Good afternoon and a warm welcome to Voliden's Q2 Earnings Call. My name is Sofia Arnios and I'm Head of Investor Relations here at Voliden. We will do as we usually do. We'll start with presentations from our CEO and President, Renato Tveren and CFO, Mikael Staffas. After that, we will open up for questions.
Renault, please go ahead.
Thank you. We had a strong second quarter. We are doing the annual shutdowns of our smelters and we had announced a disturbance in Aitik. And considering that, I think that we have a great result, strong cash flows and good production maintained cost. If we look at the trend lines, of course, it's very much impacted by the stronger dollar.
And we are in a favorable situation both when with our current portfolio, but also the fact that we have smelters in mines. Our strategic position where mines are having difficult times and smelters are getting a better time and the other way around is giving us a stability. And I think the quarter is a good demonstration of our strategic position. Earnings were up to SEK 10,400,000,000 up from a year before from SEK 9,400,000,000 Earnings before interest and tax was more than tripled to SEK 1,200,000,000 and cash flow was SEK 1,500,000,000 and our gearing is down on 28 percent. High production in mines, strong result in smelters considering the maintenance shutdown certainly, but also if you don't, it's a robust result.
The cash flow has a very strong development. The global macro is of course a reason for concern for our entire industry. The global economic growth is lower than we have seen before and the industrial production growth in China is lower than we have seen lately. And it's not only a cycle change, but it's a fact that China is maturing in development. The good news is that we have a metal portfolio with copper and zinc as the most important, but also precious metals.
I think also here we have a good balance with zinc being one of the most favorable commodities and we're going to see later a very flat price development over a long time. But we also see volatilities and that copper is continuing the negative trend. We have a market term index. If we look at the metal portfolio we have in the group and look at it in Swedish krona, we see a much more stable development than a company more in or with dollar as a main currency. We can see on this graph that Swedish krona to the dollar has been going very favorably, but it's not unique.
Some years back, we had a similar level and we have seen a slight negative trend on the currencies. But still, we are saying that even if it is negative, it's still on favorable levels, but not unique. The zinc is volatile. But if you look at the long term graph to the left, of course, we see a very flat and good development compared to most commodities. In the second quarter, we saw a sharp increase in the middle of the quarter and thereafter a decline.
And the same we see on the short term development in copper where also the same pattern happened with a peak in the middle of the quarter and a closing level lower than in the beginning. We can also see a more typical commodity long term trend with a slight negative development here. Gold and silver on the negative path and the lead stable and looking quite a lot as the zinc. If we now go into the business areas and look at what we have done. Earnings were €650,000,000 compared to €336,000,000 a year earlier.
And the CapEx was on levels of last year. The production level was continuing to be very strong in Erkumay. I think the development in our new mine here, the big investment we have done is something which we're very, very proud of and the ramping up that we're doing right now is on plan and going like a clockwork. I also like to point out the acquired mine in Finland, Kirli Lahti, where we are in high grade areas and which delivered very strong results in the quarter. We had the production disturbance in Cenitic, but not worse than we had anticipated.
And given those that we had in April May, I think we delivered strong in the beginning or in the end of the quarter, good cost control. Mine production, despite volume increase in milled production, the tonnage through the mill. In Aitik, we see the impact of higher grades and the addition of Kirli Lahti and it's a good development. In zinc, we are seeing basically everything is going as planned, but we are on slightly lower grades, which has an impact here. If we look at the smelters, basically a very good development despite the maintenance shutdowns.
Earnings were €600,000,000 compared to €170,000,000 a year ago and our CapEx is slightly over the previous year. The shutdowns were on plan, €180,000,000 were impacting the quarter, most of that in cost, but also the volume impact of the shutdowns. If I pointed out clearly Lakhty as a small and unbeatable performance on the mine side, I would like to pinpoint Oda here, a smelter which was on the really high or low or high cost end of the cash cost curves a few years ago. We have been doing different action plans there and we are delivering very nice profits in order. I also would like to say something about Harjavalta.
A very significant part of the maintenance shutdowns in the quarter was in Harjavalta. And despite that, we delivered strong solid results and over our own anticipations in Harajalalta. On the production numbers, the maintenance shutdown volumes you can see here on the copper side and we can see that we have less of an impact on the zinc side. Here I would also like to point out that the silver production from our new silver recovery plant in Kokola, which has not been ramping up the way we had hoped is now delivering on the internal plans in the past 2 months, not fully in the quarter, but close. And with that, Mikael, could you take over and take us through the financials?
