviously. Disturbances in the zinc smelters. I mentioned this year, in Q2 and Q3, was a big year in maintenance. We changed a lot in several of the smelters, and the SEK 400 million in maintenance is, I think, the biggest maintenance year we've ever had, and we increased the quality of what we have. So this is going to be important, and we improved production stability and environmental performance and other things.Prices have obviously been good, and we are going to do, in addition to the 1/3 of net profit, the normal dividends, which adds up to SEK 8.25, which is one of the higher -- well, it is the highest ordinary dividend ever. And then in addition, we pay out, or propose a payout, of additional an SEK 5.75. More on that later.The market is good. Copper is in the middle, slightly higher than the bank consensus' long-term price average. Zinc is very high priced, and nickel is very low priced, even though it has improved. We have favorable currency positions as well. On the base metals, I'd say that the demand is good, but we have a shift here. The traditional picture is that it's the poorer economies, which are building wealth and building infrastructure, which are driving the base metals' demand. Now we are seeing that construction -- that the global construction industry is not that high. It's actually having a slight negative trend, which is contradictory to the general economy, which is very, very strong. Also, automotive industry is not super strong, which is the other -- the second largest segment for our base metals. Now something happens, and that is that the new kind of infrastructure in the old economies, with more wind power, more volatile power generation, which is driving sort of overcapacity in all electric distributions and a lot of other things happening; environmental demands, climate changes, all of that is driving several of our metals. Also, the [ old world ] is now starting to drive a bit more. So it's an exciting shift -- a slight shift in demand pattern.On the supply side, it has been so important. We are seeing a few new mines, a few -- or we see some new mines, but they are well planned, nothing beyond what the market is well aware of.And the reflection on the price levels are obviously here. We see that all the prices are moving upwards, and we see that copper is up, zinc is up very much and also historic high. Copper is not very high in historic perspective. Nickel is on historic lows, which is better illustrated by this page.Here, we have the cash cost of the industry on the vertical -- or the horizontal lines. And we see all of the years with the max, min and average price. And we can see here clearly that zinc is high. It's very profitable to be a zinc miner today. And as a consequence, one should -- one would expect a lot of -- everybody with a zinc deposit should start producing here and now. But there aren't many, and therefore, it continues to be a tight market.Copper is up, less strong than zinc. And we can see that the new year -- we have the new year also reflected here. We can see what -- I think it has yesterday's price, the little dot to the far right.If we combine these prices with the currencies, we have the prices in gray, the currency portfolio of Boliden in blue. And the total of the 2, the total terms -- prices and terms, what we talk about, is on a very good level. So the combined effect is no doubt very strong right now.If we now go into talk about mines and smelters. We are in a period when mines are excelling and smelters have a more difficult time. Other years, we have the opposite, and this is one of the strengths.If we look at the mines, obviously, you can see on the quarterly, the bars here, on Q4 are -- it's a big quarter. And it's coming after a Q3, which was a bit of a disappointment with so many of the current -- or concentrator plants standing still for a week or for some days for relinings of the mills or whatever. But it has been a problem-free quarter. And also, we are in the deeper parts of Aitik, we are on good grades in Garpenberg. And in general, it's going very well.Cost has been driven a little bit by the high volumes, but not too much. If we take unit by unit, on the full year, we are also giving the profit by smelter and by individual mines. And if I go a bit in advance, I think if we look at the combined mines and smelters, I think it is a great year.Listen to this. We have Aitik and Garpenberg both earning EBIT more than SEK 2 billion, more than SEK 2.5 billion for Garpenberg, big numbers. But then we have Tara, we have Kevitsa, we have Boliden Area, we have Rönnskär, we have Harjavalta, and we have Rönnskär, Harjavalta, Kokkola. And all of these 6 units are making between SEK 0.5 billion and SEK 1 billion, closer to SEK 1 billion each. So we have a very good whiff of where the profits are coming from. It's not excelling extraordinarily in a particular place. It's widespread, and we can see them here.We can see the improvements in Aitik is, of course, extreme, where we were having issues last year, we had lower prices. We have the same in Kevitsa, very strong year-on-year development, and the total is, of course, strong. Tara, I should also say, is, of course, enjoying as well as Garpenberg, enjoying the high zinc prices.If we look unit by unit, it's very well illustrated by this one. The bars are the milled production, what we mine, the tonnage we put into the plants. And the line is showing how much metal is coming out of that tonnage. And we can see in copper that we are really enjoying very nice grades right now. So it's more the grade than the volume which is driving this. We did 143,000 tonnes of metal in concentrate from Boliden's mines last year, which is a big copper company. Zinc is more of a flat development. Nickel is very nice, and we can compare with the pro forma before we owned it, but nice improvement there.We also delivered the reserve and resources update of this year. I wouldn't call it one of the good years, but an important explanation why it's ups and downs, so it's not a bad year either. But it's an in-between year on exploration results. But some of the money we are spending this year -- quite a bit of the money we are spending this year are on exploration drifts. Exploration drifts, obviously, are expensive. It's expensive to make a big hole for a truck compared to a drill hole, which is this diameter. And we are not doing it to find any ore now, but we are doing it to find the potential of the deposits in Tara Deep and Rävliden, both are very -- if successful, very value creating because extending quite short life of mines is, of course, the most -- if you do a DCF calculation on it, nothing is adding more to the value of the company than to extend a mine we already have. All the investments are already there and everything is there, so we don't need to invest, we just extend, continue to produce. So very important to understand what we have done this year in terms of exploration drifts.Turning to smelters. A less good year in terms of the term or in light of TCs, which are under pressure right now. We also have extreme high maintenance, and we had a maintenance in Q4, which is turning the trend curve a bit down because it's -- we normally don't have Q4s with maintenance. I think the copper smelters did well. We had instability in Kokkola, and we had, as I said, the maintenance.If we look at the year result unit by unit, Rönnskär has a good progress, doing well. Harjavalta is also doing well, and we're coming -- we're investing quite big now in Harjavalta -- or very big. Kokkola is improving, and we see the process stability we have been talking about for quite a long time. It's partly related to the external concentrate [ Zincon ], which is challenging and difficult. We earn good money, but it's giving us some problems. And we have had the failure in the furnace in Odda. So the zinc smelters have not been doing a good year, but we are sorting them, so this should be a good year-on-year improvement if we sort what we are doing.In Bergsöe, good stable process. We had a fire there. You've probably read about it. We had a very profitable new project, and unfortunately, everything was destroyed. And we are planning to build it again. We're trying to figure out what we can save and so on.Smelters have a quite flat year. And again, bear in mind the maintenance -- the big maintenance year, and that included with remarks on stability on zinc. It's a good year in some regards. In some other regards, a lot of maintenance and a lot of maintenance -- or disturbances in zinc.On the financials, I pass over to you. It's a nice presentation, Håkan.
