Good afternoon and a warm welcome to Boliden's Investor Day in Stockholm. It's great to see so many of you here and also a warm welcome to those participating via the web today. This is the 1st day of 2. Tomorrow, we are heading to the most modern mine in the world, Garpenberg. My name is Sofia Arnios, and I'm Head of Investor Relations and have also the pleasure to be your moderator for this afternoon.
As you can see, we have a full program ahead of us with participations from our executive management team. There will be Q and A sessions throughout the afternoon, and you will also have the opportunity to speak to our management during the breaks. As this event is being webcast live, we will also be accepting questions from our audience over the web. The presentations are now available at Voliden's webpage. There are no fire drills planned for today.
So if you hear the alarm, the exits are located behind you and also in that direction. So to get the program underway, it's a great pleasure to introduce Bouhilden's CEO and President, Lennart Evel.
Thank you. So again, welcome very much to the Capital Market Day of this year. It's very nice to have you here. And we have a few quite exciting news we are going to talk about. For those of you not knowing us from before, we are in metals and mining.
That's no news for anyone. But we are based here in Scandinavia or Northern Europe where political risks are low where when we do things again we have done it before and we get relative to some other parts of the world we get little surprises at least from the outside world. We have smelters and mines. And today we have 5 smelters and 5 mines following the acquisition of Kyulilakti in Finland. We produce the base metals gold and silver copper and zinc.
And unlike some other companies, we have been very clear that we want to retain and keep the values from the precious metals. When the base metals go down, often the pressures go up and the other way around. If you look at long term studies, it looks like that. So it stabilizes our earnings. We have high environmental standards.
Henrik Ozberg will follow my presentation here and go a bit deeper in our environmental efforts and ambitions. And I think that you can choose to be a follower and just do what you have to do or you can be a leader. But when we are a leader, we also can take out more metals, more value metals and take advantage of complex materials with better depositing. We are some 4,800 people, have sales of SEK 34,000,000,000 and earnings of SEK 2,300,000,000 last year. We often show this picture as sort of symbolizing what we are trying to accomplish here.
We think it is important. You start with the simple things, which is normally the most difficult of them all to have everybody to work together and cut out waste in the system, reduce cost, increase the availability of machinery and really produce at the nameplate capacity of our huge investments. It is the most important of any sort of capital heavy industry. It is the fundamentals of high productivity and continuation or continuous production process abilities. We do once we have been we are good there, we can do debottlenecking, we do CapEx driven growth, the large projects and we do acquisitions like Kirillakti.
Today, we are going to talk about a few new things and let me comment them along with these slides. We first of all have the productivity improvements and process stability in Rundshare. As an example where we failed to deliver the right productivity, we have to take quite a big and significant firm step backwards, make sure that we take less complicated materials, that we understand what went wrong and develop. And this is a lengthy project or process and we are into it and Kjellstein will talk more about it. De bottlenecking, we did some or a few years ago we started the project in Oda in Q3.
We mentioned a little Oda remark that we have good earnings and good progress there. The P100 project was a debottlenecking and cost reduction project.
The thing is we reduced the distance between
the cathodes in the tank house. And that enabled us to liberate 1 old or the less productive tank house. And that has been standing idle since then. Justin will talk about more on we start to be tempted to look at it now when the utilization or utilization of zinc smelters across the world has been going up to very high levels. So we took a decision now to expand and debottleneck order in the further step now, what we call P200.
IT45 is of course also debottlenecking. We built a beautiful plant. You saw it. What a beautiful mine. I mean for us in the mining, we think this is the most beautiful scenery you can think of.
And I hope some of you also agree that nature is beautiful and sometimes it's even more beautiful if it is a pretty mine there in the middle. ITIK 45, don't laugh at that, that's serious. ITIK 45 is debottlenecking process. The concentrator was able to take a higher production volume And then we have to take out some bottlenecks in the crushers and we just got the permit and we can go up in production, typical debottlenecking. We have another organic growth project that Kerstin will talk about today.
It's our ambitions in nickel. We have been smelting nickels since years years years, but we have done it on behalf of our joint venture partner. We have for many years been discussing is this really the right setup for us. Certainly, it's not the way we buy copper and zinc concentrates and sell the material from the smelters. So an anomaly in our strategy that we poll smelt nickel will be changed now and we will buy concentrates and sell the nickel material to the market.
On acquisitions, we are continuing to work now. We bought Kielylakti. It's the Q1 we have Kielylakti in. We bought it because it's a fine mine, but we bought it primarily because we think the EM-thirty four and other exploration equipment and our experts can do a good job in the geology, which resembles very much what we do in the Shalefti field. If we look at the metal mix, in sales we are a copper company.
In earnings we are even more a zinc company. And if you look at the EBIT impact, the sensitivity chart, which we show on every quarterly result or quarterly reports, what happens if the different parameters here are going up or down 10%. As we can see, a 10% increase in copper price adds $450,000,000 to the earnings line. But the 10% on the zinc where we are much more integrated is making $600,000,000 But it's also good to understand time to time and really look at this chart because we are a precious metal company as well. If you take the combined effect of gold and silver, it's almost as much a sensitivity as we have in copper.
So we are fairly balanced between precious zinc and copper. When we met last year, it was quite exactly a year ago. Since then we have done a couple of things and you can see some of the headlines we have had since then. Well, we had a production record 10,000,000 ton in a quarter and that was a quarter we have always said Q4 and Q1 is for sort of climate reasons a little bit lower. We cannot drive our equipment full speed because steel becomes brittle and we have to take it easy because otherwise we destroy equipment and we have to have or we get unplanned stops.
So we drive a little bit or produce a little bit lighter in the Q4 and still we produce $10,000,000 $40,000,000 pays. So then we really started to say we have to get the permits, we have to debottleneck the system, we have the capacity. We did the 1st concentrate out of Garpenberg in Q1. It was some test production at an early point, but things started up well. And in the Q2, we had a lot of production coming out there.
We decided to take the debottlenecking steps in Aitik with Aitik 45 and we are well on our way. Jan will talk about that later.
We
have a refinancing round or we did in the spring and we continued in the fall a lot of Garpenberg news again in Q3 and we are up to almost full speed in the mills and we are still taking some of the ore from the stockpiles we have built up. Jan will talk more about our now big challenge to get the mine up to full speed. It looks like again we have a concentrator which works very well. We signed a contract for with the unions on personnel reduction in Syntara. We were not long ago 700 people.
We are right now as we speak cutting the 600 level or we're still probably a little over, but very soon down to 600 and we're going a little bit below that level. We had a good thing when we got the number one annual report in the world. That came as a complete surprise. We saw it a couple of or last year we were we number 5 or what was it? We said, well, can this be really true?
Well, we worked hard and we really do our very best to explain the business model, the TCs and the free metals and the process inventory and a lot of things that U. S. Analysts are having sometimes a problem to get the details on. But just think about the general public, it is fairly complicated. So we have really put some ambitions in explaining the world of metals and mining.
And in the explanation why we got the number one award. It was very much based on that. Then we bought Kuglaktir. And in Q4 that's happening now and we have the Capital Market Day here and we are continuing on Aitik 45. This is Earth from space.
And now the interesting thing is there is light in many more places than there used to be. Not many years back the same picture would have been all dark except for U. S. A, Europe and Japan. What is happening in the world?
If you look at there is I always well, I forget the name of it, but there is a graph showing how equal the resources of the world is distributed between countries. And it was really sort of 80% of the world's population got nothing. And then us and a few more we shared the 20%. It was a curve which was really showing an extreme inequality in amongst the nations. If you look at that now and the update what is happening now is that many, many more countries are starting to take a share.
And what happens then is, of course, it's industrialization. It's the rural population is moving to town, the industrialization, the urbanization. And it's driven a lot by industries being built, transportation, railroads, roads, airplanes, airports and power systems and power lines and whatever else. If Boulliden was not producing, if we decided for example one day to close everything we would do, what would happen? Well, I know for certain one thing will happen.
The supply of base metals will go down. And the price, you know how sensitive it is even to small variations in supply demand, the prices will go up. I don't think that would hurt very much if we are building the ring road around Stockholm or hospitals or something here. But it would badly hurt the poor people who are now on the way to improve. So I think the fact that we are in metal and mining and we show this that GDP per capita, the wealth on the x axis and how much base metals in this case copper is consumed per person.
Of course, this is very clear when you're very poor you're not part of the market or the demand because you're so poor. But when you start the industrialization the demand of copper is going up. And then when we come to the level where we are we don't use much more. Our power lines are already there and it's time to invest in recycling instead. We can produce a new cell phone if we turn in the old one at the same time.
But the guy in Africa, he doesn't have a known or a previous cell phone. He needs the mines. The guy here is needing recycling. And we are the world's leader in electronics recycling. Looking at copper and zinc, of course, the big thing now is what happens with the 2 main metals.
Well, if we look at the Wood Mackenzie statistics and we look at from 2013, so a little bit back in time to 5 years ahead 2018, We see that there is demand and a similar demand for both metals. It's according to them about 5% annual growth of demand. But the supply is very different. Zinc will grow in this period, but with a very low number compared with demand. And basically every method analyst and you or many of you here, I probably share the view that zinc is a scarce supply and it is a fundament for higher prices.
Copper is better supplied and in the near term probably oversupplied, But I don't think it is anywhere near what we see in iron ore or with the big mines in Brazil and Australia coming on stream or the oil with the shale gas and shale oil in the U. S. And we have seen those commodities falling dramatically. Of course, we from Bolide and we're nervous about copper because it seems like many projects are coming and they are starting now. But we are also more and more of the opinion that it's going to be probably a period of a bit of oversupply.
There is a risk there. But after that, it looks like very few copper projects are being built now. A lot of CEOs were sacked because of the big expansion plans which were delayed and costed much more than anticipated. So I think that we are a bit exposed to risk short term, but I think copper looks like there are scenarios for a very healthy and very good period within Zun also in copper. These curves are the ones you are looking at.
If we look at mine depletions, the big difference in zinc compared to in previous sort of waves of supply demand, it is that now we see some serious big mines century next year and several other going to deplete and the replacement or new projects are scarce and few. Well, there is of course one and that is Garpenberg. And we think that we really made it with the timing. I think it is nothing else than a super timing we have there or at least that's what we hope. We are taking SEK 400,000,000, SEK 350,000,000 to expand Oda.
Is that so clever now when the drive of a higher price is lower mine production? Well, this is interesting. Capacity utilization is higher than probably ever or at least for a long, long time in the zinc smelting industry. A little bit I think at least for many I think behind or under the radar of the mines depleting and the scarcity of mine supply, we probably haven't studied quite as much that also smelters are closing for environmental reason because they are aging, they are not maintained. So zinc smelting has also been going down in production or at least not kept speed with the increasing demand.
So when we saw this, we really we have been looking at the 200 P200 for quite some time. The calculated returns are good, but we have been nervous about this. But we are believing that we can supply the material and we think the TC and terms for zinc smelting will probably be good going forward. Copper mines, here we have not exactly a dramatic oversupply. You see a little bit of the lower sort of part dark blue coming over the demand line, but it's for a short time.
And then it's tailing off. And then sure there are projects possible, but they are not in production and they are not production they have not been decided. And they have like in zinc and in zinc even more so very high project incentive prices. Smelter terms are a reflection of the capacity utilization and what we see here that copper TCs are going up. That's good for Bulidin because we're more than anything a copper smelter.
We are buying so much more or 5 times or 4 times more tonnage wise or copper ton wise a smelter than a miner. So a positive development on copper TC is very good. But the less obvious change because of the reason I mentioned is that TCs are also going up. The prices have followed and we see here we forget the dark blue, but looking at copper and zinc, copper has been on a negative slope, not dramatic, but a little following that macro picture. And the zinc is up following the macro picture for zinc I explained.
And then of course we have to admit that we have a bit of good luck with the Swedish krona. We think it is sad if the political or minority or governments and the political issues in Sweden are complicated. But at least on a Capital Market Day, we can say, well, it has certain advantages for us. I will go through a couple of the details here on following the same charts as before. First of all, the process stability and cost reductions and take out slack or waste from the system.
We are having our version of Toyota production system. We have a softer side of it, who we are, which is our Toyota house or the bull Eden house. And then we have a spiderweb, which are it's not supposed to be readable here, but it's what we work with. And you can regard it as a readable here, but it's what we work with. And you can regard it as a checklist with 28 different areas.
And we tell our 10 units or break it down by department or in different areas. Have a look at the checklist. See where you have the biggest potential. What is easiest and fastest? And please work on it and make sure that we can follow-up in the different areas of this system.
So we have a group wide sort of philosophy of running the continuous improvements or the day to day management, but we are not running group wide. Okay, this year we reduce inventories or next year we do something else. It's not the way to do it in our opinion. We shall do it unit by unit and to what the situation look like in the different parts of the company. The big headlines are never on the day to day management, but accumulated a lot of initiatives can add up to very big numbers.
And we just took a few different examples here. Excavators in Aitik, we have been working with NVV, New Berlin Way. We have been working with maintenance scheduling and our availability has been going up from 73% to 84%. A part of run share 87% to 93%, which means fewer stops more production of course. And we have time for exploration.
Exploration is very long term. And of course, some other parts of the company are meeting scheduling very, very, very frequent. In exploration and in R and D and in many other areas, you have to get the drive and the dynamics from within the groups. So it's those are perfect examples where we can build the dynamics and drive in the organizations. 97 to 50 days work for time or lead time is a great achievement there.
De bottlenecking, I already spoke about. We have many. The Oda P100 paved the way for P200, which we decided on actually last Friday. So it's only days old that decision. And we held the press release until today obviously.
But we have many. Debottlenecking is making up for many small investments. And you are going to see now a tendency of we earn more in the smelters. The smelters we have got new environmental permits and we have a few we have really squeezed the investments out of the smelters in for several years. And now we're going to do some smaller adjustments for better availability and uptime.
So we have many smaller things that we can do to boost production and environmental performance at a time now when we're seeing that smelters will probably have a quite good time ahead. On the big project, if that is the debottlenecking, the previous one, the big projects, I think that this is one of the areas where we are very strong. They are always in the focus of your analyst reports and in the press and media and everything. So here we of course get much more of light on what we're doing. But we are proud.
We have been doing all of this on time. We didn't do the ITEX 36 on the CapEx budget. We had a 20% increase compared to the initial plan. But this was the first big investment we ever did or ever, but it's largest ever and it was the first big for a long time. We have been learning from Aitik and all the big projects since have been sort of taking into account the learnings there.
So we standardize procedures and that's also true for the big projects. We have what we call Boliden project manual and the manual is not a booklet or a file or a number of files. It's a complete well, it's our sort of system for running large projects. And each of the projects we have finalized, we go back and we adapt and put in the learnings and experiences in the Boliden project manual in order to make sure that next time we can learn from sort of experiences from before. We have also been successful in maintaining the same group of people or at least key individuals in all the projects in the previous slides have sort of been going from one to the other.
We have in house technology and the project management has been sort of developed in parallel with these projects. Finally, on the arrow here, selective M and A, we did the Kyule Lacte. Again, it's a small one, but we're excited about the geological possibility there possibilities and we continue to look. We are looking at mines, primarily producing mines and projects. We are looking again at copper and zinc primarily.
We are absolute clear that buying something for an NPV, an established NPV in the market and just buying it, it's an exchange of one time pay to a return with maybe 10% return on capital. It's not meaningful value creation. Value creation you do if you buy something and then you add technology or exploration or whatever project management as we have. And that's why we sort of justified the kulilakte. It was primarily on our hope for good exploration results, but also on productivity improvements in the mine itself.
So the examples I've given is are several. Coca Cola would be the obvious choice if I'm just saying who are very, very good in the group in driving continuous improvements. Coca Cola has been doing great over so many years. Debottlenecking, I already mentioned twice the other 2 projects. The big CapEx project is of course the one we are starting right now.
Some of you were at the inauguration or have been there at the time of the build of the new mine, but it's up running and it's going to be a pleasure to have you and as many as possible joining us tomorrow. And the acquisitions, well, the example is Kirli Lahti. And with that, I think that my time is over and it gave a bit of an overview. I think the thing we think, what we are proud of now, we have positioned Boliden in a good way. Mining and metals is not an easy place to be now, but we have with some luck and some good foresight been positioning ourselves in smelting and mining and in copper and in zinc.
And I think all in all, we are very happy with the position or positioning of Bouhild now. Thank you very much.
Thank you, Lennart. Our next speaker is Hendrik Asprey, responsible for corporate responsibility. Thank you.
Good afternoon. On July 25 this year, a hot leaching tank in Kokola, our finished zinc smelter broke. The entire bottom collapsed as you can see on
the
slide. And 370 cubic meters of hot acid was released in the industrial area. And this was a very serious accident, but there was no one hurt and there was actually no environmental damage. It cost us approximately SEK 50,000,000. And looking at what could have happened, this was indeed a very serious accident.
And this is really what corporate's responsibility is partly about. It's about preventing that these things happen. And if they still happen, it's about making sure that we operate the disaster as well as possibly as we possibly can and preventing that it doesn't happen again, of course. So corporate responsibility is really about safety performance, environmental performance, as well as ethical conduct. And for the next 15 minutes, I will give you insights into our operational stability, how safety links to production stability.
You will get insights into why we work a lot with minimizing environmental risk, discharges and emissions. And you will get insights into why we try to develop a business value driven business, including both our employees and business partners. So let's start with safety. We've had a very nice development, 44% during the last 10 years has our accident rate improved. And if you look at the blue line there, it's our own employees.
The darker blue line is including also the contractors, which we started to measure in 2011. So it turns up as a rolling twelvetwenty 12. Accident rate or lost time injury rate is measured by looking at number of work accidents per 1000000 hours worked. And that's a well established KPI across all industries in the entire world. So it can easily be benchmarked.
We are at 7 approximately now, including our contractors. And looking at it in a Nordic perspective, it's actually among the top 10. If we want to join the world class level, we have to go down to 1 or even below 1. So we have some way to go there. Now if we take another twist on this, if you're an average employee at Boliden and we're about 4,800 people and we have an accident rate of 7, you will have to work for approximately 80, 80 years before you have your first work accident with absence.
And then it's typically a sprained ankle. But we have set targets. We want to be at 6% by 2014, end of 2014 and then a 30% annual improvement, so we can reach 0 by 2018. But why do we then try to pursue sprained ankles? Well, 1st of all and foremost, we don't want to hurt our people.
