Ladies and gentlemen, I'd like to welcome you to Boliden's Q2 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 CEO and President, Mikael Staffas, and our CFO, Håkan Gabrielsson. After their results presentation, we will have a Q&A session. Mr. Staffas, the stage is yours.
Thank you, Olof, good morning, everybody. A very good morning to all of you. I would like to go through this presentation here then give you the chance to ask the questions afterwards. We've had a good second quarter, which has been characterized mainly by stability in terms of production, that's been true both for the mines and the smelters, I'll come in a little bit more into details regarding that in a little while. First of all, the price and terms have been quite good. They were good for us all through the second quarter, even though there's been some development early in the third quarter, that's not reflected in numbers for the second quarter, of course.
That's been good, then with help of that, we've had good results in the mines, despite the fact that we've had lower grades in Aitik and Tara, this has all been well communicated that we had exceptionally high grades in Q1 for particularly those two mines. In smelters, I'm particularly pleased that we've had a very good production. It's a quarter that you all know about that's very high in maintenance and maintenance stops. When you do maintenance in a smelter, you can always be nervous about what you find when you open up some of these places where you'd normally not go. We've had a very good run this time. All the maintenance stops have been on time and on budget, we're quite happy with that. Now, something that has not been quite so good has been on the cost side.
As equally as we're happy with the good prices and terms in terms of metal prices, there is a flip side to that has to do with energy, it has to do with chemicals, where we are feeling a pretty strong cost inflation right now. That is explaining a large part of the cost increases that we've had in the quarter, especially compared to last year. In terms of the numbers, we ended up on SEK 2.3 billion, a little bit more than that, which is a number that we feel quite comfortable with in this situation. The free cash flow was also strong at SEK 1.7 billion. If you're looking at the macro market, as I said, during Q2, we've seen a very good market. We saw very good zinc prices, also high copper prices, a nickel price that was quite good.
We had favorable exchange rates. We've seen a strong output. When we look at our strong demand, I should say, a strong industrial output in the world. That's what's also been reflected in these numbers. There's also been a healthy growth in the demand for all the metals, especially nickel, even though you can say coming from lower levels, we've seen a very good year-on-year development on nickel demand. On the concentrate side, there is still a tightness in the zinc concentrate market that's been shown, although the supply has been increasing in the world. There's been a modest increase in the copper concentrate supply.
If you look at the prices, especially if you look at them during Q2, you can see that the zinc price is still quite high compared with the cost levels in the industry. So is also true for copper, whereas nickel has now come up to levels where it is possible to make some money for the participants in the industry. You can also see here, which is maybe interesting for you, a statistic that we have, that the cost for copper mines in the world is going up, even though it's a little bit small. You can see that it's ticking up. It's probably also, just as in our case, related to increased prices for energy and chemicals. I spoke about the metal prices. We've seen a good development.
On this slide, you can also see, however, that the prices are heading down pretty sharply towards and maybe after the end of the quarter. Zinc from a very high level going down, copper from a quite decent level also going down, nickel from a level that's come up is also coming down. All in all, during the quarter, we had very stable and good prices. If you look at that in terms of the Boliden index and where we're heading on this one, you can see that even though there was a little bit of a setback going down in the prices in US dollar terms with the exchange rate added to that, we continue to have very favorable market terms.
If you go into the specific areas of the two business areas, we can start with the mines. Maybe I should stop once. I don't know to what extent you're sitting on what kind of quality of line, but you can see here now the new KiD2 crusher or the new surface crusher. It's a little bit of an interesting picture that you see to the left. You can see on the surface, just a very small part that you see on top. Also how much comes underground in this crusher where all the action is actually happening underground. The total height is over 70 meters, but it's only the 10 meters that you see on top of the ground. The most is going underground.
I'll come back a little bit to it, or maybe I should tell you right now that the installation has worked out very well. We're up and running. It took us over some capacity to put in a new installation of a new crusher. That means that you have a couple of days where you don't have any crushers in place as you're changing over your conveyor belts. That has worked out fine. So far, everything has worked according to plan. Now, the real trick with this crusher is not the first week or the first month, or maybe not even the first year. The big reason why we built this crusher is because we need to have a higher reliability and a higher availability than we had with the old crusher that had all kind of maintenance problems.
