Welcome to the K+S conference call regarding the publication of the financial report Q3 2016, hosted by Dr. Burkhard Lohr, CFO. For the duration of the call, you will be on listen only. However, at the end of the call, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you will be connected to an operator. I am now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.
Thank you. Ladies and gentlemen, welcome to our Q3 conference call. Thorsten Boeckers and I will answer your questions after a brief presentation. Let us start with the highlights of another challenging quarter on slide two. It has been a long time since K+S showed a quarterly loss. MOP prices continued to stabilize in the quarter. However, in a year-on-year comparison, lower prices have left their mark. On top of this, the limited deep well injection permit caused further production standstill at our Werra plant. We have made progress on the Legacy site. Repair work has started in connection with the recent crystallizer incident. Production of the first ton is expected in the second quarter of next year. Our salt business is preparing for the upcoming winter season. The bids are mostly concluded with mixed results.
All in all, we expect an EBIT I for the full year of 2016 in the range of EUR 200 million to EUR 260 million. Let us go into detail on all of this, starting on slide three. I mentioned the two main reasons for the negative quarterly EBIT already. We would have shown a positive result even in this tough market environment if our potash unit could have fully produced. The limited permit for our Werra plant has resulted in more than 70 days of partial production standstill with an EBIT impact of about EUR 70 million in the third quarter. This also had an adverse effect on our product mix as our specialties are mainly produced at the Werra site. Subsequently, the average selling price of our business unit potash and magnesium products declined year-on-year and quarter-over-quarter. Please turn to slide four.
Our business unit salt faced lower deicing volumes in the quarter at lower average prices. High inventories resulting from a mild previous winter had an impact on big prices and pre-season volumes in almost all regions. The biggest impacts are felt in Europe and the U.S. Midwest, which have both faced several mild winters in a row. Nevertheless, our balanced regional presence makes us more robust than our competitors. It puts us into a great position for the upcoming season, K+S is ready to deliver. Speaking of a great position, our non-deicing business continues to make progress with strong brands helping us maintaining growth in very attractive segments. The salt business is also making good progress by executing the SALT 2020 strategy. Let us turn to our potash business on slide five. The conclusion of contracts in India and China has stimulated global market demand.
The only market in which customers are still a bit reluctant is Europe. We expect this to change soon. We mentioned in the Q2 call that we believe MOP prices will stabilize, and the third quarter has confirmed that. Our main issue at K+S is that we cannot fully participate in this positive development. The missing volumes from our Werra plant are resulting in lower sales volumes and average pricing because of the product mix effect. SOP prices remain at high level despite a decline in the quarter. Slide six, please. Legacy remains our flagship project. Despite the incident in July, we are continuing to commission parts that were not affected. We have one of the biggest available cranes in Canada on site and have started with the removal of damaged equipment. We expect production to start in the second quarter of next year.
This should give us the ability to produce up to 700,000 tons of MOP next year. We will reach the 2 million tons capacity by the end of 2017 as planned. Looking at the CapEx budget in 2013, we projected CAD 4.1 billion. We were on track to achieve that. Due to the incident, we will face a moderate increase. When we look at the amount in EUR terms, the budget is unchanged versus 2013 due to a favorable currency development. Now please move to slide seven. We have already highlighted the limited deep well injection permit as it has left a severe mark on our numbers. What we can say from today's point of view is that the review process is ongoing. Production remains challenging as we are dependent on the weather to a large extent.
We are still confident that we will find a solution in the near future. From today's point of view, we can neither predict the outcome nor the timing. Permit procedures have always been part of our business and will continue to be in the future. All of these procedures are complex and occasionally need adjustments or take longer than previously expected. Our roadmap shows what is on the horizon in the coming years. For example, the application to extend the tailings pile capacity in Hattorf, also part of the Werra plant, is already underway. The construction of the KCF facility is making progress. This will help us to reduce saline wastewater by around 20% from 2018 on. Now please move to our guidance on slide eight. We have narrowed our EBIT I range by reducing the upper end. We now expect EUR 200 million-EUR 260 million for 2016.
The salt business is expected to face a decline after the mild last winter. Our projection is always based on a normalized season. In the end, a lot depends on Q4 winter weather, which may even surprise us positively. The main reason for the cut is our potash business. The previous upper end of EUR 300 million for the group assumed a new deep well injection permit in Q4, which we don't have yet. Countermeasures are making good progress. The missing permit is expected to cost us around EUR 200 million this year. Now please move to slide nine. Let me conclude my presentation with our 2020 goal. Our SALT 2020 strategy is well on track to delivering an EBITDA of more than EUR 400 million by then. Legacy will contribute positively. Today's potash prices makes the target very ambitious.