We don't think that's a good thing. Secondly, we know that there is a clear link between the sprained ankles and the really bad accidents, the fatalities. And third, we know there is a connection between the accident rate and production stability. This is an illustrative graph, but this is typically what it looks like. You have the red line, the accident rate and the gray area there, deviations from the production plan.
I'm sure if you read the Swedish newspapers these last few weeks, you will have read about terrible work accidents in different places. And apart from the human tragedy, which is always priority 1, of course, we know that it's also terrible things happening to the companies and the projects involved. Actually, one production site was shut down last week, as you may have read of. Clear connection with production stability. Finally, if we look at safety standards, we know that, first of all, if you have good safety standards, they will minimize work accidents.
Also, you will have more open minded people for alternative work, light duty. And you will also have more commitment,
engagement
among people that will ultimately decrease some short term sickly rate. And for Boliden, for example, each percentage point of short term sick leave will cost us about SEK 20,000,000 annually. And then I'm not including productivity losses or any costs for putting in replacements. So there is a quite lot of money in this as well. So that was safety and operational stability.
Let's look into the environment. At Rundshare, we've had a 99.9% improvement when it comes to metal discharges to water from 1970 and 45 years ahead up until today. Now of course as you can see the 1st 20 years was dramatic and mainly due to many technical achievements of course. At the same time we went from 3,300 tons down to about 25 tonnes in 1990. And then the improvement rate hasn't been that dramatic, but still we've had a 60% metal production volume increase since 1990.
If we look at the way it looks on a group level, we in 2,009, we set out a target to reduce our metal discharges to water by 25%. We more than doubled that. Metals to air also 25%. We almost doubled that. Sulfur dioxide, we almost tripled that.
The only area where we didn't really reach our target was carbon dioxide. We said no more increase than 3%. It was it became 4%. Then again, this is very much related to production volume. The other figures also include, for instance, the doubling of the production volume in Aitik during this time, whereas carbon dioxide is very closely connected to energy consumption, which has a lot to do with production volumes.
So it's more difficult there. But let's look at an example how we can work with carbon dioxide. This is a marginal abatement cost curve. So you have the horizontal line is the zero line and below that you have negative costs. So there you actually save money.
And along the horizontal line, the x axis, you see the potential carbon dioxide savings or reductions. So for example, if we take a look at what would happen if we electrified our trucks. And this is an analytical tool, so this is really what we use to guide us in our decisions when it comes to environmental investments unless we are forced to do them. As you can see, we will actually save money. We will lower our marginal cost if we electrify our trucks.
And at the same time, we will reduce our carbon dioxide emissions. Same thing with heat recovery in underground mines, whereas for instance, if we would start buying electricity from renewable sources that would be a small cost increase and a fairly significant carbon dioxide saving. So this helps us really when we look at what environmental investments can we do that also increases our productivity. So that was the environment. Let's go over to value driven business.
There's been a lot of focus on anti corruption these last few years and the most visible example is probably the U. K. Bribery Act. And we set a target that we want we need to train all our managers in anti corruption. We reached 80% this far.
0 tolerance of course, because we know there is a clear cost linked to corruptive behavior. It starts with fines. Legal costs will increase. Supplier contracts will become more expensive. Banks will downgrade us.
And at the end of that line, we have the image and reputation damage that potentially has the power to ruin a company, if you start walking that path. We do not accept any corruptive behavior whatsoever. This also actually includes our business partners. And we have a setup that was initiated in 2010 that we call evaluating business partners. It's based on questionnaires, dialogue, audit.
Questionnaire, dialogue, audit. It's a cyclical type of approach so that we work more with the questionnaires 1 year and initiating dialogues the other year. As you see in 2014, we sent out more questionnaires. Next year, we will focus on taking action according to the results that we have and the responses that we have from those questionnaires. Let me give you an example of one company that we have worked with in our evaluating business partners setup.
This is the largest mining company in Morocco called Mannigan, 7,000 employees, SEK 3,500,000,000 turnover. And while sending the questionnaire to them, we experienced some significant quality issues with what they supplied to Oda, which was fluoride. That really messed up our process completely. So and as I said, the response in the questionnaire was
really unsatisfactory. We have
done 2 audits. We did first 1st audit already in 2010. The quality the acute quality problems, they disappeared fairly quickly. We did a follow-up in 2012 and have continued the dialogue. And actually in the beginning of this year, they were ISO certified 14,001, 18,001.
They have committed to national CSR goals in Morocco. They are committed to their own CSR goals. They are carrying out internal trainings. And they have indeed become a much better and more reliable company to work with. Now at the end of the day, everything that I've been talking about is really about people.
This graph only shows the educational level in our white collar staff. But education and training is equally important regardless of where you are in the organization and what hierarchical level or what function you have. We need to make sure that people have a relevant training be it functional, technical or behavioral wherever they are in the organization. And we have a lot of focus on that Without making sure that we have the people the right people on board with the right skills and capabilities and behavior, nothing of what I've talked about before is or nothing, I shouldn't say that, but it's less likely to happen anyway. So to sum up, production stability and safety performance are interdependent.
They influence one another completely. We have to pursue the small injuries to make sure that we take at the same time steps away from the major disasters because they are linked. We cannot harm our people and we don't want to have the consequences that that may lead to. The same logic will apply to minimizing environmental risks. We have to take the small steps, make the small progresses all the time to make sure that we come farther away from the major disasters.
And we know that environmental investments or money spent on environmental improvements can also improve our productivity. And finally, we need to have a set of common values that is shared by employees as well as business partners because that will help us to achieve everything that I've talked about in the environmental area and the safety area. And it will help us create a sound and healthy and more productive company. Thank you.
Before we open up for questions to Henrik and Lennart, may I just remind you to wait for the microphones. We have 2 here in the at the venue. And to also to state your name and institution.
Good afternoon. It's Steph Baffler from Bank of America Merrill Lynch. I have one question on your new nickel strategy. Given that most market participants are forecasting that the nickel market will move gradually into a deficit over the course of the next couple of years, could you give us some color on where you anticipate that you will source the nickel concentrate from? And whether it's likely that you will look to exploit the nickel resource at Killua Lacte?
On Killua Lacte that remains to we have nickel in the ground there and that is sort of just an area we are looking at and that may come in later. But I think the first question is, of course, is this a clever thing to do now and why do we do it? What's the market outlook? We are one of few nickel smelters, which obviously for a lot of players in this market and the nickel market is not so liquid, there's fewer parties and fewer companies both on nickel metal or the material refining and the mines. We have been approached for years.
Are you really? Is it a clever way to do it exclusive within the joint venture format we have had? And we have been of the opinion that we are going to separate sooner or later. And the timing has been right. And we think that we have the necessary feed for the nickel going forward.
So we have thought a lot about this. As a matter of fact, we have thought about this forever or at least since we bought one half of Harjavalta because Sutokampo sold one half to the Russians and one half to us. And it's a very unusual kind of setup we have had. It's not a normal it's an anomaly to our strategy, but also what you can see elsewhere. So I think, number 1, yes, I think we have the FEED necessary.
Kjellstein will talk more about this later on. And we think the timing is relatively or not relatively, I think it is a good timing.
Okay. Thank you.
Is
it working? Yes. Hi. Lipas from Exane BNP Paribas. One quick question maybe on the strategy to move to increase the refined production at Oda.
Given what you're pointing to the zinc market and the prospects for concentrate shortfall, if you could elaborate a bit more as to why you see TCE is holding up pretty well?
The reason why well, I think the question involves 2 parts. Why do we do it and what's the risk on the TC? Shastri knows that I have been the deal the investment has been looking very attractive. It's a debottlenecking. It's good return for the money.
It's beautiful and we have a management who did it once before. So I think the concept is good. We can move Oda to a more productive position. Everything was really there. And if I haven't been or not I, we have all been concerned about the TC development.
That has held this back for quite a while. If the price is going up because there is no zinc in the market or a cone in the market, is that a clever timing to expand a business consuming the zinc concentrates? The graph I showed on capacity utilization is actually very, very convincing to me. We have had some of the best people in the world, we think, been really digging into the fundamentals. And we see that there is a lack of capacity even at the after or considering the closing mines.
So it's low production output from the mines, but that's true also for the smelters. So therefore, we think that in the market with high prices that high combined gross profit will be shared in a reasonable way. So we think it is a good deal. And we are in connection with doing it. We add from 170,000 to 200,000 tons.
And in doing so, we also reduced the cost. We absorbed the overhead cost and other. So, no, we are we have decided that this is what we believe in. But of course, there is always risk in it. But I think it is good.
We have really done the homework. I can guarantee it.
If I may add a follow-up. How much cost savings would you target for this expansion?
We have to Shasten, you can prepare the answer on that one to your presentation. But what we are seeing, if you look at the cost target, I apologize for turning the back. This is the cash cost curve for the zinc smelters. And order was at the extreme right. We did the P100 and we took if this is the curve, well, we took a step like this, left.
And now we take another step left on it and then you can take the draw the curve. That was a very precise guiding. I apologize for that. We are going further than I intended.
Hi. It's Gustavo Hensel from Danske Bank. You had a press release out today stating a new CapEx figure for next year, dollars 4,500,000,000 and Boledin has throughout the last couple of years had a very expensive or expanding strategy where you've expanded a few mines and smelters. I'm just curious going forward, will next year be a peak CapEx year or do you foresee Boledin to continue to grow via investments or new projects beyond 2015 as well?
We have guided on $4,000,000,000 level and now we add an order project with $400,000,000 So that's taking us to $400,000,000 or $4,000,000,000 to $4,400,000,000 And then we add Kirillakti and there we're going to speed the improvement plan. So of course those are making up the difference between the 2 guiding values. But there is also a fact that we are probably seeing Bouleydon or we are at least until now we have seen Bouleydon going from several years with a total focus on the mines. And we're going to refocus that a little bit. It's nothing dramatic.
But we are going to see more investments debottlenecking in the smelters and environmental investments in the smelters. And investments debottlenecking in the smelters and environmental investments in the smelters. When we are starting to enjoy the better TCs, we are going to maintain. We are going to make sure that we can produce at very, very high availability numbers. We do not want to have unplanned stops now because we think that we can earn a lot of money and that drives a bit of investment.
And then we have some environmental stuff. We have got new permits and they are also adding a bit. So we have quite a bit of investments also going forward. But I think that most of them like the Oda here, they are there for a very good reason. We are very, very proud to come out with a higher guiding on CapEx when it is securely active and the order.
That's good news. And again, we have said that everything else is the same. We're going to go down in CapEx. But if we find good investment opportunities, we are not going to skip them. We are going to continue to with a strong cash flow.
We're going to look at good return projects. And that's what we're doing.
Maybe a quick follow-up. I couldn't help myself, but peek through forward a bit in your slide package. And previously you've held forward both LABR and Rockleeden as potential expansion on forward. And I can't find Rock Leyden anymore. Does this is this due to the fact that you're less certain that you will solve the metallurgical problems in Rock Leyden or are you more positive on Lava?
No, I think you should look at it like this. You have to focus on a Capital Day. We cannot talk about everything. So I don't think it is a lower focus. You can probably draw the conclusion that we're not going to come with a rock lid and around the corner.
But no, there is not a deeper meaning behind that.
Thanks.
Do we have any more questions? Otherwise, I have one from the web to Henrik. Where are your key priorities for the next 3 to 5 years to create that additional value that you were talking about?
Well, a couple of things. First of all, we need to make sure that our safety performance is further improved. We are going to reach the 0 level by 2018 to make sure also that that has a positive impact on production stability. We're also working quite a lot on environmental impact. Now some of the slides I showed you showed tons.
Well, discharging or emitting kilos or tons doesn't necessarily say so much about what impact it has on the environment. And as we don't want to harm our people, we don't want to harm nature. So that's going to be a lot of focus on that.
Okay. Thank you. We have one more question.
Hi. It's Dan Major from UBS. A quick follow-up on your M and A strategy. You obviously laid out the kind of 4 parameters quite clearly. Kind of firstly ask is there a regional focus?
You've previously obviously been very much Nordic focused. Would you look outside of the direct region in your M and A strategy? And could you provide us with any more color on the sort of mid sized assets, a kind of range in terms of acquisition value you might be looking for going forward?
On size, I think copper production like 80,000 tons, I don't think we would wish to have something much bigger than that in the group. It would be become a too dominant asset in my opinion. If we talk zinc, maybe double that size. I think if it is a regional focus, no, not necessarily. What we have is a long list.
We follow all the things we see coming up for sale, but we are also looking at all the assets that we are interested in because they seem to have similar situations as we recognize in our own operations. So we put together both which we think maybe will come up for sale and things which we just believe in. And then we have a grading. We have probably as an Excel, it's not very many projects and many mines. And then we have grading in a lot of columns.
We talk about the normal stuff, but we also have for example the attraction of very big mines is lower and a very small one is lower and we have a sweet spot somewhere maybe 50,000 or 40,000 tons of copper or something like that would be very nice. Is it regional then? Yes, well it's more we everything else is the same. We rather do it nearby and in safe jurisdictions. But I think that if the things are if we could do if you saw upstairs here the gold leaching, the tellerides, gold tellurides, for example, if someone had exactly the same thing, we would go wherever that situation would come up and we would probably farm in or buy in somewhere, wherever it is of course not true because the further away and the more risky the more the lower the grading will be and then it's disqualified.
But we can go further away if the attraction in other parameters are compensating.
Would you have a monetary limit to how much you would spend on M and A?
Absolutely not. We don't know that and we don't work it out that way. I think if you are a listed company, we have access to a capital market. And I think that we if the deal is good, if we can find something and we have the management resources, which is more tense, more limiting often if you really drive the synergy acquisition, then you have to have the management capable of doing it. So if everything is right and the money is missing, I mean, we can raise capital in that case.
So I don't think that we would look at it as now we have a bucket of money and we're going to spend it because then you're most probably going to spend it wrong.
Thank you.
We have one more question and that has to be our final question. Over here, Stefan.
Hi, it's Eileen Ong from Bloomberg. I was wondering whether you can comment on where do you actually see the copper and zinc prices in the near term? And also what price assumptions are you using for your project expansions and your long term strategy? Thank
you. I can answer on the long term price and I wish I could answer the other the first question, which I can't. But with the outlook, I think there is a risk of a down or negative development for copper. And I think there is a good possibility for a positive development on zinc. But more than that, I think it would be wrong to give some forecasting or estimations.
We are playing more with scenarios, and we are saying that we don't know where the prices are going, but we want to understand how is our company and our balance sheet and our setup given investments and grade variations and whatever else, how are different scenarios playing into our case in order to make sure that we're not sort of derailing the company. We are not sort of exposing our balance sheet too much because we know that low price scenarios can basically come at any time, a war somewhere or something. So that's how we think it. And the long term price levels, they are Mikael, what are they now? You can stand up and tell.
The long term assumptions are all published in our annual report. We have $6,600,000 for copper and we have $2,300,000 for zinc. And actually in my presentation, I will dwell a little bit more upon that.
And more important, we have a very low dollar or a dollar Swedish luna exchange, which is 6.7 6.60, what is it? Yes, compared to today's well, it fell a little bit today, but 7.30 or whatever. So there we have a long distance between the long term assumptions that we use.
Thank you. We will continue on with the next presentation. And it's a great pleasure to introduce our next speaker, Jan Nordstrom, President of Business Area, Bulid and Mainz.
Okay. Delivering operational excellence, and I will spend some time to explain to you why Bulid makes a difference when we talk about operational excellence and profitable growth. Operational excellence, of course, our base for that is how we work with our environmental impact, our footprint. It's 3 areas where we definitely make a difference, where we are on edge on how we operate our mines. If we look into water treatment, I hope that you tomorrow will take the opportunity to see the installations we have in Garpenberg.
We have state of the art regarding both how we treat water with respect to metal, but also with nitrogen. Reclamation. After our operations, it's important for us that we can leave our sites back to the nature and ensure that we will not have any impact from our operations. I will come back a little to that as we have now a new permit in Aitik where we have strict targets for how we will reclaim that operation or that site. Then TMF, operational excellence, TMF, what's that?
Tailings management facilities, if you go back 15, 20 years ago, how did we really treat the problem with tailings? As we constructed a pond, we put down the tailings, we added some lime, we clarified it and then we discharged the water out in the recipient. Today, the TMF is quite a complex operation, both how to construct the dams, how to operate the stabilization of tailings into the pond, how we work with reclamation of the TMS. Also, if you take one step backwards, what we actually have to have a huge impact on when we talk about environmental and our impact on that is quite a simple chemical reaction. When you are in the base metal industry, base metal mining, it's generally different source of sulfides.
And you generally have a mineral called pyrite that is an iron sulfide mixture. If you have sulfides, if you have water, if you have oxygen, then you have the perfect combination for create sulfuric acid. And the problem with that is that, that will, so to say, solve the metals that are in the ore and pollute the environment. So, actually, our operational excellence, when we talk about environmental impact, already starts how we operate our mines, how do we decrease, how we use both the waste rock and the ore and how we treat it and how we deliver it into our concentrators. But if we then take the next step and try to see status of our operations today.
If we look on these slides, we can see that on the left slide left side, we have Garpenberg, 2nd highest in productivity regarding all the world's underground zinc mines, with one exception, and that is Citronen. But that actually is a project in Greenland. It has not been authorized, not even started to be developed as a mine. So we probably will see that in the future what will happen with that. I will not go so deep into Garpenberg as I hope as many as possible can join us to Garpenberg tomorrow and we'll go more deeper into what we have been doing in Garpenberg.
If we look into Aitik, present Aitik is the world's highest productivity open pit mine in the world. And of course, productivity is not the only thing that we are pursuing when we are looking into operational excellence. These slides, what does that show? If we look on the highest item, actually the head grade in Garpenbe, named Aitik, is in the 99 percentile. That means that 99% of all the world's copper mines has higher grade than ITIG.
And that is offset by the cost in mine, mill, general and overall where we are on the first or the second percentile. That means that we are the best mine in the world regarding these items. And you can also see when you come into labor cost, wage rate in Sweden, we are on the 87th percentile, but offset by the high productivity in Aitik, total labor cost for Aitik operations is on the 12th percentile. And you add all these numbers together, high productivity, low grade, then we are on the cash cost curve roughly in the mid on the 42nd percentile. So regarding this, looking into productivity and booleaning operations, I would say we are on the top regarding productivity.
