Q3 2018 results presentation. My name is Olof Grenmark, and I'm Head of Investor Relations. Today, we will have a results presentation led by our President and CEO, Mikael Staffas, and our CFO, Håkan Gabrielsson. After that, we will have a Q&A session, which I will lead. Mr. Staffas, the stage is yours.
Thank you, Olof. Good morning, everybody. First of all, before going into the real presentation, I hope that you all see what is now presented on the screen. We'll come back a little talking about it later in the presentation. You see the trolley line that we have built in our Aitik mine, which is the first step that we are taking now towards electrification of our open-pit mines, which is also linked to the announcement we had the other day of a renewal of our truck fleet. I'll come back to that later. If we start about the Q3 and about the quarter we have just finished, we've had a good quarter in terms of production. We've had lower metal prices, you all know about that.
That's no news, we'll come a little bit into also that you know that we have a lagging effect in terms of the final pricing that we always get from deliveries in previous quarters that affects us negatively when the prices go down. On terms of production, it's been well. The new crusher in Aitik is running well. We talked about that already in the last quarter, it has proven that it's now hopefully the last time, or hopefully we'll never again talk about crushers being a bottleneck in Aitik. We have lower grades in Aitik and Tara. I think that should be well communicated and well assumed.
I think we're in line with what we have guided, the same thing with the higher grades in Garpenberg also in line with what we guided for before, since we have been in low grades areas there in the previous comparison quarters. Smelters are doing well. We've had increased production, which we are feeling very good about. We still have some production issues, especially in the zinc smelters, all in all, the smelters performance has been good in the quarter. We do have a cost inflation. We talked about that already last quarter, it is still prevalent. We are in a situation where we have inflation overall in the system of roughly 4%, very much driven by oil prices and consumables linked to that, which is driving most of that. Actually, in terms of all the other things we buy, inflations are more at normal levels.
Now let's see if I can manage to get this one going the right way. In terms of the market, there's been lots of discussions in the markets around trade barriers. That has probably in some way affected the world markets. It's a little bit difficult to judge and a little bit difficult to say exactly what has happened. What we know is that prices went down sharply in June, July, and early August. They've been relatively flat in September and October. We can say that it's not due to fundamentals in that sense. We do have still a strong industrial demand. We see that. I think we see that in statistics from around the world. Supply is also, you can say, under control. Inventory is relatively low. I would say lower assumptions on future growth has led to lower metal prices.
We have been pretty well off in terms of the currencies, especially with the relatively weak Swedish krona. We'll come back to that. On the concentrate side, we can see that the spot concentrate TCs are going up, which is good for us. I think it also putting the market more into normal terms, where we probably see an end of the very low spot TCs that we've seen in the last couple of years. The metal prices, I spoke about them. You can see here very clearly they've gone down in terms of zinc from very high levels, in terms of copper, maybe not so high levels. Still down.
You also see clearly in these graphs that the official inventories of all our three main metals are clearly down in the period, we should normally indicate that the prices should be able to have a support. Not being affected so much further down. What is special this time around is that we've not been helped by precious. Normally, when we have prices going down, we typically see that precious metal go the other way around. We've had normal negative correlation. That has not been true this time. We've had also negative price development for the precious metals, which is, of course, also affecting us negatively.
If you look in the total price in the markets and compare that to the cost levels, you can see on the zinc that even though the price have gone down, the price are still relatively high compared to the cost curves. As I said, also low inventories, we feel that there's some support in these numbers anyway. You can also see that the costs are going up for the high-cost mines, not so much for the lower cost mines. The question is why is that? In our analysis, the way that we see it is that everybody's affected by cost inflation similar to we are, maybe some even more than we are. However, the ones on the low cost part of the cost curve are usually having advantageous currencies that take them down.