However, we still believe this low pricing environment is not sustainable. On top of that, our business units are working on strategic initiatives that will support our goal of EUR 1.6 billion EBITDA by 2020. Everybody within the K+S group is very committed to delivering, irrespective of the challenges we are facing right now. Ladies and gentlemen, thank you for your attention, and we will take all your questions now.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star one again. You will be advised when to ask your question. The first question comes from the line of Jonah Weiss from HSBC. Please go ahead.
Yes, hi. Good morning, and thank you for taking my questions. The first topic I'd like to ask about, relates, of course, to your production abilities or capabilities. Assuming that the current conditions that exist now are unchanged for the fourth quarter, and for the full year 2017, and also assuming that you implement the truck and rail of some saline water that you disclosed yesterday, how much potash production or how much product production do you expect in fourth quarter, and in full year 2017, please?
Thank you for the question. When we have put together our guidance for this year, the whole number is 6.1 million tons. We have already assumed that we would be able to use some measures to dispose our wastewaters, and we are very happy that we could announce yesterday that we can use the inactive mine, Bergmannssegen-Hugo . That was an important step because it's a big measure. That was already built in in our numbers. We should end up somewhere around the 6.1 million tons for this year. To give you a flavor for what one could expect in 2017, of course, there are a lot of unknowns around us still, unfortunately. If we would receive our deep well injection soon, we should be able to fully produce and come back to our seven million-plus volume.
Even without a deep well injection for the whole year 2017, that is not what I expect, but just give you difficult scenarios, we would be able to produce more than what we have done in 2016 due to the measures that we are able to use. Unfortunately, due to the fact that there are so many unknowns, and even the weather is important for that scenario, we are not able to give you a precise number now, but we hope to be able to do so when we regularly give the guidance for the following year. That means we should be more precise in March.
Okay. In terms of the truck and rail, the plan to use truck and rail to dispose or store some of the other wastewater, could you explain how this will progress, when the trucking starts, and when the rail starts?
Approximately, either on a quarterly basis or on an annual basis, how much extra cost that will add to production in 2017?
Yeah. We will start with the trucking immediately. We will build a loading facility to be able to start railing the waters to Bergmannssegen-Hugo. That should be done somewhere in spring next year. We expect that the total wastewater that we can bring into Bergmannssegen-Hugo will be roughly on the level of the intermediate deep well injection that we have received for 2016, which was 725 million cubic meters. The additional costs are more or less transportation costs only. We expect here a number between EUR 20 million and EUR 30 million. Again, that is all.
That would be-
assuming that there is no deep well injection for the entire year 2017. This is not what we expect, but just to give you a number for this scenario.
Right. EUR 20 million-EUR 30 million is for the entire year, as in annual basis?
Yes.
On this scenario?
Yeah.
Okay. I guess my last question would be regarding your debt ratings, which I understand was recently downgraded to junk. I'm wondering if this impacts your EUR 1 billion facility, either availability of cash or the rates you would have to pay for it.
Mayer, as you mentioned by yourself, we have this facility, which is only with a small amount used so far. Due to the change in the rating, we have a slight higher cost on that. We talk about, I think, 0.5%. Still a very cheap money, if you wish. We still have the full ability to use the entire EUR 1 billion. No impact at all. By the way, there is no impact on all the other debt facilities because they have fixed conditions and the change in the rating did not have any impact. Finally, we have no financial covenant at all. The impact on us is very limited.
Great. Thank you very much for your answer.
You're welcome.
The next question comes from the line of Stephanie Boffa from Bank of America Merrill Lynch. Please go ahead.
Yeah. Thank you very much, and good morning, everyone. I had one question with regard to your comments earlier on pricing and a second one on CapEx. You said in your introductory comments that European buyers are still pretty reluctant to accept higher prices on the MOP side. Some of the industry reports that we're reading are actually already talking about price increases of EUR 5-10 a ton. I want to get a sense of whether or not you have seen any indication of that in your order book thus far in Q4. Related to that, with regards to the deterioration in SOP pricing quarter-on-quarter, can you give us an indication of whether or not those prices have now stabilized in Q4? A second question on CapEx.
The CapEx for Legacy is expected to remain broadly in line with the previous guidance in EUR terms. Can you just tell us what you have actually spent already on Legacy and what is still to go in Q4 and 2017 in EUR terms? Following on from that, I think previously you've talked about EUR 500 million being the average maintenance level of CapEx for the group. Aside from any incremental CapEx on Legacy, should we be factoring in any other additional CapEx over and above around that EUR 500 million mark in 2017? Thank you.