How to continue to pursue that? What we have developed throughout actually the last years is in 2 important areas, how to continue to pursue productivity or operational excellence. One thing is world class design. And I must admit, this is a bit challenging to describe what is world class design. What is a good design?
What's a bad design? What's a design that drives productivity, what's the design that, so to say, put productivity on hold. I could try to say that it's about simplicity, how to make simple solutions that drives productivity, both in mine and in concentrator, focus on mines because generally mines are the most complicated designs to be done. It's a little bit challenged because I will not dwell so much on the design, but what's important with mine designs is if it's open or closed, because deposit almost all the time change geometry, it change geology, it change shape. And I will pass that to our CFO later in the presentation to try to explain why it's important to have an open design.
But we spend a lot of effort on creating those designs. The next step is after the design we have developed, as we have seen both in Aitik and in Garpen, where both in mine and mill, is to define what's the key. We talk a lot about key main head, but what's really the key drivers in the mine and in the mill? If you look into the mine, and that is regardless if you talk about the underground mines or the open pits, is how to decrease the lead time between each operation, how to get these serious intermediate actions to be as fluent as possible. That is our main focus in the mines.
Not saying that we have a lot of other focus, but that is the main focus, how to pursue that. If we look into the concentrators, it's a little bit different. Generally, in the concentrator, what we focus about is the utilization. How many hours of the 3 65 times 24 hours per year can we operate. And that in combination with our metallurgical performance, because really impacting our operations is how can we increase the revenues of payable metals and also decrease the impact on penalty elements.
And I will try to give you some examples how we are working with these both in mine and in mill. But before I go to that, of course, what's really important to get that best way of working with both how we optimize our mine production and also how we optimize our concentrators is a simple thing like this. I guess all of you have this smartphone. What we actually use now, we take a huge step into process control. What's important for us and that is definitely something I hope that you will see tomorrow in Garpenberg is integrated control system.
It's the foundation for us how to, in real time, operate both the mine and the mill and create the best way of doing so. We have mobile control rooms. You will probably see the main control room tomorrow, but what's important is when we have reasons or whatever reasons we have to go out in the concentrator, we can take the control room with us and do the adjustments necessary in real time. Actually, we are working with that now in some of our mines or at least one mine in the Buliden area. But if we go into the mine, and I will not speak so much about the integrated integration with maintenance system, is one of the most important areas which we have been focused for a couple of years now, and that is VLAN system.
It's perhaps something that seems quite simple for the most of us. We talk actually about wireless. If we live in a world that it's almost natural that we at all times can get connected in some way or another, we tend to forget that we operate mines. If we take a medium sized mine as Kristene Valley mine, it's the size roughly of Kung Solmen here in Stockholm. It's 4, 5 kilometers wide and a couple of not a couple, 1 kilometer wide.
But then it's on 1,000 meters depth. That means it's very hard to get online control of everything that happens in a mine, because in the mine in opposite to our concentrators, it's just a series of mobile equipment that operates very slowly. So it's all about how to develop algorithms that make that as efficient as possible. Perhaps some of you are playing chess and know how to calculate what's the best thing how to move the different types in chess and mining is almost the same. What we've been doing in Tristerene Bari and this is here I have Maestro, who will actually show us in real time, perhaps some of you saw it on the exhibition.
This perhaps not look that nice. A number of you are probably in the age that you are playing games and video games and things like that. And of course, the graphics is not like that. But that is not what we pursue. What we pursue is something unique.
What you see here is the Creston O'Bryan mine in real time showing all the movements of our mobile equipment. How do we control the drill jambos, the chargers,
the
loaders, the rock bolters, etcetera, and start to optimize them to decrease the lead time. So all the time is operating on the most important thing in the mine, the phase. When we have this opportunity, now we really can start to do these types of optimization, which we have been developed for a number of years, mining operation controls rooms where we have done these types of optimization. Now we have a very powerful tool to take the next step. But with these 2 as a fundamental for how to continue, we'll give you some examples, one from mine and one from the mill.
What are we working with in delivering operational excellence? Complex ore, that is something that we will get throughout the world. What we see the deposits that are known today, we see the increase of impurities, it's antimony, it's a lot of different metals. And we also have challenge in minerals, which means that it's hard to recover the valuable metal. I will just briefly go through a case study of Kankberg, the gold tellurium deposit in the Boliden area.
We started 2,008 with the first study of Kantei, how can we deliver a profitable mine from a deposit that contains gold, which are very hard to get recoveries on and Tellurium.
2011,
we commissioned that project where we have expanded the Kankpa mine and we also constructed the hot leaching plant and the Tellurian plant. But perhaps more important, what we were doing these years was that we established and constructed our in house ability to work with hydrometallurgical issues. We created labs. We created a pilot plant. And perhaps more important is that we engage professionals throughout the world.
And I recommend you that take the opportunity up at the exhibition and visit Paul Krieger that is an important player in hydrometallurgical performance. If we then go to the mine, Tara mine, a lot of you know that it's quite a challenging mine. It's a big operation, 2,500,000 tons annually. It has very small byproducts. It's lead.
It is a high cost mine. It has been in focus for us for years. What we've been doing in Garpenberg is to change the way of how to manage the mine, how to really address the main problem, how to get a large operation like Tara focused on decreasing lead time between operations. We changed some in the organization, the structure. We invested in MOC for 1.5 years ago, and then we started with that as base decreased the manning.
As our CEO said, we started last year with roughly 700 employees. We're very close now to 700 employees and we will continue below that. Of course, it will be really important if and how we can continue to develop the tools you saw just a minute ago, how to really get that in operation. Important also in the mine, because what's really are the key drivers for manning is, of course, our mobile equipment. In the mine in comparison with almost all other operations, you have to have 1 person in each mobile equipment.
So that means that we also decreased our mobile fleet. And of course, that has impact both on our capital need and also on our operation cost. But with then operational excellence as a foundation, I
will go over
to growth.
Just mention briefly what I think is the most important thing if you have a growth strategy, regardless if you talk about organic or M and A, and that is in house professionals. And I think that is something that we have established quite well in Bouiden, how we use our common functions in Bouiden with our operational professionals that we can put together teams, task force to both conduct the status necessary and also to conduct the expansions. If we look into growth, of course, our main focus today is Karpenberg. What you can see here on the slide is that mine production each quarter and how they are addressing the up ramping of milling. What you can see in the graph is that mine production has been added with ore from stock.
And of course, when we took the decision, the authorization of expanding Garpenberg, at that time the concentrator was a bottleneck. We immediately started to increase our mine production, ore production as much as possible and to put ore on stock, so that we could start the commissioning of the new concentrator with ore from stock. The other thing that was really important to achieve the production volume from the mine to correspond to the concentrator was to start the development. That is really what takes time in a mine and especially in an underground mine, how to create enough scopes within the mine so that you can comply with the needs from the concentrator. If we look into the mine, you see that Q1, Q2, we was roughly following the plan.
In Q3, we had some slight problems regarding mine production, not the mine production in itself, but actually we had some problems when we was commissioning 1 of the crusher or actually not the crusher, 1 of the ore passes and shoots, which we sold after a couple of weeks. So at this moment, we are following the plan both regarding the mine and the mill. If we go to the next project that is in focus now in mines, that is Aitik 45. Of course, you have seen the logics for this expansion or it's a combination of an expansion and the bottlenecking. What's important in our expansion now, of course, is how to comply with the environmental permit we received a couple of months ago.
Important for us in that is 2 areas, I would say. One thing is the depolarization of the tailings. Important for us to manage the tailing pond in Aitik is to be successful in take out all the sulfur or enough sulfur from the tailings, so we can continue with the plan as we see today how to reclaim the pond the day we will mine out mine. Another area important for Aitik is how to work with reclamation. As one consequence of the new A45 minutee plan is that we will produce substantial higher volume of ore and of course, subsequently more waste rock, which means that we will increase the waste rock dams in Aitik.
It will have an impact on our provisions for reclamation costs, which our CFO will come back to later. But it also has an impact on our direct operations. This is a quite complicated slide, and I will try to explain this. This is generally how we operate a mine. The different colors here is different parts of the mine.
And each of these arrows describes one of the pushbacks. And depending how you optimize the mine, you mine the different parts of the mine in these different sequences. And what you optimize on is, of course, the volumes, the grades, the ratio between waste rock and ore. And also in Aitik's case, was perhaps not that easy to see here is the Marginald ore dump, roughly between 20,000,000 25,000,000 tons of Marginald ore. It's consistent in the range of 0.1 to 0.15 copper.
What we are doing now in the A45 project is that we conducted metallurgical test last year. This year, we have actually tried to not tried to we have operated through the concentrator. We have had very good metallurgical performance. So, what we will add from this marginal ore into the concentrator is volume. We will put through from this T5, the total volume, 25,000,000 tons for a number of years coming forward.
And that will add to the volume from the mine. And if you put that into the in consideration, that will be the impact by doing that. And I guess it's understandable also to see by doing this, we take away the reclamation cost for the T5 Marginal Ore stock. It means that instead of having a cost for that, we will put it through the concentrator, we will take the revenues for it, and we will reclaim it into the tailings facility in Aitik. We have now a target saying that we will reach 45,000,000 tons 2017.
Our guidance today is next year, we will reach 40,000,000 tons, including impact from the T5. Life of mine grade will be unchanged, 0.22, but we will have an impact of the T5 for the 2 years to come, which means that we will be slightly below our average grades 15 16. But that will be compensated or offset 2017 going forward over the average grade. If we then continue with Aitik, important for Aitik is the way we work with infrastructure, how to achieve the 45,000,000 tons sustainable in the mine. Really important, of course, is our ore handling system.
What we've been talking a lot about since commissioning of IT36 was the present crusher installations. We've done substantially refurbishment on those crusher installations this year. Actually, we are on our way of finalizing the in pit crusher. The crusher on surface was done early October. That will be essential for us to achieve the 45,000,000 tons and we will get sustainable and stable production.
That do not stop that we are going to install a new crusher on surface, a total new crusher installations. It will not have the same design as the present. It will be a type of in house crusher installation that will ensure that we from the major parts of the open pit will have a very stable production, but also it will decrease our operational cost. Even if we have refurbished the present crusher installations, our experience is that they are very expensive to operate. And of course, with the new installation, we expect the operational cost to decrease.
If Carpentaria and Aitik is our main focus, of course, we continue with other growth options. Kyulilakte, I will come back more about Kyulilakte, what we see our possibilities or potentials in that. But just mentioned Lave, we send in our application for a mine concession late Q3. We are going to continue to fine tune the design which we have done both for the infrastructure, the tailing facilities, how we will operate the mine, how we will operate the in freight systems and the concentrator. But I must underline that Laval, of course, will be a huge challenge regarding the environmental footprint we can leave in this area as this is part of Sweden with very high nature values.
If we continue with Kilelakte or I could perhaps say that now with the acquisition we have a unique exploration opportunity And we will get a sustainable and stable production. That do not stop that we are going to install a new crusher on surface, a total new crusher installations. It will not have the same design as the present. It will be a type of in house crusher installation that will ensure that we from the major parts of the open pit, we'll have a very stable production, but also it will decrease our operational cost. Even if we have refurbished the present crusher installations, our experience is that they are very expensive to operate.
And of course, with the new installation, we expect the operational cost to decrease. If Carpentaria and Aitik is our main focus, of course, we continue with other growth options. Kyuralakti, I will come back more about Kyuralakti, what we see our possibilities or potentials in that. But just mentioned Lave, we send in our application for a mine concession late Q3. We are going to continue to fine tune the design which we have done both for the infrastructure, the tailing facilities, how we will operate the mine, how we will operate the in freight systems and the concentrator.
But I must underline that lava, of course, will be a huge challenge regarding the environmental footprint we can leave in this area as this is part of Sweden with very high nature values. If we continue with Kielylahti or I could perhaps say that now with the acquisition, we have a unique exploration opportunity. We have a presence in Sweden that are very strong. We have been working in both Norbotte and in Schallestjo field and in Berislagen. Now we have both Kuli Lakte mine and the old Outokumpo field.
One potential we see in Kylylahti, this is the mine. This is what you can say is the present mine. What we will continue as we from day 1 after the acquisition, we started to integrate Kyudelakti and all its operations in our own operation is to start up to seek out how will the depth deep part of Kydelacti look like. We have some good initial data showing that it's a potential, but that is something that we will continue to work with next year or actually starting this year. Important also is the whole Outokumpu district in Finland.
It's a lot of copper and nickel deposits. Going with acquisition is a lot of exploration data. What we have been doing for some time is going through all this geological or exploration data and try to sort it out and prioritize them and start to put up a portfolio of exploration projects to start to drill off. And with that, I will try to summarize what I'm saying. Important for us to pursue operational excellence is that, yes, we are on the forefront regarding productivity.
But our major challenge is how to pursue the possibilities if we go into our operations regardless if it's in the mines or in the mills, our overall operational efficiency. We will continue to work with designs. We will continue to work with the possibilities the new technology give us, working with the cores, as I would say always or at least for a considerable time has been the core for us to pursue that, how to work with productivity in mines, utilization of the concentrators and metallurgical performance. And with that, as a base drives growth. Thank you.
So let's open up for questions for Janelle. Should we start with Sascha over here? We have a microphone on the way. There you go.
Thank you. Thank you, Sophie. Could we please go back to slide 59 for a second? So just to help us orient a little bit, like where are you currently in the mine plan? So which zones have you are you mining and what's in the future?
Actually, for the past years, we have been in the southern parts of the mine mainly. These are one reasons why we have been below the average grade. The highest grades in Aitik is in the northern parts, in this part. And actually, what we are optimizing is the speed or going down to reach these areas of higher grades and to get the best combination of somewhat more low grade, high grade material.
Thank you for explaining that. And so the current pushback will give you the benefit of access to the higher grades. How long will you enjoy the benefits before you have to spend again on the next pre strip? And what would be the capital investment for the next stripping phase?
I think I let this be the guidance for the time being. And going back to capital, I give that to our CFO, SC will answer that later on.
So nothing beyond 2019?
Sorry.
Okay. Thank you. That's it for me.
We have one question I see from Alliance. Thank you.
Hi. This is Alain Gabriel from Morgan Stanley. If we can stay with the ITIC as well. Now that the grades will be lower than expected in 2015, 2016, what would be the cost impact approximately? Is there any quantification you can give us given that the mine is extremely sensitive to grades?
Thor, I didn't catch
The unit cost impact of the grade profile going to 2015 2016, how do you expect it to evolve versus 2014?
The unit cost will have no impact on the grades, which we have not calculated in the expansion. So what we have calculated is the unit cost decrease. And that is in the calculation, so to say.
Okay. All right. And if we can go to Garpenberg as well, now that you've been running ahead of schedule basically in terms of the mill door, is there any guidance you can give us for the budget for 2015? Should we expect 2,500,000 tons?
Yes. I think we have communicated that we will be on 2,500,000 tonnes annually paid on the later parts of 2015. And that is what we expect to do.
Hi, Johannes Kranziotis, ABG here. Question on IT 45. Could you give some color on the total investment? You mentioned the $600,000,000 if I remember it correctly. Now there is environmental costs into it as well and some other costs, I assume.
So can you tell us a bit about that?
My short answer is no. But perhaps, as you say, ITK 45 is somewhat complicated as it's substantial investments in environmental performance. So I think I leave that with our CFO, so he can guide you for the nearest year and don't give you, at this time, any total cost for IT 45.
And second question is also on Aitik and now when you are targeting IT 45. How should one look at CapEx over time of that asset? Could you give us some rough numbers there, please?
How do you mean? What has been or that will come?
No, the sort of the normalized CapEx level for the annually over the next couple of decades.
A lot of different formulas asking the same question. I think I leave it to the CFO. You can give it another
I'll try another dinner then.
Yes, do that.
After the break, I think a question from Christian. The microphone is on the other side of you, sir.
Thanks. Christian Kopf from Nordea Markets. Just a question on the grade. You're talking about Aitik enjoying higher than average grades for 2017 to 2019. What kind of levels are we talking about?
Is 0.25% or?
As it stands on the slide, it's above average grades. I don't elaborate on that, but it's over.
Okay. So with the higher than average grade, will you expect recoveries also to improve or?
I would say I probably hope for that, but our metal recoveries in Aitik are extremely well, even with the low grade which we have been operating now. So of course, I hope it will improve, we are on world class regarding recoveries.
And then on Kyllilaakti, have you set any cost savings for that mine?
Let me put it like this. Kyllilaakti now is working or guided to operate according to expectations set out when we did the due diligence and the acquisition. What will be focused for Kurylakti is to develop some sort of development plan throughout 2015. And then we decide, will it continue to operate as is or do we see something else? So it's premature to start to talk about different directions or alternatives for Kyudellakte.
Thanks.
Yes. Could I also comment on the questions here? I think that the present plan for Aitik, on Sascha's question, I think it is beyond 2020 somewhere we have the next pushback coming. So maybe 2022, 2023, 2024 look like low years right now. And when it comes to how we cycle in the pushbacks here, as you see, Aitik was it was a little hole here.
We do a pushback here and then we mine and then once down there, we start in the beginning again and we have south and north. It becomes many more positions now and the variations possible are quite many. So I would say that we are in a we know exactly where today's plan is and that is a lower point somewhere 2022 or something, 2023. But I think that we are going to work hard with exploration and with different evaluations. So I'm what we're saying is, yes, we know exactly what it looks like now, but we're pretty certain that we will probably turn it and tilt it many times before then.
But that is at least giving you some kind of idea of what you
model. We have a question from Julian.
Yes. Lennox, as you're the man who's able to give the candidates' answers.
I shouldn't have answered. I realized that. I thought that was the last one.
So could you just describe to us what the budget sanction amount was for the ITEC 45, including the environmental costs? What the budget? Well, I assume that the Board has signed off on a budget for the expansion of Aitik, including the new environmental requirements.
Yes, absolutely. And the question was, did we understand what I mean, we had all the environmental implications there, of course, and we justified it including a new dam somewhere beyond 2025 and the mine plan including the numbers or the indications I said. We are working on a possibility to do variations of it. But we have the base case is what we decided on. And then we are looking at, okay, now can we spend some more time on exploration there?