In this comparison also maybe positive developments of by-metals because you should be aware that these numbers have a little bit of a lag. What you see here on cost is more reflecting the cost maybe in Q2 of the world market with the lag of the consultancies that put these kind of numbers together. You can see also in copper, costs are going up in the world market. Prices are still a bit above. On nickel, yes, the costs are going up and the prices are going up. Here we are thus in a better situation before, and we still think that there's lots of things that can happen in the nickel price going forward. Overall, in terms of the Boliden situation, you can see to the right here that the Boliden Price Term Index has gone down.
That should all be known to you, being able to read exactly what's going on with our respective sensitivities. On the mine side, we've had a good production development. Here, of course, you see this final pricing from previous periods and previous deliveries in previous periods, I should say, is hitting pretty hard with roughly minus SEK 200 million in the quarter alone, which of course hampers the result as we do it. When you look at actual production, Aitik has been going very well. The 10.8 million tons is a record for a quarter linked to the new crusher that's working well. We have grades according to our guidance. In Garpenberg stable production, we have an increase of grades. In Kevitsa also with stable production and strong grades.
In Tara, we've had some planned maintenance, and on top of that, there's also some unplanned maintenance that has led to lower zinc production than we've had in previous quarters, but I would still say according to our own measures, according to our plans. When we sum this up, yes, the copper production is down from the very high levels that we had when Aitik was in the very high grades, but still on a very nice level, the copper production. Zinc production, a little bit low with the lower output in Tara, and nickel production very healthy. On the smelter side, we've had a relatively good quarter. It doesn't mean that we're totally free from issues, but we've had it good. We have a lower metal prices that hits also here, the results.
TCs that are lower because it takes a little time to get the full effect of the lower benchmark terms that came in with this year. We also buy a little bit spot with low TCs, but we have a stronger dollar making that up. We've had, as I said, an increase in production compared to the comparison periods, despite that we haven't had perfect production, and the maintenance has been according to what we've planned and what we have communicated. When you look at that, we have a stable production level, copper production looking relatively good, zinc production, in terms of metal, a little bit down. We are not really where we want to be in terms of recoveries, especially in Kokkola, but that's something they're working on, and I think we're gaining more stability as we're talking.
The nickel in matte production is also on a healthy level. Regarding financials, I will give it over to you, Håkan.
Thank you. Thank you, Mikael. Let's see. To sum it up, I think, Mikael, you've covered a lot that is in this slide. We did an EBIT excluding Process Inventory Revaluations of just above SEK 2 billion in the quarter. That is close to SEK 300 million up compared to Q3 of last year, but it is SEK 300 million down compared to Q2. The quarter has been influenced by lower prices. The SEK 200 million negative lagging effect of final pricing has been covered, so that's in there. Looking at CapEx, we are at SEK 1.5 billion in the quarter. Rolling four quarters, we are trending now at SEK 6 billion. This is well in line with what we've guided for. Free Cash Flow was influenced by a high level of paid tax.
We've been talking about that in earlier calls, that there is a time lag between when taxes are charged to the P&L and when they're paid, this quarter we have been catching up. This obviously largely relates to the earnings level of last year. By segment, we are down in mines to SEK 1.1 billion. This is much related to the lower metal prices. Smelter is stable, other and eliminations is positive. This is primarily the internal profit elimination, where we've been able to reduce internal stock and realize the profits. This is also something that we indicated would happen in the last quarterly call. If we dive into some more details comparing quarters to quarters, this is on the first slide, Q3 2018 compared to Q3 2017. We are SEK 276 million up. Prices and terms, the net effect is fairly limited.
We see the negative correlation in play. We have stronger currencies and weaker metal prices. Volumes are clearly up. We've got high production in both mines and smelters. On the mining sides, the milled volume in Aitik is clearly above last year's, and in the smelters, generally good production, but on top of that, good free metals. Costs are up by about SEK 200 million. That is to a very large extent inflation. We have a cost inflation of about 4%, excluding the personnel cost, which is obviously on a lower level. In those 4%, that's primarily driven by bulk energy and consumables, where we see a higher inflation, for example, in caustic soda and similar. If we instead look at sequentially comparing Q3 to Q2, we are down SEK 300 million. The main effect, of course, is the SEK 600 million negative impact on prices and terms.