That's, of course, not going to show in a new one in the first month or so. So far, in what we can tell, we are very happy with the operations of the new crusher. Mines in general, we're having a very favorable situation with SEK 2 billion in profit, or a little more than SEK 2 billion, favorable price and terms, just as we have for the whole group. In Aitik, we have lower grades quarter-on-quarter, this was well communicated to everybody that we were in extremely high grades for the last few quarters. We're heading down. We are now still mining over reserve grades, even though it's not as high as it was in Q1. The same thing is true for Tara, where we also come down from the very high levels that we had in Q1.
As I said, the new crushers in operation in Aitik. In Garpenberg, we have lower zinc grades, so I think was also well communicated, but the production, in general, is very well. In Kevitsa, we have the other way around. We have very high grades, and we have a stable production. I think we have a production record in terms of nickel coming out of Kevitsa. If you look in total in the production, yes, the amount of metal is coming down in copper from the very high levels that we had with the high grades, but the throughput is quite on decent levels. In the zinc mines, as we're coming down and as the Maurliden mine is being depleted, we will have more difficulties keeping the throughput up, and the grades are also down with the communicated lower grades in Garpenberg.
If you look at the nickel side, we've had a very good quarter in nickel in general, and with the high grades, we have a record production of nickel. Moving over to the smelters, as I said in the start, we are quite happy with the quarter for the smelters totally. We've had here a stable metal price and term situation, I should say, where the metal prices are strong, just as for mines. However, the lower TCs makes the total picture more balanced. We've had very stable production. As I said, the maintenance stops has come in as communicated. There's been no extra problems that we found during that. We've also made a decision yesterday in the board meeting for a new leaching plant in the Rönnskär smelter.
It's a SEK 750 million investment for a plant that will take care of old materials and by-products that comes out of the existing production. It is an investment that stands on its own merits and makes money as of itself. It's also taking care of an environmental problem. Had we not been able to do this investment, we might have had a negative impact instead. It always depends on where you put the zero line on this one. We're quite happy with this investment, and it will be coming up online in about 24 months or 27 months from now. Smelter production is at stable, generally. We've had good production everywhere, and maybe the zinc side is what's been the best side. As you know, for the last few quarters, we've had problems and some stability issues in our zinc smelters.
That has, at least for the time being, been overcome, and we're doing better production-wise there. The other smelter is on par to get up to the speed of the 200,000 ton pace. Also, the nickel production has been quite good in Harjavalta. Financials, and here I would like to leave this floor to you, Håkan.
Thank you, Mikael. Good morning. As Mikael said, this has been a quarter with good prices and terms and strong results. If we start by looking at some of the numbers, we have an EBIT excluding process inventory of SEK 2.3 billion. That is slightly up compared to Q2 of last year, but lower than Q1. CapEx is SEK 1.6 billion. This is fully in line with our guiding for the full year of just over SEK 6 billion. Free cash flow is SEK 1.7 billion, and that leaves us with a net debt to equity ratio of 13%. In that number, you should also remember that we have paid dividends and redemption of shares amounting to roughly SEK 3.8 billion. Strong quarter and a strong balance sheet. Looking at the financials by segment, you can see in mines that we've strengthened the result up to SEK 2 billion.
Smelters, stable in spite of maintenance stops. Then finally, other and eliminations, which is negative, and that includes an internal profit elimination of about SEK 300 million. I'm not going to spend too much time on that, because it's simply a matter of timing, and when the profit in mines gets higher, so does the impact of timing. I know that there are quite a few of you who does modeling by segment. Just a few words on this already now. In the second quarter, we've had very good deliveries from the mining side. Mines have been able to reduce the concentrate stocks with about 25,000 tons, and that shows in the mines numbers. That stock is now showing up in smelters. Basically what we've been doing is moving 25,000 tons one step in the value chain.