Can we take that before that and model it a bit more clever? But I think the main thing is now. We got the permit. We can go up in speed already on short notice. And what is the ore we have available on short notice?
Well, it's this beautiful. It's low grade, but it's a big stockpile. And that had the impact on the near term adjustment. We don't have high grade ore available on short notice to run 40,000,000 tonnes. So we said, okay, let's go out on Capital Market Day, say that we have got the permit.
We're going to try to push up to 40 and we take what we have now, and that is this T5 stockpile. So
we
are in a very interesting sort of testing of different models. But the decision was on the default plan. We know what we're running and then we're testing alternatives.
Thanks. Yes, it's Julian Beer from SEB. With regard to the environmental approval for the ITEC 45, we had a brief discussion about this at the Q3 report. And we were told that there's nothing significant in terms of additional cost for runoff water cleanup. Could you just give us a bit of an idea about what you're actually being asked to do here in the new environmental ruling?
I would say that the most important area for us to achieve is the desulfurization that we will install the processes and facilities to take out the pyrite from the tailings. Also what's important for us is that we will increase the dam highs of the clarification ponds so that we can ensure these very extreme low contents of metal. And that actually is one part that we will have we will go back to the environmental court and ask for provision throughout the 2 years of construction that we probably will not manage the conditions, but going forward, I don't see any obstacles to us to meet all expectations.
Great. And did any of the other bodies appeal against the expansion decision? Or did that just go through on appeal?
No, it has been appealed by both Natur Borchvejeket and I think it's whole Ocmeleur, but I'm half Savarta.
Great. And then on Gothenburg, the question is regarding here again cost per tonne. Where are you in 20 14 compared to the 2011 figure? And can you give us a road map of how we get down to the 75% of 2011 level once you're up on €2,500,000?
I would say we are following the planned extremely well. Of course, we have an impact on inflation, mainly on the workforce cost and energy, but we are following the plan very well. And of course, that is something that we will continue until we are up on full production. That would be somewhere late next year.
Okay.
Do you see that 25% cut as
a target still? Of course. And I expect to achieve it also.
Great. And then finally for me on Aitik. When you say that you've got a world class recovery level, what does that mean? I think recovery has been a little bit up and down in 2014 quarter by quarter. Is 90% world class, for instance?
That depends on what you have put into the mill, of course. What you have seen throughout 'fourteen is some periods where you have really low grades. And of course, when you have going down in grades, generally, you have a constant level of copper in the tailings, and that means that the recoveries goes down. But in comparison with the levels we operate, I would say it's world class. I don't see anyone that are close to that.
So if we can see that at 19 basis points, your recoveries were a bit on the low side. Can we look at 2021 and pretty much just take a straight line between that and where you were at 2022?
Roughly, whatever roughly means.
Thank you very much.
Julian, if you could pass the microphone to Conor, that would be great. Thank you.
Conor Reilly, Credit Suisse. Just a quick question on NYTIC. The 45,000,000 tonnes in 2017, is that a full year production target or is that an exit run rate? And also what throughput do you expect in 2016?
It's a full year run rate on 45,000,000 tonnes.
And 2016.
And 2016? Yes. Well, if you take a straight line from 40%, 15% and 45%, 17% then I guess you have it roughly.
We will
have time for one more question. No? Anyone else? Yes. Stephanie here.
Hi. It's Steph Bothell at Bank of America. Just a follow-up question on the business improvement process at Tahoe. So over and above the 5% saving that you'll get from the headcount reduction, can you give us some idea of the quantum in terms of the cost per ton reduction that we should see over the course of next couple of years from the productivity improvements that you talked about?
I would say it's quite linear as we have a fixed production target. And if we decrease the cost base according to this, it would be linear to that.
Okay. Thanks. Okay.
We will now take a break, and we will continue on here at 3:4 to 5 p. M. Sharp. And please enjoy our exhibition area.
Gold fever hits here in the Vesterboten forests for the first time in the early years of the 20th century. A shortage of metal during the First World War led to increased interest in the area from an ore perspective. Known in Swedish as emission companies was launched. These were speculative holding companies formed by the banks. The Boliden we know today has its origins in one such company called Central Groupon's Initions Bollag.
Central Groupon's Initions Bollag was started to bring order to the search for ore bodies. However, prolonged field exploration proved fruitless. Finally, they gave up and the entire project was canceled. But the news had not reached some of their geologists who were working in the village of Bureleden in Vesterboten. So unaware of development, they kept on looking.
1 cold morning on 10th December, 1924, the geologists found themselves on a bog on the outskirts of Buelliden. A persistent grinding sound was heard from a drill. Silence fell as the final drill core was retrieved and they saw that they had found ore containing huge quantities of gold. It would soon become apparent that they had found an ore body containing Europe's richest ore. Even today, Boledin still owns that first drill core that laid the foundation for the entire company.
There's a lot of gold in this. This drill sample also paved the way for a new community. Sweden's Klondike grew and the gold rush became a reality. In 1929, construction on the mining community commenced. The town was laid out in a fan shape that was considered modern for the time.
Homes and accommodations such as a work hotel were constructed, the post office and telegraph arrived, a community center was built and the railway reached Boledin. By 1936, the community was home to around 2,300 inhabitants. Construction of Boliden's mining community also meant that people had access to a doctor's surgery. The mining town was a welfare community and was considered among the most modern in all of Sweden. Mining communities grew up in many places around the mines and sometimes as here in Lava, which operated between 1937 1946, they completely disappeared once the mine was exhausted.
Since then, technical development has advanced and Boliden is now examining the scope for mining ore in the lava area once more. While the world was experiencing the Great Depression in the 1930s, Boliden's Shalift operations flourished. This led to economic development in the region and local population growth. First mine in Boliden was exhausted. It is exploration, the search for new deposits that lays the foundations for all mining operations.
Without new ore bodies, the business dies out in the long term. Therefore, exploration
in
the field in areas of interest is an ongoing process.
The work is
divided into field exploration which involves exploring new areas,
conducted close to existing mines. Boledin's strategy in recent years has been to prioritize mine site exploration. New finds near existing mines save both time and resources as the infrastructure is already in place. Mine site exploration is taking place at all the mines in Sweden and Ireland. A few 1000000000 years ago, the Shelestay field lay at a depth of 3,000 meters.
The area experienced vulcanization, which is how the ore we mine today was formed. All collected information is processed and interpreted by the Geo Data Department using various computer programs to produce a multidimensional model. The need to work with geology in several dimensions is increasing all the time. In a well explored area, the chances of finding new mineral deposits close to the surface are likely to be slim. That's why it is increasingly important to understand the nature of the deep bedrock.
Boliden's exploration efforts have been successful. And over the past 10 years, mineral resources have increased dramatically. But it's a long process. From up to 1,000 interesting exploration areas, only a few lead to identified deposits. And then it often takes between 5 10 years before mining can start.
So you have to plan ahead. Boliden currently has 4 mining areas in Sweden and Ireland. Processing of the deposits here in Garpenberg started in the 13th century, which makes Garpenberg the oldest mining area in Sweden still in operation. Ore containing zinc, silver and lead are mined here along with small quantities of copper and gold. Successful exploration has led to Boliden finding new large ore bodies here and so the emphasis is on expanding capacity.
An investment of DKK3.9 billion will see production increase to 2,500,000 tonnes of ore per year. The investment includes new shafts, a new industrial area, a facility for crushing ore underground, not forgetting an ultra modern concentrator that will also be able to meet future needs. The Voliden area is located in the mineral rich Shelifte field where nearly 30 minutees have been opened since production began in the 1920s. All the mines here produce complex ore which contains zinc, copper, lead, gold and silver. Successful exploration has gradually extended the life of the Boliden area.
In 2012, Boliden opened the new Kankberg gold mine thanks to a combination of exploration, technical development and changed market conditions. Zinc and copper were previously mined at Cankberg. Gold was discovered there back in 1995, but it was combined with a rare ore from which it was not initially possible to extract gold. It took 17 years to reach a point where it was technically possible to start production. And in the meantime, the price of gold had increased tenfold.
Today, the Kankberg mine is in full operation after an investment of DKK 475,000,000. Tara in Ireland is Europe's largest zinc mine and the 9th largest in the world. Here, zinc and lead concentrates are mined and enriched for shipping on to Boliden's zinc smelters for further processing into pure metal. Aitik in Jelleva, Boliden's giant open pit copper mine is Sweden's largest mine. Every day around the clock, a large quantity of ore is mined and transported here.
This open pit mine focuses on large scale mining and productivity is high, thanks to large volumes and a high degree of automation. It is home to some of the world's largest and most efficient machines, including 8 meter high trucks that can be loaded with over 300 tonnes of ore at a time. The deposit consists of chalcopyrite containing low levels of copper and gold and silver. The mineralization was first discovered in the 1930s, but the equipment and technology needed to make mining profitable were not available until the 1960s. New facilities were inaugurated in 2010 that double Aitik's ore production to 36,000,000 tonnes per year.
The expansion project began in 2,008 and the investment which amounted to SEK6 billion is one of the largest industrial investments in Sweden in recent years. The expansion has also created the conditions for mining additional ore. In parallel with the expansion project, Boliden is examining the possibility of further increasing production volume to 45,000,000 tonnes of ore per year. All the crushed and ground ore is transported to the concentrator. Here in Aitik, recent investment has led to construction of a new huge concentrator that can process the increasing ore volumes from the mine.
During the concentration process, the various minerals in the rock are separated from one another. The Aitik mine uses a method known as flotation, which means that the sulphide ore that contains copper is ground into a fine powder and suspended in water. Air is passed through the mixture so that the ore particles stick to the bubbles and rise to the surface. They are skinned off and the water is squeezed out, leaving a fine grained concentrate. The concentrate now represents approximately 0.5% of the total amount of rock mined.
Since its start, Borleiden has moved from hacking at the ore with pickaxes to high-tech. The work in modern mines, concentrators and smelters tends to employ sophisticated technical methods and tools these days. For instance, in the ITEEC mines concentrator, it is possible to control the hardware using a smartphone or tablet. Personnel can connect directly to the concentrator's control system via the mine's wireless network to control processes at the plant, revise drawings and wiring diagrams and troubleshoot and report faults. And here at Boliden, they have developed a new leaching method to enrich gold.
In order for the ore concentrate, as the end product of mining is called, to be high quality, pure metal, it must be refined in a smelter. The refinement process differs depending on the metal being produced. The Runsha copper smelter outside Chelope Deyo is Boledin's largest production unit. Here, copper and lead concentrates from the mines are smelted and refined, but the smelter is also the world leader in the recovery of copper and precious metals from electronic scrap. When ore concentrate from the mines is smelted, it forms a mat with a copper content of about 55%.
This is tapped into a converter furnace where iron and other impurities are separated out. What remains is crude copper with a copper content of 97% to 98%. This is then processed in an anode furnace to increase the purity from 98% to 99%. This crude copper is then cast to form anodes and placed in tanks with steel cathode plates. Here, the anodes are dissolved and the copper ions migrate over to the steel plate.
The cathodes are then separated from the steel plates and washed. They are then ready for delivery. Munshare has been recycling electronic scrap on a large scale since 1980. The market has grown gradually and the plant has increased its capacity for this type of material. Money has been invested in a coldo furnace which has been specially designed to deal with e scrap.
The ore at Voliden's first mine contains 20 grams of gold per tonne and was considered one of the richest in the world. Now compare that with e Scrap and you'll find that computers and mobile phones for instance contain significantly larger levels of gold. So as far as Rundsjar is concerned, the mines of the future are in the cities. In addition to Rundsha, Boliden has 4 other smelters. The Kokola Zinc smelter in Finland has a capacity of around 315,000 tonnes of zinc per year making it the 2nd largest zinc plant in Europe.
The Oda zinc smelter in Norway mainly produces pure zinc and zinc alloys. Haya Vallta in Finland smelts copper and nickel concentrate and refines copper. Its main products are copper cathodes, gold and silver. The Bariso lead smelter is one of Europe's largest recyclers of used lead batteries. Its main products are pure lead and alloys.
Bariso contributes in various ways to a profitable eco cycle by extracting lead from around 4,000,000 used car batteries every year. Voliden currently produces metals that are used everywhere in modern life. The global population is increasing all the time and as more and more people lift themselves out of poverty, the need for metals for homes, infrastructure and electricity transmission will also increase. Boliden's metals are sold to industry mainly in Europe. Payment is based on the
It's a great pleasure to introduce our next speaker, Kerstin Komradsson, President of Boliden Smelters.
So today, I will guide you through how we work to improve our performance in the centers. And before I dig into details, I will make a short recap of the assets we have because these are the ones we work on and try to leverage the value. So just a reminder, we have 2 zinc smelters. We have Oda in Norway and Kokkola in Finland. We have 2 copper smelters.
They are in a way similar, but on the other hand quite different. Valkari, northern part of Sweden, focused on primary but also secondary raw materials. You are all well aware of our expansion of the e materials in Rokhai. And then we have Harjavantra, which not only smelt copper, but also smelt nickel, which we also have started to talk about today. Then in the southern part of Sweden, we have a secondary lead smelter, which recycles car batteries producing lead.
So we have identified 3 strategic areas within Volumes and Smelters that will help us create value with CR being a prerequisite. I will not go into that since Henrik have already told you quite a lot about it. But also to understand that this is a little bit like the Aero Lernerschelde. So we start with improved operational efficiency. That is sort of the first step.
It is about having process stability, high yield, low unit cost. That's the basis. And when we have that in place, we can start to work on flexibility. And if we are very good in treating complex raw materials and if we are good at taking care of the waste residues, we become more flexible. And what is the benefit of being more flexible?
Well, the benefit is, of course, that we access much broader raw material on the market because we have the capability to treat them. And then the third one is, of course, to maximize the metallum byproduct output. So what I will do now is that I will go through them 1 by 1 and I will give you some examples. So first of all, improve operational efficiency. We have now during the last years carried out quite extensive improvement programs in almost all centers.
I think the biggest one is the example Leonard already told about the P100 program. It was a 3 year program with a target to reduce costs of NOK 100,000,000 and we reached a target actually a little bit above end of 2013 according to plan. And it was also a lot about improving the stability of the processes. But when you look at this chart, you also see that other units have actually had the same kind of cost efficiency improvement as OTTA, for instance, Baeser. It's a small unit, but they keep on doing this year by year.
Also, as Lennard said, Coca Cola is probably our most stable unit production wise, but also cost wise, delivering very stable results. Haria Ralta, we have had problems. Some 2, 3, 4 years ago, we had big problems with stability. They are quite they were quite similar to the problems we experience today in Rancher. But they have done a great improvement work.
They have improved the process stability, and we have seen great results coming out of Harrier Alta for some years now. Now they are back on more normal level. So the improvement program we now have is Ronge, which was started up about 1 year ago. And you see that the ambition now for this program, which is a 3 year program, is to improve the EBIT with SEK 275,000,000 And I will go a little bit more into detail so you understand how we intend to do that. So first of all, this year this time of year last year, we identified cost savings potentials in the magnitude of SEK 125,000,000.
And beginning of this year, we thought that well, maybe we can reach SEK 50,000,000 this year. But actually, we have and I'm very happy to say that we have been able to deliver far above our expectations, and we now give the forecast for this year SEK 400,000,000. It's mainly done on contractors this year. We have just finished negotiations with the union, so we will have permanent manning reductions that will take start to take place beginning from now, I would say, but they will partly be offset by the contractors. So you shouldn't expect very much more savings next year, slightly more, but you see the target is SEK 125,000,000 We also work with other areas, so especially spare parts and consumables.
So moving into process balance, which is I mean, this is cost is the quickest way to improve the result of a unit, and that is why we have spent so much focus on it. But the process balance is, of course, the one with sort of the highest potential, but it also takes longer time before we start to see the results. Here, we have identified a target of improving the EBIT with SEK 150,000,000 and the forecast for this year is SEK 50,000,000. So there are 3 main areas, I would say, that we focus on. The first one is to manage the impurities.
And how can we do that? Well, of course, when we choose raw materials, we select them based on the content. And actually, today, we have quite a favorable market because there is quite a lot of copper concentrates available on the markets, so we can actually choose. Just a few years ago, we didn't have the sort of possibility to choose because there was a shortage, but now we can choose. We also put some penalties in some of the contracts.
That's one way. Then you know that we have stockpiled intermediates at Schoninger due to the process problems we have had. And our target now is to try to feed them back to the process and extract all the valuable metals that are in there. And how we do it? Well, we do it in different ways.
One way is that we have daily process control, which means that we, on a daily basis, look at all the impurities we put into the process, we maximize it, we can't exceed it because if we do, we will start to have the process balance problems again or we risk the quality of the final product and we can't do that. So try to optimize the impurity capacity, but not to forget to also optimize the valuable capacity because there are valuables in these materials that we also need to extract. Then there are more technical things that we could do. For instance, when we built the new Ical though, we discovered that we started to have quite big volumes of sludge. And the problem we thought we could feed them back to the process, but the problem with the sludge is that it contains high moisture.
And if we put it back to the furnace, there are risks of explosion, and we can't take that risks. So what we have done now is that we have installed a dryer, so we can dry the sludge and then we can safely feed it back to the process and we can extract the metals. So that are typical actions that we are doing now in Rangar to get the value back from the intermediates. So if we look at the second strategic area, increased flexibility, It's about optimizing the raw materials. Once again, I will come back to this repeatedly, impurities, valuables and our capacity and capability.
And basically, when you are a smelter, you can choose 2 different routes. You can choose to treat clean concentrates. Well, everyone can treat clean concentrates, and the only way you can compete is by having lowest cost. And that is quite difficult for us in the Nordic regions. The other way you can go is to treat complex concentrates probably in a combination with clean.
So you mix clean and complex concentrates. But then you must also understand what you do and you must understand the trade off between the complex materials and the costs they might incur. So how do we do this? Well, we evaluate each concentrate. And this is now a zinc case.
It's 10 different concentrates. We look at them and you see the on the positive side, we have different gross profit components. So it's the treatment charge, it's the free metals. Actually, it's different free metals. It could be penalties, but penalties is normally quite little.
And on the negative side, you have not all the costs related, but the ones that are specific to that raw material. So and normally, it's consumables. The red is consumable. You see it's quite stable for most of them. But we also need to consider what is the waste treatment cost because these materials contain impurities.