Thank you, Lennart.
Good afternoon to you, everybody. Now I need to get this right. Going through the general numbers, you've seen these. The revenues on the top are a little bit over €10,000,000,000 for the Q2 in a row. And we have nice EBIT excluding the process inventory revaluation of almost €1,300,000,000 We are quite pleased with the results ourselves.
And as been pointed out, we've had a relatively good production underpinning that. Investment levels in the quarter are also around the planned levels that we had internally close to 900,000,000 I will also point out here that we have not revised our guidance for the full year. The guidance of more than SEK4 1,000,000,000 for the full year is still in place. We have a nice free cash flow of almost SEK1.6 billion underpinned by a strong earning, but also release of working capital, which we already said last quarter was likely to happen since we were tying up a little bit too much in the Q1. Now looking at the bridges and how we come from the old level that we had in Q1 and over into Q2, you can see that we have a positive volume effect.
And this positive volume effect is from mines. We have the ramp up in Garpenberg going on, which is important. We had
very nice production in Kirillati, which
are the ones that are driving it. That are driving it. But also mines like Tara and Aitik are actually producing better in Q2, even though we're not at all satisfied with the performance, but they're still better than they were last quarter. Price and terms in this comparison is not so big. It's a little bit positive.
The costs are up, but that's also not such a big thing. We've had big maintenance shutdowns that will be shown on the cost side. And these cost levels that we do have are very much in line with the internal plans that we have and I feel good about the cost control in the company. Compared to last year, we're having a volume effect of close to €300,000,000 In this comparison, there's of course once again the Garpenberg mine and the ramp up and also Kyulakte that was not in the family a year ago that are driving this. We have a very nice development on price and terms especially currencies in this comparison goes to €800,000,000 We are having higher costs, but that's not so strange because we have the ramp up in Garpenberg and we have the kirilakti coming into the family.
So if you take that away, we feel that we have a very good cost control in place. Depreciations are getting a little bit higher. That's also once again very natural. We're having Garpenberg that was not fully depreciating a year back. We're having Hillaakti in the group.
And we're also having more expensive pushbacks in Aitik as we've been explaining previously. The cash flow looks very nice. We've had as I said before, we had a release of working capital of about €400,000,000 That combined with the good strong profits that we've had helps us to get to €1557,000,000 level of free cash flow in the quarter. Here it should also be mentioned that the nickel business that we are running now on our own books since the 1st July basically did not affect the working capital in Q2. The inventories that came in mainly ended up in payables and there was not much cash flow going out.
So that effect is still to come during Q3. The nice positive cash flow also plays in over on the capital structure. You can see the net gearing down to 28% from previous quarters 33%, also in line with plans, in line with the good positive cash flow and also a lowering of the pension liability in Para due to a new calculation that was done and also helped in getting a lower gearing coming in there. With this, Leonard, I will leave it up to you to summarize the quarter.
I think the most important thing to say is we have demonstrated the position that we have created over
a long
period of time. The combination of mines and smelters have not always been positive to every investor or analyst, but I think we have demonstrated that there are strong synergies and is a balancing factor to have both in the same company. We also have a combination of base metals and the share of zinc is particularly good, but we also have precious metals. And they are living different cycles and I think that's also stabilizing the company long term. The high productivity, we are talking about quite often that we have the highest productivity in the world.
And despite the high cost part of the world, we have low production cost because of the high productivity. The production was good in the quarter in both mines and smelters. The cost control is we are quite very satisfied with it, because with a weak Swedish tuna one could have a risk of imported inflation on all things we buy internationally. And of course, they have an increase in relating from currencies. But we have maintained the cost in very active work on the procurement.
Favorable prices and terms. Of course, the terms are currency. It's very good to be in have a lot of cost in Swedish krona, which is having a favorable development. But that is not too different from many of our peers. Many of the commodity nations in the world also have weak currencies or supporting their profits.