Of course, that doesn't have any impact on the group result, but you will see a profit in mines and then a negative impact on the elimination. So good deliveries in mines, but purely a timing effect in the profits. With that said, if we then go into the bridge, the EBIT bridge, comparing Q2 with the same quarter last year, as you can see, there's a slight improvement of roughly SEK 100 million, and we're helped by prices and terms that added SEK 700 million to the results. Primarily metal prices being better offset a bit by negative foreign exchange rates and Treatment Charges. Volume side, we've had slightly lower milled production and lower grades in the mining area. For example, in Aitik. Furthermore, also in Garpenberg, I think you could add comparing to last year. We've had higher production in the zinc smelters.
As you might recall, last year we had some process issues in Kokkola, and that is now gone, and the zinc smelters have been operating at a good pace. Cost side, compared to last year, as Mikael indicated, there is an increase in inflation, and we see it primarily in energy and consumables. There is, of course, an annual increase in salaries as well, but that is by relative terms, a smaller amount. Roughly the inflation that we see in energy and consumables here is about SEK 140 million out of the SEK 220 total cost increase. So it's a significant amount. And then depreciation is related to the metal production and all in all, a positive change of SEK 132 million. If we instead compare with the previous quarter, Q2 to Q1 of 2018, there is a SEK 400 million lower result. The main factor in there is lower grades in mines.
We've had very high grades in Aitik and Tara in Q1, and as we talked about in the last quarterly call, they would come down to this quarter. And they have done that, and that has an impact in the bridge of about SEK 500 million, so it's a significant amount. The throughput in mines is higher. We also have higher free metals in smelters that have compensated for the maintenance. So operationally it looks good. Prices in terms slightly better, primarily due to a stronger dollar. And then on the cost side, we have about SEK 80 million cost for the maintenance stops in Q2 that wasn't there in Q1. Furthermore, there is some seasonality, there is some inflations between the quarters, but I'd say that the individual amount from the maintenance stop is the biggest one in the cost side. Cash flow.
We are slightly up compared to Q1, or slightly down compared to Q2 of last year. There weren't that much impact from working capital this quarter. We have slightly higher CapEx, and we have higher taxes paid, basically because of higher earnings. But a good cash flow of SEK 1.7 billion. And that gives us a balance sheet that is very strong. Gearing, as I said, 13%, even with significant payments to shareholders. We've extended the loan duration to 3.8 years. As you may have seen in an earlier press release and in the report, we have done a refinancing in the quarter, and we've also amortized some of the loans with a shorter duration. So we've extended the loan duration to 3.8 years, and still a good interest rates of 1.2. So strong balance sheet. Mikael, with that, over to you again.
Thank you, Håkan. One thing that's in the numbers and you should all be aware of is that we've had a new ruling in the environmental court in Sweden regarding Aitik, where some of you might have read about it. It has a short-term effect that we need to put into collateral SEK 1.1 billion extra related to the decommissioning cost. This discount, it has led us to increase the provision for the decommissioning with about SEK 800 million. This then from an accounting point of view, becomes an asset of the equal size that will be amortized over life of mine, which means that the depreciation going forward will be bigger. That we have done.
We have also appealed this ruling. We'll see where it ends up, but we've taken a cautionary approach and make sure that we put the more conservative number into our accounting. Otherwise, going forward, first, the general thing that needs to be said, that even though the grades are down compared to Q1, Q2 is still on average above reserve grades in terms of grades. We should be aware of that when we're looking into the future longer term. Regarding Aitik, we are guiding for the remainder of 2018 and 2019 at 0.25. Continue for the next six quarters over reserve grades. Also for 2020 to get to the 45 million tons that will be possible with the new crusher in place. In Garpenberg, we have guided before for the 4.0 grade in zinc for the rest of this year.