It's a nice presentation. Thank you. Good morning.A strong quarter, Q4. We achieved an EBIT, excluding process inventory, of SEK 2.9 billion, which is, in fact, SEK 800 million [ up ] compared to Q4 of last year, which was also a strong quarter, and SEK 1.1 billion up compared to Q3. It's also good to see an EBIT number about SEK 3 billion, which is in fact the first time.Cash flow was strong, SEK 2.4 billion, which led us to a gearing net debt-to-equity ratio of 11%, which is then 8 percentage points down during the quarter.We then move over to analyze the results compared to last quarter. You can see, there it is. An improvement of SEK 800 million. As you can see, we were helped by better prices compared to last year. We've seen a good recovery in most metals. In addition to that, we've had good production in the quarter, a production that helped put SEK 400 million on EBIT. That is, in its entirety, grades in the mining division. We've had good grades in Aitik, we've had good grades in Garpenberg, which are the 2 biggest mines. So that has been important.Costs, fairly similar to last year. We've had some inflation, and then depreciation is up. And just as a reminder there, we do depreciate the stripping and the rock development work based on production. In the case of stripping, based on metal production. This will vary with production.Moving over then to the comparison, Q4 to Q3. There we see the bigger numbers, an improvement by SEK 1.1 billion. Again, we've been helped by good prices, adding SEK 700 million to the P&L; but also, a very significant contribution from volumes, SEK 1 billion. Out of that SEK 1 billion, again, 50% roughly, is grades; grades in Garpenberg were fairly low in Q3 and are on a substantially higher level in Q4; but also a good increase in Aitik. So Q4 really is a high-grade quarter.The remainder, we have also SEK 300 million positive contribution from better mill production in mines. Part of that is related to the more extensive maintenance in the mining divisions than we had in Q3. But we had good mill volume in Kevitsa. We've had it in Aitik and so on and a record level in fact in Garpenberg.Costs are up SEK 400 million. Out of that, roughly SEK 150 million are seasonal changes. Q3 is typically a low-cost quarter with vacation periods and partial closures and so on. In addition, we have volume-related costs, higher production drives volume and some costs for the extra maintenance in Q4 in smelters. And again, higher depreciation due to higher production.Moving over to the full year, it's a slightly similar picture, about SEK 50 billion almost in net sales; SEK 13.5 billion in EBITDA; SEK 8.9 billion in EBIT ex PIR; and again, another first, SEK 9 billion in EBIT, so really a strong quarter. CapEx came in where we planned and where we guided for when we talked about this in the Capital Markets Day, SEK 5.5 billion. Strong cash flow, and again, giving an earnings per share of SEK 25.Doing the comparison then with last year. I mean, we've been helped a lot by better prices, SEK 3.5 billion due to higher base metal prices, primarily; some negative effect on FX; but overall, a very positive effect price-wise. Again, very good production compared to last year, half of that rates, and the remainder is good production in mines.Costs are up. One aspect is higher personnel costs. We've had some increases in variable pay. We have a profit-sharing program, which is based on financial result, and we have an annual inflation in salaries. But also, higher production, and as Lennart pointed out, this was a high maintenance year in smelters, which also drives costs. Depreciation, much related to production volumes, and then we had some one-off costs, which were -- or one-off revenues, which were positive in last year, but nothing affecting comparability in '17.So strong year, strong quarter. And also, same goes for cash flow. A good EBITDA as a start, and then we've been able to reduce working capital in spite of increasing prices, which we're happy about. I should mention also that we saw a positive effect from internal inventories, result-wise, this quarter, and that was due to hard work to reduce the inventories towards the quarter-end. So we're happy about that.And then a bit higher taxes paid this quarter, still lower than the amount on our P&L. And I expect some catch-up during next year. But all in all, a very good free cash flow.And as you've seen, gearing is now down to 11%. We have reduced it to just over 20 percentage points in the year and by 8% in the quarter. So it's a strong trend downwards, and we are in good shape financially. Payment capacity of close to SEK 9 billion and a good level on the loans, on interest rates. So in good shape.And Lennart, do you want to take the dividend proposal?
