2018 Results Presentation. My name is Olof Grienmark, 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, Hakan Gabrielsson. After that, we will have a Q and 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 will see what is now presented on the screen. We'll come back a little bit talking about it later in the presentation. As you see, the trolley line that we have built in our Aitik mine, which is the first step that we are taking now towards electrification of our open pit mines, which is also linked to the announcement we had the other day of a new renewal of our truck fleet.
And 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, and you all know about that. That's no news. And 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.
In terms of production, it's been well. The new crusher in Aitik is running well. Talked about that already in the last quarter, but it has proven that it's now hopefully the last time or hopefully we'll never again talk about crushers being a bottleneck in Aitik. We have lower grades in Aitik and Tara. I think that should be well communicated and well assumed.
I think we're in line with what we have guided and the same thing with the higher grades in Carpenberg also in line with what we guided 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. But all in all, the smelters performance has been good in the quarter.
We do have a cost inflation. We talked about that already last quarter and 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. And actually in terms of all the other things we buy, inflations are more at normal levels. Now let's see if I can manage to get this one going the right way.
In terms of the market, there's been lots of discussions in the markets around trade barriers and that has probably in some way affected the world markets. It's a little bit difficult to judge and a little bit difficult to exactly what's happened. What we know is that prices went down sharply in June, July early August. They've been relatively flat in September October. We can say that it's not due to fundamentals in that sense.
We do have still a strong industrial demand. We see that and I think we see that in statistics from around the world. Supply is also, as you can see, under control and inventory is relatively low. But I would say lower assumptions on future growth has led to lower metal prices. We have been pretty well off in terms of the currencies, especially with the relatively weak Swedish krona.
We'll come back to that. On the concentrate side, we can see that the spot concentrate TCs are going up, which is good for us. And I think it also putting the market more into normal terms where we've probably seen 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, but still down. You also see clearly in these graphs that the official inventories of all our main 3 main metals are clearly down. In the period, we should normally indicate that the prices should be able to have a support and not being affected so much further down. What is special this time around is that we've not been helped by pressures. Normally when we have prices going down, we typically see prices of base metals going down, we typically see that precious metal go the other way around.
We've had normal negative correlation. That has not been true this time. We've had also negative price development for the precious metals, which is of course also affecting us negatively. If you look in the total price in the markets and compare that to the cost levels, you can see on the zinc that even though the price has gone down, the price is still relatively high compared to the cost curves. But as I said, they're also low inventories, which we feel that 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? And in our analysis, the way that we see it is that everybody is affected by cost inflation similar to we are, maybe some even more than we are. However, the ones on the lower cost of the low cost part of the cost curve are usually having advantageous currencies that take them down. And in this comparison also maybe positive developments of bimetals because you should be aware that these numbers have a little bit of a lag.
So what you see on cost is more reflecting the cost maybe in Q2 of the world markets with the lag of the consultancies that put these kind of numbers together. You can see also in copper costs are going up in the world market. The prices are still a bit above. And on nickel, yes, the costs are going up and the prices are going up. Here we are thus in a better situation before and we still think there is lots of things that can happen in the nickel price going forward.
Overall, in terms of the bullion situation, you can see to the right here that the bullion price term index has gone down. It should all be known to you being able to read exactly what's going on with our respective sensitivities. If you go and talk about the mines, on the mine side, we've had a good production development. Here, of course, you see this final pricing from previous periods of previous delivers deliveries in previous periods, as you say, is hitting pretty hard with roughly minus CHF 200,000,000 in the quarter alone, which of course hampers the result as we do here. But when you look at actual production, I think has been going very well.
The 10.8 1,000,000 tonnes is a record for a quarter linked to the new crusher that's working well. We have grades according to our guidance. Gartenberg's still production, we have an increase of grades. In Kevitsa, we also have a stable production and strong grades. And in time, we've had some planned maintenance and on top of that, there is 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. So when we sum this up, yes, the copper production is down from the very high levels that we had when I think it was in the very high grades, but still on a very nice level, the copper production. Zinc production a little bit low with a lower output in Tara and nickel production very healthy. On the smelter side, we've had a relatively good quarter. It doesn't mean that we're totally free from issues, but we've had it good.
We have lower metal prices that hits the also here the results, TCs that are lower because of it takes a little time to get the full effect of the lower benchmark terms that came in with this year. And also we also buy a little bit spot with low TCs, but we have a stronger dollar making that up. And we've had, as I said, an increase in production compared to in comparison periods despite that we haven't had perfect production and the maintenance has been according to what we planned and what we have communicated. So when you look at that, we have a stable production level, copper production looking relatively good, zinc production in terms of metal a little bit down. We are not really where we want to be in terms of recoveries especially in Coca Cola, but that's something they're working on and I think we're gaining more stability as we're talking.
The nickel in the matte production is also on a healthy level. Now regarding the financials, I will give it over to you Hakan.
Thank you.