We're also adding the guidance that we will continue on that level also for the next four quarters after that on average. The 2019 average is also 4.0. We're having a higher silver grade for the rest of the year at about 115. The silver grade for next year is the reserve grade, which is roughly 100. 2020 is the guidance for the 3.0 million throughput volume. That project is also going according to plan so far. For Kevitsa, we have guided for the 9.5 million pace coming up in 2020. That project, even though it's in early days, is also going according to plan. We did have the negative impact from the profit elimination in Q2. Over time, this is a timing effect that should be zero. However, it was very positive in Q1. You should be very careful what you say for Q3, but it shouldn't be negative anyway. Planned maintenance. We still have planned maintenance coming up for Q3 with SEK 70 million. That's guidance, I think that's in line with previous guidance we've given. The CapEx guidance for the year is still the same as before, slightly above SEK 6 billion. The conclusion, we'd like to make this point, we still feel that what we've said many times is still true. We are well-positioned in this market. We have mines and we have smelters. They are working together, and it's working as a good cooperation. We have base metals. Precious metals that also provide a good and healthy, stable operation environment. High productivity, stable operations, high corporate responsibility.
It was very positive in Q1, so you should be very careful what you say for Q3, but it shouldn't be negative anyway. Planned maintenance. We still have planned maintenance coming up for Q3 with SEK 70 million. That's guidance, I think that's in line with previous guidance we've given. The CapEx guidance for the year is still the same as before, slightly above SEK 6 billion. The conclusion, and we'd like to make this point, we still feel that what we've said many times is still true. We are well-positioned in this market. We have mines and we have smelters. They are working together, and it's working as a good cooperation. We have base metals and precious metals that also provide a good and healthy, stable operation environment. High productivity, stable operations, high corporate responsibility.
We are also working in stable jurisdictions, and we have a long life of mines compared to many of our competitors. We have a strong balance sheet, and we have lots of growth opportunities that are not yet in the plans, but we talked about before, including Tara Deep, which is also going according to plan, even though it is still a couple of years out before we will be able to make any decision on that. The Kylylahti prolongation and the cobalt situation is also moving relatively well. We will come back to that in later quarters and when we have the reserve upgrade coming in the winter. The smelters are well-positioned for the circular economy in general, and the new leaching investment in Aitik is in line with that. I would also like to just give you very quickly a head-up for those who haven't seen it yet.
We have a capital markets day planned in Stockholm and in Aitik for March 13 and 14 of next year. We are very happy to see as many of you there as possible. With this, have I said anything I shouldn't say that I shouldn't have said, then I haven't said it. With that, I would like to go over to the operator and open the stage for questions.
Thank you. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you will enter a queue. Our first question comes from the line of Alain Gabriel of Morgan Stanley. Please go ahead. Your line is open.
Good morning, everyone. Three short questions from my side. First, on the eliminations line, you mentioned it is probably going to even out for the full year. Do you mind giving us a split between Q3 and Q4, or should it be evenly split? Second question is on the cost inflation expectations for the second half. I guess many of your competitors are increasingly talking about cost inflation. What are you seeing in the business, and what should we expect for the second half? The third question is on the investment that you have, the leaching plant at Rönnskär. Is that more of a defensive investment just to comply with environmental standards, or does it meet the internal hurdles of IRR of 15% that you have alluded to in the past? Thank you.
Let me start from the bottom and say that the leaching plant in Rönnskär is meeting the internal target, so it's a financially viable investment, and it's also clearing out some environmental issues at the same time. It's an investment that solves two things at once, and we're very happy that we can put it up that way. Regarding cost inflation, you can work the numbers out yourself, but the inflation that we're seeing right now compared to last year is around 4%, is very much driven by the energy side and by the consumables or chemical side, and not so much by other supplies that we're getting. It's very difficult to give a forward guiding for that. I think the only thing I can say that the level that we have right now is probably a level that we'll have to stick with.
Any further increases is up to the markets to decide for these kind of commodities. Regarding elimination, Håkan, maybe you'll take that. This is an accounting issue.
I can do it, yeah, sure. As you say, it's a matter of timing. Last quarter was a fairly significant positive number. This one is a negative one. If you look at the full year numbers so far, then it should come back over time. Of course, there is a price dependency as well in there, but it's difficult to give some guidance quarter by quarter. I would calculate with positive amounts going forward.