Yes.
Yes.
Okay. With good profits and reduced inventories, we have a good cash flow. Gearing is down to 11%. The financial targets are 2, 1/3 is of net profit. We have no intention to have a constant dividend to the shareholders. We think that our variable pay programs to people, our variable 1/3 of net profits will go up and down. But we have an additional target, which is one -- the 20% gearing target. The purpose of it is that we think it is very value increasing or value creating to have a strong balance sheet, be in good control when tough times are coming. That enables us to be in control, and it enables us to move when other companies have difficulties.So the gearing target of 20% is the other one, which is kicking in now and which is the purpose of an extra dividend. 1/3 of net profit is SEK 5.75 and -- SEK 5.25. And then we are doing -- or proposing an extra dividend up to a total of SEK 14 per share. That is a pro forma. If you would pay that out on the last day of the year or on the year-end, it corresponds to 24% gearing. The reason we are going over the 20% is, of course, that we are now in the middle of the first quarter, the market continues to be strong, so it corresponds very well. It's right in line with our proposal to have 20% gearing in good times.We are doing it with a special situation with a distribution or mandatory redemption share. We're issuing a share. We're having it -- an obligation to take them back and to pay out the money. And the purpose of that is to separate it clearly from the ordinary dividend of 1/3. So no one [ thinks ] that we are now going to have a different distribution. 1/3 of net profit is normal. We don't need to have a stronger capacity or capital capacity than 20%, and the surplus is now paid out. Decision on this will be on the AGM, obviously.We have taken a decision -- or we took a decision yesterday on the board meeting to do 2 investments in Harjavalta, Pori. Harjavalta has a limitation in the flash furnace, and we are now doing a number of steps to take out additional tonnage out of the flash. Doing that, we add more anode -- I mean, a smelter is producing anode copper. We already are producing more anode copper than we can refine in the Pori refineries. So now with the additional anode production, we are also taking a step for refining capacity, and we are now expanding the Pori refineries.The CapEx is totaling EUR 45 million. We're now going up from 135,000 tonnes of refined copper to 170,000. We will be there by 2020. And the investment will be going in the meantime -- or in -- from now and until 2020. Be careful with the 25% increase of copper production. We are making the money, to a large extent, in the smelting, and there is only a 10-or-so percent increase. So be careful that you don't draw the wrong conclusions here. But it's a very significant expansion.We can also put it in retrospect of our copper/nickel strategy, where we started to invest in Harjavalta some years back. Harjavalta was not a very given structure. Strategically, it didn't fit too well with taking external copper con from outside or from far away up in the Baltic Sea and then returning copper to -- down to Europe. But we started to invest because we saw the profit capacity. We then focused on nickel because we had the nickel tolling agreement with one of our customers. And we took that on in our own books, and we started to build customers for the nickel product. And then we bought Kevitsa. And suddenly, we have put Kevitsa, Harjavalta, in a total -- really deep into our core strategy. And we are investing in both here and in Kevitsa.And the expansion in Kevitsa is quite simple. We have a large deposit. We have high grades. If you look at [ combine ], it's a copper equivalent, it's a high grade for being an open pit mine with big resources.The bottleneck in Kevitsa is the concentrator plant, and more specifically, it is the milling capacity. Kevitsa has a variation and sometimes very hard ore. And we will -- we have seen it, and we will see it, that production volume is going to go up and down with the hardness of the ore. But we have calculated and come to the conclusion that we should expand the mill, we buy a new ag mill, and together with the infrastructure and new building for the mill and all the feeds and feeding and everything, it's a CapEx or an investment of EUR 80 million. It will be one of the things taking us from 7.5 million tonnes to 9.5 million tonnes. The CapEx value here has been in the guidance of CapEx. We said before that we are going towards 9 million tonnes, so it's no news that we are expanding Kevitsa, but now we are taking -- we took the decision now to build the mill. Full production will be 2020. I think that covers that one.To finish this presentation, we normally put your eyes -- or highlight a few things, which are important when you model Boliden going forward. We had a record production in Q4 in several mines, and we have over reserve grade or reserve grade averages, so we are mining in higher grades than normal.We have winter condition in Q1, don't forget that. We're saying open pits, they are full of snow and it's snowing and it's a snowy winter. So I'm not suggesting any big problems, but it's a seasonal -- seasonality thing in the winters in the open pits here.Aitik, we're working with a new crusher. It's on plan. We are taking more ore from the bottom of Aitik because we're working on the crusher on -- high up now. It is going to be on-off a little bit, and it will also be variations in grades. And as we have said before, until we have the KiD2, as the new crusher is called, in production, we're going to see a bit of volatility, both in volumes and in grades, and Q4 was good volume, good grade.Garpenberg, 2018 on reserve grade -- or on grade guiding on 4%, we're going to be below that in the first quarter, but the average for the year is good. Zinc smelters are -- were improving. I said -- I talked about that a lot before. Kokkola is looking better. The maintenance in Odda is done, so that behind us is good.We have planned maintenance this year of SEK 200 million as compared to SEK 415 million last year. So it's only half of what we had of -- last year, the big year in maintenance.The fire I mentioned. The low inventory I mentioned, so probably you will see that we're filling up a little bit of inventory in Q1, which is quite a normal seasonal pattern. And the CapEx guiding, including the new investments, is not changing. We have had this in the numbers, but we have not been spelling out what exactly they include.And my conclusion then is, well, today, mines are excelling. TCs are low. We have nickel on a low. We have zinc on a high. So again, we have several -- or we have 11 units, each with different market terms. Everything is not going perfect, but the grades are good. Productivity is high, and we're continuing to drive it with our New Boliden Way programs and we have the investment and maintenance. So we continue to work hard on that one. The disturbances on zinc has improved -- have improved. And I think all the rest have been said.So we've the disclaimer, if we said something wrong. We can move to this picture and say that we are ready for your questions.