Lower metal prices were not fully compensated by currencies. Volume-wise, fairly stable. We have lower volumes in mines, primarily in Tara and the Boliden Area. Much is related to grades. Mikael covered a part of it as well. Cost side is clearly lower than last year. There is an element of seasonality. We have lower maintenance as well. But in essence, the difference compared to previous quarter is lower prices, whereas the net effect of volumes and costs is positive. Cash flow. I think the main news in this slide is the tax payments, where we've been catching up. Again, a timing effect. Apart from that, we have the EBITDA, which is up compared to Q3 of last year, and a positive impact from working capital. Balance sheet still strong. We are at a net debt just shy of SEK 4 billion, at SEK 3.8 billion.
Net Debt to Equity Ratio of 10%, and the average interest rate has been coming down further to 1.1% comparing to the slightly higher levels in the comparison periods. This is again a financing cost that we're happy about. It's a competitive financing, especially considering comparing to other peers in the sector. So we're happy about that. With that, Mikael, do you want to continue?
Yes, I will continue. Let me talk a little bit about investments. I will come back to that, but let's start with the investment that you see in front of you, we see the haul trucks in Kevitsa that we came out with in the end of last week. Need more haul trucking capacity for the expansion of both Aitik and Kevitsa. Part of it is insourcing, part of it is deeper pits that will increase the average transportation needed for every ton coming out, and part of it is replacement. So those are the main parts and maybe you can say that a third is expansion and maybe a third or a little bit less than a third is insourcing and deeper pits and replacement makes up the last third. What is also important with this, all the trucks are prepared for electrification.
Even though we so far have only decided to go ahead with a test trolley line, the one that I showed you in the beginning, that we need to run now through the winter to get a full season tryout and see how this works in Arctic conditions. It is clearly an ambition that we have to be able to continue to work on our carbon footprint and financial statement of being able to reduce the dependency on oil and diesel by moving over to electricity. And as I said, all the new trucks that we're now putting in are prepared for electrification, and they're also prepared for autonomous driving once that becomes a reality all the way out. Also, having a new fleet and a fleet that is a single fleet makes it possible to work, especially in Kevitsa, with the pit design for further cost reductions.
This will, over time, be able to work on the slope angles and work on the average ramp width that will make it quite positive, and this is all in all a very positive investment the way that we see it and the way that we calculate. As I said, we talked about the electric trolley. We do have the first line in place. It's only 700 meters. In itself, it's a small investment and in itself is a good investment as such, but we've decided not to move ahead with further electrification until we get a full test run out of this one to make sure that it works in all kind of parts of the year in the climate that we're operating in, where there's so far very few experiences around the world in similar climate conditions.
Going forward, just to make the obvious point that also Q3 production is above reserve grade average, which isn't, of course, when you're working on this long time we cannot continue to mine over reserve grade. We are reiterating there's no new guidance in terms of the short-term grade in Aitik of 0.25 for the rest of this year and next year. We also are reminding you again that we aim to be up for 45 million tons by 2020. Kevitsa, the plans are still going on. Here we assume to get the pace of 9.5 million by the end of 2020. It is almost a year different between these things, just to be very clear about how we do the semantics. It's full speed in Aitik and in Kevitsa it's speed in the end of the year.
Garpenberg, 3 million tons volume by the end of the year, here we're also reiterating the guidance for zinc for the rest of this year and next year. Planned maintenance, we do not have any planned maintenance in the smelters for Q4. There should not be any part of that. Let's talk a little bit about the CapEx point at the bottom, I'm sure that I will get plenty of questions on it as we move into the Q&A session. First of 2018, we are reiterating the guidance that we put in place of SEK 6 billion or slightly above SEK 6 billion. That is still the guidance for this year, there's nothing changed in that.
