Good day and welcome to the Norsk Hydro conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stian Hasle. Please go ahead.
Thank you. Good afternoon, and welcome to this update on the situation at Alunorte and the agreements that we have reached with Ministério Público and the government of Pará yesterday. We will start with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session, also joined by CFO Eivind Kallevik. With that, I'll leave the word to you, Svein Richard.
Good afternoon. Today, I am happy that we have signed the two agreements representing a milestone to resume normal operations at Alunorte, which you all know are currently subject to embargoes imposed by the authorities and has been running at 50% since March. The agreements consist of a technical agreement, what we call a Term of Adjusted Conduct, signed by Alunorte, Ministério Público, and Government of Pará, which regulates certain technical improvements, audits, studies, and payments for food cards to families living around the Murucupi River, as well as a social agreement, Term of Commitment signed by Alunorte, Government of Pará, which addresses the additional efforts and investments related to the social development of communities in Barcarena. The total monetary commitment in these two agreements are estimated just in excess of BRL 300 million , evenly split between the TAC and the TC.
Neither of the agreements signed include provisions or establishes a timeline for restart, but we consider it an important step towards resuming operations and preserving jobs for Alunorte, as well as Paragominas and Albras. We have implemented measures that enable Alunorte to operate safely also going forward, and will further enhance the robustness of the plant through the TAC initiatives, which we are fully committed to deliver on. It is important to mention once again that internal and external reviews confirms that there has been no overflow from bauxite residue deposits or harmful spills from the February rain event.
Thank you, Svein Richard. Operator, we're now ready for questions.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone opportunity to signal. We will now take our first question from Nicholas Snowdon from Deutsche Bank. Please go ahead.
Hi. Thank you very much. Two short questions here. I think the first would be regarding any information you can provide on the potential pace of the ramp-up at Alunorte as and when you have a court decision to approve a restart, and what factors we need to consider in the pace of that ramp-up. I think the second question would be, given that you purchased a lot of alumina in the spot market so far this year to cover your needs, in the event of a Alunorte restart, would you then start to sell some of that alumina back into the spot market, or would you hold onto those volumes? Thank you very much.
Thank you, Nicholas Snowdon. With regard to the ramp-up of Alunorte and bringing Alunorte back to 100% capacity utilization is still an uncertainty due to the fact there is, we have not an agreed timeline. As we have now in place the agreement with Government of Pará and the Ministério Público, it is, I think, it will be the next step now is to bring this agreement to the court, which will then make the final decision. That will be done as soon as possible, and the court will take its time. We don't have any indication how long time it will take to make a final decision.
I'm sure they will also do a proper work, and it is probably not done overnight. We should expect that the court will take some time to make a final decision here, but it's impossible to say if it's weeks or months or anything like that. It's too early to say, and of course, we also trying to understand the timeline better now after we have achieved these agreements. With regard to purchase alumina, Eivind, maybe you can comment on that.
Yeah, it is, as you say, we're well covered for the remainder of 2018. How we would then potentially deal with Alunorte coming back in and supply giving us surplus for the rest of the year is something that we would deal with at that point in time. There are, of course, several uncertainties in the market at the moment, in terms of other possible issues relating to resolve and other situations as well. We would come back to that when Alunorte is up and running again.
Brilliant. Thank you very much.
I think you also had a question in terms of timing. Sorry, I think you also had a question in terms of timing, how long it would take before we would get back up to production, if, or when, we are allowed to restart. The current operational mode is, we estimate some three to four weeks before we're back up at 100%.
Okay. Brilliant. Thank you very much. That's very helpful.
As a reminder, to ask a question, please signal by pressing star one on your telephone keypad. We will now take our next question from Kirtan Mehta from HSBC. Please go ahead.
Hello. Just I wanted to understand, there are several parties which have imposed an embargo on the operation of Alunorte refinery. Do I understand it correctly that all the parties which have imposed embargo on alumina refinery were party to this agreement? In terms of the timeline for court to take decision, what are the additional aspects that court could look into before giving the final decision? If any more color on this aspect would be useful.
I think if your first question was which parties have imposed an embargo? Was that your first question? Yeah?
Yeah. Whether those parties are sort of included in the agreement that you have received, all the parties were involved in the agreement that you have signed.
Yes, I can comment on that. Of course, the agreement there is based on negotiations with the Government of Pará, which is a very important party, of course, and the SEMAS, the local environmental agency for the Pará province. During the last part of this process, we also have fortunately had Ministério Público on board, which is a sort of ombudsman's function. They should be create agreements between different parties in the society. They have been very active during the last weeks.
Due to the fact that we have all these parties now on board and have agreed to this, I think we are in much better shape than the alternative, which could be that we only had the agreement with the Government of Pará. We know that this is not only painful for Hydro, but it's also painful for Pará and the fact that there are a lot of jobs that has been lost during this embargo and the fact that Hydro has now also reduced the number of contractors significantly during this period. We have service companies, contractor companies that have been supporting the operations that have not had any jobs.