Thank you very much, Håkan and Lennart. We will now open up for questions, both from the telephone conference, but firstly from the conference room here in Stockholm.
All right. It's Christian Kopfer from Nordea Markets. Just a few questions from my side. Firstly, on the investments that you announced today. So those investments, EUR 125 million, those were already implicitly announced when you had the Capital Markets Day?
It include -- they were included in the guidance then. The -- yes, basically. And the increase in production, now we are announcing higher than announced in Kevitsa. What we are doing in Harjavalta and Pori were not announced. We had the numbers in the CapEx guidance, but we have not been putting forward the production increase. So that is new information.
Okay, okay. Fine. But for Kevitsa, what is new there? Because we previously said up to 9 million tonnes, right, for 2020? But what happened there between 9 million and 9.5 million?
What happened? Well, we're working on the feasibility, and we are putting in a slightly bigger mill and a few little tweaks there. And then we are saying that, with an average hardness of the ore, we're going to do a little bit more. But we're also investing a little bit more than we thought then, but we're going to take it back elsewhere. So no problem with that, no. So it's good news on the detailed planning.
Okay. Can you say anything about return on -- return -- expected return on those investments? Because it is brownfield, so I guess it should be pretty good, the returns, I guess.
Yes, I mean, good. We like this. I mean, this is our favorite things, very, very good returns.
But your cost of capital is 10% still? I mean, the hurdle rate that you have...
We are calculating everything with 10% discounting factor. Our true WACC is lower and our returns is much higher than this.
Right. And finally from me, on the mine side. If I just look at -- because now we can calculate the OpEx on separate mines for the year, and it seems like costs have come up pretty remarkably in some of the mines. For example, in Aitik, I don't know if some inventory effect or other effects, but it seems like costs have come up quite substantially. Are those -- is it something special that you want to mention here? Is the extra -- was it the extra maintenance that had cost effect? Or is it cost inflation? Or...
I think I can -- on Aitik, I think your observation is right. I think that it's nothing extraordinary. Maybe there's -- in Aitik, we have high cost, and this is again the same story you have heard so many times before. We have -- we call it the Thomas effect, a guy called Thomas Söderqvist. He is the most expensive guy in the company. We put him in Aitik, and you see the result in terms of milled volume. So I think it is good return of it. But no doubt, it has -- it is expensive to keep the old crushers going. And we only have 5 months to go -- or 4 months to go and then we're hopefully going to be over that period.
Cost per tonne in Aitik with the new crushers should come down meaningfully then.
Yes.
You asked for inflation. And we do see some inflation as well. It's still low, low single digits, but there is an element of inflation.
Ola Soedermark, Kepler Cheuvreux. I have to follow-up on Aitik and the crushers there. Can you give us some more information on how it's going, what's the status right now? When are your tests running the new crusher? And how should we view the volumes for full year and next year?
Hans Jönsson, the General Manager in Aitik, he sent me a video just the other day. See, it's moving. And it was a conveyor belt moving this fast. So I mean, it was nothing very -- nothing for you, but something is moving there. A lot of equipment is in, and we are going to have it up running in the second quarter. And again, I -- all the big investments we are doing, I'm repeating this. When you do the plan, and you have something going on for 3 years, you can say that, "End of first quarter, I'm going to be in production." And then we -- 3 years later, we're there, and then we're having a meeting, and we say, "Are we in production or not?" And it's always difficult to define because you have start, stop, correcting and so on. But at end of the second quarter, I think it will be a big production in it, according to plan. But how this is going, we will see. And it's always adjustments to be doing and we want to have the time, we want to do it right. So when we are now closing down the old crusher -- or surface crusher in the fall of this year, we haven't been pushing the start-up so that we then have to stop it. But it's perfect, according to plan.
And you can expect higher volumes in Aitik, to...
It's a very important piece of the expansion plan to 45 million tonnes a year. So that is part of that expansion plan and a key element of it, yes.
And on the zinc smelters, there are still some issues in Kokkola, but it's improving. Is it possible to quantify? Is it material? Or you mentioned, it's -- I suppose, it's material, but is it possible to quantify? Is it SEK 50 million or -- the quarter? Or...
It can probably be more than that even. But I think what we're seeing now is we had things happening, developing, which we have corrected. And so everything equal to equal, I think Kokkola looks to be out of the woods, and we have been struggling for a long time, as you know. But now we're struggling with something else, and that is we are, as you were seeing, we're switching Boliden quite a bit towards more -- much more internal feed on copper and less in zinc. We're expanding the zinc smelters and having lower grades in the zinc mines. And therefore, we are buying more zinc concentrate in the open market. And the terms there, but more important, the quality there in the market, which is very tight, is low. So I think all smelters in the world are a bit struggling with quality of the poor material that the few zinc mines can produce.