What you should be aware of is that there is a pretty big currency effect in this, the fact that we have a weaker Swedish krona and lots of our investments are in EUR, this means that actually investments are less than they were when we planned this in the beginning of the year. Doesn't look like that, looks like we're perfect on plan, but we're actually investing a little bit less. Money-wise, with the translation difference, it becomes the same. For next year, we are now guiding close to SEK 8 billion, why is that? Number one, we do have a currency effect, with the weak Swedish krona that we love in many other places, of course, the number in Swedish krona, as we're having so many operations that are EUR-based, of course, becomes bigger. That's part of it.
It's also part that we are doing lots of exciting things, and we talked about this. We are expanding Aitik, we are expanding Kevitsa, we are expanding Garpenberg with the trucks that we just put in place and that we have announced is a large part of why we're having big investments. We're also having the big investments, as previously announced, in Harjavalta, the expansion both with the new sulfuric acid plant and the expansion of the copper refinery. We're having the leach plant that we talked about last quarter that's coming into Rönnskär, and we're also having big dam expansions. We talked about the Capital Markets Day in Aitik and in Tara and in the Boliden area. All of these things come together in 2018. We are having the way that we define Maintenance CapEx is not a big difference from this year.
It's slightly more than four, and it's maybe slightly more than four next year as well. All these other investments, which are expansions or prolongations that are not year to year. For example, we take these dams that are happening every seven years as opposed to every year. Those get into the Non-maintenance CapEx category. With that, we ourselves are feeling very good about our investment levels. We're having good projects, good return projects that are in these numbers, and we feel good about it. With that, a conclusion, you've seen these things as well. We feel once again that we're having a good mixture of mines and smelters that is helping us. The mixture of base metal and precious, we still think is very good, even though in this particular quarter it did not help us with the negative correlation as we typically see.
We do have a high productivity and a stable production. I think we've proven that, and we think we have good production in the quarter. We have a long life of mine of the key mines. We have stable jurisdictions where we are working. We have a strong balance sheet, and we have several growth opportunities that we're still working around. Smelters are well-positioned generally for the circular economy. There are many interesting things that could happen around that. Mill volume expansion in the key mines that we spoke about, that we already promised to get. We have other options that we have not yet gotten far enough to be able to define well good projects around, which is Tara Deep, which is the Rävliden expansion in Kristineberg which is not on this one here.
We have the Kylylahti prolongation, which is linked very much to the cobalt, that we feel very good about. Exploration is moving on in a good sense. That's the conclusions of my talk, and with that, I will invite you back, Håkan, and we will take questions.
Yes, ladies and gentlemen, we start our Q&A session, and we will start here in Stockholm. Johannes.
Okay. Morning. Johannes Grunselius , Handelsbanken here. Two questions. First one on Aitik here and how you feel about the crusher. Obviously very good numbers. I think on an annual basis it was 43 million tons or something like that. Has that been a smooth volume throughout the quarter, or has there been deviation? Have you become more confident now than you were three months ago when you presented last time on the crushing station?
I would say the crushing station has not been a bottleneck for the whole quarter. There are other bottlenecks in an operation like this. As we push up towards 45 million, those bottlenecks in terms of mills and in terms of trucking and in terms of shoveling will become more apparent. We've seen some of that in this quarter. The crusher, I would say, is not any more a bottleneck.
Okay. I know that obviously the crusher is sort of sensitive to the Arctic climate. Would we see less of that impact going forward now when that is not a bottleneck anymore with the crusher?
With the new design that we have the crusher, it is, as you can call it, indoor crusher, maybe not quite the right term. It is less sensitive to climate than the previous crushers have been.
Are there further benefits to come out from this investment? I am thinking about lower, for instance maintenance cost, consultants, and so forth. Did we see the full benefit in this quarter, or is it more to come?
We are still ramping up, that is not really kind of easy to see. There might be something more coming on that. It is a little bit too early to tell. Of course, that is a clear ambition to get the maintenance cost down.
I am also curious about Tara. It was both lower ore volumes and very low grades. How should we see that one in the next quarters?
