Good morning, and welcome to the presentation of Boliden's Result for the Q1 2017. My name is Sophie Jarnos, and I'm Head of Investor Relations. Today's presenters are our CEO and President, Lena Tevrel and our CFO, Hakan Garbertson. After their presentation, there will be an opportunity to ask questions via the telephone conference. We will also have our AGM here in EITIC later today.
So we will try to limit this call to 1 hour. So, Lennart, please go ahead.
Thank you, Sophie. Well, good morning. The Q1 results were published a moment ago, and we're quite pleased. The underlying result is spot on. I think the market expectations.
The group result was slightly lower because of the internal profit, but that's just the timing element. It's SEK 260 1,000,000. So we're very happy with how things have turned out. We are in Aitik with the shareholders today and we're excited to be here. The Kidd II, the new crusher is well on its way.
It's a huge construction. We are seeing the old crushers doing slightly better, and the result of Aitik has been very good actually in the Q1. I think the result and many more actually. We have some somewhat low production in the zinc smelters, tar Kokola and Oda, dollars 1,61,000,000 which is clearly up from last year, as I said, and a little down from the previous quarter. Dollars 1,000,000,000 in cash flows.
The market in general is favorable. We see good demand for most of the construction markets and car, Somewhat concerning that it's debt financed, but China is again driving the market very well. Metals demand were good 2%, 3% in the base metals, copper, zinc and higher in nickel. And we have seen some short term issues in some of the large copper mines in the world and which is holding back the mine supply a little bit, but I think it is shorter term. The zinc price or the prices are following on the slides here and we can see the very strong development for zinc and its environment in the beginning of Q2.
Compared to copper, we see a very different long term trend where too many copper mines came out and put pressure on the copper price, which is still quite low. But the shorter term reaction in the second half of last year and the first quarter is similar to zinc. Reasonably happy with where it ended. The price escalators are gone, but the TC levels are now not going down with a lower zinc price, unfortunately not going up with a high vol. If we combine metal prices, TCs and currencies, as we can see on the right hand, the yellow graph, is a very strong development.
And it's quite unusual that we are seeing both a positive currency development and a positive or together with a positive price environment. So a bit of an unusual positive correlation, whereas they normally go opposite directions, but that obviously are is helping us in the performance. If we look at the prices compared to the cost of the industry, you are familiar with the graphs. The lines are showing the cost level of the 90th, the 75th and the 50th percentile. And you see the spreads earnings, dollars 1,500,000,000 previous year, euros 240,000,000 so of course, it's a huge difference.
And the previous quarter was €1,100,000,000 is quite good actually. If you look at profit now, when we bought it, many were asking, okay, are you buying a loss maker or is it EBITDA positive and things like that. We actually do a return on capital employed in the Q1 of over 13%. So contribution from Kevitsa, it's much as a mines and it's actually down from the previous quarter. Now we are seeing the lower tis is filtering through in the end of the quarter and results in Q4, but that is to a large extent because of an exceptional strong Q4 rather than a weak Q1.
On the production numbers, you can see a good level and but quite flat. On the negative, you can see there is a slice of negative.
Also, symmetry of just over SEK 2,000,000,000 which is very similar to Q4, which was a very strong quarter for that. When it comes to the Q1 of last year comparisons, we're actually close 3x as high profit this quarter. Investments CapEx is just about SEK1 1,000,000,000, just about SEK 1,000,000,000, which is down from last quarter. This is due to changes in working capital and some more tax payments. This leads to an improved debt to equity ratio.
So we're now down to 27%. This is a 5 percentage point reduction in the quarter, and we are approaching the pre acquisition levels as you can see on the comparisons with Q1. We also added a slide on internal profits because I think that came in a bit more negative than many of you expected. Just to repeat, we recognize the profits from the mining divisions only when the metals have been sold to external customers. And as we keep roughly a month of production in inventories, that means that roughly a month of profits from the mines are eliminated on our balance sheets.
So it's purely a timing matter. And when prices increases or when we increase the level of internal concentrate stocks, that means that we have a negative impact on the P and L. And both of those have happened in the Q1. You've all seen the metal prices increase and that explains half of this €260,000,000 In addition, we had some imbalances in the zinc flow where mine production was very good towards the end of the quarter. At the same time, there were some disturbances in both our zinc smelters.
And that has caused higher than average inventories of zinc concentrates, which explains roughly a quarter of this 260,000,000 Again, a timing effect that we will at least the volume component, we'll expect to see coming back in the near future. Diving into a bit more detail about the EBIT and on this first slide, I compare Q1 of 2017 with Q1 of 2016. The main difference is, of course, the strong recovery that we've seen in prices. Metal prices, combined with favorable currencies for us, has added SEK1.6 billion to the profits. In addition, we have higher production in the copper mines.