Stephanie, it's Thorsten to answer the first question. The reluctance of European customers we were talking about is mainly related to demand right now. We see strong demand from Asia. We also see a strong demand from Brazil. With regard to Europe, customers are right now waiting a little bit before they start buying. We don't expect this to last for long, because usually customers start to buy at the end of November and December. With regard to pricing, yeah, we indeed see a positive development there, but with the low demand, you don't have really much of evidence there. When I look at our own pricing, we don't expect any further decline. We even expect an increase in MOP prices also in Europe. Can you repeat the second part of the question, please?
Yeah, sure. It was on the SOP side. You comment in the slides that there was a deterioration in prices quarter-on-quarter. I wanted to understand if that price development has now stabilized.
We expect that we found the bottom in SOP pricing as well, and we should see a better market price in the fourth quarter. This usually takes a little bit time until it materializes in our average selling price. From a market point of view, yes, we have seen the stabilization also there. The CapEx question is answered by Burkhard.
Yeah. Many parts of CapEx concerning Legacy first, and that gives me the opportunity to again highlight That, yes, we had this incident in Canada. Yes, in terms of Canadian dollars, that means we have a moderate increase of our budget, but we always finance that project in Europe. As we have a Euro balance sheet, the Euro view on the project is more important or the important view on it. Due to the favorable currency development and some lucky hedge decisions, we are able to keep the EUR 3.1 billion budget, even taking into account the whole impact from the crystallizer incident. We will have roughly another EUR 100 million to spend in this year, in Q4, for Legacy. The final amount, roughly EUR 200 million in 2017.
After we have finished Legacy, our run rate CapEx number, which is a bit lower than the EUR 500 million, what you have mentioned, is only impacted by further investments in our environment, especially in the Werra area, what we have called the Four Phases Plan, that will start in 2018, with numbers of roughly EUR 80 million-EUR 100 million annually until 2021. I hope that answers your question.
Very helpful. Thank you very much.
Welcome.
The next question comes from the line of Michael Schaefer from Commerzbank. Please go ahead.
Thanks for taking my questions. First one is on your outlook for the sales volume of 6.1 million tons, given that you have reported 4.4 million tons of sales in the nine months, this would imply something like 1.7 million for the fourth quarter, which would be close to a kind of record level, or at least significantly above the five years average you recorded over the past years. I wonder where this comfort comes from that you can sell this amount of where the product comes from, basically, in the fourth quarter, would be my first question. Second one is on the OpEx for Legacy in the third quarter you've booked in there, and maybe also what you expect there in the fourth quarter. Finally, just a clarification on the Bergmannssegen flooding exercise.
Have I got it right that basically the amount you can flood there on an annual basis is equivalent to basically the temporary injection permit you have received? Where would this bring you to? Are we talking without any kind of permanent permits, would you look rather for a 6.5 million ton of run rate of production in 2017?
Okay. I forgot to ask you to ask one question by the other. I have taken all the three, but I would appreciate if the other questionnaires would be one by one. First of all, yes, 1.7 million sales in the first quarter is a high number, but we are sure that we will be able, if we have the production, and after we have the approval for Bergmannssegen- Hugo, we should be able to produce the volume. The demand is strong. We could have done more in the first three quarters of this year if only we would have the capacities available. That's why we believe the 1.7 million tons in the fourth quarter is doable. To the CapEx numbers, in the third quarter, we had EUR 170 million. I mentioned earlier that there will be another EUR 100 million in Q4.
Sorry, I was referring to the OpEx related to Legacy. You booked something
Oh, sorry
like EUR 22 million in the second quarter, I haven't found any number here in the report. Just to update us.
I give you the expected annual number. Then you can do the math by yourself. It's a bit lower than we have expected previously. Due to the incident, we have shifted some works from 2016 into 2017. We will have roughly EUR 110 million OpEx for Legacy for the whole year. Bergmannssegen and Hugo, I mentioned that we should be able to bring 700,000 cubic meters into that old mine, this inactive mine. There is lots of storage capacity so that we would be able to use it for many years. The only limiting factor is logistics, because if you take the 4,000 cubic meters annually by the production days, you would end up with a higher number, but there is a natural or technical limit due to logistics. I already mentioned the EUR 20 million-EUR 30 million impact on the OpEx related to that.
I'd still be reluctant to give you a number what that means really in production, because I said earlier, there are so many impacts. If we are working with the scenario, no further deep well injection, even the weather has an impact. Please allow me to give you a qualitative answer, it will be more than this year, but it remains to be seen how much it will be in 2017.
