Good morning, and a warm welcome to the presentation of Boliden's results for the first quarter of 2015. We're broadcasting live today from our zinc mine, Garpenberg, in Sweden. My name is Sophie Arnius, and I'm Head of Investor Relations here at Boliden. Today's presenters are our CEO and President, Lennart Evrell, and CFO, Mikael Staffas. After their presentations, there will be an opportunity to ask questions via the phone. We will also have our AGM later today, the event today is planned not to take more than one hour. Lennart, please go ahead.
Thank you. Good morning. Well, we are presenting the first quarter results. Maybe a bit of a disappointment to some when it comes to production numbers, most of the production decline compared to Q4 are well communicated and absolutely according to plan. Year-over-year, we have a very strong production development. If we look at the summary, we had sales of SEK 10.4 billion compared to SEK 8.5 billion the previous year. EBIT, and without the revaluation of inventories, were SEK 1.1 billion compared to SEK 385 million, almost three times up compared to the year before, and on the same level as the fourth quarter. The cash flow is low. We ended the year with very low inventory levels, we had a buildup in the first quarter. We're not nervous about this buildup.
We see, I think many will say that, okay, the first quarter is very much a result of strong USD compared to weak SEK. There is a different story, which is long-term, that we have followed the strategy and we have positioned ourselves with mines and smelters. When the mines are now having more difficulties than in the strong periods a few years back, we can now see that it's the smelters which are driving the profits to a large extent. Strong USD is, of course, an impact of the situation or the good results, also the smelter terms and premiums. The terms have been more favorable for the smelters than for the mines.
The expansion of Garpenberg continues on plan, we are very proud, we have the AGM here today, it's a great project we're going to show. The lower volume in the fourth quarter is compared to the previous quarter, strong year-over-year development. Cost is under control. The working capital is higher, as we know. We have an appeal regarding the diesel tax that has been in Aitik, which has been an ongoing process. It has been rejected, the process continues. On the demand side, the macro continues to be soft on the global industrial growth, as a consequence, the base metals demand. It's driven by China, the rest of the world is a mixed picture. There is growth in the demand.
The metals markets are therefore softer and driven by the global macro, and the growth continues but on a lower level in China. The zinc is in deficit, and the copper is in a slight surplus, not as high as expected or anticipated some time ago. The dollar to most currencies development is well known to you. If we look at Boliden's particular sensitivity to the terms, we can look at the portfolio of Boliden's metals, and if you put them together with their proper weights and we look at them in our cost currency or primary cost currency, Swedish krona, we can see that the impact on the currencies and metal prices combined is that we have recovered the downturn 2013 and 2014, and we are approximately on the same level as we were in 2010 and 2011.
On this particular page, we can look at the Swedish krona development, the dark blue, but we can also see, for those not being European, that the euro has had a similar development or very similar development as the krona. We sell everything in US dollars, and if we look at the zinc prices, they have been essentially flat over a long period of time. In the last couple of quarters, we have seen a decline. The average of the Q1 was clearly below Q4, but we saw a recovery towards the end of the quarter and in the beginning of the new quarter. If we look at the copper, the long-term trend is down, not flat as with zinc, and we see this decline into Q1. The average was considerably lower than Q4 in dollars, but also here, an improvement towards the end of the quarter.
The precious metals, gold and silver, have had a long-term decline, continuous basically in line with the gradual deterioration we have seen in the past. Lead has been having a stronger decline than we have seen before, and we had not expected this soft lead development. If we go into the different business areas, and we start with the mines. Profits were much, much higher than last year, probably because of the improved terms, but also the ramp up of Garpenberg. Also we would like to mention the Boliden area, which has had low profits for a long or several years, and which is delivering very promising results now. Good development in Aitik when it comes to grades, but lower production. The grade improvements has come as forecasted, and the production has been lower also as forecasted.
There was winter this year as every winter, of course, but this time it was probably less affected by extreme low temperatures, but more of very heavy snowfalls. We are driving the trucks in steep hills, and it's dangerous to drive them without clearing the snow, and also the snow is coming with the ore into the conveyor belts and ore storages and creates ice and other issues there. Normal seasonality, in other words. The Garpenberg success is there, but we see compared to Q4, slightly lower production. That is perfect in line with our guidance before. We had built up an ore storage over several years, which was depleted by the end of the year. Now we are continuing the ramp up of the mine, which will be in full production at the year-end.