We have another question in the back of the room.
It's Johannes Grunselius here, Handelsbanken. So more questions on the Mines here from my side. But in Garpenberg, I can see you did record-high mill ore production. You had a record of 2.8 million or something annualized. This -- is this kind of a new level that could be sustainable before you do the expansions?
I think you should look at -- draw out -- we are on the expansions in Garpenberg. As you know, we're now going towards 3 million tonnes, and the time line of that we have said. But mining is never a straight line. It's going up and down, and we're clear that this quarter was a good quarter. So a bit of prudence there is not just a step to a new normal. We are on a positive trend line, but we're going to be a little bit up and down on that one. No comment on it.
Okay. Then I wonder if you could be a bit more specific, perhaps, on your outlook for the Mines for the quarters. You mentioned here, for instance, that zinc grade is expected to be lower in Q1 versus the 4% average grade. Could you indicate how much lower?
No, I -- you probably remember, it was 2 quarters ago, I think, we were in the really high grade area, and we had a -- one room collapsing. And we lost that, and we have to take lower grades on other areas, and we're seeing the consequence of it. But that is only in the first quarter now, and then we're coming back, so the year averages is going to be on the 4% level. And exactly how this is playing out, we're doing as good as we can to keep it up. But we'll say that we're not going to be on that average in Q1, therefore, we put them -- the information on that.
And then the message is volatile production in Q1, Q2 in Aitik. And could you say if you see a risk more on the upside bend or more on the downside versus the 0.25 grade? I got a sense that it's more on the upside.
I think the guidance is there. We have, probably, 0.4% in the bottom and 0.15% or something at the top. And then we have on the top crusher, which is going to start and stop and start and stop, and we're rebuilding it, we have been giving the guidance we can, and it can be higher than the average, it can be lower than the average. And we're shy of giving any more information. And simply, we don't have it, and it's normal. And this is not that we are having problem. It's just the normal volatile -- or the volatility we're spending a lot of money to take away the old crusher. And then when we're commissioning and starting up the new one, obviously, we have to have a start and stop. So we're just saying be careful. It doesn't matter, really, the value of the ore is there, and we're going to take it sooner or later. And the average of the year is in the indication there.
Thank you very much. That sums up the questions from the conference room. We will now switch to the telephone conference. Operator, please go ahead.
[Operator Instructions] Our first question comes from the line of Alain Gabriel from Morgan Stanley.
Two questions from my side. Firstly, on the smelting business. You seem to have [ beat ] on the gross profit and smelting. Is there anything unusual in the terms during Q4 that we should read across for the 2018 and 2019, such as renegotiation of some of the fees or movement towards more spot or the lack of thereof in that business? And the second question is on the central costs, which appears to be much lower than what the market was expecting in the quarter. Do you mind explaining the individual components of that?
On the terms in the smelters, it's a good remark and good you ask. I should probably have mentioned this. We have benchmark contracts with the external suppliers of concentrates. We don't want to be over-hedged. And as a consequence, we don't buy on long-term contracts more than, for example, 90% of our needs. And if it works this way, that we work ourselves through the 90% until the 10% is there. So now the spot terms are low and we get much more of it in to fill up the difference between the contract volume and the capacity we're doing. So we have a Q4 impact there, which will not be repeated going forward. Then we're going into the dual benchmark terms for next year, and the balance may have a bit of a variation when the spot is very different from the term prices.
And the second question was about the central part, meaning then the component or the result that is outside the mining and the smelter divisions. Essentially, there is 2 things in there. One is the regular costs of the head office function. Nothing out of the ordinary there. It's stable. The second part, which is in the results of this internal profit elimination. And there, I mean, typically, when we have increasing prices and especially in a situation with strong production towards the end of the quarter in Mines, all things like, you would expect a clearly negative amount there, let's say in the vicinity of 150 at constant inventory volumes. We have been working hard to get the inventory out towards the later part of the year in order to realize profits. And instead of this significant negative, it's actually a positive. So that is perhaps better than what the market expected.
Our next question comes from the line of Liam Fitzpatrick from Deutsche Bank.
My first question is just on zinc smelting. Could you just repeat the point you made around Q4 about part of it being exceptional? Was that an exceptional profit that won't repeat or was it a loss? Secondly, you make a point in the release about the tight concentrate market and that zinc smelting volumes returned to normal by the end of the quarter. Are you implying that Q4 is the run rate that we should use for 2018 because Q4 was below the previous 3 quarters for that year? And then moving on to working capital. There's obviously a very big inflow in Q4. Can you just comment on how far below normal end-of-year working capital was? And linked to that, of the SEK 1 billion volume improvement that you had in Q4 versus Q3, how much of that was inventory related? And then finally, just on the dividend, is it your plan to potentially top up the payout through the year or will you continue just to make a dividend announcement once per year?
On dividend, we are paying once a year. And I -- we do not discuss any alternative to that, so that's a simple one. On zinc smelters, there is one plus and one minus. In my presentation, I said we had maintenance in the smelters, and we had disturbances in Kokkola, which improved towards the year-end. So on that end, it's -- it was a bad quarter in zinc smelters and improvements. The other one was on TCs. Yes, we had lower TC. We had a bigger influence from the low spot terms in Q4 than you would normally see. And then it depends on the new TCs, of course, and we know from the press what is there. And then it was -- yes.