I have a last follow-up on this permitting issue. There will be a high-level meeting of politics on the 21st of November with Thuringia. Is this an event where you expect a kind of breakthrough for the whole issue, or is this just a kind of informal and there's nothing major to expect from this one?
Every meeting is important in that sense and this meeting as well. I would give that too much importance if I would say we expect a breakthrough that day. I'm not expecting it. We have made progress, and believe me, we are very unhappy not being able to give you a more precise view on that. That day is most probably not the day where we will receive the permit.
Thank you.
You're welcome.
The next question comes from the line of Andrew Benson from Citi. Please go ahead.
Yeah. Thanks very much. I'll just ask them one. In the last slide, you define the current price of potash is not sustainable. I just wanted to examine your rationale for that comment, please.
Yeah. That was related to our view on 2020, and that we still believe we could generate EUR 1.6 billion EBITDA. Of course, that is based on a set of assumptions, and one very important assumption is the potash price. I think I have mentioned that earlier in other calls, we would need a potash price slightly higher than EUR 300 per ton, and we are always talking about the reference meaning MOP granular in Brazil. We know that we are not there. That was why I mentioned, I don't believe that the current level is sustainable, because if that would be the case, there would be a gap to the EUR 1.6 billion, which of course, we would try to close with other measures.
As we have seen a swing, especially in Brazil, especially in Q3, you know that we were trading around EUR 200, and now we are talking about EUR 240. Why should the current status remain until 2020? I believe a price in that range at EUR 300 is not out of range.
Okay. Thanks for that. On your slide eight, where you talk about the price and volume and then the missing deep well injection permit. Perhaps I'm being a bit thick here, but I thought the absence of volumes caused by the inability to deep well inject caused the profit shortfall, and you've incorporated that into the first bar. Can you just explain how you're allocating that EBITDA reduction between the price volume and the absence of deep welling?
Yeah. The first bar is a mix out of the lower prices in the potash business. The effect from the mild winter in the salt business, meaning pressure on the prices and lower volume in the salt business. The second bar is a pure effect, and you're right, that is a volume effect as well, but that is a pure effect from the missing deep well injection in total, expected for this year, roughly EUR 200 million.
Okay. Gas costs have started to creep up in Europe. Is that a factor that could be significant to the outlook for you next year?
Are you talking about the cost per ton?
Yeah, energy cost. Yeah, that's right.
Energy cost.
Yeah.
Energy costs are still on a very low level. I assume that this will not change entirely, so that we still believe that we will save compared to 2015, double-digit percentage on our energy bill in 2016. I hope that covers your question.
Yeah. No, I understand that. In 2016, they're obviously quite a bit lower than 2015. If they're in 2017, they're likely to be higher than 2016, or it looks like it's going to be higher anyway. I'm wondering how you're absorbing that additional potential cost.
It will be marginal, because the most important energy portion is natural gas. As you know, Legacy will start up production. Here the gas portion will be significant compared to what we have in Germany, because we have a solution mine production in Canada. We have already locked in good parts of our requirement for 2017 with respective delivery contracts.
Okay. That's for Europe and Canada, or just Canada?
Both Europe and Canada.
Thanks very much.
You're welcome.
The next question comes from the line of Oliver Schwarz from Warburg Research. Please go ahead.
Thank you. My questions, gentlemen, I try to walk you through one by one. First one is, the given average rate you're guiding to, the EUR 200 million-EUR 260 million on page eight on your slides. You're assuming an average winter, you're assuming a total sales volume of 6.1 million tons, which alludes to 1.7 million tons in Q4. We talked about that earlier on. What gives you the EUR 200 million, what gives you the EUR 260 million, given that you don't expect a permit at the 21st of November to be granted, so most likely later than that. What is the volatility here based upon? Thank you.
Yeah. Mr. Schaefer-
No, that's correct. Schwarz.
Schwarz. Sorry. Mr. Schaefer before. The biggest swing factor, of course, is still the permission because Hattorf is still not running, one of our three sites in the Werra Valley, and it makes a huge difference whether we assume it's not running for the rest of the year, or we get the permission today, and we can start running it fully.
I get that. I guess your guidance is based on the volume number you gave, 6.1 million tons. Is that 6.1 million tons if you get the permit immediately, or is that 6.1 million tons if that permit is granted by the end of this year? Are we to expect higher volumes if the permit is granted perhaps tomorrow?
The 6.1 is the, I wouldn't say worst case, but the case without a permit.
Okay. That refers to the EUR 200 million then? Yeah, basically, if you say, "We don't expect a permit anytime soon.