Therefore, when we go into the new year without the stockpile, we go to a slightly lower level. Actions in Tara continue. If we look at the numbers in ore production, we see the decline, and also compared to a year earlier, it is a rather low ore production in Q1. We see the solid or the line diagram on slide 11 that copper production was holding up, primarily because of higher grades in Aitik, but also the Kylylahti mine, which we did not have a year ago, but we had it in the previous quarter. If we look at the zinc production, it is up, of course, with the startup of Garpenberg year-on-year, but it is lower than probably anticipated growth some time ago because of the issues in Tara, which we assume will be over in the end of this year or in the second half.
We go on to the smelters, a huge increase in earnings as seen on this picture, which is a result of the action plans we have been talking about, but primarily also on the sequential development because of the terms, which is playing well into the hands of the smelters. Earnings were SEK 681 compared to less than SEK 200 million a year ago, and on the same level as in Q4. Stronger USD improved terms are the main drivers here. If we look at the tonnages in copper, it is a reasonable and quite good quarter, but not as good as the outstanding Q4, which was very, very strong. In zinc, we have a reasonable quarter too, but not as good as the outstanding or very, very strong Q4. Here we have some issues in Kokkola, which we had not planned for.
Now, I hand over to you, Mikael, for the financials.
Thank you, Lennart. Good talking to you everybody this morning. Let us talk briefly through the financials. On the first page, you are seeing the summary of the numbers that we are having. The main number, as always, is the profit excluding the processing material revaluation at SEK 1,102. I will briefly actually comment on the EBIT after revaluation. Here, that one is slightly lower. I will come back to that. We have done some adjustments to the valuation model for the process inventory revaluation that comes out about SEK 40 million less than it would have done otherwise. Investments, as you can see here, are also slightly lower than previous periods, and the free cash flow closes zero, and I will get back to the cash flow and see what has happened there. If we look at the bridge and looking what has happened, we can see that the volumes compared to last quarter are clearly less.
We've had Aitik with winter impact, but also more maintenance, as Lennart has said. In Garpenberg, we had a very strong Q4 because we were milling from the stockpile. The stockpile ended very early in the year, we did not really have that effect at all during Q1. We had a very strong smelter production in Q4 that we could not copy in Q1. A last point, which has to do with the way that we've set up these bridges. We've changed one thing. We have on the group level taken away the internal profit elimination, we've taken that into its pieces, which is a volume effect in reality. Because of this, we've had some buildup of inventory, this buildup of inventory gives a negative volume effect as well. Price and terms are positive, that's overexplained by the currencies that we heard before.
The metal price is actually working the other way around. Costs clearly lower than the previous quarter, of course, linked to the lower production, we also feel good about the cost control that we have in the operations right now. Looking compared to last year, the volumes are up that's not so strange. We have Kylylahti in the system, we have Garpenberg ramp up now in the system that we did not have a year ago. Prices and terms are clearly very favorable for us, it's once again, it's the currencies are explaining or overexplaining the whole effect. Costs are higher, that's not so strange, that's linked to the ramp-up of Garpenberg and Kylylahti. We still here feel that we've good control over our costs. Depreciations are up. Not so strange. We have the Garpenberg effect.
There's some depreciation connected to Kylylahti, also, as we've said previous quarters, we are in Aitik now moving over to the pushback six, which is a more expensive pushback in terms of depreciation than the previous S2 that was the main part of production last year. Cash flow. This is probably one where you have some questions and you're trying to understand what's happened, we have a tie-up of working capital of SEK 1 billion or a little bit more than SEK 1 billion. Why does this happen? There are two main effects. One is the improvement in prices and terms. That alone roughly gives a tie-up of about SEK 250 million in the working capital as such. About a quarter of the effect is that price and term effect.