We have increased the mill production and the grades in Aitik and Kevitsa, which has a positive contribution on the P and L. On the negative side, the higher volumes have also included some higher costs. The higher profitability have meant higher variable remuneration. We have profit sharing schemes and we have bonus schemes that comes up. And then we had some extra costs for the disturbances in the zinc smelters that I talked about.
But all in all, a very strong improvement compared to Q1 a year ago. Compared with Q4, firstly, Q4 was a very strong quarter. We're roughly on the same level, but we have a negative volume impact coming from some more maintenance on the mining side, planned maintenance in a couple of the zinc mines. There has been lower volume in mines, and we changed the deferred stripping model in Kevitsa, which contributes with €50,000,000 in this quarter. And again, better metal prices.
So strong quarter. Moving on then to the cash flow. It's SEK 1,000,000,000, fairly good number. We've tied more in working capital compared to Q4. Inventories have not increased, but prices have pushed up the levels of receivables, for example, in the working capital.
Also in Q1, we paid more taxes. It's if you compare tax charge to the P and L and tax cost, you will see that it's they are the match. But Q1 is typically a quarter where we pay slightly more tax than other quarters. All in all, it adds up to a strong balance sheet. Looking at the curve, we peaked at around 43% gearing after the Kevits acquisition, and we're now down to 27%, an improvement of 5 percentage points in this quarter.
The other key ratios, I believe, were strong. Average interest rate, 1.4 percent and net payment capacity, 7.2 percent. We've started paying down some of the acquisition debt. And you can see on the balance sheet, it's not on this slide. But looking at the balance sheet, you'll see that debt to credit institutions has decreased by billion.
So strengthening the balance sheet, and we're feeling in good shape. Last slide is more of a technical nature. It's an update to the external process inventories. We have higher share of internal material when it comes to gold and silver. So these are the tonnage to use from Q2 and onwards in your simulations.
With that, Lennart, some concluding remarks.
Yes. As I said in the beginning, we are delivering a good result. And going forward, I think you should bear in mind the Aitik mine has been on high up in the pit. We're going deeper and we're saying that we're going to average 0.25 as a grade in 2017 'nineteen. We were not quite on that level in the Q1.
So we expect better development there. Garpenberg have lower reserve grades, but we do not see any difference from the plans of before this big improvements of the reserves. If you look at the previous reserve date average and plan for that in the next 5 years, I think it's the guidance we are giving. Kevitsa had good grades and are having better grades on the depth. You saw it in the Q1.
And the guidance you have in the information here. And we also are unhappy to inform that we had a stop in Tara, which is now performing so well profit wise for 5 days in the beginning of Q2. In the smelters, we have not seen the full effect of the TCs. But as I said, it's not a dramatic sort of deterioration. I think that the combined gross profit for zinc smelters are looking good.
On the maintenance, we have a big year. It's one of the biggest ever. And the maintenance is going to predominantly be in the Q2, but also Q3 and Q4 will carry some of it. The other P200 project is going to be we are having an inauguration there next week and we're going to be seeing the full effect in the second half of the year. CapEx guiding is remaining what we have had before.
To summarize the quarter, we are seeing the benefits of being a mining and smelting company. We have seen that when the mines are now going much stronger, we are seeing part of that offsetting that the smelters are going opposite direction. And last year, we saw very much the other way around. We are seeing the combination of precious metals that we have not streamed out, that we are carrying the precious metals and increasingly much so and giving a good balance to situations where metal base metal prices are weak. I think the production has been in generally going very, very well.
In Q4, someone asked me, are you having any one offs with this surprisingly strong or exceptional strong Q4. And I said, well, no, we don't have any one offs really. Well, wait a minute, maybe 1. Not a single maintenance and every unit did in parallel go very, very well. That is not an exactly a normal situation.
This quarter, we have had some maintenance in Garpenberg, the high profit maker. We have had some issues. So that given, we have a very good result, which is the underlying profit is in line with the market expectation. So with that, I think we can conclude our presentation. And Sophie, you take over.
Yes. Thank you, Leonard and Hakan. We will now open up for questions and from the web sorry from the telephone conference. And may I also ask you to limit yourself with 1 question per person?
And we have first question from Alan Gabriel from Morgan Stanley.
One question from my side on the smelting division. Leonard, you seem to have strong headwinds pending for Q2 in terms of planned and unplanned maintenance and lower pricing terms for zinc and copper TCs. What can you represent the impact of those factors? And it would be great if you can give us some color on the margin development, Q2 versus Q1.