There are more than only this one impact. This is of course a dominating impact, but there are more impacts. There could be volatility for the rest of the year in the currency, the prices are not fixed, et cetera. Don't try to give a precise EBIT number to the 6.1 million tons.
No, I just wanted to know whether that is more closely tagged to the upper end or the lower end of the guidance, because as Michael Schaefer said before, the 1.7 million tons is something you haven't achieved very often having a permit in the last couple of years in Q4. That is a very ambitious number, as you said yourself. Hence, I wanted to know what number refers more likely to the 6.1 million tons or 1.7 million tons in Q4, the upper or the lower end of the guidance. That's basically what.
If you want to have a qualitative answer, it's closer to the lower end of the range.
Okay. Thank you for that. A second question, wastewater. I guess you love that topic. The provisional permit you have for deep well water injection runs out by the end of this year. If it isn't renewed and if you don't get permanent permits, I guess that the measures that you unveiled yesterday, pumping saline wastewater to Bergmannssegen, will just compensate for the amount of wastewater you were able to inject this year. Basically, let's say if worst case scenario, you don't get a permanent permit and you don't get a provisional permit, it's most likely we'll see a production number in the ballpark of 2016 also in 2017. Would that be a fair assumption?
No. I mentioned earlier that we will be able, even in this scenario, to produce more than in 2016 because Bergmannssegen is not the only measure we have. This alone covers the intermediate permit. We have Springen, another inactive mine in Thuringia, and we are working on additional measures.
Okay.
We would be, even in this scenario, be able to produce more than 6.1 million tons.
Okay.
Oliver, you know that 2016 has been a very dry year, more dry as we have expected, what we have especially experienced in the second quarter. In our expectation, we always expect what we call a hydrological normal year, right?
Absolutely. Thank you for that.
You're welcome.
My last question is, I think I heard you correctly when you stated that we might see production in Legacy already in 2016 of 700,000 tons. Is that correct? Did I hear that correctly?
If I may correct the year, in 2017.
Yeah, 2017. Okay. Yeah.
700,000 tons is correct.
That basically implies that judging from the 1 million tons we heard before the incident at Legacy and now the 700K, that basically the ramp up is expected to be a bit faster than it was originally scheduled. If we assume that you can produce from Q2 onwards. Would that be a fair assumption?
That is totally correct. That, if we look a little bit further down the road, could have a slight impact on 2018.
We will have the capacity definitely available of 2 million tons at the end of 2017. Due to this quicker ramp up, we might have more stand st ills in 2018 than if we would have started at the end of this year. The production in 2018 might be marginaally below the 2 million tons. That is still future. Your assumption that we have a quicker and steeper ramp-up curve is correct.
Wonderful. That covers all my questions. Thank you very much.
Thank you.
The next question comes from the line of Markus Mayer from Baader Bank. Please go ahead.
Yeah, good morning, gentlemen. First question is on the efficiency measures or cost measures. Have you planned any further measures besides the Fit for the Future program? That would be my first question.
Yeah. First of all, thank you for your question. I would like to mention that all our fit measures at the end of this year are sustainable measures. We have this regain from that positive ideas and implementation of projects for the future. In addition to that, we have a small double-digit million number that we want additionally saved in 2017, 2018 and 2019. That is our new midterm planning horizon.
The small double-digit number is per year, every year, additional small double-digit number?
Yes.
Okay. That was the first question. Second question. On Reuters, I saw the news that they expect a decision for this deeper injection permit in the next few weeks. On slide seven, I see that you expect a prolongation of the deep well injection 2019. Is the difference the temporary permission and the other one, the long-term permission, or how can I read this kind of gap in between?
No, there was a lot of speculation, we by ourselves have often thought, now we are done, we will receive the permit. That's why we have stopped giving any indication. Of course, I have hope that it is not too far away, we cannot predict when and if at all. I cannot say more to this chapter, unfortunately.
Okay. Next question would be on the forex hedging for next year. Can you give us an indication on the sensitivity and what will happen if U.S. dollar will weaken, et cetera?
Yeah. As usual, we have hedged a good portion of our US dollar exposure. It should be in the area of 60%-70% of our exposure, which is usually roughly EUR 1 billion. It will be more with Legacy, of course, but that is covered by the 60%-70% as well. We would have, if I can answer that by heart, if the dollar would weaken to 120, always compared to '16.
Yep
We would lose only roughly EUR 20 million due to the hedges. We could gain, if we would see parity, more than EUR 100 million on that scenario.