So when you look at this, you see that, okay, concentrate number 15, they look nice, right? So those are the ones I want to put in my feed. But the problem is, it's not as simple as that because we have once again, we have all these different and it's numerous boundary conditions We need
to
consider arsenic, mercury, cadmium. If it's zinc, we need to consider copper and etcetera. And in order to do that, we need to have some sort of IT support. And what we do is that we use linear optimization, well, simple, I would say, but a standard mathematical model to optimize the profitability. And the result that comes out of that is well, I will give you an example, could look like this.
And you see that there is a sort of average profitability of this feed. And you see that there are not only 2 concentrates. It's actually a blend of maybe 10, 15. And you also see that when you look at it that this here, the big bulk volumes, well, they are not the ones with the highest profitability, but you need them. You need them to dilute the impurities that you bring in the process, but they don't give you the highest revenue.
If you look at the ones to the left, then you start normally to look at the more complex ones. You see that they actually contribute with a quite high gross profit. But of course, they are related with some issues. So for instance, the one to the left, I know, is very high in arsenic and mercury, and the treatment cost or waste handling cost for that is quite high. And we have limitations.
And maybe we don't want to fill up the mercury limitation with just one concentrate. So we need to consider all this again. If we, for instance, look at and also to say that the ones to the left normally are low in zinc because then we get high TC. But if they are low in zinc, of course, they contain a lot of other stuff that we don't want to have. But if we, for instance, take this one, it's a concentrate with fairly normal zinc concentrates, but it contains free metals like silver.
So this is the way we try to optimize the feed and make sure that we get the maximum gross profit out of the raw materials we put in. So still working on the second one on the flexibility, the new environmental permit in Ergenheim. We received it this summer. We have communicated that the total investment will be about SEK 1,000,000,000. It's a lot of money.
But we will have 2 things, 2 important things. We will have the possibility to expand our copper production, but we will also have the possibility to build a deep deposit storage under Renkha plant. The deep deposit storage as such is roughly estimated to cost SEK 600,000,000. It's very expensive, but we
have a very good plan for exploration data and try to sort it out and prioritize them and start to put up a portfolio of exploration projects to start to activity. But our major challenge is how to pursue the possibilities if we go into our operations regardless if it's in the mines or in the mills, our overall operational efficiency. We will continue to work with designs. We will continue to work with the possibilities the new technology gave us, working with the course, as I would say always, or at least for a considerable time has been the core for us to pursue that, how to work with productivity in mines, utilization of the concentrators and metallurgical performance. And with that as a base drives growth.
Thank you.
So let's open up for questions for Janne. Should we start with Sasha over here? We have a microphone on the way. There you go.
Thank you. Thank you, Sophie. Could we please go back to Slide 59 for a second? So just to help us orient a little bit, like where are you currently in the mine plan? So which zones have you are you mining and what's in the future?
Actually for the past years we have been in the southern parts of the mine mainly. These are one reasons why we have been below the average grade. The highest grades in Aitik is in the northern part
mines near existing mines save both time and resources as the infrastructure is already in place. Mine site exploration is taking place at all the mines in Sweden and Ireland. A few 1000000000 years ago, the Shelefte field lay at a depth of 3,000 meters. The area experienced vulcanization, which is how the ore we mine today was formed. All collected information is processed and interpreted by the GEO Data Department using various computer programs to produce a multi dimensional model.
The need to work with geology in several dimensions is increasing all the time. In a well explored area the chances of finding new mineral deposits close to the surface are likely to be slim. That's why it is increasingly important to understand the nature of the deep bedrock. Boledin's exploration efforts have been successful and over the past 10 years mineral resources have increased dramatically, but it's a long process from up to a 1,000 interesting exploration areas only a few leads to identified deposits. And then it often takes between 5 10 years before mining can start.
So you have to plan ahead. Boliden currently has 4 mining areas in Sweden and Ireland. Processing of the deposits here in Garpenberg started in the 13th century which makes Garpenberg the oldest mining area in Sweden still in operation. All containing zinc, silver and lead are mined here along with small quantities of copper and gold. Successful exploration has led to Bolivar finding new large ore bodies here and so the emphasis is on expanding capacity.
An investment of DKK3.9 billion will see production increase to DKK2.5 million of ore per year. The investment includes new shafts, a new industrial area, a facility for crushing all underground not forgetting an ultra modern concentrator that will also be able to meet future needs. The Validen area is located in the mineral rich Challete field where nearly 39 to been opened since production began in the 1920s. All the mines here produce complex ore which contains zinc, copper, lead, gold and silver. Successful exploration has gradually extended the life of the Boliden area.
In 2012, Voliden opened the new Kankberg gold mine thanks to a combination of exploration, technical development and changed market conditions. Zinc and copper were previously mined at Cankberg. Gold was discovered there back in 1995 but it was combined with a rare ore from which it was not initially possible to extract gold. It took 17 years to reach a point where it was technically possible to start production. And in the meantime, the price of gold had increased tenfold.
Today, the Kankberg mine is in full operation after an investment of DKK475,000,000. Tara in Ireland is Europe's largest zinc mine and the 9th largest in the world. Here, zinc and lead concentrates are mined and enriched for shipping on to Boledin zinc smelters for further processing into pure metal. Ipeak in Yalivar, Boledens giant open pits copper mine is Sweden's largest mine. Every day around the clock a large quantity of ore is mined and transported here.
This open pit mine focuses on large scale mining and productivity is high thanks to large volumes and a high degree of automation. It is home to some of the world's largest and most efficient machines including 8 meter high trucks that can be loaded with over 300 tonnes of ore at a time. The deposit consists of chalcopyrite containing low levels of copper and gold and silver. The mineralization was first discovered in the 1930s but the equipment and technology needed to make mining profitable were not available until the 1960s. New facilities were inaugurated in 2010 that double Aitik's ore production to 36,000,000 tonnes per year.
The expansion project began in 2,008 and the investments which amounted to SEK6 billion is one of the largest industrial investments in Sweden in recent years. The expansion has also created the conditions for mining additional ore. In parallel with the expansion project, O'Liden is examining the possibility of further increasing production volume to 45,000,000 tonnes of ore per year. Here in Aitik, recent investment has led to construction of a new huge concentrator that can process the increasing ore volumes from the mine. During the concentration process, the various minerals in the rock are separated from one another.
The Aitik mine uses a method known as flotation which means that the sulfide ore that contains copper is ground into a fine powder and suspended in water. Air is passed through the mixture so that the ore particles stick to the bubbles and rise to the surface. They are skinned off and the water is squeezed out leaving a fine grained concentrate. The concentrate now represents approximately 0.5% of the total amount of rock mined. Since its start, Borleiden has moved from hacking at the ore with pickaxes to high-tech.
The work in modern mines, concentrators and smelters tends to employ sophisticated technical methods and tools these days. For instance, in the ITEEC mines concentrator, it is possible to control the hardware using a smartphone or tablet. Personnel can connect directly to the concentrator's control system via the mine's wireless network to control processes at the plant, revise drawings and wiring diagrams and troubleshoot and report faults. And here at Boledin they have developed a new leaching method to enrich gold. In order for the oil concentrate as the end product of mining is called to be high quality pure metal it must be refined in a smelter.
The refinement process differs depending on the metal being produced. The Runshaw copper smelter outside Chelope Deyo is Boledin's largest production unit. Here copper and lead concentrates from the mines are smelted and refined but the smelter is also the world leader in the recovery of copper and precious metals from electronic scrap. When all concentrate from the lines is smelted, it forms a mat with a copper content of about 55%. This is tapped into a converter furnace where iron and other impurities are separated out.
What remains is crude copper with a copper content of 97% to 98%. This is then processed in an anode furnace to increase the purity from 98% to 99%. This crude copper is then cast to form anodes and placed in tanks with steel cathode plates. Here, the anodes are dissolved and the copper ions migrate over to the steel plate. The cathodes are then separated from the steel plates and washed.
They are then ready for delivery. MoonShare has been recycling electronic scrap on a large scale since 1980. The market has grown gradually and the plant has increased its capacity for this type of material. Money has been invested in a cold furnace which has been specially designed to deal with e scrap. The ore at Boledin's first mine contains 20 grams of gold per tonne and was considered one of the richest in the world.
Now compare that with e scrap and you'll find that computers and mobile phones for instance contain significantly larger levels of gold. So as far as Rundshall is concerned, the mines of the future are in the cities. In addition to Rundshall, Boliden has 4 other smelters. The Kokola Zinc smelter in Finland has a capacity of around 315,000 tons of zinc per year making it the 2nd largest zinc plant in Europe. The Oda zinc smelter in Norway mainly produces pure zinc and zinc alloys.
Hayavalta in Finland smelts copper and nickel concentrate and refines copper. Its main products are copper cathodes, gold and silver. The BAE SO Lead Smelter is one of Europe's largest recyclers of used lead batteries. Its main products are pure lead and alloys. BAE SO contributes in various ways to a profitable eco cycle by extracting lead from around 4,000,000 used car batteries every year.
Voliden currently produces metals that are used everywhere in modern life. The global population is increasing all the time and as more and more people lift themselves out of poverty, the need for metals for homes, infrastructure and electricity transmission will also increase. Borlieton's metals are sold to industry mainly in Europe. Payment is based on the
It's a great pleasure to introduce our next speaker, Kerstin Konradsson, President of Boliden Smelters.
So today, I will guide you through how we work to improve our performance in the smelters. And before I dig into details, I will make a short recap of the assets we have, because these are the ones we work on and try to leverage the value. So just a reminder, we have 2 zinc smelters. We have Oda in Norway and Kokkola in Finland. We have 2 copper cementers.
They are in a way similar, but on the other hand quite different. Rhenka in northern part of Sweden focused on primary, but also secondary raw materials.
You are
all well aware of our expansion of the e materials in Ralka. And then we have Harjavalta, which not only smelt copper, but also smelt nickel, which we also have started to talk about today. Then in the southern part of Sweden, we have a secondary lead smelter, which recycles car batteries producing lead. So, we have identified 3 strategic areas within Bolivar and Smetas that will help us create value with CR being a prerequisite. I will not go into that since Henrik have already told you quite a lot about it.
But also to understand that this is a little bit like the arrow Leonard showed. So, we start with improved operational efficiency that is sort of the first step. It is about having process stability, high yield, low unit cost. That's the basis. And when we have that in place, we can start to work on flexibility.
And if we are very good in treating complex raw materials and if we are good at taking care of the waste residues, we become more flexible. And what is the benefit of being more flexible? Well, the benefit is, of course, that we access much broader raw material on the market because we have the capability to treat them. And then the third one is, of course, to maximize the metallum byproduct output. So what I will do now is that I will go through them 1 by 1 and I will give you some examples.
So, first of all, improve operational efficiency. We have now during the last years carried out quite extensive improvement programs in almost all centers. I think the biggest one is the example Leonard already told about, the P100 program. It was a 3 year program with a target to reduce costs of NOK 100,000,000 and we reached a target actually a little bit above end of 2013 according to plan. And it was also a lot about improving the stability of the processes.
But when you look at this chart, you also see that other units have actually had the same kind of cost efficiency improvement as OTTA, for instance, VASER. It's a small unit, but they keep on doing this year by year. Also as Leno said, Coca Cola is probably our most stable unit production wise, but also cost wise delivering very stable results. Haria Ralta, we have had problems. Some 2, 3, 4 years ago, we had big problems with stability.
They are quite they were quite similar to the problems we experience today in Rancher, but they have done a great improvement work. They have improved the process stability and we have seen great results coming out of Harya Alta for some years now. Now they are back on more normal level. So the improvement program we now have is Ronge, which we started up about 1 year ago. And you see that the ambition now for this program, which is a 3 year program, is to improve the EBIT with SEK 275,000,000 and I will go a little bit more into details to understand how we intend to do that.
So first of all, this year this time of year last year, we identified cost savings potentials in the magnitude of SEK 125,000,000 and beginning of this year we thought that well maybe we can reach SEK 50,000,000 this year. But actually we have and I'm very happy to say that we have been able to deliver far above our expectations and we now give the forecast for this year SEK 400,000,000. It's mainly done on contractors this year. We have just finished negotiations with the union, so we will have permanent manning reductions that will take start to take place beginning from now, I would say, but they will partly be offset by the contractors. So you shouldn't expect very much more savings next year, slightly more, but you see the target is €125,000,000 We also work with other areas, so especially spare parts and consumables.
So moving into process balance, which is I mean, this is cost is the quickest way to improve the result of a unit and that is why we have spent so much focus on it. But the process balance is, of course, the one with sort of the highest potential, but it also takes longer time before we start to see the results. Here we have identified a target of improving the EBIT with SEK 150,000,000 and the forecast for this year is SEK 50,000,000. So there are 3 main areas, I would say, that we focus on. The first one is to manage the impurities.
And how can we do that? Well, of course, when we choose raw materials, we select them based on the content. And actually today, we have quite a favorable market because there is quite a lot of copper concentrates available on the markets, so we can actually choose. Just a few years ago, we didn't have the sort of possibility to choose because there was a shortage, but now we can choose. We also put some penalties in some of the contracts, that's one way.
Then you know that we have stockpiled intermediates at Stoninger due to the process problems we have had. And our target now is to try to feed them back to the process and extract all the valuable metals that are in there. How we do it? Well, we do it in different ways. One way is that we have daily process control, which means that we on a daily basis look at all the impurities we put into the process, we maximize it, we can't exceed it because if we do, we will start to have the process balance problems again or we risk the quality of the final product and we can't do that.
So try to optimize the impurity capacity, but not to forget to also optimize the valuable capacity because there are valuables in these materials that we also need to extract. Then there are more technical things that we could do. For instance, when we built the new e Caldo, we discovered that we started to have quite big volumes of sludge and the problem we thought we could feed them back to the process, but the problem with the sludge is that it contains high moisture and if we put it back to the furnace there are risks of explosion and we can't take that risks. So what we have done now is that we have installed a dryer, so we can dry the sludge and then we can safely feed it back to the process and we can extract the metals. So that are typical actions that we are doing now in Rangkaj to get the value back from the intermediates.
So, if we look at the 2nd strategic area, increased flexibility, it's about optimizing the raw materials once again. I will come back to this repeatedly impurities, valuables and our capacity and capability. And basically when you're a smelter you can choose 2 different routes. You can choose to treat clean concentrates. Well, everyone can treat clean concentrates and the only way you can compete is by having lowest cost and that is quite difficult for us in the Nordic regions.
The other way you can go is to treat complex concentrates probably in a combination with clean, so you mix clean and complex concentrates. But then you must also understand what you do and you must understand the trade off between the complex materials and the cost they might incur. So, how do we do this? Well, we evaluate each concentrate and this is now a zinc case, it's 10 different concentrates. We look at them and you see on the positive side we have different gross profit components.
So it's the treatment charge, it's the free metals, actually it's different free metals. It could be penalties, but penalties is normally quite little. And on the negative side, you have the not all the costs related, but the ones that are specific to that raw material. So, and normally it's consumables, the red is consumable, you see it's quite stable for most of them. But we also need to consider what is the waste treatment cost because these materials contain impurities.
So when you look at this, you see that okay concentrate number 15, they look nice, right. So those are the ones I want to put in my feed. But the problem is it's not as simple as that because we have once again we have all these different and it's numerous boundary conditions. We need to consider arsenic, mercury, cadmium, if it's zinc we need to consider copper and etcetera. And in order to do that we need to have some sort of IT support.
And what we do is that we use linear optimization, well, simple, I would say, but a standard mathematical model to optimize the profitability. And the result that comes out of that is, well, I will give you an example, could look like this. And you see that there is a sort of average profitability of this feed and you see that there is there are not only 2 concentrates, it's actually a blend of maybe 10, 15. And you also see that when you look at it that this here the big bulk volumes well they are not the ones with the highest profitability, but you need them. You need them to dilute the impurities that you bring in the process, but they don't give you the highest revenue.
If you look at the ones to the left, then you start normally to look at the more complex ones. You see that they actually contribute with a quite high gross profit. But of course, they are related with some issues. So for instance, the one to the left, I know is very high in arsenic and mercury and the treatment cost or waste handling cost for that is quite high and we have limitations. And maybe we don't want to fill up the mercury limitation with just 1 concentrate.
So we need to consider all this again. If we for instance look at and also to say that the ones to the left normally are low in sync because then we get high TC. But if they are low in sync, of course they contain a lot of other stuff that we don't want to have. But if we for instance take this one, it's a concentrate with fairly normal zinc concentrates, but it contains free metals like silver. So this is the way we try to optimize the feed and make sure that we get the maximum gross profit out of the raw materials we put in.
So still working on the second one on the flexibility, the new environmental permit in Anke. We received it this summer. We have communicated that total investment will be about SEK1 1,000,000,000. It's a lot of money, but we will have 2 things, 2 important things. We will have the possibility to expand our copper production, but we will also have the possibility to build a deep deposit storage under Renkoye plant.
The deep deposit storage as such is roughly estimated to cost SEK 600,000,000. It's very expensive, but it will give us on the topic of flexibility, it will give us what we have in order today with the mounting caverns, a safe deposit sustainable for future to take care of the more complex materials. And this will be the same only it will be underground. So this is what it looks like. It's quite amazing.
I mean, you know, Dunker, it's an island, water around it. And what we will do is that we will start to build this ramp now. That will be the first step. We expect it to be some 3 50 meters down below Rangher and there we will build the storage rooms for the material. And the very nice, the beautiful thing with this is that we don't need to transport the material.
So we just put it underground. Also we see this as something that is expandable depending on future and how raw materials develop. Now I will come into the 3rd one and the 3rd strategic area and the one I really find the most exciting one because this is how do we sort of maximize our metal and byproduct production. So if we look at this, now the system again with the 5 smelters, we consider them as being 1 integrated. But actually I should have put the mines on the slide as well, because we also consider and work quite hard with the integration between mines and smelters.
I mean that's one of the strategy behind being an integrated company that we actually can benefit between mines and smelters. So we have the feed going into the system. We actually have quite a lot of recirculation within the system. So we try to recirculate as long as it's technically or financially viable. But then in the end, it has to come out as something.
