Good morning, and a warm welcome to the presentation of Boliden's result for the first quarter 2017. My name is Sophie Arnius, and I'm head of investor relations. Today's presenters are our CEO and President, Lennart Evrell, and our CFO, Håkan Gabrielsson. After their presentation, there will be an opportunity to ask questions via the telephone conference. We will also have our AGM here in Aitik later today, so we will try to limit this call to one hour. Lennart, please go ahead.
Thank you, Sophie. Well, good morning. The first quarter 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 a timing element. It's SEK 260 million. 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 KID 2, 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 first quarter. I think the result, and many more, actually. We have somewhat low production in the zinc smelters, Tara, Kokkola, and Odda.
SEK 2.61 billion, which is clearly up from last year, as I said, and a little down from the previous quarter. SEK 1 billion 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. We have seen some short-term issues in some of the large copper mines in the world, 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 the second quarter.
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. 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 level. If we combine metal prices, TCs, and currencies, as we can see on the right hand, the yellow graph, is a very strong development. It's quite unusual that we are seeing both the positive currency development and a positive or together with a positive price environment.
A bit of an unusual positive correlation, whereas they normally go opposite directions, but that obviously 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. You see the spreads. Earnings, SEK 1.5 billion. Previous year, SEK 240 million. Of course, it's a huge difference. The previous quarter was SEK 1.1 billion. It's quite good, actually. If you look at the 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 first quarter of over 13%. Contribution from Kevitsa, it's as much as the mines, and it's actually down from the previous quarter.
Now we are seeing the lower TCs filtering through in the end of the quarter. 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 but quite flat. On the negative, you can see there is a slice of negative.
It was a symmetry of just over SEK 2 billion, 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 to three times as high profit this quarter. Investments, CapEx is just above SEK 1 billion. Just about SEK 1 billion, 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. 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 sheet. It's purely a timing matter, and when prices increase, or when we increase the level of internal concentrate stocks, that means that we have a negative impact on the P&L. Both of those have happened in the first quarter. You've all seen the metal prices increase, and that explains half of these SEK 260 million. 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, that has caused higher than average inventories of zinc concentrates, which explains roughly a quarter of this SEK 260 million. 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. On this first slide, I compare Q1 2017 with Q1 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 SEK 1.6 billion to the profits. In addition, we have higher production in the copper mines. We've increased the mill production and the grades in Aitik and Kevitsa, which has a positive contribution on the P&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. We had some extra costs for the disturbances in the zinc smelters that I talked about. 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's been lower volume in mines, and we changed the deferred stripping model in Kevitsa, which contributes with SEK 50 million in this quarter. Again, better metal prices. Strong quarter. Moving on to the cash flow. It's SEK 1 billion. Fairly good number. We've tied more in working capital compared to Q4.
Inventories have not increased, prices have pushed up the levels of receivables, for example, in the working capital. Also, in Q1, we paid more taxes. If you compare tax charge to the P&L and tax cost, you will see that they match. 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 Kevitsa acquisition, and we're now down to 27%, an improvement of f5 percentage points in this quarter. The other key ratios I believe are strong. Average interest rate, 1.4%. Net payment capacity, 7.2%.
We've started paying down some of the acquisition debt, you can see on the balance sheet, it's not on this slide, looking at the balance sheet, you'll see that debt to credit institutions has decreased by SEK 1.6 billion. Strengthening the balance sheet, 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.
Yeah, as I said in the beginning, we are delivering a good result. Going forward, I think you should bear in mind the Aitik mine has been on high up in the pit. We are going deeper, and we are saying that we are going to average 0.25 as grade in 2017 and 2019. We were not quite on that level in the first quarter. 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 five years, I think it is the guidance we are giving. Kevitsa had good grades, and are having better grades on the depth. You saw it in the first quarter. The guidance you have in the information here.
We also are unhappy to inform that we had a stop in Tara, which is now performing so well profit-wise, for five days in the beginning of Q2. In the smelters, we have not seen the full effect of the TCs. As I said, it is 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 is one of the biggest ever, and the maintenance is going to predominantly be in the second quarter, but also Q3 and Q4 will carry some of it. Our other P200 project is going to be, we are having inauguration there next week, and we are 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, where we are carrying the precious metals, and increasingly much so, and giving a good balance to situations where base metal prices are weak. I think the production has been, in general, going very well. In Q4, someone asked me, "Are you having any one-offs with this surprisingly strong or exceptional strong Q4?" I said, "Well, no, we do not have any one-offs, really. Well, wait a minute. Maybe one." Not a single maintenance and every unit did, in parallel, go very well.
That is not exactly a normal situation. This quarter, we have had some maintenance in Garpenberg, the high profit maker. We have had some issues. That given, we have a very good result, which is the underlying profit is in line with the market expectation. With that, I think we can conclude our presentation. Sophie, you take over.
Yes. Thank you, Lennart and Håkan. We will now open up for questions from the telephone conference. May I also ask you to limit yourself with one question per person.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you'll enter a queue. We have a first question from Alain Gabriel from Morgan Stanley. Please go ahead. Your line is now open.
Yes. Good morning, ladies and gentlemen. One question from my side on the smelting division. Lennart, you seem to have strong headwinds building for Q2 in terms of planned and unplanned maintenance and lower pricing terms for zinc and copper TCs. What company effect of those factors? It would be great if you can give us some color on the margin development Q2 versus Q1. Thank you.
Well, we don't give forecasts, as you know, but the guidance we're giving is the numbers, the profit impact from maintenance shutdowns you have, they're quite big. What I've also said is that if you do the calculations on 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 zinc prices continue to be strong, that is. I think margin-wise, it doesn't look bad at all. Maintenance, we have a big maintenance, the plan is that they will also sort the minor disturbances we had in the first quarter. I think it looks good. On copper, well, the high TCs continue, even though they are slightly lower. No, I don't think there is much more of a guidance to give there.