More than EUR 100 million, okay. Then the last question on this CAD 100 million higher Canadian dollar CapEx. As far as I understood, part of this CapEx might be insured. Can you give us any kind of indication what kind of amount this might be, or is it too early to say?
I cannot give you a precise number, but I can give you a flavor. Of course, the direct impact, for example, we need a new crystallizer.
That, of course, is insured and that will not be paid by us. That is not part of the overrun. Again, when we talk about overruns, only in CAD, which is in a way a statistical currency because it is EUR-financed and we have no overrun in EUR terms.
The overrun is then basically due to other contractors which are on the working ground and currently writing its bills and you basically do not take up this kind of services. That is the overrun.
Yes. Their performance is lower than expected because we have to change the production patterns, et cetera. That are the indirect costs which are not covered by the insurance. Of course, we will try to find somebody who takes part of that burden. For safety reasons, we have modeled that in our budget, and that leads to a moderate overrun in CAD terms.
Okay, great. Thanks.
Welcome.
The next question comes from the line of Martin Evans from JPMorgan. Please go ahead.
Yeah. Morning. Just want to go back to your debt position and the 5 times net debt EBITDA and the fact you said you don't have any covenants. Can you explain what the limitations on your borrowing facilities are, in as much as with EBITDA falling sharply and debt going up? Theoretically, if trading deteriorates from here and your net debt EBITDA goes up to 6 times, that historically is kind of dangerous level of borrowing, whereby lenders do get very jittery. What's your fallback position in terms of where you can go to borrow more money urgently if you need to? Thanks.
Yeah. First of all, as I mentioned earlier, the instrument in place are not affected. Only margin with the syndicated loan, which means 4.5% higher interest rates on that. There are a couple of hundred million EUR undrawn in this facility. We will peak that number at the end of this year. We will have lower CapEx next year, and we believe even with such a high leverage, we would be able, if necessary, to enter the debt markets successfully. You always have to take into account that the high debt, the good portion, a major portion of that, is our provisions for mining obligations, which will lead to cash outflow in many, many years from now. This number, by the way, is impacted by the low discount rates.
If you really take that into account, you will see that the situation is not nice, but it's not dramatic.
Just finally therefore, if you needed to raise funds, obviously a rescue rights issue would be out of the question. You said there are other routes. You wouldn't need to get the government involved at all, given the number of jobs and the history of the mining industry. You're confident you can self-fund without any further external involvement on that front?
Yeah
Should things deteriorate very rapidly? Okay, thanks.
Yes. Okay.
The next question comes from the line of Patrick Rafaisz from UBS. Please go ahead.
Good morning. Thanks. Couple of questions. The first one, very simple one on Legacy, assuming the 700,000 tons. Would you say my guess is correct in saying that the EBITDA contribution from Legacy would then still be negative at current spot prices in 2017?
Yes. Short answer.
Good. Thanks. The second question. You mentioned the additional wastewater disposal measures. Can you talk a bit more about what exactly that is? You're mentioning in the report this morning that there's still difficult from a timeline perspective, technical tests, permits that need to be obtained. Just a more color on that would be very useful. Thank you.
Yeah. Two examples we have reported on inactive mines, one in Thuringia, one in Lower Saxony. There are lots of these inactive mines in this area, close to our Werra area, so that there are many opportunities to find further storage opportunities for our saline wastewater and dispose it there. There are not further used gas caverns, for example, available. We have ideas to further build.
They can.
Further ponds to temporarily store the water that we can then bring into the Werra when the water flow in the Werra is higher due to rain. A whole package of ideas. We need permissions for every single measure, we are happy that we have received the two permits already. Bergwerk Segeln is a big one because there's a huge volume available for us. Additional measures are on the way.
Okay. You've given us quite good details on the Bergmannssegen impact in terms of what you can dispose there. Can you give us a number for these additional measures? In total, how much of that could be realized in a reasonable timeframe?
No. Unfortunately, because If I be more precise on others who are not permitted currently, I might be forced to tell you next time we are now facing other alternatives. The only information that is really important to know for a full production without any impact, we need a deep well injection. We can do a lot to get more in a normal pattern in 2017 with these kind of measures. Please understand that I don't want to be precise on things which are not realized so far.
Okay. Thanks very much.
Thank you.
The next question comes from the line of Lisa De Neve from Liberum. Please go ahead.
Hi, good morning. Lisa from Liberum. I just have two questions. First of all, I just wanted to allude it to Stephanie's question on SOP prices. You mentioned you believe they have bottomed. Can you just give me some information on what you're seeing in the market that appears that prices have stabilized? As when I look at industry reports, I see that prices are still down from the fourth quarter, relative to the third quarter. On top of that, do you believe that the current premium to MOP is sustainable, or do you expect a strong recovery in MOP prices next year? Thank you.