And of course, the target is to take out as much as possible as finished refined metal. And today we take out 6 copper, zinc, gold, silver, lead and cadmium. We don't take out very much cadmium, but I mean the alternative would be to put cadmium in the residues. So instead of doing that, I think it's great that we actually can take it out as a refined metal and sell it. So, of course, the target is to reduce the waste because we put valuable metals in waste deposits, so we lose the metals, but it's also very expensive to build the deposits and they take quite a lot of space in nature.
So the target is to reduce the residue streams. Then actually we have a third one which is intermediates. And I was a bit amazed when I looked at the numbers because actually we take out 13 metals as intermediates. We take out tellurium as copper telluride. We take out platinum and palladium concentrates.
We take out selenium, antimony, bismuth etcetera. So, totally 19 metals we take out of the system, but I think you're in principle only aware of 5. And also to give some examples what do we recirculate? Well for instance some and we consider them to be complex. Some zinc concentrates contain copper.
The zinc smelters normally don't like copper, but we have some capacity to take out copper, which we do. And then we send the copper as an intermediate from Oda or Kokola, Turonka and Hagia Alta and in the end it comes out as a finished product. So for me this is one of the most exciting areas we have. And I will give you now some examples that we have already touched upon them. Some are known since before and some are known since this morning.
But taking the first one and this we have worked with for quite some time and that is to actually take care of the silver that is present in the zinc concentrate. So we took the decision to spend €27,000,000 investing the silver recovery in Coca Cola. It have had some hit. I mean, we started well in the Q2. We have made small deliveries to customers.
Then we had tank reactor damage in July and we had to stop the silver recovery. So it has been idling and now we are slowly starting it up again. So it will take some time, but we are in process. So besides this unfortunate situation with reactors, we consider the project to be on time and on CapEx and will start to deliver quite soon. Then we have a second one and that is the zinc expansion in Oda.
We have done some small minor debottlenecking, so the capacity today is 170 1,000 tons. And as Leonard said, one of the consequences is that we have put 1 old tank house idling that has a capacity of 30,000 tons. So if we modernize it, restart it, we could add on 30,000 tons. What else do we need to do? Well, we need to install 2 new direct leach reactors And we also need to do some other modernization in the plant, totally a CapEx of NOK 350,000,000 or NOK 400,000,000.
And just to be sure about or to clarify, the new capacity expected to come on stream in the Q2 2017. So in times where zinc is well, the zinc price is favorable, the outlook looks good, we find this to be a very exciting opportunity to buy quite small means add on more zinc to the market. And then we have the 3rd one, which is even more exciting and maybe a little bit more, well, new, and that is the nickel. As I said, we have been smelting nickel for a long time, but it has not really been something we have talked about, but we have very much investigated, analyzed and thought about what do we do with this asset we have in Harjalten. And if we look at the global market, we see that it's growing.
It's driven by the demand of stainless steel in China. We also see, I mean, this has been up and down, but we see right now there is a favorable market because there are new mines coming on stream, so there is concentrate available. There are smelters closing mainly for environmental reasons, not all of them have sulfur capturing instance. And we also see that we don't know what will happen, but the Indonesian ban that was put in place beginning of this year has actually right now taken out 25% of the nickel from the market, which of course increases the nickel prices. Probably the idea is to build capacity in Indonesia and the nickel will come back again, but when and how we don't know.
But right now it adds on to the story that this is a favorable market. We consider ourselves to be very well positioned within nickel. We are the only nickel smelter or the nickel tolling smelter in Western Europe. We are located in Finland. And I mean we see there for instance that there is local feed available in Finland or in the Nordics.
There is exploration ongoing. We see that we have very favorable logistics solutions. If you look at this map and you see the green ones, which are the ones that are and are planned to be in operation in future, you see that most of them are located inland, while Harjavalta is located close to a port. So logistically it's very favorable. And we also have very good environmental performance.
So one of them has already closed down Fortaleza and there are plans to close down the Vale operations in Northern America. Coming back again to the fact that we also have long experience in nickel smelting. We were the first one to start to smelt nickel in the flash smelting furnace already 1956. We are producing a nickel mat and today as we said we are in this tolling agreement or you could say customer smelting agreement which means that we don't buy the concentrate, we don't own the material, so we smelt it for a customer. And totally today the outcome from the smelter in Haya Alta is 25,000 tonnes of nickel.
We also said before, we have a tolling agreement. It expires mid-twenty 15. We have thought quite long about what to do when this expires. Do we want to continue to have one customer? Should we add on a portfolio of customers?
Or should we go into the business ourselves? And what we see with all these the favorable market situation and also we feel that there is a real strong interest for Wollid and Mat, we have taken a decision to go into this business with a new business model. And the business model is, as said before, we will start to buy nickel concentrates. We will sell matte and it will be on long term contracts and we will build a portfolio. So it will be several suppliers of concentrates and several customers on the matte side.
And we already have entered long term agreements today. But it's always when you build a new business that you start to build a book. So of course, it takes time before we are where we want to be, but we are in a very good way. And why do we do this? Well, of course, I mean, there are financial reasons we see we will improve the results.
Basically, the nickel is less transparent than copper and zinc, so it's a little bit more difficult to understand. But the principle is more or less the same. So there is a treatment charge and there are payable metals and what we get from it besides the treatment charge are the free metals. And as you see, there are quite many. It's nickel, it's copper, cobalt, platinum, palladium and also the precious metals like gold and silver.
Of course, now we build a new business, so we and nickel is expensive, so we will build up working capital, but we expect the result to exceed the working capital we build up, so we expect to improve our profitability. Otherwise, we would not take in this decision to go this way. That was the last one for now. But of course, we would like to come back with more interesting projects in this strategic area. So just to conclude or to sum up, how do we do when we work with this sort of expanding our project pipeline?
Well, we have R and D sources mainly located in the smelters and we work together with these mines. I just this morning had a nice opportunity to have the welcome address for the first technical seminar we have held in Boulder for many years. It's a joint seminar with people from the mines and from the centers. I think we gather somewhere between 5060 people. So these 2 days now when we have the Capital Market Days, they are sitting at Arlanda having a 2 day seminar.
And I expect the outcome to be a good experience change, but also in the end something that will turn into new projects and technology. And what does it look like, the pipeline of our projects? Well, you see the ones that have already sort of come out. We built hot asset leaching in order to prepare for the silver recovery in Kokkola. We have the Ical though putting us as number 1 recycler of electronics in Dhanhohe.
We have expanded the roaster capacity in Kokkola, which means that now we are back to flexibility. So we have the flexibility to choose if we go the roaster line or the directly tune line depending on the concentrates and what gives the highest profitability. And now we add 25,000 tonnes in a new business model for nickel and also decided last week 30,000 tonnes of zinc. And of course, there are more ideas coming, but we need to prepare them and put them into a technology that could give us what we need. So just to summarize, coming back to the strategic areas, we have and we will continue to deliver on improving our operational performance.
We see increasing flexibility both on treatment side and waste handling as a competitive advantage and with a possibility to access more raw materials. And we see that by adding on new metals, more metals, we will support Poulet and by increasing the gross profit.
Thank you. So let's open up for questions for Seshteyn. Should we start with Luc?
Quick question, maybe if you could provide a bit more color and quantification with regards to the cost savings that would be generated after the ODA expansion? That would be my first question. And second one, if you could elaborate a bit more as to how much profitability boost our working capital weak crime, I'm sorry, boost you will expect out of the change from tolling into smelting of nickel? Thank you.
Yes. Well, the cost savings in ODDO, it's I don't really have the exact numbers, but it's quite easy to calculate because we add on the 30,000 tonnes and it's only the variable costs besides the depreciation from the investment. Coming to nickel, it's a bit sensitive because we are still in negotiation with our new long term partners and we can't reveal our margins. So it's and we don't really know where we will end up in the negotiations either. So but I would say it's not
major. We have one question over there from Alain.
Hi. This is Alain Gabriel from Morgan Stanley. If I look at your slides, you seem to have a quite rich pipeline of investments. And if you were to tie this in with what Lennart has said of the desire to put in more capital into smelting, this is in contrast to almost no capital gone into smelting in the last 8 years. Has your outlook changed on smelting?
Or is it more to do with the past that has been undercapitalized as a business?
Well, it's I would say it's both. We do have a lot of maintenance needs. We have the environmental permit in Rangai SEK 1,000,000,000. We will have environmental permits in the other centers as well. But when we speak about this project pipeline, I'm more focusing on what will add value.
And then of course, we evaluate each and every project based on the return of the project. So if there are very good returns, well, I don't see why we shouldn't do them.
All right. Thank you.
So, Gustavo.
Thank you. Gustavo Sandstrom, Danske Bank. I have a question regarding the upcoming benchmark negotiations of TCs. Do you see any reason why the contracts should not improve for the smelters given the recent hike in spot TCs?
This is a difficult one. Of course, I would like to see them go up and we argue for it. We see that there is some, what to say, the uncertainty about the development in Europe in general, etcetera, makes the process a bit slow. So we don't really have the indications yet. So I can't really answer that question today.
Okay. And another question. Given that you are seem to have a pretty thick project pipeline now, I assume you see good profitability ahead for these investments. So could Could you maybe elaborate a bit on what you think a reasonable return on capital employed for this type of business is over a business cycle?
That's also a very good question. We have growth targets and we're trying to reach those. I think that's where I stay unless Mikael, you wanted to have all the questions here.
Okay. Thank you.
Just to follow-up on the nickel production at Harjavalta, so we can understand it a little bit more. Is it going to be material contribution through earnings at Harjavalta? Or is it just a good supplement?
Somewhere in between, I would say. It is I mean, we take the decision because we see that it's adding more value than today's setup. And once again when you look at the different business cycles, there has been times when nickel have actually contributed to Heijer Alta more than copper and the other way around. So there are more than sort of one reason for doing it. One is the different business cycles and one is that this will add on more value compared to today's setup.
Okay. And just to follow-up on the treatment charges for copper, think it was in the last week, in the end of last week, there was some indication that the treatment charges next year is going to go up by 20% to 30% to 110% to 120% next year. Is it just is it something you can comment on?
I mean, we have not made any agreements yet. So we can only sort of we have the same information as you have when it comes to what the analysis says. So
Christian Kopfron, Nordea again. On the restructuring program in Renkraer, mentioned that you expect to achieve SEK 150,000,000 by year end. How much have you achieved for the 3 quarters this year?
Well, we are on the now we are on the running rate of SEK 150,000,000. So it means that we are we don't we see that we have had the spring and then we have the second quarter has been quite stable. So we will stay on the level we are right now.
You don't expect any further impact on cost savings in Q4 then?
No, not we expect to reach SEK150 by year end.
Okay. Have you taken any restructuring costs on this program?
Not yet. There could be in future, but not yet.
Okay. On the 600,000,000 deep deposit investment in Renekar, is that matching your capital requirements? I think it's 12% nominal WACC or so.
Well, I mean, the deep deposit is something we need to do related to environmental permits. So it's a little bit more difficult to calculate return on such a product. But as I said, we do see it is expensive, but we do see a benefit of having it. We might not have done it if we would not have had the requirements to do it, but now we have and we see the benefits.
Okay.
And on the ODDO project, I know that Pauline in the past has liked to talk about payback time in terms of EBITDA cover. What sort of payback you're expecting for the ODDO expansion?
Well, that's above the normal. We spoke about the WACC of TEN, it's well covering that.
So it's about 4 or 5 years on that now. Okay. 1 or 2 notes from the front of the room. With regard to the nickel inventory, what sort of sums are we talking about? The buildup of inventory you're going to have to make at
Yes, that's I can't reveal that since we are in the middle of negotiations.
Okay. That was secret. What's a normal sort of number of weeks of inventory you need to hold?
Well, we said number of weeks, I don't really know. We said that you want to comment or?
I can maybe just step in and say that. If you look at our other businesses having around 10% of sales tied up in working capital is not unknown. And you could then figure out what the sales is here. It's roughly SEK 3,000,000,000. But no, all that's very, very premature since the negotiation with the suppliers and the customers are not all finished yet.
Some are finished, but not enough to give a precise number.
Okay. But most of it is going to be seaborne supply. So I guess you've got to hold your inventory on-site?
Yes. But it's also a question about payable terms.
Okay. With regard to the zinc TC outlook, which has obviously been a big factor you've had to think about in terms of this investment at Oda, we've heard that Boledin is not expecting any appreciable increase in global mine supply of concentrate over the next 5 years. And Leonard's expecting capacity utilization for zinc smelters to stay high as well. Does that mean that you're not expecting any of your competitors to follow you down the line of expanding zinc smelter capacity?
I think
there will be. I think Neustar has announced that they plan to do some debottlenecking investments. So yes.
But is your investment decision premised on TC staying at the current rate?
Yes. I mean the calculations are based on that, but the sensitivity analysis actually allows for quite a big drop in TC and still give a good return.
Okay. Thank you.
Okay then. Thank you, Shastin. And it's a great pleasure to introduce our last speaker for today, Mikael Staffas, CFO.
You mean last and least? Yes. I hope you're still all awake. I will try to keep the energy level up also for these last few minutes and try to help you through some of the questions that I want to discuss and maybe answer some of the questions that you had along the way as well. Now, what I want to talk to you about is first a general setup regarding our targets.
Where are we standing in regard to our targets And how do we look at them going forward? We will then come into some of the questions you've already had questions around which is the guidance especially around CapEx, but we'll also talk about maintenance stuff in that. And then as always in these occasions I cannot stop myself from having a tutoring session with some of you regarding how some financials work to help you all in your work going forward. Now our targets. These should all be very well known to you.
They're the same as they've been for quite some time, the same three targets that we have had. We have a target regarding the returns that we have on new investments. I will dwell a little bit more upon that in just a few moments. Then we have the balance sheet target regarding our debt equity. I will dwell a little bit on where we are in that journey, but also a little bit around how we think about the whole financing side of the balance sheet and a little bit recap what we did in the spring when we refinanced a large part of the balance sheet.
And then the last step which is 1 third payout ratio, I will come back to that very quickly but that's I suppose the simplest one to state. Now, investments and investment portfolio. How do we deal with that? Well, the calculations we have a rate of 12% nominal or 10% real. We actually do all our calculations in real just for you to know.
We're looking at the total system impact. This might be a strange word but we did have your question just a moment ago how do you look at something like the deep storage in Runge? Can you get calculated return on that? Well, if the alternative to that would be to close down Runge, yes we can do it in alternative. You get a very, very high profitability.
But the alternative might not be that. The alternative might be to actually send it away to somebody else and pay somebody else to take care of this which is also doable in the legal context. And then we looked around that alternative compared to doing it ourselves and you get still a very good number of doing this ourselves more reasonable maybe than the other alternative. But it's important that you do have a full impact of the whole system what you're looking around when you're looking into these different options. Now the other thing is also there's a very strong emphasis to make sure that we have several options.
The worst thing you can do as a company when you're especially in capital intensive industry is to say that either we do this or we do nothing. And if we don't do this, we do nothing. We get a very bad result. So we have to do this. And of course the whole challenge here is to make sure that before this thing that needs to be solved, we create a number of different options.
And with a number of different options, we can choose the option that gives us the best return. And this is probably the most challenging part both for me and my day to day job, but also for all the managers to make sure have we looked into all the potential options that there are so we know that the one we're picking is the best. And then finally, we do have transparent prices and terms and you all know these ones because you've seen these already before. They've been published in our annual report at least a column that says 2013. You've all seen these numbers.
You could read them. The one that says 2014 has not been published yet. So you see these numbers for the first time now. But you can see to a large extent they're very much the same. We of course build ourselves a point of view about the long term prices and the long term conditions and we're unlikely to change them drastically unless there's new information.
So we have in a very condensed way just keeping them the same. Now looking at this you can see which might surprise you today how on earth if they were going to change something why did they change the exchange rate and in that way given the recent developments? Well this was all done in the spring. We're changing them that way which actually seemed to be the prudent way of dealing with the situation then. And we need to put these conditions in place in the first half of the year because they're also the basis for calculating the ore calculation.
Life of mine.
Life of mine plan ore calculation and that all needs to be put in place. It takes quite a few months to do that through. So you need to put these conditions in relatively early. Now for investments coming back there, we use these prices that you see here for year 2 and onwards. For the 1st year we actually do use what we call budget prices and they happen to be the forward curve on October 30 on August 31st of every relevant year.
So that's used for the 1st year. Now today there might not be a big difference but at certain times that could be a bigger difference. Now combined with these long term prices, we also work on scenario analysis. I'll come back a little bit to that but I'll show you the numbers right now. These are the numbers that we are using when we're looking into scenarios of a downside where we're looking into what we call floor prices and then we typically apply them for a year.
What happens to this investment if those floor prices were to come into play for 1 year what happens to returns? But we also look at what we call the long low prices. That's when you have a situation where you might have an extended period, in our case 4 years of low prices and what happens then to the return of the investments. And once again, if you have different choices that might be different in terms of the trade off between OpEx and CapEx, the answer might not be the same in the different low scenarios as in the standard scenario. And that's of course leads to discussions regarding what is actually the appropriate way of solving the situation that you have in front of you.
So we do investment calculations. This might seem very simple, but we do use them and we use IRR as the primary method of selecting which investments to do. Now if you have several different options to solve the same problem, NPV might also come in as the prevailing choice of which options to use. We also look at payback as an important part of the total calculus that we do. But then comes all the other things that come in.
Maybe I as a CEO should not talk too much about them, but these are actually quite important consideration that come into play. Do we have the management enough to carry through these different projects that we have? Is there things around corporate responsibility that plays in? How do our permitting play into the different options? Shashin already mentioned the situation we're having in Dermen Share where we have roughly $1,000,000,000 worth of investments to be able to handle the permitting.
Now we're of course trying very hard to make sure that this is not just a simple cost of $1,000,000,000 but we also combine that with maybe some offensive moves at the same time and getting the best total effect out of these all coming into play in this developing the different options. Now then having said that, once we put all the different potential investments for a year for example together, we then apply the different scenarios to see what happens to the balance sheet in the different scenarios to make sure that we have a balance sheet integrity going in here. Now moving over to the balance sheet. There's a clear target that you can read in our annual report that we're supposed to have a 20% gearing at an end of a good cycle. This is the historical numbers that we've had that you've all seen.