Thank you, Mikael. So let's see. To sum it up then, I think Michael you've covered a lot that is in this slide. We did an EBIT excluding process inventory revaluations of just about SEK2 1,000,000,000 in the quarter. That is close to SEK300 1,000,000 up compared to Q3 of last year, but it is SEK300 1,000,000 down compared to Q2.
And the quarter has been influenced by lower prices. The SEK 200,000,000 negative lagging effect of final pricing has been covered. So that's in there. Looking at CapEx, we are at SEK1.5 billion in the quarter. Rolling 4 quarters, we are trending now at SEK6 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 timing there is a time lag between when taxes are charged to the P and L and when they are paid. And 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 SEK1.1 billion. This is much related to the lower metal prices. Smelt is stable and other eliminations is positive. This is primarily then the internal profit elimination where we've been able to reduce internal stock and realize the profits. This is also something that we indicated would happen in the last quarterly call.
If we then dive into some more details comparing quarter to quarter, this is on the first slide, Q3 of 'eighteen compared to Q3 of 'seventeen. We are SEK 276,000,000 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 have got higher production in both mines and smelters. On the mining sides, the mill volume in Aitik is clearly above last year's and in the smelters generally good production, but on top of that good free metals. Costs are up by about SEK 200,000,000 that is to a very large extent inflation. We have a cost inflation of about 4%, excluding then the personnel cost, which is obviously on a lower level.
In those 4%, that's primarily driven by bulk energy and consumables where we see a higher inflation, for example, in caustic soda and similar. If we instead look at sequentially comparing Q3 to Q2, we are down SEK 300,000,000. The main effect, of course, is the SEK 600,000,000 negative impact from prices and terms. Lower metal prices were not fully compensated by currencies. Volumize fairly stable.
We have lower volumes in mines primarily in Tara and the Buliden area, much is related to grades. Michael 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, the timing effect. Apart from that, it's I mean, we have the EBITDA, which is up compared to Q3 of last year and a positive impact from working capital. Balance sheet still strong.
We are at a net debt just shy of SEK4 1,000,000,000 at SEK3.8 percent, 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 whole trucking capacity for the expansion of both Aitik and Kevitsa.
Part of it is in sourcing. Part of it is deeper pits that will increase the average transportation needed for every tonne coming out and part of it is replacement. So those are the main parts. And maybe you can say that a third is expansion and maybe a third or a little bit of a third is in sourcing and then deeper pits and replacement makes up the last third. What is also important with this is all the trucks are prepared for electrification.
Even though we so far have only decided to go ahead with a test trolley lane, the one 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 these the new trucks that we're now putting in are prepared for electrification and they're also prepared for autonomous driving once that becomes a reality all the way out. It also having a new fleet and a fleet that is a single fleet and makes it possible to work especially in Kevitsa with the pit design for further cost reductions. And this will over time be able to work on the slope angles and work on the 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 it 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. Now going forward, just to make the obvious point that also Q3 production is above reserve grade average, which is and of course when you're working on this long time, we cannot continue to mine over reserve grade. We are reiterating there's no new guidance in terms of the short term grade in Aitik of 0.25 for the rest of this year and next year. And we also I'll remind you again that we aim to be up for 45,000,000 tonnes by 2020. Kevitsa, the plans are still going on.
Here we assume to get the pace of €9,500,000 by the end of 2020. So it is almost a year different between these things just to be very clear about how we do the semantics. It's a full speed in Aitik and in Kevitsa, it's speed in the end of the year. Garpenberg, 3,000,000 tonnes volume by the end of the year and here we're also reiterating the guidance for zinc for the rest of this year and next year. Planned maintenance, we do not have any planned maintenance in the smelters for Q4.
There should not be any part of that. Now let's talk a little bit about the CapEx point at the bottom and I'm sure that well, I will get plenty of questions on it as we move into the Q and A session. First of 2018, we are reiterating the guidance that we put in place of SEK 6 $1,000,000,000 or slightly above $6,000,000,000 That is still the guidance for this year. So there's nothing changed in that. What you should be aware of is that there is a pretty big currency effect in this.
And the fact that we have a weaker Swedish krona and lots of our investments are in euro, this means that actually investments are less than they were when we planned this in the beginning of the year. It doesn't look like that. It looks like we're perfectly on plan, but we're actually investing a little bit less. But money wise with the translation difference, it becomes the same. For next year, we are now guiding close to SEK 8,000,000,000 and why is that?
Well, then we do have a currency effect and 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 euro based, of course, becomes bigger. That's part of it. But it's also part that we are doing lots of exciting things and we talked about this. We are expanding Aitik. We are expanding Kevitsa.
We are expanding Garpenberg with the trucks that we just put in place and that we have announced. It's a large part of why we're having big investments. Then we're also having the big investments as previously announced in Harajahalta, the expansion both of them 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 Rundshall. And we're also having big dam expansions we talked about at Capital Market Day in Aitik and in Tara and in the Bulidin 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, slightly more than 4% and it's maybe slightly more than 4% next year as But all these other investments which are expansions or prolongations that are not year to year, for example, we take these dams that are happening every 7 years as opposed to every year. Those will get into the non maintenance CapEx category. So with that, we ourselves are feeling very good about our investment levels. We're having good projects, good return projects that are in these numbers and we feel good about it.