Okay. Working capital, yes. Inventory levels at the end of the quarter, they are below average levels. Looking at finished metal, it's low. Looking at concentrates, it's below average, especially so in copper cons. So I do expect some bounce back on the cash flow side in Q1. And then the impact on the P&L, we have roughly SEK 200 million coming from stock reduction, meaning then realizing SEK 200 million better than Q3 from stock reductions coming into the internal profit side.
Could I just follow up just on the zinc, Q4? I probably haven't drunk enough coffee this morning, but just on the point where you increased spot volumes. Just given spot TCs are below contract, are you implying that, that was a negative for Q4 [ smelting ]?
Yes, yes. It's a negative. We're producing the volumes we have on benchmark terms. It's going out. We don't have -- we have bought all the volumes on the term prices, and then we are open to a bigger fraction on spot, which is lower. So yes, it was lower in Q4 than normal.
Our next question comes from the line of Jatinder Goel from Citigroup.
Two questions. On your additional dividend, how did you compare that to a buyback? And any particular reason for following this structure versus buyback, which could give you a more permanent EPS accretion? And secondly, are you still open to inorganic opportunities? And more specifically, would you still add any smelting to your portfolio if something becomes available within your preferred geographies?
You're going to take the -- on buybacks versus the redemption shares.
Yes, we -- I mean, the advantage with the redemption is that it's -- the shares are redeemed with a cash payment, so it's something that goes to each shareholder, provided you don't sell the redemption shares. And I think that is a buyback -- or an advantage to buyback, so that is the main reason there. And then...
On what we are buying. Our focus has so far been on mines. Would we buy something right now? We -- I don't think we would buy anything in the near term because mine prices are very elevated, and we don't like to overpay. Smelters could be an option. It's not an impossibility. We are looking on opportunities, both in mines and in smelters. So maybe a slight, more higher interest in looking at smelters, recycling and things like that than before, but we are not moving fast in our strategy exchanges. We're following the direction we have followed for a long time.
If I could just follow up on the additional dividend then. Is there anything you can help to guide where we should forecast going forward? Because you said 24%, but it's very hard to predict where your target number will be to get that additional dividend beyond 1/3 EPS. Anything you can guide?
Yes, we have a very precise guiding. We have an extremely transparent guiding, and that is 20% gearing, and we have 1/3 of net profit when we are not applying that 20%. And everything [ above ] 20%, we are proposing the shareholders to pay out the balance. That would, pro forma, take us to 24%, which I think is still okay. It's prudent, given that the market is good right now, and we have a very strong cash flow, so not a problem. And then, of course, I mean, if we are -- if I'm looking at shareholder interest, which I do all the time, of course, paying out too much if the market would drop down there, it would be very bad. The 20% has been calculated on our worst-case scenarios, our ability to purchase or acquire the kind of assets we're looking for, even in quite difficult circumstances. So it's not a random, and we are perfect -- transparent. Until we say something else, I think you should look at 1/3. And when gearing is below 20%, we're probably returning it to 20%. And we are going up to 24% now, if you look at pro forma the last of December. We had return on equity of 20 -- what was it, 22%, 21% in the year? So I think our equity is returning very good values. So I think it's in -- yes, it's a well thought through sort of payout.
Just to ask it in another way, what would your maximum pro forma number will be in future years, if you have any number in mind? Is it like 30%, 25%?
I didn't hear the question.
Your pro forma number that you said is 24% after current dividend declaration, is there a maximum pro forma number, where you would cap it for the future additional dividend?
No. No. We don't do that. We're targeting 20% in the end of an up term in order to have a strong balance sheet in possible difficult times to come when we can move forward and do very interesting deals and be strong, where other companies are struggling. So how you can say that we could forecast cash flows and things like that. But the problem in a cyclical industry, we're not forecasting anything. We're saying that by tomorrow, there might be a big problem in the world, and commodity prices are falling big. And then we have our 20%, or almost, we're at 24% then. We have done, so far, a good first quarter because it hasn't happened until now. But I think the thinking is very transparent. 20% in good times in order to be strong in the bad times. We are doing a bit more than that, 24%, if you apply the whole dividend. Think of it as being paid out on the last day of the year, we would be on 24%.
And our next question comes from the line of Jason Fairclough from Bank of America Merrill Lynch.
Folks, just a couple quick ones from me. You've published a new reserve and resource statement, and I see that you've redone the mine plan at Kevitsa, you've actually taken some reserves out there. And if I'm reading it correctly, it looks like a 15-year mine life. I just wanted to square that with the decision to make more investments at Kevitsa. You must be thinking that there's exploration upside at the deposit. And secondly, just to come back on the whole redemption share structure. Again, I just wanted to make sure I understand the decision to use the redemption share structure. I think it's tax advantage for Swedes, but I just want to make sure that, that's what it is.
On Kevitsa, of course, producing more from the asset base we have with some marginal sort of debottlenecking investments, it's EUR 80 million, so it's not so small money, but that is a good deal. We improved the NPV with the mine plan or with the resources we had or with the reserves with the life of mine plan we have. But the resources are big, and of course, we are looking at possibilities to extend this life of mine. And it is a resource-rich part of Finland. We have exploration going and -- going on. And again, the life of 15 years does not take into account parts of the additional resources we have identified. Whether that will be economical or not, we don't know. We have calculated and justified its investment on the resource we know.