You can also see that after having built up debt for some time, we're now on the way heading down. This should not really be of any surprise to anybody given that we've been through a relatively heavy investment period. At the same time that we haven't had a Garpenberg, we haven't had a Coqola Silver and we have not had the grade in ITEC that we want to have on average. So going through such a period, it is not a strength thing that we built up some extra debt and that we're now heading out of this situation where we've had high debt. Now, we already talked about that we are continuously simulating our balance sheet on basically a weekly or monthly basis to make sure that we all the time have a good stand up for a situation where things could turn bad.
But we also use this in terms of handling the financing side both when we set up the facilities and I'll talk a little bit about that in a moment what happened in the spring, but also on a day to day basis in terms of which facilities we draw upon and how we use the different options that we have at our hand. And of course the point is that we want to reach the 20% over time and of course keeping the payout ratio that I'll come back to into play. So all these things played into the refinancing that we had in the spring. And just a little bit of recap, there should be nothing new to anybody on this slide, but we did have a bond issued back in April. That one was issued at 190 basis points over STIBOR for a 6 year bond.
We at the same time set up a bilateral facility with SEK with a duration of 7 years. And then we renegotiated syndicated facilities to get a harmonized banking group in place of 13 banks but also to be able to set up a duration profile that we wanted. And so we now have 2 tranches of a €850,000,000 facility. And this was all based on the simulation coming back to the low prices that you saw a while back that if we get that situation with the really low prices for 1 year or we get the slightly better prices, but for 4 years we will always keep a SEK 3,000,000,000 payment capacity in place to make sure that we don't have to get into a situation where we need to suboptimize in our day to day business. As you also pointed out and somebody pointed out that this is a slightly smaller facility than we had before.
We actually scaled down on it slightly. And that of course has to do with the projections on how much debt we do need, basically taking back some of the facilities that we increased a couple of years back for what we then anticipated to be a buildup of the debt. So if you look at the financing profile that we do have in place today, we have SEK 13,700,000,000 out of which sorry, SEK 12,700,000,000 out of which SEK 12,400,000,000 is for over a year. We have a commercial paper program in place with a limit of SEK 4,000,000,000. Out of that, SEK2.7 billion was drawn at the end of October.
We have the bond. We have the bilateral loans. We have the syndicated facility out of which SEK1 billion was drawn. Then we have some pension debt just to put in the total debt position and then we had some cash also in place at that time. The net payment capacity was $5,000,000,000 dollars and the interest rate that we paid on average was 1.7% at the go on rate at the end of October.
And the maturity profile of our banking or total debt portfolio looks quite favorable with large undrawn tranches sitting back in 2017 2019. Hedging, the title here is conservative hedging policy. Of course hedging also plays into how we deal with the balance sheet. If you go back in time and you look on the bottom part here what's called strategic hedging, we have decided to take big hedging portfolios over time when we knew that the balance sheet was stretched. That came as an alternative to having bigger bank facilities in place to be able to handle a downturn.
So we have used that actively when it was felt necessary. Today we don't have any strategic hedges in place. And when they will come we'll have to be in connection with the new situation where we're stressing the balance sheet. Otherwise apart from that, we basically don't hedge. But having said that, we do have a full offset hedging in our smelters, making sure that we should not have any adjustment of inventories reflected in changes in prices and terms apart from the process inventory.
And then we have one specific hedge in place, which is the Kankberg Gold Mine where we actually use the fact that the gold hedges are available for a long time to actually lock in a large part of the return on the Cancunberg gold mine already at the start of the project and these hedges go through 2017. On the payout ratio, just very quickly, we are we have a very clear policy of 1 third payout. We've been around that numbers from 2027, which is actually the year when it was put in place, the 1 third payout ratio. We've been around there. We've had some rounding up and down just around that target.
You should not read too much into that rounding. It's just it's literally a rounding. Now moving into guidance and moving into investments. There's been lots of discussion about this and there's been some questions and some answers already. But let me just quickly go through what we are guiding right now.
We are guiding for this year $4,500,000,000 in investments. That is to be compared to what we said to be $4,000,000,000 before. Now the reason why there's a difference and it looks like it's gone up, but of course the Culze Leste acquisition is in these $4,500,000,000 So if that was not to be there, we would be rather at a $3,800,000,000 which is slightly below what we have guided. Looking for next year we had guided $4,000,000,000 we're now guiding that up to $4,500,000,000 What's the difference between $4,000,000 and $4,500,000 Well, some of it is a rollover of the fact that we haven't done really all the development work this year as we're supposed to do. We're a little bit behind and we're catching up some of that next year.
We have the other expansion, the $400,000,000 out of which maybe half comes in already in 2015. And then of course we're now adding Culiolakti and we're adding Culiolakti we get one more unit that needs its maintenance CapEx. And of course the maintenance CapEx of Curie du Lac de was not in the previous guidance. So the 4% to 4.5%, I think there is nothing really that changes the underlying guidance that we've given. It's things that have come extra into the situation.
Now there are maybe 2 things that should be common or 3 that should be common or things that are not on this slide. The first one is we will in the end of 2015 have a fake investment. We will adjust up the linked to I-thirty 45, we will adjust up the future reclamation cost. And when you do that the way IFRS works is that you get an increased debt, but at the same time you get an increased asset. This asset is a fake investment, but it does come as an investment the way accounting works that will then start to be depreciated going forward.
So that number is a non cash item. Therefore, we tend to never talk about it. We had a similar situation a couple of years back around that. So it shouldn't come as a surprise when it comes there. Then we have the position during next year which actually is a cash item which is linked to the nickel in Harjavalta.
We will build up some working capital. We don't know how much yet because we haven't gone into being in a stable position regarding the book building on the nickel business. The next thing that is not on there is 2016. We are not at this stage ready to guide on 2016. There are a couple of reasons behind that.
And I think we've you've asked lots of these questions around and we can just summarize them that there are issues that we're trying to get our arms around. I've already spoken about the run share. What will the investment be when you combine the environmental liabilities that we have talked about before with some of the actions that we want to do in order to handle more impurities? It is not 100% clear. Therefore, we prefer to wait.
There has been discussions around when will Harriah Walter need a new asset facility to handle assets. A little bit unclear on timing. Therefore, we prefer not to guide at this stage regarding that. So I think those would be the 2 main reasons why we're at this stage not quite prepared, but there's also been somewhat of a discussion that there is a ITIG 45 Phase 2 or Phase B That is most likely to maybe be beyond 2016, but we don't know for sure yet as we haven't made any decisions on the Phase 2 of the ITIC expansion ITIC 45 expansion. So those are some of the reasons why we're not prepared to give the number today and we'll come back to you all when we feel that we have our arms around these numbers and the timing around these things.
A more simple guidance, but still a guidance that come out is the cost that we see as an EBIT effect of the maintenance shutdowns planned for next year. Total effect of 265, slightly above average of we say 200 is more of a normal year. So 265 will be a little bit more than a normal year. It is a little bit skewed towards Q2 with 170 in Q2. And actually we managed to get a little bit pushed out into Q4, which we normally say is free of maintenance shutdowns.
But in 2015, we will have some small maintenance shut up also going into Q4. Now based upon this and then I think the guidance part and now I'll come to the tutoring session of my discussion. And the first one is maximizing NPV. And now let's see if I can find the actual marker here, the laser marker. I always get very often get questions about how do you do all this investment that you're supposed to make sure that you increase your return, but actually the return goes down.
And that is not a situation that is uncommon that you have a situation where when you maximize your NPV actually the short term return on capital will go down. And I'll just this is a very simple example. If you have a mine that still has some 10 years left, it has a capital employed of 50, has an EBITDA of 10, that gives you an EBITDA of 15, because you're depreciating these 50 over 10 years, it gives you an EBITDA of 15. Let's assume more kind of other timing difference are 0. That gives you an NPV of 98 and return on capital flow is 20.
If you take 10 divided by 50 you get 20%. Now what if you were to do an investment of 150 here? Well, if you do an investment of 150 your capital flow goes from 50 to 200. That's your investment. Now this is an investment that actually changes your life or mine to 20 years.
It increases your EBIT to 30. That means EBITDA goes to 40 because you have the 200 now divided by 20 years that goes to 40. If you do the NPV of this it's 340. So you had basically 100, you had 150. This is a really value creating investment.
You create a value of 90. But your return on capital employed in the short term well that's your 30 now divided by 200 is only 15%. And you can look around these numbers and you will find lots of situation where it is quite clear that a good investment will lower your return on capital employed in the short term. Now the very clear example that we have of this is of course Garpenberg. Garpenberg was having a very healthy return on capital employed before we did the investment.
The investment is a great investment giving all kind of value to the shareholders, but the short term return on capital employed actually goes down. The other example will be ITIC. If we had not done the ITIC36 investment, this will be the last year next year will be the last year of ITIC around, but it would have all been depreciated. It would have been a perfect very, very good return on capital employed year of maybe over 100%, but then it will be the end of it. So mining is around extending life of mine and extending life of mine will not always but a lot of time might compromise the return on capital employed in the short term.
Next thing next interesting little tutoring session is the looking into maximizing NPV and here is actually real pictures from the Rheinstrand mine. What you see here if you start moving to the right, you will see that if you have a high cost or low prices in your planning, well then only the very high value ore becomes interesting to mine. If you go to the other end with the decreasing cost or higher prices for the ore, suddenly the ore body becomes much bigger. And now you start getting the secondary effects because when you have a bigger ore body you can use more cost efficient mining techniques. You get your cost down even further and you get a cycle working your way.
The same way as when you go that way, well suddenly you get higher cost because you cannot use the large scale mining methods as you could here and you might move even further out. So this is how important it could be in certain situations to make sure that you have the right conditions in place for your planning because it does give you both lots of secondary effects in how you look at your whole ore body and what is really ore and what is waste. And it could really play into the whole planning. And of course this is something that we spend lots of time with working through in our different mines what does the optimal mine plan look like given the conditions that have been given. The next area that's been lost discussed during this year has been the internal profit as our internal profit tended to move around.
Internal profit that's only timing difference and then we're going to get the whole profit. But since we're a group we cannot give the mining profit into our bottom line until it has gone through the smelters. And this is a relatively simple curve that shows that this is the bullied and weighted in Swedish kronor metal price index over the last 5 years. And the red one here is the reserve that we have for internal profit and it's not really any strange that when you have prices and terms going up, well then you make more profit and when you make more profit most likely you have to take some of that away because you cannot recognize it until it comes out. Now you've seen that in the individual quarters there have been some jumps in this.
And the reason why these jumps is that the trick here is that there are some very rich concentrates that we produce that are very rich in precious metals. They come they tend to come from Garpenberg that has a copper and a lead concentrate very rich in precious metals and Buliden area has a copper concentrate very rich in precious metals. And these can jump up and down a little bit in the end of the quarter. They can be on a higher inventory level or on a lower inventory level. And therefore because of that you can see some of these jumps sometimes.
But the general trend when price and terms go up you will have to put more into reserve. Now when the prices go down you can take some of that reserve out and we had when this goes down that helps generally helped the profit levels and now when it went up again, well up came started coming up again the build up a little bit more of the reserve again. But I think in general, it's very clear there's a correlation over time that correlates very well with this and then we can have some individual jumps in individual quarters, which is nothing really strange around that. One last slide and this is maybe should have been first because this might be the most simple one. But just to reiterate again where does the profit come into the different business areas.
If you have a total metal value comes here, the mines get the gross profit which is the total metal value minus the TCRC and minus the free metals. In a copper world, this might be 10% and this might be 90% going to the mines. In zinc, this might be 30% and this might be 70% just to have an order of magnitude of how it is split. And then these things these parts they move over to the smelters and becomes part of the smelter gross profit. On top of that smelters get premium and they can sell by products.
That's a simple way of just clarifying how the revenue models work for our different business areas. So with that, I just wanted to summarize what I have said. I've gone through the financial targets. I hope I've given you some clarity on how we're standing with the financial targets and how we're dealing with them. I've given you some guidance on CapEx and I've given you some guidance on the maintenance stops and I've done some tutoring sessions.
Now there's something I haven't spoken about. I haven't spoken about the process inventory revaluation. This has been a kind of main theme last year. Now there's a reason I haven't spoken about it because to the left here you can see what it looked like a year back when lots of you analysts there were not really quite on the target and lots of you were quite way off the mark. It's gotten much better during the year.
If you look for example out of Q2, I feel that as a group and these are the analysts that are part of our consensus from SME and when you look at that you can see that the group as a whole has performed much better. So I was going to try to restrain myself this year from having another tutoring session regarding how to do the process inventory evaluation. I think that that one is now well done and well finished. Now having done that, I think it's interesting to see who got it most right. So what we did, we took the last 4 quarters and we looked at your estimates beforehand and looked at the real Process Inventory evaluation and we did a little competition.
And the winner is with an average deviation of SEK23 million over these 4 quarters having hit almost perfect for 1 quarter and it was a little bit more off for other quarters, the winner is give a big hand to
Ursula Demarc from Swedbank. Come up.
So this is for you, for having done this and this is just to make sure that you can keep warm now when you're going to go out in the ice in the winter and make yourself warm and remember our company.
Thank you very much. You're welcome.
With this, I think it's open for questions.
Yes. So do we have any questions for Michael? Yes, we do. Let's see if we have any microphones. We have questions, please.
Thank you.
Hi, Michael. This is Alan Gabriel again from Morgan Stanley. My question is around capital management. How fixated are you on the payout ratio that you've just highlighted? And how flexible can you be
in case you approach quickly to the 20% net debt
to equity? And how does this fit into your capital return to shareholders ideas?
I think that as long as we are where we are now and as long as we are around or above or around the 20%, nothing will happen. Your question I suppose is what happens when you were to go significantly below 20%. And what I will say that as always that we don't have a fixed answer for that beforehand. We will deal with that issue as it comes,
if it comes.
All right.
It's Bobby Hennano from Goldman Sachs. Just a quick question detailed on the SEK 4,500,000,000 2015 CapEx. You mentioned there's rollover from 2014, the Oda expansion and the Kyawlasty, But there's no mention of the deep deposit permit for Ranshar. That $1,000,000,000 or $600,000,000 is supposed to be spent for the next 3 years. Is that within the $4,500,000,000 or that's going to be additional?
No, that was in already before. Okay. So there's nothing really new in this period.
Sasha Bupiceva again, BMO Capital Markets. What is the what's your exposure to Swedish kroner in your operating costs and capital expenditures like roughly high level as a percentage?
Operating costs, I think we are around 70% Swedish kroner, but I can tell you that.
And related for the company, right?
For the company, for the whole group. On the CapEx side, that's a little bit more tricky to answer. The first question will be that it's roughly the same, but indirectly there will be more euro in there because even though we buy some things in Swedish krona there could be a euro producer behind it who will eventually adjust their prices.
Thank you. And with respect to order, what is the distribution between fixed and variable costs?
In general, in the
For the smelter, yes, for the operating costs, what's how much of that is fixed, how much is variable?
Help me, Shasten. We have whatever 40 a little bit more than 40% electricity for sure variable. And then consumption, which is variable, another 20 more. So let's assume around 60 variable, 40 fixed.
Okay. Thank you.
Hi. It's Dan Major from UBS. A question on your sort of CapEx going forward. You mentioned in the smelting business a number of other potential projects and obviously environmental projects that may be required. Could you give us an indication of a sort of long run sustaining maintenance CapEx number sort of excluding those projects from the smelting business and also from the mining business?
Well, the total guidance has always been or has not always been, but it's been quite some time that we're around $2,500,000,000 together between mining and smelting. And for simplicity that's roughly fifty-fifty between the two units. It's not exactly that in the various little bit by year, but roughly that. But that is as you're pointing out, that is excluding what you can call the really heavier maintenance like your new asset plant comes above that.
Thanks so much.
Do we have any more questions? No? Thank you, Michael.
Thank you.
Before Lennart sums up with his closing remarks, I would just like to point out some practical details. We will have dinner served outside in the exhibition area. And for those attending tomorrow's visit to Gartenberg, please make sure that you have the details where from where the bus departs at 8 am tomorrow. Lennart, please go ahead.
I will start to tell 2 anecdotes. The first one was after a week with Kjellstin or maybe 2 when you started here, we went to Finland. And we were standing in the copper nickel smelter. And I'm telling the story because it has a lot of relevance with what we have talked about or what we spoke about today. And we stood at the far end of the smelter in an absolute God's forgotten place under big machines, rusty, dirty.
It was incredible. And we stood there and one of our Finnish hosts said, we have never taken any visitor here before. But this Kerstin, the new boss of the smelters, this is where we produce the secret money. We PMs, precious metals, we know gold and silver. We know PGMs, the Platinum Group Metals, which is also produced there.
But here in Finland, we do OPMs, they say. What? OPMs, other precious metals. Okay. So what's other precious metals?
Well, it's a name of metals you haven't heard of before. And they are showing up at the end of this little happened in the spring,
but also on a day to day basis in terms of which facilities we draw upon and how we use the different options that we have at our hand. And of course, the point is that we want to reach the 20% over time and of course keeping the payout ratio that I'll come back to into play. So all these things played into the refinancing that we had in the spring. And just a little bit of recap, there should be nothing new to anybody on this slide, but we did have a bond issued back in April. That one was issued at 190 basis points over a STIBOR for a 6 year bond.
We, at the same time, set up a bilateral facility with SEK with a duration of 7 years. And then we renegotiated syndicated facilities to get a harmonized banking group in place of 13 banks, but also to be able to set up a duration profile that we wanted. And so we now have 2 tranches of a €850,000,000 euro facility. This was all based on assimilation coming back to the low prices that you saw a while back that if we get that situation with really low prices for 1 year or we get this slightly better prices, but for 4 years, we will always keep a SEK 3,000,000,000 payment capacity in place to make sure that we don't have to get into situation where we need to suboptimize in our day to day business. As you also pointed out and somebody pointed out that this is a slightly smaller facility than we had before.
We actually scaled down on it slightly. And that, of course, has to do with the projections on how much debt we do need, basically taking back some of the facilities that we increased a couple of years back for what we then anticipated to be a buildup of the debt. So if you look at the financing profile that we do have in place today, we have SEK 13,700,000,000 out of which sorry, SEK 12,700,000,000 out of which SEK 12,400,000,000 is for over a year. We have a commercial paper program in place with a limit of SEK 4,000,000,000 out of that SEK 2,700,000,000 was drawn at the end of October. We have the bond.