So with that in conclusion, you've seen these things as well. We feel once again that we're having a good typically see. We do 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.
Milled 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 Revli then expansion in Kislneberg, which is not on this one here. And we have the Killahti prolongation, which is linked very much to the cobalt that we feel very good about and exploration is moving on in a good sense. So that's the conclusions of my talk. And with that, I will invite you back Hakan and we will take questions.
Yes, ladies and gentlemen, then we start our Q and A session and we will start here in Stockholm. Johannes?
Good morning. Johannes Grunselius, Handelsbanken here. Two questions. First one on Aitik here and how you feel about pressure. Obviously, very good numbers.
I think on an annual basis, it was 43,000,000 tonnes or something like that. Has that been like a smooth volume throughout the quarter? Or has there been deviation? And I mean, have you become sort of more confident now than you were 3 months ago when you presented last time on the crushing station?
I would say the crushing station has not been a bottleneck for the whole Then there are other bottlenecks in an operation like this. And as we push up towards SEK 45,000,000, those bottlenecks in terms of mills and in terms of trucking and in terms of shoveling will become more apparent and we've seen some of that in this quarter. But the crusher, I would say, is not anymore a bottleneck.
And I know that obviously the crusher is sort of sensitive to the Arctic climate. We see less of that impact going forward now when you have when that is not the bottleneck anymore
with the crusher? With the new design that we have the crusher, it is as you can call it indoor crusher or maybe not quite the right term. It is less sensitive to climate than the previous crushers have been.
And are there further benefits to come out from this investment? I'm thinking about lower, for instance, maintenance cost consultants and so forth. I mean, did we see the full benefit in this quarter or is it more to come?
We're still ramping up, so that is not really kind of easy to see. So there might be something more coming on that. But it's a little bit too early to tell. But of course, that's a clear ambition to get the maintenance cost down.
And then I'm also curious about Tara. Was lower 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 the very low grades. I mean, we have lower grades, but then grade point average, but it's average, but it's not that much, right? The lower volumes, we had quite a lot of maintenance in Q3. That's in Tara. That is a typical month when we have typical quarter where we have maintenance.
On top of that, we've had some unplanned maintenance as well. So regarding Tara, we should be coming back on those volumes too.
Is it more like representative to look back a few quarters and the average of, let's say, the last 4 quarters or something?
I would say so, yes. Okay.
Next question, Gustav.
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 Rundej and Marcea. If those have been sold, then if we can get any sort of quantification on volume loss or financial impact?
It's difficult to give exact numbers regarding financial impact, unfortunately, around that. I would say that the main issue that we're still struggling with is the recoveries in Kokola. Even though they're better, they're still not where they should be. Then we've had some minor issues in Ranskar connected to electricity supply and some other things. But I wouldn't make too big a deal of that.
I mean these things happen now and then.
All right. Thanks. And then just to clarify on your new CapEx guidance. So the SEK 8,000,000,000, does that include anything new except for the new fleet of trucks that you came up with a few days back?
The SEK 8,000,000,000 or close a little bit less than SEK 8,000,000,000 is, of course, a total guidance. It includes all the things that we've said we're going to do is in there. And 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. And our first question comes from Alan Gabriel from Morgan Stanley. Please go ahead. Your line Two questions from my side. Firstly, on the CapEx, the SEK 8,000,000,000 guidance for next year.
Around half of that is you classify as maintenance. The other half, we can disagree on the terminology. But of this SEK 4,000,000,000 extra above maintenance, can you link directly to net earnings growth or volume growth? And how much of that portion will fall away in 2020? And the second question is on your 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 1, how much of the SEK 8,000,000,000 will fall away? And what you're really asking for is what would be a guidance clean sheet out of 2020 and we will come back to that. I said the other ones that, of course, if we were to not announce anything more during 2019, then 2020 will go down.
But we have other things in the pipeline, so who knows what we're going to announce, but we will only do investments that are profitable and we will talk about the total number once we have the sum there. Then was a question I think regarding energy prices and our contract structure. Hakan, can you
take that? Yes. I assume that you were referring to how much is locked in and how much is not. We typically lock in the pricing for a couple of years. In some areas, we have longer contracts that has a fixed price structure.
But we have an open part, which is roughly 20 percent of electricity goes on spot. And as you know in Scandinavia, the spot prices went up quite a lot during the summer.
And what proportion of your energy costs are electricity? That's
a good question. Hakan?
Yes. It's let's see now. I mean for the smelting side, the vast majority is I think you can look at it by business area. For the smelting side, the vast majority is electricity. It's a lower part for the mines.
Okay. Thank you. Thank you. And 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 Days here in Stockholm on March 13 and then going up in the evening of 2013 and then spending March 14 in Aitik, a chance for you to see both the new crusher and a chance to see the trolley line that we're working on and see that more for yourself. There's more information available on the website.
Okay. Ladies and gentlemen, that concludes our Q3 2018 conference call. Thank you for listening.