Cash flows was well covered by Mikael. If we go forward, what are we doing? ITEC is continuing to have higher grades than we have seen in the past years 0.21 as an average going forward. We have reduced our guidance for the ore tonnage this year. What we lost in the Q2 will not normally be taken up again in Q3 and Q4, not a dramatic change.
The change in or the ramping up of Garpenberg continues and it's going absolutely as a clock. Power up improvements, we are improving, but it's too little improvements to make us happy. But there is an upside here obviously. Coca Cola, we have some stability issues, but all in all very high return on capital. The silver is up running.
I think we have an upside potential in Coca Cola, but basically we're close to where we should be. Their own share action plan is moving on. And you have been continuous sort of information about our progress that is going to plan. To the right here, we see the first deliveries of nickel matte in our new nickel strategy where we are buying nickel concentrate from external mines and we're selling nickel mud to for refining by external parties. And we will build up the or we have started to build up the working capital and we think this is a good strategy, which will contribute to the profits going forward.
The Oda expansion to 200,000 tonnes a year is going to plan and Oda has in general a very good development. And finally, the planned maintenance for this year is essentially taken, but we have €80,000,000 left in Q3 and another €30,000,000 in Q4, so some of it left. And with that, I think we are prepared to take questions, right?
Yes. So we are opening up for questions from our audience via the telephone. Operator, please go ahead.
Our first question comes from Mr. Alain Gabriel. Please go ahead, sir.
Yes. Good afternoon, everyone. This is Alain Gabriel from Morgan Stanley. Just a question and ask for you on the capital management. It looks like we are closing in very quickly on your target of 20% net debt
to equity. Where do we go
from here? Are you having internal discussions? How is your thinking process? How should we think about cash return versus more investments in growth? Any color would be much appreciated.
Thank you.
Well, first of all, it's a very strong quarters. Inventories are going up and down a bit. So the strong cash flows was probably not an indication of every quarter looking the same. We have increased cash flow or investments in the 2nd quarter. But that said, if the terms prevail, of course, we have a very good cash flow profile.
We have not been discussing the gearing of 20%. We come from 32% or 33% I think to 28%, so it's going fast. And we are going to be close to the target levels within a couple of quarters if everything continues. But again, we have not been discussing anything else. And it's likely that or we are going to discuss if we what we shall do with the level if we are talking about return of additional funds or buybacks or something else.
But the answer to your question is no, we have not discussed that yet.
Thank you. And as a quick follow on, do you have a minimum IRR threshold for any new deals or any projects that you can share with the markets?
Well, we are sharing with the market the IRR, the return on investment requirement, which is real 10% nominal 12%. So that is not changed is what we have communicated since several years. So no new communication on this. Okay.
Thank you very much.
Our next question comes from Mr. Leon Fitzpatrick. Please go ahead sir.
Afternoon everyone. Three questions. Just firstly on costs, clearly a good quarter in that respect. Do you think there's still more to go as you ramp up volumes in the second half in twenty sixteen? And if there is, is there any way you can quantify that in percentage returns perhaps?
Secondly, on CapEx, it looks like you're undershooting your guidance by quite some way for 2015. Are you sticking to the guidance for 2015? Or is there potential for some of that to slip into 2016? And then finally just on Aitik, can you confirm that you're fully over the issues that you encountered in Q2? And have you implemented anything that's going to avoid those type of problems coming up in the future?
Thank you.
I think on the cost side, most of the cost plan in Jean Sher has So most of that cost development has been already in the number or is already in the number. The CapEx which is undershooting well is coming a bit on and off, but we have not changed our guidance for the full year. And when it comes to the problems in Aitik, it was shallow levels or the upper parts of the mine where we have oxidized or oxide ore. That happens over the years. Every time when we are up there and also along some areas of the mine we have that kind of situations.
So it will probably come back, but I don't think it will come back in anywhere near the level we had. We have actually not seen the magnitude of problems that suddenly came over us. So it was unexpected. We have learned something from it. But regardless, it's an unusual combination of situations.
But it's a bit of what mining is about. Ore is never the same same, but I think it was a pretty extreme situation. And that one we are over.
Could I just follow-up on the first question on costs? I was referring more to the mining operations. Do you think there's scope for more unit cost reductions over the next 6 to 12 months? Or do you think you're now at a fairly normalized level?