Thank you.
Our next question comes from Daniel Major from UBS. Please go ahead, your line is now open.
Hi, Lennart. 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 often, in terms of earnings variance or for those components of smelter earnings outside of the treatment charge?
The components now in the high price environment we have on zinc. free zinc is more important than TC, actually. That is a main component, and we have premium adding to it. 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 second quarter as an effect of the full impact. In the first quarter, we had the old TCs for a while. The difference isn't dramatic.
I think if I may, Lennart, just adding. Looking at the EBIT bridge for smelters, there is a SEK 145 million reduction in volume-related profit compared to Q4. That reduction is basically getting down to a normal level in free metals compared to a very strong Q4.
Okay. The volumes are now at a normalized run rate for free metals and byproducts. Is that fair?
Yes.
Thank you.
Our next question comes from Ola Södermark from Swedbank. Please go ahead. Your line is now open.
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 fluctuated if metal prices are going up and down. That being positive some quarters and negative some quarters. What run rate should we expect in, as internal profit at the 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. Lar is going to be a plus when the prices are going down. That's my overall picture. You can put some more light on it in detail.
To be clear, the impact reduced the 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.
Flat prices and flat production is a zero game?
Flat prices and flat inventories is a zero game. Yes.
Yes. Thank you.
Our next question comes from Jason Fairclough 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 your view on nickel prices and why it's staying so depressed.
Well, first of all, I can't. I don't know why it is so depressed. The demand is very strong for nickel. It is a good demand growth. 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 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. 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. The Philippines and Indonesia-
Go ahead. Your line is now open.
Yes. Hi, everyone. It is Johannes here from Handelsbanken. Lennart and the team, I know you are sort of hesitant to give us details on the grades in Aitik over the quarters, 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? Also related to the Aitik reasons behind it. Thanks.
Well, first of all, on the winter, it was certainly not an unusually cold winter or difficult. It was good. 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 is up running, it is 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 get a constant and go around the 0.25 we are guiding for. The variations will be there, and we are saying again that the volatility must be expected. Of course, if we had 0.23 in the first quarter and we average 0.25, it means higher.
When that happens, we don't want to go into, we don't know it because of the volatility. We think that the availability of the crushers are, if anything, slightly better now.
The 0.25 for the full year is still valid, just to repeat that.
Okay. Thank you.
Our next question comes from Fraser Jamieson from JP Morgan. Please go ahead. Your line is now open.
Yeah, 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 SEK 260 million between volume and pure cost, please?
The main part is volume. That's the biggest component. The main smelters involved are the copper smelters. It's Rönnskär and Harjavalta. Cost would be a smaller part of it. Primarily volume.
Okay. 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, the impact will be that we take SEK 200 million per year more in CapEx, and we take SEK 200 million less in operating cost. That has been the case in this quarter. Then, of course, over time, the amounts that we charge to CapEx will come as depreciation. The impact on this quarter is an EBITDA improvement of SEK 50 million and an increased CapEx of SEK 50 million.
Okay, perfect. Thanks. Just on operating cost in smelters, you were up from around SEK 1,750 million last year to SEK 478 million this quarter Q1 over Q1. Was this mainly volumes in the Odda expansion, or why was the cost in smelters so much higher than in Q1 last year?
Part is volume, part is cost related to the disturbances that we've been talking about. Also there is a general inflation on the salary side. We do have profit-sharing programs with all of our employees that is based on financial performance. With a clearly better return on capital employed this year compared to last year, the variable cost is higher. I guess those are the three main components.
Okay. I see. Thanks.
The next question comes from Conor Rowley 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, you saw almost no effect of the new TC in Q1, or is there some sort of backdating? Also on copper, I think last year it was something like two-thirds of old, one-third of new. Is that what we should think in this quarter as well?
It's about 50-50 for both metals.
Okay, thanks. Including zinc?
Yes.
Okay. Right. Thank you.
The next question comes from Oskar Lindström from Danske Bank. Please go ahead. Your line is now open.
Yes, thank you. One question. You mentioned some production problems at Tara at the beginning of the second quarter, if I understood you correctly. Is that something that you could quantify the impact of?
Yes, we had five days of interruption in Tara, and that is over. I think five days of production in Tara should be modeled in.
All right. That's something that is not going to repeat, 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.
Okay. Thank you.
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're less sensitive to price variation, both good and bad, whether it's the zinc price. 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. We're not that concerned with the zinc situation. It works well.
Thank you.
Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad now. Our next question comes from Eily Ong from Bloomberg Intelligence. Please go ahead. Your line is now open.
Hi, can you say for lower mill volumes at the mine? Thank you.
Who takes that question? Okay, you know that or?
Well, the guiding we give is that please calculate with the reserve grade that's going forward.
That's zinc, 6.3%.
Yeah. I don't know if that came through, but 6.3% for zinc.
6.3%. Thank you very much. As a final reminder, ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. Our next question.
What's the secret here, please?
Well, the secret, I was asked this question by the board yesterday, and they said, "Oh, okay, this is as good as you said when we invested, and are you surprised?" 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. All in all, we have offset the negative nickel environment with the other metals and certainly the PGMs. 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's a very nice development of the mill tonnage. We have said higher grades on depth, and they are coming.
Better grade, better production, and a bit of support on copper and PGMs are offsetting the disappointment on nickel.
There are no further questions registered at this time. Please go ahead, speakers.
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. The underlying profits in both mines and smelters together are on the level, and we have a negative of SEK 260 million 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. From here, we're happy. Thank you very much for attending.
Thank you.