Should I take the...
Yes.
Okay. Redemption of shares is a fairly common way of distributing extra funds on the Swedish market, so it's a well-proven model. I think the reasons, you could say, are 3. First -- firstly, we want to clearly separate it from the ordinary dividend. Secondly, compared to buybacks and so on, there is a cash payment going to each shareholder. I think it's tangible and it's visible when you redeem the shares. And thirdly, tax-wise, there are advantages for Swedish private shareholders, but also for most international shareholders.
Our next question comes from the line of Luke Nelson from JPMorgan.
Just a question on grades, again, which were fairly strong, particularly Aitik and Garpenberg. I know we've already spoken about guidance for 2018, so it's fine. But could you just give us a bit more sense around the progression of grades, maybe over the medium term, particularly in the context of where grades are relative to reserve grades? And secondly, on Kevitsa, just a bit more detail on the phasing of that EUR 80 million investment. And is that incremental to stripping? And also, does that impact the stripping profile that you guys outlined at the Capital Markets Day late last year?
On stripping, first, I think higher production is you put stripping earlier, so there is an element of that. That is not considered in these numbers. The capital investments we're doing are going to be basically 2019 -- 2018, '19 will be the big years of that CapEx plan. And what was -- what more did you ask about? I think that covers your...
Just on grade.
Yes, on the grade profile, yes. If that was a general question, Aitik, we are clearly above the reserve grade. And Aitik has a typical 10-year cycle on grades. Next time, we're going to be in low grades. It's, well, 2022 or 2023, somewhere like that. But of course, a lot of things will happen. We are working on exploration and stuff, so we don't know in all the details, but in the plan, we have next low year by then. We were in low years, 2012, '13, we were down to 0.19 or whatever. So this is what every open pit in the world is doing or disseminated or open pits are doing, so quite normal. Garpenberg, we had huge increases in reserves. And with the lower cost per tonne, we can make economical lower grades than the average of the old concentrate plant or the setup. But this is all in line with what we have been guiding for in the Capital Markets Day, so no news on that one.
Sorry, just one follow up, just on the expansion. Is there any further permitting that remains outstanding or -- from what's been announced this morning?
What...
Permitting. If there is any permitting related to the...
No. I think there are permits involved in a few places, nothing that we highlight, nothing that we are -- no, nothing special, I would say.
Our next question comes from the line of Oskar Lindstrom from Danske Bank.
Two questions from my side. The first one's just more of a technical one. You talked about exploration drift. Could you please explain the significance of that in terms of does that mean you're preparing for -- you're laying the groundwork for exploration that's going to take place in 2018 and that we should expect more sort of reserve and resource increases then?
We have identified 2 very important deposits, near-mine, to quite short life-of-mine, big profitable mines; one, Boliden Area; one, Tara. Both are on big depth. They are 1,000 meters or below or 1,500 meters, typically, and drilling from the surface is very expensive. We know that we have something there. But to identify that and define those deposits from the surface is not very good. It's very expensive and takes a lot of time, so we take a full stop on that exploration. And still, instead, we build a road down to whatever, 1,400 meters or 1,500 meters or something, and then we stop there, and we park that drifting. And then we start exploration from that point, and then we can drill around there and quickly and swiftly define the indications or the strong indications that we have in both. So yes, we will be able to upgrade resources to reserves if things go as planned. And hopefully, we will find new resources. So those are -- that is the plan. And when we know it, well then we can start to do feasibilities and see if we can mine the deposits in a clever way. And an interesting note is, of course, that we are very excited about the profits we are doing in Garpenberg. Deep deposit, not -- I mean, high grade, but not extraordinary grade, and we can make it with a lot of profit. And of course, with that, taking a shaft, one-step shaft, down to the depths we are talking about, would open. But don't let this be an indication of what is going on. We don't know, but we know enough to spend the money. And you asked about the money, well, it's quite significant parts of the exploration budget for these 2 roads, which cannot lead to any exploration result when we build the road, but certainly could thereafter.
All right. Interesting, I mean, you mentioned the sort of good profitability in Garpenberg and the opportunities there. Talking about sort of the extra dividend, the balance sheet and investments, one alternative way of interpreting an extra dividend is that you don't have or don't see any near-term sort of significant expansion opportunities. So instead of investing these funds internally at very good rates of return, you distribute them to shareholders. Is that -- so do you feel that there is a dearth of investment opportunities at the moment?
I think that we are -- we are in -- it's a slightly sort of surprising question. We are in very big years of debottlenecking, we are in big years of investing, and we have just announced 2 quite large investments. And going through what we said in the Capital Market Day, short life of mine Tara, we're spending a lot of money to see if we can extend it. Aitik is in expansion plans to [ 45 ]. We're increasing Garpen to 3. We are -- we have found cobalt. We haven't -- or we see the high cobalt prices. And add almost a year in little Kylylahti, and that is, of course, a joker here, what could that give. It's very small, but still exciting, I think. And then we can go through the smelters, where we are seeing improvements in the zinc smelters, and we are -- have taken a decision to expand Harjavalta. No, I think we're expanding a lot. And I think, again, the 20% -- their gearing target is in line with a dynamic, although quite careful and a prudent company, which likes to be -- trying to be lower risk than the average and have the financial strength in a downturn. So I think it is a balanced picture, and we're excited about it.