We have the effect of having very low year-end tie-up of working capital, where we had a very good production quarter, with a good production quarter, very low inventories, especially of concentrates going out of the year. That effect going back to a normal level is in the order of magnitude of SEK 0.5 billion, the rest SEK 250 is that we're actually a bit above normal levels in the end of Q1. Cash flows from investments, I'll come back to talk about investment for the whole year in a little while. Capital structure, there is nothing remarkable changing here. We have not done any major refinancing or anything within the period. The loan duration is slightly lower. As it happens when you don't refinance anything, the gearing is slightly lower with the improvements in equity we've had. CapEx projection.
We have come up with a new guidance for 2015, a correction of the previous one, and a guidance for 2016, where we had not guided before. For 2015, we are lowering the guidance from 4.5 to slightly more than SEK 4 billion. This is mainly that we have gone through our investment project. We have pushed investments out in time, and we feel that we can do that without jeopardizing the production going forward, and therefore, that's the appropriate thing to do. We're also coming up with the end guidance for 2016, which comes up at slightly below SEK 4 billion for 2016. We'll probably come back in the questions about what the effects are in there. On the process inventory valuation and the update here, as you know, there's always been an internal and external part of the inventory in the sense of how it's been valuated.
The external's been valuated at market terms, and the internal been valuated at cost. Cost typically being lower than the external valuation. Now, with the new mine in Garpenberg and with the Kylylahti mine in the system, we have adjusted our valuation model, and we have lowered slightly the external numbers, and we've increased the internal numbers. You see the new external process inventory numbers here. This means that you have slightly different numbers to work on when you're doing your modeling going forward. You also get a one-time effect from the fact that the internal inventory is valued much lower than the external, and that's roughly SEK 40 million that came into Q1 as a one-off effect of this changing. With that, Lennart, I'll give it back to you to summarize the quarter.
Thank you. Well, first of all, the project update. I would say that most of the projects are continuing as planned. Garpenberg, the ramp-up continues. The silver recovery in Kokkola has been hit by the changes in the production in the main zinc flow and the material feed into the new silver production has not been as good as planned. We think we have our arms around it, but there is a slight degree of uncertainty for that one. Aitik 45, the ramp-up is continuing, and we have good news because we can push a little bit the CapEx after the repairs or the stabilizing of the crusher systems that we have done. We think that we can push the new crushers a little bit forward. The permit appeal is an ongoing process. It's basically normal, but we continue the appeal process.
In Odda, we have decided to continue with P200. Don't mix it with P100 that we decided on a couple of years back. That was cost down SEK 100 million. The P200 project in Odda is to increase the production to 200,000 tons per year of zinc from the 160 where we are. Finally, Laver. The application for exploitation concession has been appealed, or we have a hiccup at a quite early stage of the Laver permit process. This is somewhat a concern to us, but quite normal. If we summarize the first quarter, we think that short term, we had very strong smelter development and smelter terms, but we are essentially there because of a position that we have built up over many years. A combination of smelters and mines is a stabilizing factor. Today, it's the smelters which is driving the results to a large extent.
The Garpenberg project is well-timed and is generating very satisfactory results. The lower volumes compared to Q4 should not be a surprise to most. We have announced it well beforehand, the seasonality in Aitik and the Garpenberg is slightly lower, and that's in line with the expectations. Well, first of all, Aitik is going into the high grades. We had a 0.21 grade in Q1, and that will continue 2015 and 2016. We are going to continue to ramp up to 45 million tons as part of the Aitik 45 project, and the guiding for 2015 is 40 million tons, slightly up from the previous year.
The Garpenberg, again, is continuing with a full year effect next or this year, but also the quarter by quarter will come up from the level we are at, and we will be at two and a half million tons pace by the end of the year. Tara, we are changing Tara quite a bit from mining in the higher, larger stopes to the lower, to the what we call swecs. In doing so, we have to reduce cost. We are cutting down on people. We are giving new responsibilities and organization to many, and that's impacting both our internal people and some of our suppliers. Kokkola, I mentioned already, Rönnskär action plan is going as planned, but maybe a little bit of a hiccup in the first quarter. I don't think it's any problem with that one.