Well, we don't give forecast, as you know. But the guidance we're giving is the numbers, the profit impact from maintenance shutdowns you have, and they're quite big. What I've also said is that if you do the calculations on the TC, the lower TCs, which are in the market, you know them, but also looking at free metals and the high recovery we have in the group, It's actually a quite small impact if the prices zinc prices continue to be strong that is. So I think margin wise, it doesn't look bad at all. Maintenance, we have a big maintenance, and the plan is that they will also sort the minor disturbances we had in the Q1.
So I think it looks good. On copper, while the high TCs continue even though they are slightly lower. So I no, I don't think there is much more of a guidance to give there.
And our next question comes from Daniel Major from UBS. Please go ahead. Your line is now open.
Hi, Leonard. Just a follow on question from Alain's question specifically on the smelters without trying to labor the point. In terms of the individual components of earnings, can you give us a sense of the run rate in terms of free metal generation and byproducts? Are you in terms of earnings variance for those components of smelter earnings outside of the treatment charge?
I mean, the components now in the high price environment we have on zinc, free zinc is more important than TC actually. So that is a main component and we have premium adding to it. But I would say that your conclusion you draw you did the right analysis yourself. I think that we are seeing a slightly lower TC in the Q2 as an effect of the full impact. I mean, in the Q1, we had the old thesis for a while, but the difference isn't dramatic.
I think if I may, Leonard, just adding, looking at the EBIT bridge for smelters, there's a €145,000,000 reduction in volume related profit compared to Q4, and that reduction is basically getting down to a normal level in free metals compared to a very strong Q4.
Okay. So the volumes are now at a normalized run rate for free metals and byproducts. Is that fair?
Yes.
Thank you.
And our next question comes from Ola Sodermaier from Swedbank. Please go ahead. Your line is now open.
Yes, thank you and good morning. If you can clarify the other line and internal profit again, assuming that metal price is staying at this level because it has obviously fluctuate if metal prices have gone up and down, So I've been positive some quarters and negative some quarters. But what run rate should we expect in internal profit at current metal prices and mine production?
Before you take it, I think the main story here is simple. We had maintenance in Garpenberg in the middle of the quarter, and then we took it back in the end of the quarter. So a lot is going to be a plus when the prices are going down. So that's my overall picture. Then you can put some more light on it in detail.
I think to be clear, the impact used inventory levels to more normal levels, you should see roughly 25% of this coming down during the next quarter and the remainder is a function of prices.
So flat prices and flat production is a zero game?
Flat prices and flat inventories is a zero game, yes.
Yes. Thank you.
And our next question comes from Alexander Bergman from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi, thank you. Just one question. You were talking a bit about nickel and how it's just gone below 10,000 again. I just wanted to get like your view on nickel prices and why it's staying so depressed.
Well, first of all, we are I can't. I don't know why it's so depressed. The demand is very strong for nickel. It's a good demand growth. But of course, the reason for it lies somewhere in Indonesia, Philippines and Nickel Pig Iron to China.
The visibility is low. The inventories are very high. I think there is a what will need to happen is the official inventories need to go down, and then I think we are going to see a more normalized price environment. But at this point, we are surprised. I did not expect nickel to go negative.
I thought we would start to see the impact of good demand and good fundamentals. But the Philippines and Indonesia
Go ahead. Your line is now open.
Yes. Hi, everyone. It's Johannes here from Handelsbanken. So Leonard and the team, I know you are sort of hesitant to talk give us details on the grades in Aitik over the quarters. But could you help us a bit how to view the Q2 here being that the grade is moving above the 0.25 already in Q2?
Or will that come in later quarters? And also related to the IT reasons behind it? Thanks.
Well, first of all, on the winter, it was certainly not an unusually cold winter or difficult. It was good. So no major issues relating to the high grade, the highest grades. We have a crusher there, the 285, one of the old crushers with volatility. When the 285 is standing still, we have to take the ore from other parts of the mine, which is lower grade.
When it's up running, it's going to be very high grades. It can be lots higher than 0.25 in that section. We are trying to mix this and we are trying to give get a constant and go around the 0.25 we're guiding for. But the variations will be there, and we're saying again that the volatility must be expected. But of course, if we had 0.23 in the Q1 and we average 0.25, it means higher.
So when that happens, we don't want to go into and we don't know it because of the volatility. But we think that the availability of the crushers are, if anything, slightly better now.
And the €0.25 for the full year is still valid. So just to repeat that.
Okay. Thank you.
And our next question comes from Fraser Jameson from JPMorgan. Please go ahead. Your line is now open.
