Good afternoon, a warm welcome to Boliden's Q2 earnings call. My name is Sophie Arnius, and I'm Head of Investor Relations here at Boliden. We will do as we usually do. We'll start with presentations from our CEO and President, Lennart Evrell, and CFO, Mikael Staffas. After that, we will open up for questions. Lennart, please go ahead.
Thank you. We had a strong second quarter. We are doing the annual shutdowns of our smelters. We had announced the disturbance in Aitik. 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. We are in a favorable situation, both with our currency portfolio, but also the fact that we have smelters and 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 stability. I think the quarter is a good demonstration of our strategic position. Earnings were up to SEK 10.4 billion, up from a year before, from SEK 9.4 billion.
Earnings before interest and tax was more than tripled to SEK 1.2 billion. Cash flow was SEK 1.5 billion, and our gearing is down on 28%. 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. The industrial production growth in China is lower than we have seen lately. 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. We're going to see later a very flat price development over a long time. 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 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. 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. 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 are on the negative path, 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 SEK 650 million compared to SEK 336 a year earlier, the CapEx was on levels of last year. The production level was continuing to be very strong in Garpenberg. I think the development in our new mine here, the big investment we have done is something which we're 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, Kylylahti, where we are in high-grade areas and which delivered very strong results in the quarter. We had the production disturbances in Aitik, but not worse than we had anticipated. Given those that we had in April and May, I think we delivered strong 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 Kylylahti, 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 SEK 600 million compared to SEK 170 a year ago. Our CapEx is slightly over the previous year. The shutdowns were on plan, SEK 180 million were impacting the quarter, most of that in cost, but also the volume impact of the shutdowns. If I pointed out Kylylahti as a small and beautiful performance on the mine side, I would like to pinpoint Odda here. A smelter which was on the really high cost end of the cash cost curves a few years ago.
We have been doing different action plans there, we are delivering very nice profits in Odda. I also would like to say something about Harjavalta. A very significant part of the maintenance shutdowns in the quarter was in Harjavalta, despite that, we delivered strong, solid results and over our own anticipations in Harjavalta. On the production numbers, the maintenance shutdown volumes you can see here on the copper side, 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 Kokkola, which has not been ramping up the way we had hoped, is now delivering on the internal plans in the past two months. Not fully in the quarter, but close. 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 SEK 10 billion for the second quarter in a row. We have nice EBIT excluding the process inventory valuation of almost SEK 1.3 billion. 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 SEK 900 million. I will also point out here that we have not revised our guidance for the full year. The guidance of a little more than SEK 4 billion for the full year is still in place.
We have a nice free cash flow of almost SEK 1.6 billion underpinned by a strong earning, 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 first quarter. 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. 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 Kylylahti, which are the ones that are driving it. Also mines like Tara and Aitik are actually producing better in Q2, even though we're not at all satisfied with the performance, 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, that's also not such a big thing. We've had big maintenance shutdowns that will be shown on the cost side, these cost levels that we do have are very much in line with internal plans that we have, I feel good about the cost control in the company. Compared to last year, we're having a volume effect of close to SEK 300 million. In this comparison, there's of course, once again, the Garpenberg mine and the ramp-up, also Kylylahti 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, close to SEK 800 million.
We are having higher costs, that's not so strange because we have the ramp-up in Garpenberg, we have the Kylylahti coming into the family. 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 Kylylahti in the group. 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 SEK 400 million. That combined with the good strong profits that we've had helps us to get to a SEK 1,557 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 of July, basically did not affect the working capital in Q2. The inventories that came in mainly ended up in payables. 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 quarter's 33%. In line with plans, in line with the good positive cash flow. A lowering of the pension liability in Tara due to a new calculation that was done also helped in getting a lower gearing coming in there. Lennart, 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. 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. I think that's also stabilizing the company long term. The high productivity we're 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 costs because of the high productivity. The production was good in the quarter in both mines and smelters.
The cost control, we're very satisfied with it because with a weak Swedish krona, one could have a risk of imported inflation on all things we buy internationally. Of course, they have an increase relating from currencies. We have maintained the cost in very active work on the procurement. Favorable prices and terms. The terms are currency. It's very good to have a lot of cost in Swedish krona, which is having a favorable development. 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 nickel. What are we doing? Aitik 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 second quarter 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. There is an upside here, obviously. Kokkola, 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 Kokkola, but basically we're close to where we should be. Their own share action plan is moving on, and you have been continuous information about our progress there. It's going to plan.
To the right here, we see the first deliveries of nickel matte in our new nickel strategy, where we're buying nickel concentrate from external mines, and we're selling nickel matte for refining by external parties. 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 order expansion to 200,000 tons a year is going to plan, and order has, in general, a very good development. Finally, the planned maintenance for this year is essentially taken, but we have SEK 80 million left in Q3 and another SEK 30 million in Q4. Some of it left. With that, I think we are prepared to take questions, right?
Yes. We are opening up for questions from our audience via the telephone. Operator, please go ahead.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. That is 01. 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 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 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 second quarter. 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. We're going to be close to the target levels within a couple of quarters if everything continues. Again, we have not been discussing anything else, and it's likely that we are going to discuss what we shall do with the level if we are talking about return of additional funds or buybacks or something else.
The answer to your question is no, we have not discussed that yet.
Thank you. 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. That is not changed. It was we have communicated since several years. No new communication on this.
Okay. Thank you very much.