We have by the end of or in the middle of 2015, a quite significant change, which is a new strategy for nickel, where we continue process or production-wise in the same way as before, producing nickel and copper in Harjavalta. From the 1st of July, we're going to do it in own books instead of having a tolling agreement with our partner, which has been canceled. We're building up the new situation, and it's going as planned. Working capital, Mikael said we were on a very low level, and we are coming up to a slightly high level. If you think that we are going to get the negative cash flow from working capital is going all the way back, it's not true, but we will have an improvement there.
The nickel business is, on the other hand, a working capital buildup when we put it on own books in the second half of the year. The maintenance shutdowns have been increased slightly from previous guidance. It's not that we have increased them, but it's the value of them. We are earning more money than in earlier guidance, and therefore, a stop is costing more. With that, I hand over to you, Sophie, and we take the questions.
Thank you, Lennart and Mikael. Let's open up for questions via the telephone. May I ask you to limit yourself to one question at a time? Operator, please go ahead.
A reminder to press zero one to ask a question. Our first question goes to Mr. Liam Fitzpatrick from Credit Suisse. Please go ahead.
Morning, everyone. It was just one question. I'll start with the smelters. It was our expectation that you would see the benefit of the higher TCs more in Q2, but the release suggests that you saw a lot of the benefits through Q1. Can you give some slightly more specific guidance on what % of the smelter sales in Q1 reflected the new rates, and what sort of step-up we could expect in Q2? Thank you.
Take some more timing on the Q2, sir.
Yeah. Because of the low inventory they've had in the year, this was quicker than it normally is. We usually say that is about two months until we get the effect, but this year we probably got the effect already after one month. Let's for the simplicity of things that we say that we had the two-third impact already in Q1, and then we will get the full impact in Q2.
Okay. Thank you.
Our next question goes to Mr. Alain Gabriel from Morgan Stanley. Please go ahead.
Yes. Good morning, everyone. Just my question is for Mikael on the working capital. Going back to your comment, I just wanted to clarify how much of the working capital buildup is expected to reverse throughout the year and how much of the working capital would be built up again because of the nickel inventories. Thank you.
If you start with the latter end, we've said and we guided before that the nickel business is probably likely to be like the rest of our business, which means that you typically need to hold about 10% of your annual sales in working capital. Depends a little bit on where the nickel price is, but somewhere in the order of SEK 90 million to SEK 300 million is roughly a number, but it will go up and down. What will revert? Well, you can say that, let's just say assume that half a billion of that SEK billion that we saw was covering up for a very low level in the end of the year, SEK 250 million is prices and terms. If you have no changes in price and terms, you should basically see SEK 250 million reverting, which to some extent meets the nickel number by coincidence.
All right. Thank you very much. Okay.
Our next question goes to Mr. [Gustav Sundström from Danske Bank. Please go ahead.
Yes. Good morning, everyone. I have a question on Aitik. You maintain your guidance of 40 million tons production for the full year. That would indicate quite high production levels for the remaining three quarters. How confident are you that you can actually sustain that type of production going forward throughout the year?
Well, the low production in Aitik is actually, we don't tell our budgets, of course, but it's to a large extent planned because of the normal seasonality. We don't see any major change from the plans.
All right. Thank you.
Our next question comes from Mr. Julian Beer from SEB. Please go ahead.
Thank you very much, Sophie. Good morning, gentlemen. For the Aitik again, the concentrate recovery, I think has been running generally below 90% recently, and quite a bit below that for the last three quarters. What's your long-term recovery expectation for the process of Aitik, and what do you need to get back there?
Good question. Low grades normally gives low recoveries, but there is another factor sometimes. We have parts of the mine where we unexpectedly have lower recoveries because of reasons we don't really understand, but it happens. Now we have been in those areas for a longer period of time. It's not a process issue, it's not a grade issue, it's just that the mountain, the rock or the ore is slightly different. This will be normalized, it's the natural variation that we see in the mining industry.
Okay. I know it's a tricky one, do your mine guys say that you're going to continue going through that low recovery area during 2015?
No, I don't think we will. I hope we will not, we don't think we will.
Okay. Thank you, Lennart.
Our next question goes to Mr. Amos Fletcher from Barclays. Please go ahead.
Yeah, morning, gentlemen. Just one question. Would you think about hedging any of your FX exposure at these levels on a discretionary basis? Thanks.