Going forward, I think it relates it depends which mine you're looking at. I think Garpenberg is going to continue to develop in the ramping up. I think it's going to have a positive development because of grades. And but we are basically already there. But the disturbance if you look at the quarter development of course the cost level is improving.
But I would say all in all, no big change.
Okay. Thank you.
Our next question comes from Mr. Gustafsson from Danske Bank. Please go ahead, sir.
Thank you, operator. Good afternoon, everybody. I have a more of a general question. Looking at as you mentioned, your gearing is now obviously dropping quite significantly. Meanwhile, Dorpenberg is up and running.
Coca Cola runs here is doing well. And it looks to me at least as if you have quite a thin project pipeline going forward. And on the acquisition side, while the Swedish krona is positive to you versus the dollar in P and L, it might not be so if you're going out to buy an international asset. So my question is really, what do you see your way forward now to create the maximum shareholder value from here? Is it would it really be prudent to start a new project in current environment?
Or do you see other ways to enhance your value?
Yes. I think if you look at Boullida and compare we're in our industry. We have not been following the normal pattern if there is any normal pattern where everybody got overenthusiastic when profits were up and everything everyone started big risky projects. We didn't do that. And I think now when the market general say that it's payback time we should deliver all the returns, I mean we are not changing our attitudes.
We try to stay out of that sort of cyclical or trends. What we are doing is we are trying to build a project pipeline of profitable projects. And when we have those and with prudent pricing, prudent calculations when they are making sense, of course, we're going to do them. And that's true both for internal projects or for the acquisitions that we are constantly monitoring or following up and having discussions about. So I think that we are less tending to look at the short term movements and more look at long term price, long term terms where are we delivering good returns on the capital we have at our disposal.
I think that's more of a much more of a long term view than trying to maneuver in the short cycles. I don't know if that was a good answer to your question, but it's a bit telling how we think.
All right. Perfect. Thank you.
Our next question comes from Mr. Rob Clifford from Deutsche Bank. Please go ahead sir.
Yes. Thanks guys for the time. Two operational questions. 1 on Agiavealta and the nickel. What are you guys expecting for nickel and that in the second half?
And on an annualized basis, where do you want that to ramp up to as a target? And secondly on Kiriadati, great grades at the moment. In terms of mine plan, how long do you think to be going through those grades? And on a sort of a more future based question, you bought this asset with some exciting perspective drilling below 400 meters. I'm sure you've sent the rigs out there.
I'm also sure even you're normally very conservative you won't necessarily say you've got something here to drill something out. But are you seeing anything at depth there that's keeping your interest in that in the deep believe in like mineralization?
Well, you put the question very elegant there. So you really say, are you going to say something or do you follow the normal track and we follow the normal track. So we're going to update you on it when we release our results in the beginning or together with Q4. On the nickel strategy in Harjavalta, of course, what we are seeing there is a production volume, which is basically the same capacity and production same volume is a guidance going forward as we have done in the past. We are going to assume capital and we think that we can return a decent return on that additional capital.
In other words, margins improve, capital base increases and volumes stay the same. Sorry. And then Kyri L'Alakte, well, we don't guide anything else than the average grade in the reserve and that's true also from Kyuralakti. And you're right, we are on high levels right now.
So just on Kizuzaki, can you indicate how much you're spending then on exploration? Is that something you can let us know?
Right now most of it's not primarily drilling right now. It's a huge data gathering and some drill holes. So it's not a great amount of capital spend on exploration. But you know we have got millions of data points from drill holes over 80 years from Outokampo. We put that into our geological modeling.
And from that, we are doing some test areas, which are obvious, but that's how it works. So we have a full ambition on the new areas. The capital spend or the money spent is still relatively modest.
Okay. Thanks very much for that. Cheers, Carlos.
Our next question comes from Mr. Daniel Major from EBS. Please go ahead, sir.
Hi there and congratulations on strong quarter. Two questions for me. One is a follow-up on Liam's question on CapEx. It sort of seems like the main area where your run rate is below target is in smelters. Could you remind us of the split between mining and smelting CapEx you're expecting in 2015 and obviously going forward?
And sort of why you've been sort of falling short of that anticipated run rate? The second question is on sort of on the markets a little bit more. We saw an accumulation I guess globally of zinc concentrate inventory in the last couple of years. And I guess there's an improvement in the treatment charges. We've seen a big increase in imports of concentrate to China this year.