Our next question comes from Mr. Liam 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 2016? If there is there any way you can quantify that in % terms 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? Finally, just on Aitik, can you confirm that you're fully over the issues that you encountered in Q2? 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 Rönnskär has been taken. More of the additional results of the action plan is in process and production and recoveries. Most of that cost development has been already in the number or is already in the number. The CapEx, which is undershooting, well, it's coming a bit on and off. We have not changed our guidance for the full year. 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. 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 all suddenly came over us. It was unexpected. We have learned something from it, but regardless, it's an unusual combination of situations. It's a bit of what mining is about. Ore is never the same-same, but I think it was a pretty extreme situation. 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 6-12 months, or do you think you're now at a fairly normalized level?
Going forward, I think it depends which mine you're looking at. I think Garpenberg is going to continue to develop in the ramping up. Aitik is going to have a positive development because of grades. We're basically already there. The disturbance, if you look at the quarter development, of course, the cost level is improving. I would say all in all, no big change.
Okay. Thank you.
Our next question comes from Mr. Gustaf Sandström from Danske Bank. Please go ahead, sir.
Thank you, operator. Good afternoon, everybody. I have more of a general question. Looking at, as you mentioned, your gearing is now obviously dropping quite significantly. Meanwhile, Garpenberg is up and running, Kokkola and Rönnskär is doing well. It looks to me at least as if you have quite a thin project pipeline going forward. On the acquisition side, while the Swedish krona is positive to you versus the dollar in P&L, it might not be so if you're going out to buy international asset. My question is really: Where do you see your way forward now to create the maximum shareholder value from here? Would it really be prudent to start a new project in current environment, or do you see other ways to enhance your value?
I think if you look at Boliden compared, we're in our industry. We have not been following the normal pattern, if there is any normal pattern, where everybody got over-enthusiastic when profits were up and everyone started big risky projects. We didn't do that. I think now when the market general say that it's payback time, we should deliver all the returns. We are not changing our attitudes. We try to stay out of that cyclical or trends. What we're doing is we are trying to build a project pipeline of profitable projects. When we have those, and with prudent pricing, prudent calculations, when they are making sense, of course, we're going to do them. That's true both for internal projects or for the acquisitions that we are constantly monitoring or following up and having discussions about.
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 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 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, one on Harjavalta and the nickel. What are you guys expecting for nickel matte in the second half? On an annualized basis, where do you want that to ramp up to as a target? Secondly, on Kylylahti, great grades at the moment. In terms of mine plan, how long do you think to be going through those grades? On 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 you're normally very conservative. You won't necessarily say you've got something here to drill something out. Are you seeing anything at depth there that's keeping your interest in the deep Boliden-like mineralization?
You put the question very elegant there, you really said, are you going to say something or do you follow the normal track? We follow the normal track. We're going to update you on it when we release our results together with Q4. On the nickel strategy in Harjavalta, of course, what we're seeing there is a production volume, which is basically the same capacity and same volume as the 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. Then Kylylahti, well, we don't guide anything else than the average grade in the reserve, and that's true also from Kylylahti. You're right, we are on high levels right now.
Just on Kylylahti, can you indicate how much you're spending on exploration? Is that something you can let us know?
Right now, it's not primarily drilling right now. It's a huge data gathering and some drill holes. It's not a great amount of capital spend on exploration. We have got millions of data points from drill holes over 80 years from Outokumpu. 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. 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.
Our next question comes from Mr. Daniel Major from UBS. Please go ahead, sir.
Hi there. Congratulations on a strong quarter. Two questions from 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 falling short of that anticipated run rate? The second question is 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 as an improvement in the treatment charges have seen a big increase in imports of concentrate to China this year. What are you seeing in the market, or could you provide us any color on the amount of inventories you're seeing 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, as it has been in many years, mining is the one that's taking most of the investments. They are. Now, for the whole year, I also want to point out, if you look in 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. Therefore, that we are below the kind of annualized target for the first two quarters is according to the plans.
Okay. Just to follow up on that, 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. Your longer term guidance and maintenance CapEx is still around SEK 2.5 billion?
Yes.
Okay, thanks.
The question on zinc concentrate. 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 from the global mines. That will continue, and we know some big closures, and we know that there are a few new projects. 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. I think that even if the demand is forecasted to be low, 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. 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 nameplate capacity, 2.5 million tons by Q4 or is it too optimistic?
We have not been updating our guidance values there. 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 Kylylahti, you mined very good volumes, obviously, for the second quarter. Is that reasonable to be kept up or 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. 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 the run rate for forever? No, I don't think so. It's looking good, I have to say. Kylylahti is looking very good.
Thanks for that. Just finally then, on Aitik, was quite low recoveries, even lower than in Q1. For the second quarter, 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 Gjenselius 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 very normal mix, or could you give some color on that, please?
What kind of mix are you referring to?
Yeah. You typically like to take care of what you sometimes call dirty concentrates that you get better-
Material feed is the normal-
Yeah. Material feed, yeah.
Well, it's always variating. I don't have any precise information by heart. I'm not seeing that we had any two unusual combinations there. I think that we are seeing recovery improvements in Rönnskär. We are seeing the silver coming from Kokkola. Basically, of course, when we do shutdowns, we are more limited. We are tweaking that, and exactly how that is playing in with the mix, I couldn't say. 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 from me. Thank you.
I remind you, if you have a question for the speakers, you'll have to press zero one on your telephone keypad. That is zero one. 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 of October. Hope to see you there.
Thank you.