Always tempting to look at that. We have taken a very broad-based decision, which I think is very important to understand. We have decided we are not smarter than the market to understand where metal prices or currencies are going. We take the instrument or the tool of hedging in very specific cases when we ourselves take decisions to stretch our balance sheet or financial position. We can take hedging in order to lock in downside scenarios. We are not going to take sometimes tempting situation, as probably is the case now.
Okay, thank you.
Our next question comes from Mr. Christian Kopfer from Nordea. Please go ahead.
Okay, thanks. Good morning. Firstly, on volumes, you reported a quite big amount of negative volume effect, I must say, versus the fourth quarter, almost SEK half a billion negative. Is it fair to say that you expect most of that negative volume effect to revert already in the second quarter?
First of all, it's what we before identified as internal profit elimination, which you have to bear in mind. We're changing that slightly, as Mikael said, other than that, you can comment more on the volume effect.
No, I think we should see it. I will also comment on one more thing, which is maybe stating the obvious, Q1 is a 90-day quarter, Q4 is a 92-day quarter. Those two days make a difference. Now we have a 91-day, and then we have two 92 days coming. We should clearly see that reverting.
Okay, fine.
The decline in Aitik is seasonal very well, or as guided for, Garpenberg is on a lower level compared to Q4. Be careful with the Q4. Everything went exceptionally well. We have guided for lower volumes, we have negative news slide in Kokkola and Rönnskär. That's basically the picture.
Okay, fine. Finally from me on cost, remembering from other years, you typically record some higher, or you hire some contractors, more contractors in the fourth quarter, or sorry, in the first quarter than in the other quarters. Can you maybe comment if you had higher one-off cost or so related to the winter in the first quarter?
The winter conditions in Q1 were essentially a result of a lot of snow. We have to clear the roads. We cannot take risks on driving the trucks in the steep ramps, we have some icing situations in the ore storage and conveyor belts. Basically, it's according to normal, on the suppliers, not a big difference. No, that's quite normal, I would say.
Okay. Thank you.
Our next question comes from Mr. Rob Clifford from Deutsche Bank. Please go ahead.
Good morning, gents. Lennart, you mentioned that you're getting some very promising results from Boliden area. What's driving the improvement that you're seeing there?
The gold mine is developing very well. We started a few years back, and basically, we have good news there as we go. The other one is the very rich but small Renström mine, where we also have had a number of promising exploration results, and we have been able to take more from these valuable ore mines and less from the rather thin open pits in the area. Also a little less from Kristineberg. It's a positive mix change, which is not only a short-term mix change, but it's really a quite good story there.
In those underground mines, you are finding higher grades higher up, actually, if I remember rightly. Is that the case? You're finding ore higher than where you're mining?
It's slightly embarrassing to admit that it is the case, because you should look carefully where it's cheap to mine. We have been lucky. We have found part of the rich ore body higher up and on the side than where we have been before. Very favorable.
Right. Thank you.
A reminder to press zero one to ask a question. Our next question comes from Mr. Johannes Krøvel-Selius from Handelsbanken. Please go ahead.
Yes, hello everyone. This is Johannes Krøvel-Selius. Could you give some more color on your new CapEx guidance, please? First, what actually are you pushing forward here in 2015? Also, I know there has been a bit early talks about environmental investments for Harjavalta. Is that something that you are able to push as well, or can you give some color on that, please?
Regarding what exactly we have pushed, there is nothing, one single thing that we pushed. We pushed a little bit everywhere where we feel that we can do it with staying within the environmental permits that we have and within production. Part of it you know, which is Aitik 45 that has been pushed out, but there's also lots of other smaller things that have been pushed out. That's a general push out. A flavor on what's in 2016, well, of course there's always the maintenance CapEx in the base, the SEK two and a half. You know very well about the other P200, it's been well communicated. You know about the environmental investment in Rönnskär, relatively well communicated. When you do that math, you're coming up to maybe three. What's the rest then, up to a little bit short of four? Well, there's some that's been pushed out.
There is something of Aitik 45 phase II that's in there that we haven't communicated yet, of course is in our plans, even though we haven't our full arms around it. There is something around the environmental permit in Harjavalta that we haven't really communicated well out, but we have said that there will be investments connected to that one. Unclear yet exactly what, but we have some idea, and that's in that number.