What are you sort of seeing in the market? Or could you provide us any color on sort of the amount of inventories you're seeing sort of globally in terms of zinc concentrate? Thanks.
Okay. You take capital and I take zinc, right?
Let's do so. On the CapEx, the exact split we haven't really guided for between the two business area, but it is of course, it's been as it's been in many years, mining is the one that's taking most of the investments and so they are. Now for the whole year, I also want to point out if you look into the last few years, we've always had a little bit of a seasonality with our CapEx with relatively large CapEx in Q4. That's the way that usually comes out in our planning. So therefore that we are below the kind of annualized target for the 1st two quarters is according to the plans.
Okay. So just to follow-up on that. And medium term in terms of your longer term CapEx maintenance CapEx, would you expect that to be evenly split between mining and smelting? Is that the same sort of
There is a little bit more typically on mining than on smelting with the developments being calculated as maintenance CapEx. Okay.
And your longer term guidance on maintenance CapEx is still around €2,500,000,000 Yes.
Okay. Thanks.
The question on Singkhan. I think the transparency is not great here and it's difficult to answer your detailed question. I think the most important here is that at a time of for several years, we have had a growth, but a very small growth of the mine production output in the global from the Global Mines. And that will continue and we know some big closures and we know that there are a few new projects. And some of the new projects are also very doubtful.
They are in risky areas and some of them have even been announced that they are going to be later and smaller than what the official sort of metal analysts are saying. So I think that even if the demand is forecasted to be below, I think that certainly in zinc, the supply is also low. When it comes to the concentrate balance, bear in mind also that some of the overcapacity in zinc smelting is inland in China and the zinc smelting capacity in sort of open for the traded material is having already a very high level of capacity utilization. So I think that the visibility is low, but I think bottom line, it's a quite positive picture even for zinc smelting, even though I'm a little bit more nervous about zinc smelting than copper smelting.
Okay. Thanks.
Our next question comes from Mr. Christian Kopfer from Nordea. Please go ahead sir.
Thanks, operator. Just a couple of questions. Firstly, a follow-up on Tara. You expect the volumes to come back during the second half of this year. Is it reasonable to expect that you will reach the say sort of nameplate capacity 2,500,000 tonnes by Q4?
Or is it too optimistic?
We have not been updating our guidance values there. We are seeing that we are going we expect to be improving. Exactly how that is I don't have an update on, but the guidance has not been changed.
All right. On Kildaleghty, maybe just you mind very good volumes obviously for the Q2. Is that reasonable to be kept up also during the second half of this year? Or will you move back to the volume that we saw in the beginning of the year?
I think it was an exceptional quarter, no doubt. But I think we are on a good track. I think the grades you have all the information to model that right. It was a great quarter. Is that sort of the run rate forever?
No, I don't think so. But it's looking good, I have to say. Clearly, Lacti is looking very good.
Thanks for that. And just finally then for on Aitik, it was quite low recoveries, even lower than Q1 for the Q2. Do you expect the recoveries to come back to normal already in Q3?
The short answer is yes.
Okay. Perfect. Thank you very
much. Our next question comes from Mr. Johannes Jenszelius from Handelsbanken. Please go ahead sir.
Yes. Hello, everyone. Johannes here. Just a question on the smelters. Can you give some more color on the mix you had during the quarter?
Were you very happy with that? Could we see that as a or could we see that as a very normal mix? Or could you give some color on that please?
What kind of mix are you referring to? Yes.
I mean, you typically like to take care of what
you sometimes call
dirty
Yeah.
Yes. Well, it's always very interesting. I don't have any precise information by heart, but I'm not seeing that we had any 2 sort of unusual combinations there. I think that we are seeing recovery improvements in run share. We are seeing the silver coming from Coca Cola.
And then basically we of course, when we do shutdowns, we try to do some we are more limited. So we have we are tweaking that and exactly how that is staying in with the mix, I don't I couldn't say. But I don't think it's anything else than what you have seen. There are no extremes I am aware of.
Okay. That's all for me. Thank
There are no further questions at this time. Please go ahead speakers.
Okay. Thank you for joining us today. We will have our Q3 report published on 23rd October. Hope to see you there.
Thank you.