This is about job and value creation, which has been very negative for the Pará province, during this embargo. My impression is that the authorities now are, I would say, very motivated to make sure that Alunorte come back in full speed. Especially the fact that we have also got confirmation now from the authorities that, also like we have said previously, there's not been any overflow from the red mud deposits or harmful spills from the February rain event. That has been also quite important now for, I think, the lifting of the embargo.
This is a court decision, which again, we have to let the court work now, and they need to take their time necessary to make that decision. We don't know exactly how long that will take.
Thank you. Just sort of a follow-up question. I just wanted to confirm whether I understood it correctly, that you said that it will take four to six weeks for full ramp-up of the refinery?
I said it would take from the day we get the approval to restart to 100%, it will take roughly three to four weeks before we're back to 100%.
Thank you.
We will now take our next question from Jatinder Goel from BNP Paribas. Please go ahead.
Hi. Good afternoon. A couple of questions, on three to four weeks timeline, do you need to wait for the water treatment capacity expansion before you actually go back to 100% just from internal risk management perspective? Obviously it was whatever, one in 100 or 1,000 year rain, but just to cover yourself. Is your intention to go back to full capacity as soon as possible, or would you look at the market dynamics of alumina, demand supply as well? Secondly, on bauxite and primary, are you able to give a timeline on full resumption on those elements for Paragominas and your smelter as well, please?
Yes. With regard to the, again, the timeline, and the, if there are any direct relationships to the expansion of the water treatment system, that is outside the agreement, to say that way. That we just have to wait for the court decision. We are now outside the rain season. We will have in place, in fact, the new water reservoir system before the big rain season or the next rain season that is starting in the end of this year, beginning of next year.
The full water treatment capacity, the water purification and water treatment station will not in itself be finalized before the end of the first quarter. There's no indication or we haven't got any signal so far that there is a prerequisite that this has to be in place before we are back in full production. Now we are outside the rain season and again, as I said, we will have the water reservoir system in place quite early. It depends very much again, what, how the board or how the court will look upon this.
With regard to the supply situation and the fact, the question about if we will look at the supply -demand side, on the bauxite, of the alumina before we make any decision on full scale production. I would say that looking at the market today, I think there's absolutely space for higher alumina volumes. I think there is quite high tension in the market. It's a very tight market and some uncertainties related to other factors than Alunorte here, which adds to the situation.
I can say that our intention now is that if we get the approval from now on for the lifting of the embargo from the court in Pará we will immediately start resuming full production. As Eivind said, it will take three to four weeks.
Okay. And bauxite and primary resumption, full resumption timeline?
Yeah. Well, Alunorte will be ramped up according to the operations in Alunorte. That will go in parallel. With regard to the Alunorte curtailment. Now, excuse me, the Albras curtailment, we will make a final decision on that, but we expect that the restart of the electrolysis cells, of course, again, depending on the market situation and some other things, it will take some months, at least three months before Albras is back in full operation. It may be that we start immediately after the lifting of the embargo to restart Albras because again, it will take some months before Albras is back on full speed. The final decision has not been taken.
As we look upon, the situation now, we will probably start, the restart of Albras, quite early after the lifting of the embargo.
Sure. If I could ask a couple more small questions. Do these two agreements actually cover and including the previous commitments, all the social costs and the fines that you would expect from the process? Or do you think there could be more to come? Can you give a timeline of the spend which has come from these two commitments overnight? Thank you.
Okay. With regard to the Sustainable Barcarena Initiative, that is something that we will spend over BRL 100 million , that will be spent over 10 years. While the commitment we are doing now with regard to the food tickets, BRL 65 million , that is something that will be distributed during next one year.
Okay.
We have this investment in the water treatment station that comes on top of it. Beside that, there are some environmental measurements and analysis work that will be taking over some time. Also there will be payment of fines from, even from, 2009. That will be done shortly.
Sure.
With regards to fines, from 2009 event, that is NOK 33 million in total with a February event.
Sure. The BRL 150 million social commitment, sustainable urban development?
Yes. That is also something that will be developed. This is, I would say infrastructure project. It's housing for the local community. First of all, that, it is a project that has to be developed by or in cooperation with the government.
Sure.
It is still too early to say how this would be timed into the coming years. That could take quite a long time. It could also be done within the next few years. We are not sure about the timeline there yet because this is the early stage. This will be a major project for the society.
Got it. Thank you very much.
We will now take our next question from Hugo Bravery from UBS. Please go ahead.
Hi, it's actually Daniel Major here. How's it going? Sorry if I joined the call a couple of minutes late, so sorry if these questions have already been asked. Two questions. First, can you give us a bit more details on the increase in the payments you're making? Obviously, it's quite a large uplift in terms of payment. The second point on that, particularly with the social commitments, my understanding is that goes to the state of Pará, which is then sort of responsible for further allocating and handling those funds.
What degree of confidence and have you got sort of full assurances that, you know, there's no way you could be associated with any misallocation of sort of the funds that should go to the communities? The second one, which you may have already covered, is it absolutely confirmed that and sort of as part of the same document that everyone is in agreement that there was no environmental damage caused by the rainfall event in the first quarter of 2018?