We have seen now, three quarters in a row, a decline in the SOP prices. We are talking about a broad mix of different markets. You talk about U.S. markets, you can talk about the Middle East markets, you can talk about Europe. Then we have to differentiate between granular and standard, which goes into the NPK industry. Trade magazines are mostly referring to the top line prices of granular in the U.S. There indeed, we haven't seen a stabilization yet, which has also to do with the supplier structure. When we look at our European markets, and what we hear from our customers and from our sales is that, we don't believe that prices will go down further in that area. With regard to the premium, this answers also the question with regard to the premium to MOP.
We don't like to think too much into MOP premiums because we are not a Mannheim process producer, the premium is less important to us. We look at absolute prices, they are still on a high level. MOP prices have stabilized, as we said, as well. This indicates that the premium will be sustainable.
Okay, thank you very much. Then, just a quick second question. Unsurprisingly, average operating costs have been quite a bit higher this quarter. My rough calculation points to a value of EUR 278 a ton versus EUR 249 in the same quarter last year. Obviously, this is due to lower production volumes affecting fixed costs spreading out over lower volumes. I just wanted to understand what the spread, or if you could give some split between how much is due to that and how much is due to higher Legacy startup costs or any other elements I'm maybe missing out on.
Well, the majority comes from the operating leverage. The incremental Legacy costs are EUR 11 million.
Okay. Thank you.
The next question comes from the line of Jeremy Redenius from Bernstein. Please go ahead.
Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the question. Just coming back to the question about the long-term potash price that you envisioned. I guess I think about the long-term potash price in the industry is kind of more determined by the economics of the industry rather than your specific profitability or the 2020 targets. I would think that very long run potash prices, MOP prices, are determined by the cost you need to incentivize new capacity to the market. First, I just want to check that logic with you. Secondly, would you have a value that you would put on the price of potash you think that needs to be needed in the long run to attract new capacity? Thanks.
Yeah. Of course, there are a lot of impacts on long-term prices, but I believe we are in an oligopoly, and even if we should have one or two more market entries, it still ends up in a real oligopoly. In oligopolies, prices do not tend to develop to marginal costs. If you see what happened this year, when prices were still a bit away from marginal costs, every competitor did the utmost to participate in a market where price is more important than volume, and capacities were not fully utilized. If you, in a way, expect that this continues to be the case in the market, and that was my message earlier, that EUR 300 price should not be completely out of range for the year 2020.
I know that it's a philosophical question, and there are so many opinions on that, but that is my view in a very brief speech.
I understand your observations and I would tend to agree. I guess I'm just looking, though, how do we know 300 is the right number? Is EUR 300 per ton enough to get companies to reinvest, to continue to build so that the market remains supplied long-term?
No.
Would a number lower than that work?
No, with EUR 300. Don't get me wrong, I did not say that EUR 300 is the price I expect for 2020, but that would be the price that we need to achieve our EUR 1.6 billion EBITDA goal.
Yes.
I'm not giving a guidance, but I'm saying EUR 300 is not out of range. EUR 300 would definitely not be sufficient for additional capacities. Therefore, I can't believe that any investment case would deliver a positive NPV on the assumption that EUR 300 is a long-term price.
What price do you think it would need to be then, if higher than that?
You would need to have a price starting with a four.
Okay. Great. Because I've estimated between EUR 250-EUR 325, but it sounds like you would think higher than that.
Yeah.
Okay. Great. Thank you for that.
Of course, it depends on the investment. Are we talking about brownfield or greenfield, et cetera? I was more thinking about a greenfield project. I cannot imagine that this could be economical with the price below EUR 400.
Okay, great. Thank you very much.
You're welcome.
The last question comes from the line of Javier Castan from Anchorage. Please go ahead.
Hi. First of all, many thanks for taking my questions. My first question would be, I think it has already been asked, I would like to look at it on a different way. On a per metric ton basis, what would be the cost next quarter and for the entire fiscal year 2017 when it comes to all these measures that you are implementing, in relation to the production problems that you have at the Werra plant? If you don't mind, distinguishing between, OpEx per metric ton, and then if you could, again, tell us what the CapEx is going to be, in relation to, for example, crystallizer and other measures.
I mean, Javier, when we would be able to produce fully, I leave out Legacy right now because we said that Legacy's contribution next year will still be negative on an EBIT level and also on EBITDA level. When we only look at Germany and we could produce fully, we wouldn't need to use our additional measures, this would avoid this extra cost. Thanks to the cost-saving measures we have initiated, we would be at a level which we have previously always expected for 2016, which was around between EUR 210 and EUR 220 per ton. We won't, of course, achieve that, if the full production is not possible next year.