Okay. That's very helpful. Thank you.
Our next question comes from Mr. Julian Beer. from SEB. Please go ahead.
Yes. Thank you. This is a follow-up. Can you hear me? I'm sorry. Can you hear me?
Yes, we can.
Thank you, Lennart. This is a longer term question. You and industry consultants have been highlighting the potential tightness in zinc concentrate market over the next few years, emerging from closure of existing large mines, which is obviously something to think about for people operating zinc smelter businesses. Now, in the past, you've been supplying a good deal of your own concentrate internally, or at least balancing it through tolling arrangements. We do know that the large Tara mine will be exhausted sometime in the next five years by the look of it. How do you think about that potential risk in your business? Do you feel that you should be planning to build up or at least secure new production which can replace that Tara mine when it depletes? If so, what sort of investment level do you think will be required to replace the Tara volumes?
Well, first of all, I think it is important to say that both zinc concentrates and copper concentrates are liquid markets. The liquid market is going to be tight, so it's going to be a lot of material out there, and it's going to be a bidding, and therefore you can be concerned about who will be the winners of buying the concentrates. From one end, you can be concerned over time, and we have to plan for that, and we have to buy and find new supplies for that volume, which is going to deplete. There is another side of this equation, which is quite intriguing, interesting, and which is, in our eyes, reducing the risk somewhat. That is, there has been very few investments in mine or in zinc smelters too.
The capacity utilization is rapidly going to an historic high in the zinc smelting industry. Even though there will be a shortage of concentrates, there will not be a lot of smelters wanting to buy because they aren't there. Therefore, I think this situation that one probably could have, that smelting capacity is always available and mines is going to be scarce, and therefore those paying the most will always get the concentrates, but it's going to be expensive and bad terms. We're not so convinced about that any longer. It's going to be, in our opinion, a scenario where prices can be high, but the TCs may continue on a reasonable level.
Okay. I guess in the mining business, one doesn't have the luxury of last-minute decisions, particularly if one is exploiting own discoveries. I guess if you wait until it is a tight market, you pay an awful lot for zinc production if you buy it on the market. I guess you've got a long-term strategy as what to do about this. What is the long-term strategy?
The long-term strategy is to fill up the lost volume from Tara with external concentrates. That's the base case scenario, we're working on that, of course. Then if we could buy mines or expand Garpenberg, for example, or Tara, extend the life of the Tara mine, that would be great news. Of course, we're working hard on that too. We are working on parallel tracks here.
Thank you very much.
Our next question comes from Yatinder Gaul from Citigroup. Please go ahead.
Hi, good morning. Just a quick one. Lennart, you mentioned in your previous quarters call that you have been knocking several doors. Has there been any progress on that? Is anybody willing to have a discussion, and is there any asset of your interest which you think you can make some decent progress? Is there a timeline by which you think there can be something more visible in the market? Thank you.
Well, first of all, of course, we are not commenting on any specifics. We don't comment that. I can say on a general note, that we're following our long list where we prioritize assets in the market, which we would like to buy if an opportunity and at the right price would appear, which is easy to do but not so easy to make happen. We're not going to buy anything because we just want to buy. We're going to wait for the good timing. We're shortlisting a few, and we're quite a lot following up and knocking doors and expressing our interest. Else than that. This is quite a lot the same as normal. More projects and more assets are for sale or probably open there, but those coming out to the market are not necessarily the ones we would like to buy.
Sure. If I could just quickly follow up, which commodity would you prefer if you could choose just one in copper, zinc, and nickel, given you need zinc to replace in longer term based on the previous question, and you need more in-house nickel concentrates to produce at Harjavalta, and obviously copper could be more interesting generally on a structural basis?
We like zinc. We think in near term, zinc is looking probably as the most favorable commodity of the ones we're working on. If we take early stage projects also, the copper market is looking interesting in a couple of years' time. I would say the priority is copper and zinc mines.
Thank you.
There are no further questions on the telephone.
Okay, thank you very much, and we appreciate having you here. We are going to meet next time in the second quarter. Thank you.
Thank you, everybody.