I'm not sure if I agree with very low grades. We have lower grades, but then grade point average, but it's average, but it's not that much, right? The lower volumes, we have had quite a lot of maintenance in Q3. In Tara, that is a typical quarter where we have maintenance. On top of that, we've had some unplanned maintenance as well. Regarding Tara, we should be coming back on those volumes.
Is it more representative to look back a few quarters and take the average of, let's say, the last four quarters or something?
I would say so, yes.
Yeah. Okay, thanks.
Okay, next question, Gustaf .
Thank you. Gustaf Schwerin from Pareto. Two questions from my side. First on smelters, you talked a little bit about some production issues in the report. Just if you could clarify a bit more on that, I think it was in Rönnskär and Boliden. If those have been solved and if we can get any sort of quantification on volume loss or financial impact.
It's difficult to give exact numbers regarding financial impacts, unfortunately, around that. I would say that the main issue that we're still struggling with is the recoveries in Kokkola. Even though they're better, they're still not where they should be. We've had some minor issues in Rönnskär connected to electricity supply and some other things, I wouldn't make too big a deal of that. These things happen now and then.
All right, thanks. Just to clarify on your new CapEx guidance, the SEK eight billion, does that include anything new except for the new fleet of trucks that you came up with a few days back.
The SEK 8 billion or a little bit less than SEK 8 billion is, of course, the total guidance. It includes all the things that we've said we're going to do, is in there. Of course, there's also provision that some minor things we haven't said, but we have planned will be in there, but it's basically reflecting what we have said we're going to do.
All right. Thanks.
Any more questions here from Stockholm? Okay, operator, please then we'll open up for questions via the web.
Thank you. Ladies and gentlemen, if you have an audio question, please press 01 on your telephone keypad and you will enter a queue. If you would like to withdraw your question, that is 02 on your telephone keypad. Our first question comes from Alain Gabriel from Morgan Stanley. Please go ahead. Your line is now open for your question.
Yes. Good morning, gentlemen. Two questions from my side. Firstly, on the CapEx, the SEK 8 billion guidance for next year. Around half of that you classify as maintenance. The other half we can disagree on the terminology, but this SEK 4 billion extra above maintenance, can you link directly to net earnings growth or volume growth? How much of that portion will fall away in 2020? The second question is on your exposure to electricity prices. Can you remind us about your contract structure for electricity and what proportion of your energy costs are electricity? Thank you.
We unfortunately have some problems in the technology, but I think I got your questions. Number one, how much of the SEK 8 billion will fall away? What you're really asking for is what would be a guidance, a clean sheet out of 2020, and we will come back to that. I said at the other ones that, of course, if we were to not announce anything more during 2019, 2020 will go down. We have other things in the pipeline, who knows what we're going to announce, we will only do investments that are profitable, we will talk about the total number once we have the sum there. Was a question, I think, regarding energy prices and our contract structure. Håkan, can you take that?
Yeah. I assume that you were referring to how much is locked in and how much is not. We typically lock in the pricing for a couple of years. In some areas, we have longer contracts that has a fixed price structure.
We have an open part, which is roughly-
20%
20% of electricity goes on spot, as you know, in Scandinavia, the spot prices went up quite a lot during the summer.
What proportion of your energy costs are electricity?
That's a good question. Håkan?
Yeah. Let's see now. For the smelting side, the vast majority is, I think you can look at it by business area. For the smelting side, the vast majority is electricity, it's a lower part for the mines.
Okay. Thank you.
Thank you. Ladies and gentlemen, if there are any further questions, it is 1 on your telephone keypad to register. Since we have no more telephone questions registered, I now hand back to our speakers in the room.
Okay, if there are no more questions here from Stockholm, just double check that. Maybe we should do some advertising for our big event in March.
Yes, as you can see here, we have the Capital Markets Day here in Stockholm on March 13. Then going up in the evening of 13th, then spending March 14 in Aitik. A chance for you to see both the new crusher and a chance to see the trolley line that we are working on and see that more for yourself. There is more information available on the website.
Okay, ladies and gentlemen, that concludes our Q3 2018 conference call. Thank you for listening.