Yes. Good morning. Thanks for taking the question. Just on maintenance, you've obviously given the overall guidance for the remainder of the year. In terms of the Q2 number, can you give us some sense of the breakdown of that €260,000,000 between volume and pure cost, please?
The main part is volume. That's the biggest component. And the main smelters involved are the copper smelters, it's Remcoeur and Heijerwalta. So cost would be a smaller part of it, so primarily volume.
Okay. I mean, are we talking mines and the cost on Kevitsa? I think you mentioned that you have moved from OpEx to CapEx, the cost in the Kevitsa, was that fully impacted this quarter or will it also impact Q2?
We've adjusted the model for deferred stripping and the impact will be that we take SEK 200,000,000 per year more in CapEx and we take SEK 200,000,000 less in operating costs. And that has been the case in this quarter. And then of course, over time, the amounts that we charge to CapEx will come as depreciation. But the impact of on this quarter is an EBITDA improvement of €50,000,000 and a CapEx, an increased CapEx of SEK 50,000,000
Okay, perfect. And then just on operating costs in Smelters, you were up from around SEK 13.50 million last year to SEK 1,478,000 this quarter Q1 over Q1. Was this mainly volumes in like the whole expansion? Or why was the cost in smelter so much higher than Q1 last
Part is volume, part is cost related to the disturbances that we've been talking about. And then also there is a general inflation on the salary side. And we do have profit sharing programs with all of our employees that is based on financial performance. So with a clearly better, well, return on capital employed this year compared to last year, the variable cost is higher. I guess those are the 3 main components.
Okay. Thanks.
And the next question comes from Connor Rallie from Credit Suisse. Please go ahead. Your line is now open.
Hi. Just a quick one on TCs as well. You said in Q1 that you saw sort of part of the old TCs and part of the new TCs. Can we assume with zinc, given the timing of the announcement towards the end of March, that you saw almost no effect to the new TCs in Q1? Or is there some sort of backdating?
And then also on copper, I think last year it was something like 2 thirds of old, 1 third of new. Is that what we should think in this quarter as well?
It's about fifty-fifty for both metals.
Okay. Thanks. Including zinc?
Yes.
Okay. Right. Thank you.
And the next question comes from Oskar Lindstrom from Danske Bank. Please go ahead. Your line is now open.
Yes, thank you. One question. You mentioned some production problems at the beginning of the Q2, if I understood you correctly. Is that something that you could quantify the impact of?
Yes. We had 5 days of interruption in Tara, and that is over. But I think 5 days of production in Tara should be modeled in.
All right. And that's something that is not going to repeat it. I mean, as far as you know, it's a problem that you've solved, not a problem that just hasn't come back?
No, it's solved. In fact, it shouldn't have that much of an impact on investments in the smelters, I don't think. I think it takes some time to see the price environment. And I think now we are less sensitive to price variation, both good and bad, whether it's the zinc price. Less doesn't have so much of an impact on the group results because it's good for the mines and 70% of that is impacting the smelters in the other way around in both directions.
So we're not that concerned with the zinc situation and so it works well.
Thank you.
And our next question comes from Ellie Ong from Bloomberg Intelligence. Please go ahead. Your line is now open. Hi. Complete for lower milled volumes at the mine.
Thank you.
Who takes that question? Can you do that?
Well, the guiding we gave is that please calculate with the reserve grade that's going forward.
And that's, I think, 6.3 percent?
Yes. I don't know if that came through, but 6.3% for zinc.
6.3%. Thank you very much. And our next question
What's the secret here, please?
Well, the secret, I was asked this question by the Board yesterday, and they said, okay, this is as good as you said when we invested and are you surprised? And I said, no, I'm a little bit negatively surprised by the nickel price. That's a very important factor. Copper has been going well and Kevitsa has a lot of PGMs and they have developed well. So all in all, we have offset the negative nickel environment with the other metals and certainly the PGMs.
Then we have stabilized the production. Production is going very well. And if we look at the performance from the time we didn't own it, it's a very nice development of the mill tonnage. And then we have said higher grades on depth and they are coming. So better grade, better production and a bit of support on copper and PGMs are offsetting the disappointment on nickel.
So I There
are no further questions registered at this time. Please go ahead, speakers.
Yes. Okay. To finalize, as you can hear, we're proud. We're slightly disappointed, of course, not to meet exactly to the level of market expectation. But the underlying profits in both mines and smelters together are on the level.
And we have a negative of $216,000,000 in internal profit. That is a timing element, so it will come back. Some exceptional results in Tara and Kevitsa, we have already mentioned also better stability in Aitik. And a minor problem we see in the zinc smelters, nothing big, nothing much to talk about, I think. So from here, we're happy.
Thank you very much for attending.
Thank you.