I was trying to be a little bit provocative just to see...
I like that. That's fine.
But my point was just that -- so it's more a question of that you feel confidence about the future in terms of earnings that you're distributing this -- these extra funds now?
We have upsides in many areas, as we have said here. But with the grades are extraordinary, and we had good flow in Q4. So Q4 was a very good quarter. I think the sort of -- the long-term picture is good.
Our next question comes from the line of Daniel Major from UBS.
Two questions. First, on CapEx, you mentioned that the additional detail you've given on project approval [ is also ] included in the 2018 guidance of just over SEK 6 billion. Can you give us any more details on the trajectory of CapEx over the subsequent 2 years in terms of the sustained sort of level of spending? And at the Capital Markets Day, you highlighted sustaining CapEx of SEK 4 billion, which was up from SEK 3 billion you announced post the Kevitsa acquisition. Is that SEK 4 billion a sort of long-run sustaining capital -- CapEx level we should be thinking about? And then the second question, just on the exploration spending. Is the budget still SEK 500 million? Any changes to that? And in light of, I guess, the mixed mineral resource statement, do you think it would be prudent to lift that exploration number to improve reserve replacement?
Should I start with the CapEx, though? First question then, CapEx and the SEK 4 billion sustaining. A very significant part of the sustaining CapEx of SEK 4 billion is related to stripping in the open pit mines. And going back to the Capital Market Days, Mikael showed the projections for the key mines going forward. And from that, I think you can deduce that the SEK 4 billion level is where we'll be for the next couple of years. After that, it comes down pretty significantly. So that's the guidance we can give on CapEx.
And on exploration, the other question, I think we have the biggest exploration year ever. We are putting a fair amount on building a tunnel for cars to have a location for the additional drilling. So of course, in that sense, we don't have any return on that spend now, but later. Also worth mentioning is, of course, that we are focusing very much on near-mine, to find things which could enable us to debottleneck or to better use the big CapEx infrastructure and mills, process plants we have. But we are also doing field exploration. And we have increased our presence in Finland outside of the near-mine exploration. So we have exciting new areas, too, which we don't have any sort of discoveries on, but we are spending a bit of money elsewhere, too.
Sorry, just a follow-up, you -- on the CapEx guidance, obviously, the SEK 4 billion is sustaining. But in 2019, 2020, should we expect total CapEx to be closer to SEK 4 billion or closer to SEK 6 billion?
We have not given any guidance, and I'm not prepared to do it today either for '19, for the full level. You have seen some elements that will have an impact. At least it's difficult to land at SEK 4 billion with these investment that has been communicated. But the exact level, we'll have to come back to that.
And our last question comes from the line of Daniel Lurch from Exane BNP Paribas.
Just 2 quick ones relating to the market outlook. On the smelting terms, you've mentioned that you kind of see a trend down in TCs, both in zinc and copper. Could you explain whether you see any pressure at the moment by miners to reduce the benchmark sales and maybe sell you more on spot terms? You've mentioned you're usually buying at around 90% of your volumes on contract, is this -- do you expect this to go down potentially? Or do you expect any discounts, given the tight market? And lastly, second question on the Chinese import restrictions on low-quality scrap. Do you think this is a net benefit for Boliden? Or do you think it's actually a risk to increase pressure on copper TC/RCs going forward? Or do you see any opportunity here to increase profitability at your recycling operations in terms of the low-quality or more complex scrap?
On the TCs, well, obviously, the -- there is pressure on terms. The reason I said that we have a somewhat negative effect in Q4 is not for any sort of long-term reason, it's just a year-end impact. I think, in general, we are in a high-price environment because the mines are the limiting factor. And when the mines are limiting factors, they are difficult to negotiate with, and TCs are under pressure. At other times, the high prices are fueling the interest in starting new mines and more concentrate comes to the market. And we have years when the smelters are enjoying very good terms. So I think the general cycles, I have no other indications or I have no other knowledge than that these cycles will probably continue, which is one of the reasons why we like so much the combinations of mines and smelters. So I think nothing is particular there. On the scrap market and spot market in scrap and things like that, there are speculation, there are news. I wouldn't say that I see anything particular there. When it comes to recycling, it's one of our favorites. At this point, we are more focused on complex materials because the mines and the worlds are struggling to keep up with demand, and we can buy at quite good terms the more challenging materials, which are challenging the same sort of odd sort of metals or odd components, limitations, bottlenecks we have in our smelters. So instead of using it for the complex material, electronic scrap, for example, we're using it for complex concentrates from mines with sort of complex ore.
Can I just follow up on the first point? So basically, you are still expecting to buy around 90% at -- under long-term contracts and in '18 and potentially going forward or do you expect the spot share to increase?
Yes.
Thank you for all of these questions. Mr. Evrell, would you like to have some concluding remarks for 2017?
Yes. When grades are high, production is good, and terms are good. Of course, it's beautiful times. We are in a cyclical industry. Our focus has always been and will always be to be strong in the more challenging times. At this point, I must say that the general macro is looking quite good, but it may turn anytime, that's the nature of our business. But I think Boliden is standing very strong. And I think that can conclude our presentation for today. We thank you all on -- in the room and on the webcast for participating.