Got it. Just a very quick follow-up. You're saying that independently of the transportation cost going up because of all the saline wastewater being taken from one part of Germany to another part of Germany, plus other measures that you are implementing right now, your production cost is going to stay at the same level on a per metric ton basis?
Yeah. I mean, including these measures and also assuming that when we have to implement those measures and use those measures, we cannot produce fully, then you will see a number which is of course higher than that. We said earlier that Bergmannssegen alone cost us between EUR 20 million and EUR 30 million next year if we're going to use it fully. This gives you an indication.
Got it. It's just that the former CFO, something like a month ago, was in London for a management presentation, and he indicated EUR 30 per metric ton, in relation to all those measures. That's why.
The former CFO of which company? Sorry.
Well, the former CEO, sorry.
He is still CEO.
Mr. Steiner is still CEO.
Well.
Yeah.
Okay. Part of the management team was in London, and they indicated that. That is why I couldn't really reconcile what you were saying today, that production costs are going to stay at the same level when everything that is going on at the Werra plant.
I suggest the following. Why don't we go through it again offline?
Sure.
Give us a call after the call.
In relation to CapEx?
Can you repeat that question, please?
Sure. The first question was in relation to OpEx, when it comes to CapEx, for this coming quarter and then next year, for all these measures that you're implementing at the Werra plant.
CapEx is only a very low number.
Yeah.
We will have a very low double-digit number for all the measures that we can imagine in 2017. It's more a question of additional OpEx due to transportation.
Got it. My second question would be around the fact that you note around the sustainability of current MOP prices. It's just that, to me, given that current inventories are at historical levels, Canpotex is increasing capacity next year, you are also increasing capacity next year. It seems it's not really consistent to say that prices are not sustainable when you yourself have been bringing capacity next year, right? Again, crop inventories are at historical levels. I just wanted to get your view on how you think about the fact that Canpotex is getting capacity again, and you're increasing capacity, and I feel prices will go up.
Yeah. First of all, we are expecting. It's not completely ruled out that there will be a demand increase for 2017. We will only have additional 700,000 tons from Legacy in 2017. Again, we have seen behavior of all participants in the market to not fully run the capacity and to prove that price over volume is the right strategy in the market. By the way, now you could argue, "Yeah, but you're running full capacity," which is available. We always said Legacy with the solution mine concept is so variable and so flexible that if necessary, we would participate in such behavior as well.
We have seen historical developments of prices, and we believe, and that is not only our view, I think that it's a common sense in the market, that the bottom of the bottoming is behind us, and then there will be a slow but continuous positive development. That is our expectation.
Okay. Understood. Thanks for that. My last question, and I guess it goes along the lines of what you just said, that you could potentially think about not producing at full capacity in Legacy, which, given your level of leverage, it could be a bit dangerous. I guess, designing a scenario, and my question is that design a scenario in which there's no permit for the Werra plant. Costs are higher because of those transportation costs that we talked about before. There's no visibility around timing. Attached markets could stay where they are or even SOP premiums come down. Again, your plants that are producing that SOP are running at a higher cost than in the past. De-icing salt demand, if they solve this winter because of what we know about inventory, Legacy ramp-up takes a bit longer.
Even if it is as it is, it's already delayed. My question is, under that scenario that I see that actually quite likely, the maybe scenario in which it's not that you may run out of liquidity, but you may be close given that cash balance. For example, today it's 130 versus last quarter, EUR 300 million. In that scenario, would you tap the equity market? Could you go for an equity raise, or would you continue just raising debt?
I said earlier that first of all, there are a lot of EUR 100 million available from our facility, which is in place. In addition to that, a double B-plus rated company is still able to enter the debt markets. If that would be necessary, and you have put together a lot of assumptions. I have a more positive view on the future, nevertheless, let's talk about that. If necessary, we would be able to enter the debt market. I'm not seeing any equity measures due to liquidity constraints.
Okay. Many thanks.
Thank you very much.
Thank you. I will now hand back to Dr. Lohr for the conclusion of the call. Please go ahead.
I would like to thank you all for joining us today. Obviously, 2016 is a challenging year for us, but I hope that we gave you some flavor that we are not too pessimistic for the future. Especially Legacy will make a big difference for the company starting second quarter next year. If you have further questions, please call investor relations, and I'm looking forward to see you soon again. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation, and have a pleasant day.