Thank you.
Thank you. Our next question comes from the line of Liam Fitzpatrick of Deutsche Bank. Please go ahead. Your line is now open.
Morning. Two questions from me. First one probably for Håkan, just on the financials for the mines. You did answer part of this by giving us the inventory reduction, but I just wondered if you could give us an idea of what mines EBIT would have been if you didn't have that inventory reduction through Q2. Secondly, just on strategy, you mentioned in the presentation about growth opportunities. They're all organic. Is M&A still part of the strategy? Are you still looking at opportunities similar to Kevitsa? Thank you.
Should I start with the
You can start with the accounting.
I don't think you need to think so much about the second one either. Anyway, roughly SEK 250 million-SEK 300 million lower without the inventory movements.
I can come in to talk about the strategic growth options and M&A. The answer is we are interested, we're looking, we're participating in several situations. We are, as we've always been, quite conservative, and we will only make deals that we think makes a lot of sense. If we find something, we will act upon it. I don't know if I can answer it more than that. The primary focus in our strategy is for sure to maximize what we got and do the best out of what we got.
Okay. Very clear. Thank you.
Thank you. Our next question comes from the line of Christian Kopfer of Nordea. Please go ahead. Your line is now open.
Thanks, operator. Good morning, everyone. Firstly, just follow up on the new crushers in Aitik. Are they running according to your plans here so far in Q3?
Yes.
What does that mean in terms of if you can say anything about the capacity and how much they can produce?
I will put it this way. In a normal mine, a crusher should never be a bottleneck. Mine Aitik has been a very particular place where the crusher's been a bottleneck. It should never be. With these new crushers that we put in, we have designed them so the crushers should not be the bottleneck. As I said in the presentation, so far everything looks good. It doesn't look like the crushers will ever be a bottleneck going forward. There will be other bottlenecks. We will have bottlenecks before the crushers in terms of loading and trucking, and we'll have bottlenecks after the crusher in terms of milling where they should be. These are operations in Aitik that has never really been put to test because there was always the crusher that helped them. When they had low availability, they could blame somebody else.
That's going to be a new game. Exactly how fast this will be sorted out and exactly how fast we will be able to come up in terms of quarters is not possible to really say because we're testing new grounds, we have guided for the 45 million tonnes for 2020.
Right. If I look second quarter 2017, you produced more than 10 million tonnes. Now, that was with the old crushers and with the unavailability and so on. We should at least see an increase from that level?
Yeah, you can say that in Q2 2017, we had a time when for a quarter the crushers did not cause a problem and then that was what the mine could do, 10 and a little bit. That's of course a good quarter normally in terms of weather and so on. That was a good quarter in terms of weather, but that's where you would have been without any other thing. We have to then push the availability for the systems around to get up to the 45, which requires an 11.5 per quarter.
Right. Then on the cost inflation side again, the chemicals inflation and so on, is that mainly on the smelters or?
Yes.
Right. If I look at the cost inflation for the mine side, you said that the second quarter increase cost was primarily due to mill volumes and something else. If I look at mill volumes, they are definitely up. They are up 8% in the second quarter, but the cost is up 22% in the second quarter versus the first quarter. Were there a lot of one-time costs due to the new crushers or what happened there?
I can say there were some one-time costs which were, I think, more dependent on that we had other problems before the new crusher came in, not directly into the crusher. You should also be aware, Christian, that we do have a seasonality in terms of cost. We always have higher costs in Q2. One of these drivers is that we take in lots of summer extras that we train, and we have that cost always in Q2 every year to be able to run our mines through the summer. That's one thing that comes in there. I think I see numbers off the top of my head that we typically have 6% higher cost or so in Q2 compared to Q1, just from seasonality.
Right. If I look at cost per ton base in Q2, for example, to Q1 it's typically coming down, actually. In Q2 of 2017 it came down from Q1 because you have a lot of winter cost or lower volumes perhaps in Q1. I guess I should definitely see volumes per ton coming down underlying in the next couple of quarters.