Thank you very much, Dan. With regard to the last one, I think we can just refer to what has been stated by both, the Federal Environmental Agency, IBAMA, and also the State, Environmental Agency, SEMAS, that there has been no, spills or, damage, environmental damage, on the environment due to the heavy rainfall in February. That has also been stated by the government of Pará. I think we have a quite, a good agreement with regard to the realities here. With regard to the question of the payment uplift, yes, we have committed to increase, the support to the local community. This has been, of course, part of the negotiations and discussion we had over time.
Compared to the fact that it costs quite a lot of money to be out of production now, we have been, I would say, constructive during the negotiations of find solutions which we feel also can be defended from many point of view. We see it is important for us to have a viable society around us to attract the talents and employees around Alunorte. We need to have a stable and well-developed society and see that there are big potential to make improvements there. We have committed ourselves to support that. There will be support to the social development in Pará.
With regard to misallocation of funds, that has been a major issue for us that we have done our utmost to ensure that what we are going to do on support now can be audited. It should be transparent and it is set up in a way now where we are quite confident that this will be under full control. That is a major issue for us.
If I can add, Daniel, it's also going to be on the, you know, normal requirements that you will find from IFC, the World Bank and UN for instance, when these developments are taking place.
Great. That's really good sort of reassurance on that, on that last point. Just a very quick follow-up. Is it fair to assume that all of this additional spend will go through as CapEx? What would that mean for updated guidance for CapEx?
Part of this will count as CapEx. Part of it will be expensed as it is incurred when it defines, right? It's a mix, Daniel.
Can you give us a rough split for the mix from a modeling perspective?
I understand. We haven't detailed out the split as of yet, Daniel Major, so I would rather come back to you on a separate note on that.
Okay, no problems. Yeah, please you got it out of the line.
We will now take our next question from Rajesh Lachhani of HSBC. Please go ahead.
Yeah. Hi, just one question from me. If I understand correctly, the court decision would be the final decision after which you can restart the refinery immediately. Is there any time for the next hearing of the court that you can provide us with? Thanks.
Okay. With regard to the question about court decision and restart, we have also the fact that SEMAS, the local environmental agency, has to give us back the full license to operate the full speed in addition to the court decision. SEMAS has been a part of the negotiations here. We have in a way SEMAS on board on the agreement. Of course, we have the court decision that is an independent body that has to make the important decision to lift the embargo.
Any date of the next hearing of the court?
No, there's no fixed date for this, for this hearing.
Understood. Thanks.
We will now take our next question from Henrique Ribeiro from Platts. Please go ahead.
Hi. Good morning. I would like to ask how close you are in contact with the Brazilian court, if you are, or if it's just handled by SEMAS, this communication? If you have any kind of feeling about when a decision or a green light should be granted to resume full operation at the refinery?
Thank you, Henrique. With regard to the court, as I said, this is a completely independent body that has to make up its mind. As I said initially, I think they will do a proper job and spend the necessary time to make up their mind and make the decision. We don't have any signals or any contact with the court. We just have to wait for that decision. The main basis for the decision will of course be the agreement that has been now signed yesterday with government of Pará and Ministério Público.
The fact that Ministério Público is also part of this agreement, I think is also a very important signal to the court because Ministério Público is a very important body in Brazil today.
All right. Richard, okay. Thank you.
As a reminder, to ask a question please signal by pressing star one on your telephone keypad. We will now take our next question from Felix Schlueter from Goldman Sachs. Please go ahead.
Hi. Thanks for taking my question. I just had a quick one. You've previously played with the idea of taking down, or potentially taking down another production line at Alunorte. Just wondering, with the news today, is that completely gone or is that still something, a potential outcome that you're looking at?
Thank you, Felix. With regard to this question, the easy answer is that we are not going to take down any production lines. We have now five in operations and two in standby, and it will take three to four weeks to resume full production when the decision by the court has been made. I think, we are preparing ourself for full production, it is not a good step to take out production lines beyond what we already have done here.
Yeah. No, that's perfect. Thank you very much.
There appears to be no further questions at this time. As a reminder, please press star one. We will now take a follow-up question from Henrique Ribeiro from Platts. Please go ahead.
Hi. Sorry, just to follow up. Do you have any estimate on how much production was left behind so far due to the embargo to production at Alunorte?
Well, it's easy to calculate because you know the date when we took out production and how that was done. Since that date, we have produced at 50% capacity. When the court decision has been made, we will make a press release, of course. You will be informed that we are now restarting the production. After three to four weeks, we are back in 100%. It depends very much on the date of the decisions that are going to be made by the court in Pará. Beside that, it's very easy to calculate the volumes.
Okay, thanks.
It's roughly 260,000 tons per month, represents the 50% curtailment.
200 and? Sorry, I missed.
Roughly 260,000 tons per month, represents the curtailment.
All right. Thank you.
There appears to be no further questions. As a final reminder, please signal by pressing star one on your telephone keypad. As there are no further questions, I'd like to turn the conference back to the host for any additional or closing remarks.
Thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.
This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.