Now you're taking it per tons, of course the Boliden area is not the biggest thing, the fact that we're depleting the Maurliden mine is playing in somewhere in this, where we had relatively cheap open pit tonnes that will be replaced by expensive underground tonnes from the other mines in the Boliden area. There is a little bit of a mix change that is forever, although that might be a smaller number.
Right. The new crushers in Aitik should be quite positive on the unit cost, I guess, in Aitik.
Yes.
When they're Yeah.
Yes.
Finally from me then, on administration costs, they are up to the highest levels I've ever seen ever in Boliden here. I think it was almost SEK 200 million in the quarter. What happened with that cost item?
Yeah, I think you should look at the total cost. There will be individual items and corrections and movements between those lines in the quarters. We focus the combined costs, we're working with that, and we have the inflation that we mentioned and so on. I wouldn't spend too much time looking at the individual cost lines. There's no dramatic change happening there.
You know that administration for us, Christian, that's exploration. We haven't made a big thing out of that, exploration activities for different reasons was quite intensive in Q2. They were also relatively lower in Q1, we expense all our exploration.
Yeah, that's true enough. Okay, fine. Okay. Right. Maybe on the electricity side, you mentioned energy cost, but is that electricity or is it oil or what is it?
It's both.
It's both. On the electricity side we are much more hedged with long-term contracts, although we do have a part that is on spot that comes through. On the other, on the oil cost and coking coal and all the other fuel costs that we have, there we're all open. There we get the market price much more directly into our P&L.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Luke Nelson of J.P. Morgan. Please go ahead. Your line is now open.
Morning, everyone. Three questions from me. Firstly, CapEx. You're tracking below the SEK 6 billion target. Obviously H1 is seasonally impacted. As we now stand sort of halfway through summer, how confident are you of hitting the target? More generally, given a few years of undershooting guidance, are there any risks this starts to impact mine planning? Secondly, again on guidance, you've obviously added another year of zinc grades for 2019. My question is, when can we expect more quantifiable guidance around medium-term grades and CapEx, especially with the expansions that are underway across a number of the mine assets? Or do we have to wait for the capital markets day next spring? Finally, given the zinc treatment charge settlement in the quarter, what was the net impact of remarketing Q1 treatment charges in the period? Thank you.
I'll leave the last one for you, Håkan, I can take the first two ones. Regarding CapEx, it's right that we are a little below the marching rate, and we need to get that up in the second half. We are maybe more confident this year than other years that we will actually reach it. We are not yet in the kind of problems that you said, that we're underspending and thus having to change the mining plans. We're not at that situation yet. Of course, this is one thing that we monitor very closely. Your second was regarding guidance and regarding guidance on average grades, you will have to wait until we do the upgrade or update on the reserves and resources, which is in February in connection with the Q4.
We will, depending on where they end up, which we don't know at this time of speaking right now, that might be something that we will delve more deeply into on the capital market day. I will leave the last one for you, Håkan.
CapEx guidance, I think you should expect more in Q3. Regarding TCRC, we had a negative impact. You can see those in the EBIT bridge in the report of SEK 86 million in smelters. A part of that is internal money, so SEK 47 million in the group between Q1 and Q2.
Okay, thanks.
Okay, yeah.
Thank you. Our next question comes from the line of Alain Gabriel of Morgan Stanley. Please go ahead. Your line is now open.
Yes. Hi. Thanks again. Just one question on the CapEx guidance. Mikael, you typically like to give a CapEx one year out at a time. In light of the investment fund that you have in the leach plant, how do you think the CapEx in 2019 directionally at least, will develop versus 2018? Should it still come down or would it rather remain flat year on year? Thank you.
That's of course a good question. I will give you a very blurry answer because we will sum this up in our own processes in the early fall. That's when we get a better number. We are in capital intense periods, as you can see just by adding up what we have announced that we're doing. The exact direction, I will come back once I have a better number.
Okay. Thank you.
Thank you. Just to remind everyone, if you would like to ask a question, please press zero one on your telephone keypad.