We have the bilateral loans. We have the syndicated facility out of which $1,000,000,000 was drawn. Then we have some pension debt just to put in the total debt position and then we had some cash also in place at that time. The net payment capacity was 5,000,000,000 dollars and the interest rate that we paid on average was 1.7% at the go on rate at the end of October. And the maturity profile of our banking or total debt portfolio looks quite favorable with large undrawn tranches sitting back in 2017 2019.
Hedging, the title here is conservative hedging policy. Of course, hedging also plays into how we deal with the balance sheet. If you go back in time and you look on the bottom part here, it was called strategic hedging. We have decided to take big hedging portfolios over time, but we knew that the balance sheet was stretched. That came as an alternative to having bigger bank facilities in place to be able to handle a downturn.
So we have used that actively when it was felt necessary. Today, we don't have any strategic hedges in place. And when they will come, we'll have to be in connection with the new situation where we're stressing the balance sheet. Otherwise, apart from that, we basically don't hedge. But having said that, we do have a full offset hedging in our smelters, making sure that we should not have any adjustment of inventories reflected in changes in price and terms apart from the process inventory.
And then we have one specific hedge in place, which is the Kankberg gold mine, where we actually use the fact that the gold hedges are available for a long time to actually lock in a large part of the return on the Kankberg gold mine already at the start of the project and these hedges go through 2017. On the payout ratio, just very quickly, we are we have a very clear policy of 1 third payout. We've been around that numbers from 2027, which is actually the year when it was put in place the 1 third payout ratio. We've been around there. We've had some rounding up and down just around that target.
You should not read too much into that rounding. It's just it's literally rounding. Now moving into guidance and moving into investments. Lots of there's been lots of discussion about this and there's been some questions and some answers already. But let me just quickly go through what we are guiding right now.
We are guiding for this year $4,500,000,000 in investments. That is to be compared to what we said to be $4,000,000,000 before. Now the reason why there's a difference and it looks like it's gone up, but of course the Culadalex the acquisition is in these 4.5 So if that was not to be there, we would be rather at a $3,800,000,000 which is slightly below what we have guided. Looking for next year, we had guided $4,000,000,000 We're now guiding that up to EUR 4,500,000,000. What's the difference between EUR 4,000,000,000 and EUR 4,500,000,000?
Well, some of it is a rollover of the fact that we haven't done really all the development work this year as we're supposed to do. We're a little bit behind and we're catching up some of that next year. We have the Oda expansion, the $400,000,000 out of which maybe half comes in already in 2015. And then of course, we're now adding Kirillati. And we're adding Kirillati, we get one more unit that needs maintenance CapEx.
And of course, the maintenance CapEx of Culio L'Arte was not in the previous guidance. So the 4% to 4.5%, I think there's nothing really that changes the underlying guidance that we've given. It's things that have come extra into the situation. Now there are maybe 2 things that should be comment or 3 that you should be comment or things that are not on this slide. The first one is we will in the end of 2015 have a fake investment.
We will adjust up the linked to the IT-forty five, we will adjust up the future reclamation cost. And when you do that, the way IFRS works is that you get an increased debt, but at the same time you get an increased asset. This asset is a fake investment, but it does come as an investment the way accounting works that will then start to be depreciated going forward. So that number is a noncash item. Therefore, we tend to never talk about it.
We had a similar situation a couple of years back around that. So you shouldn't comment as surprised when it comes there. Then we have the position during next year, which actually is a cash item, which is linked to the nickel in Harjavalta. We will build up some working capital. We don't know how much yet because we haven't gone into being in a stable position regarding the book building on the nickel business.
The next thing that is not on there is 2016. We are not at this stage ready to guide on 2016. There are a couple of reasons behind that and I think we've you've asked lots of these questions around and we can just summarize them that there are issues that we're trying to get our arms around. I've already spoken about the run share. What will the investment be when you combine the environmental liabilities that we have talked about before with some of the actions that we want to do in order to handle more impurities?
It is not 100% clear. Therefore, we prefer to wait. There has been discussions around when will Harajahalta need a new asset facility to handle assets. A little bit unclear on timing. Therefore, we prefer not to guide at this stage regarding that.
So I think those would be the 2 main reasons why we're at this stage not quite prepared, but there's also been somewhat of a discussion that there is a IT-forty five Phase 2 or Phase B that is most likely to maybe be beyond 2016, but we don't know for sure yet as we haven't made any decisions on the Phase 2 of the IT-forty five expansion. IT-forty five expansion. So those are some of the reasons why we're not prepared to give a number today and we'll come back to you all when we feel that we have our arms around these numbers and the timing around these things. A more simple guidance, but still a guidance that come out is the cost that we see as an EBIT effect of the maintenance shutdowns planned for next year. Total effect of $265,000,000 slightly above average of we say $200,000,000 is in more of a normal year.
So $265,000,000 will be a little bit more than a normal year. It is a little bit skewed towards Q2 with $170,000,000 in Q2. And actually, we managed to get a little bit pushed out into Q4, which we normally say is free of maintenance shutdowns. But in 2015, we will have some small maintenance shutout also going into Q4. Now based upon this and then I think the guidance part and now I'll come to the tutoring session of my discussion.
And the first one is maximizing NPV. And now let's see if I can find the actual market here, the laser market. I always get or very often get questions about how do you do all these investments that you're supposed to make sure that you increase your return, but actually the return goes down. And that is not a situation that is uncommon that you have a situation where when you maximize your NPV, actually the short term return on capital will go down. And I'll just this is a very simple example.
If you have a mine that still has some 10 years left, it has a capital employed of 50, has an EBITDA of 10, that gives you an EBITDA of 15, because you're depreciating these 50 over 10 years, it gives you an EBITDA of 15. Let's assume all kind of other timing difference are 0. That gives you an NPV of 98 and return on capital employed is 20. If you take 10 divided by 50, you get 20%. Now what if you were to do an investment of 150 here?
Well, if you do an investment of 150, your capital employed goes from 50 to 200. That's your investment. Now this is an investment that actually changes your life of mine to 20 years. It increases your EBIT to 30. That means EBITDA goes to 40 because you have the 200 now divided by 20 years that goes to 40.
If you do the NPV of this, it's 340. So you had basically 100, you had 150, 000,000 this is a really value creating investment. You create a value of 90,000,000 but your return on capital employed in the short term well that's your 30,000,000 now divided by 200,000,000 is only 15%. And you can look around these numbers and you will find lots of situation where it is quite clear that a good investment will lower your return on capital employed in the short term. Now the very clear example that we have of this is, of course, Garpenberg.
Garpenberg was having a very healthy return on capital employed before we did the investment. The investment is a great investment giving all kind of value to the shareholders, but the short term return on capital employed actually goes down. The other example will be ITIC. If we had not done the ITIC36 investment, this will be the last year next year will be the last year of ITIC around, but it would have all been depreciated. It would have been a perfect, very, very good return on capital employed year of maybe over 100%, but then it will be the end of it.
So mining is around extending life of mine and extending life of mine will not always, but a lot of time might compromise the return on capital employed in the short term. Next thing next interesting little tutoring session is the looking into maximizing NPV. And here's actually real pictures from the Rejandstra mine. What you see here, if you start moving to the right, you will see that if you have a high cost or low prices in your planning, well then only the very high value ore becomes interested to mine. If you go to the other end with the decreasing cost or higher prices for the ore, suddenly the ore body becomes much bigger.
And now you start getting the secondary effects because when you have a bigger ore body, you can use more cost efficient mining techniques. You get your cost down even further and you get a cycle working your way. The same way as when you go that way, well, suddenly you get higher cost because you cannot use the large scale mining methods as you could here and you might move even further out. So this is how important it could be in certain situations to make sure that you have the right conditions in place for your planning, because it does give you lots of secondary effects in how you look at your whole ore body and what is really ore and what is waste. And it couldn't really play into the whole planning.
And of course, this is something that we spend lots of time with working through in our different mines what does the optimal mine plan look like given the conditions that have been given. The next area that's been last discussed during this year has been the internal profit as our internal profit tended to move around. Internal profit, that's only timing difference. In the end of the day, we're going to get the whole profit. But since we're a group, we cannot give the mining profit into our bottom line until it has gone through the smelters.
And this is a relatively simple curve that shows that this is the bullied and weighted in Swedish kronor metal price index over the last 5 years. And the red one here is the reserve that we have for internal profit. And it's not really any strange that when you have prices and terms going up, well then you make more profit. And when you make more profit, most likely you have to take some of that away because you cannot recognize it until it comes out. Now you've seen that in the individual quarters there have been some jumps in this.
And the reason why there's jumps
is
that the trick here is that there are some very rich concentrates that we produce that are very rich in precious metals. They come they tend to come from Garpenberg that has a copper and a lead concentrate very rich in precious metals and Buliden area has a copper concentrate very rich in precious metals. And these can jump up and down a little bit in the end of the quarter. They can be on a higher inventory level or on a lower inventory level. And therefore, because of that, you can see some of these jumps sometimes.
But the general trend, when price and terms go up, you will have to put more into reserve. Now when the prices go down, you can take some of that reserve out. And we had when this goes down, that helps generally helped the profit levels. And now when it went up again, well, up came started coming up again the build up a little bit more of the reserve again. But I think in general that it's very clear there's a correlation over time that correlates very well with this and then we can have some individual jumps in individual quarters, which is nothing really strange around that.
One last slide and this is maybe should have been first because this might be the most simple one. But just to reiterate again, where does the profit come into the different business areas. If you have a total metal value comes here, the mines get the gross profit which is the total metal value minus the TCRC and minus the free metals. In a copper world, this might be 10% and this might be 90% going to the mines. In zinc, this might be 30% and this might be 70% just to have an order of magnitude of how it is split.
And then these things these parts they move over to the smelters and becomes part of the smelter gross profit. On top of that, smelters get premium and they can sell byproducts. That's a simple way of just clarifying how the revenue models work for our different business areas. So with that, I just wanted to summarize what I have said. Well, I've gone through the financial targets.
I hope I've given you some clarity on how we're standing with the financial targets and how we're dealing with them. I've given you some guidance on CapEx and I've given you some guidance on the maintenance stops and I've done some tutoring sessions. Now there's something I haven't spoken about. I haven't spoken about the process inventory revaluation. This has been the kind of main theme last year.
Now there's a reason I haven't spoken about it because to the left here you can see what it looked like a year back when lots of you analysts there were not really quite on the target and lots of you were quite way off the mark. It's gotten much better during the year. If you look for example out of Q2, I feel that as a group and these are the analysts that are part of our consensus from SME and when you look at that you can see that the group as a whole has performed much better. So I was going to try to restrain myself this year from having another tutoring session regarding how to do the process inventory evaluation. I think that that one is now well done and well finished.
Now having done that, I think it's interesting to see who got it most right. So what we did, we took the last 4 quarters and we looked at your estimates beforehand and looked at the real process inventory evaluation and we did a little competition. And the winner is, with an average deviation of SEK 23,000,000 over these 4 quarters, having hit almost perfect for 1 quarter and it was a little bit more off for other quarters. The winner is, give a
big hand to, Ulla Sodermaque from Swedbank. Come up.
So this is for you, for having done this and this is just to make sure that you can keep warm now when you're going to go out in the ice in the winter and make yourself warm and remember our company.
Thank you very much. You're welcome.
With this, I think it's over for questions.
Yes. Do we have any questions for Michael? Yes, we do. Let's see if we have any microphones. We have questions.
Thank you.
Hi, Michael. This is Alan Gabriela again from Morgan Stanley. My question is around capital management. How fixated are you on the payout ratio that you've just highlighted? And how flexible can
you be in case you approach quickly to the 20% net debt to equity?
And how does this fit into your capital return to shareholders ideas?
I think that as long as we are where we are now and as long as we are around or above or around the 20%, nothing will happen. Your question, I suppose, is what happens when you were to go significantly below 20%. And what I will say that as always that we don't have a fixed answer for that beforehand. We will deal with that issue as it comes,
if it comes. All right.
It's Bobby Hernando from Goldman Sachs. So just a quick question detailed on the SEK 4,500,000,000 2015 CapEx. You mentioned there's rollover from 2014 as of the order expansion and the Kialati, But there's no mention of the deep deposit permit for Ranskar. That $1,000,000,000 or $600,000,000 is supposed to be spent for the next 3 years. Is that within the $4,500,000,000 or that's going to be additional?
No, that was in. And that was in already before. So there's nothing really new in this period.
Sacha Bupiccia again, BMO Capital Markets. What is the what's your exposure to Swedish kroner in your operating costs and capital expenditures like roughly high level as a percentage?
Operating costs, I think we are around 70% Swedish kroner, but I can come up. And related for the company, right? For the company, for the whole group. On the CapEx side, that's a little bit more tricky to answer. The first question will be that it's roughly the same, but indirectly there will be more euro in there because even though we buy some things in Swedish krona, there could be a euro producer behind it who will eventually adjust our prices.
Thank you. And with respect to Oda, what is the distribution between fixed and variable costs? In general in the For the smelter, yes, for the operating costs, what's how much of that is fixed, how much is variable?
Help me, Sebastien. We have whatever 40 a little bit more than 40% electricity for sure variable. And then consumption, which is variable, another 20% more. Yes. So let's assume around 60% variable, 40% fixed.
Okay. Thank
you. Hi. It's Dan Major from UBS. A question on your sort of CapEx going forward. You mentioned in the smelting business a number of other potential projects and obviously environmental projects that may be required.
Could you give us an indication of a sort of long run sustaining maintenance CapEx number sort of excluding those projects from the smelting business and also from the mining business?
The total guidance has always been or has not always been, but it's been for quite some time that we're around $2,500,000,000 together between mining and smelting. And for simplicity, that's roughly fifty-fifty between the two units. It's not exactly that and it varies a little bit by year, but roughly that. But that is as you're pointing out that is excluding what you can call the really heavier maintenance like your new asset plants comes above that.
Thanks so
much. Do we have any more questions? No? Thank you, Michael. Thank you.
Before Lennart sums up with his closing remark, I would just like to point out some practical details. We will have dinner served outside in the exhibition area. And for those attending tomorrow's visit to Garfin Bay, please make sure that you have the details where from where the bus departs at 8 a. M. Tomorrow.
Leonard, please go ahead.
I will start to tell 2 anecdotes. The first one was after a week with Kjellstin or maybe 2 when you started here, we went to Finland. And we were standing in the copper nickel smelter and I'm telling the story because it has a lot of relevance with what we have talked about or what we spoke about today. And we stood at the far end of the smelter in an absolutely God's forgotten place under big machines, rusty, dirty. It was incredible.
And we stood there and one of our Finnish hosts said, we have never taken any visitor here before. But this Kerstin, the new boss of the smelters, this is where we produce the secret money. We PMs, precious metals, we know of gold and silver. We know PGMs, the platinum group metals, which is also produced there. But here in Finland, we do OPMs, they said.
What? OPMs, other precious metals. Okay. So what's other precious metals? Well, it's a name of metals you haven't heard of before.
And they are showing up at the end of this little the little pit at the end of the smelter. And they said, it's a brilliant business concept, because we don't feed it anywhere and still it's coming out here and see how much it is. And they had little plastic bags weighing heavy like gold or something. And I said, it's higher kilo price than gold. And we have no clue where it's coming from.
And then of course that's another day at work for Chastain 1 week in the company and we spoke about that of course. And we have been talking about it for a long time. And this three spoke wheel here with feed in and different metals out, we have to maximize the primary metal output, but we also have to look at other things which otherwise go to the tailings. I think OPMs is another word of what we talk about here. It's improving our financial performance.
It's improving our environmental performance. And where is it coming from? Well, it's coming from copper, sometimes coming from or concentrates, sometimes coming from zinc concentrates. In drillshare, we probably have quite plenty and it's coming with electronics. And in Hurriamalte also as you said on one of the slides with a nickel.
I think there are going forward every company in our industry or in anyone else we have to make sure that we take care of, we process big volumes. We have to take out all the value elements there is in there. The other one is an interesting discussion Mikael and I had lately. We were looking through our plans as we all do and I'm sure you also have yearly sessions and we were looking through the strategic plans. And we had threats and opportunities and we have the you can imagine what it is.
And then one of the threats or one threat was increased environmental cost. And we sat here late evening and we really got pissed on the whole thing here, because if we have a problem with living up to high standards when it comes to our environmental performance, we can look at it as a proactive thing. We want to be good. We don't want to destroy the world. We want to make things good around where we are.
Or we can be defensive. Okay, we get a new permit. Damn, it's going to cost $600,000,000 more. But I think if it is a threat or an opportunity, I can tell you one thing. If we call it a threat, which we don't, but if we would call it a threat, imagine what everybody else in our industry has on their table or what they have on their tables, because environmental legislation and environmental demands are increasing all over the place.
And I think we have come a long way. So if we are taking additional steps, which we do, we do it because we think it is good to do it and we have our own agenda. We are not only going to look at legislation. We think legislation is far too misleading and costly in some situations, but we think the authorities are missing out on a couple of other areas where we think that we should do a lot more than what we are asked. So we start and I think we will be a bit of a forerunner in or we hope that we are a forerunner in really making our own agenda.
Where should we argue to be paying less or investing less because it has very little marginal impact? Or where shall we do more? And we're working very hard on modeling this and having this as our own agenda. But again, is it an opportunity or a threat? I think for us it is more much more an opportunity than a threat.
And certainly I think it's a big threat for many in our industry when demands are improving. We have projects. We are proud of our project pipeline. And if we look at this, I would say that we have positioned ourselves. We have positioned Bulidern where we are today.
We have never been or we have always been favoring high return projects and we have wanted to be in smelting and mining. We have been selecting or we have been in copper and zinc, but we have also been working on many different metals opportunities or options. But we have stayed where we are because we have the knowledge there, but we have and we like them. And I think we have seen the macro development being in favor for many years in the primary metals where we are. The project pipeline is very important for us.
When someone here I think the answer the question, oh, Kjellstein, you have a lot of projects. And probably the question came with a concern that we are going to spend a lot of money, but you should absolutely look at it. We want to have a portfolio and a pipeline, so we can pick and choose with the management capacity we have and we are not going to do stupid investments because we have a strong cash flow. We have high demands on delivering returns to shareholders and we are going to pick the best projects. And if we don't have projects, we think it is a great value creation to return more money to shareholders.
I mean we it's a very good route going forward. But of course even better it is if we can do like I think the Oda project for example will look like. It's a better return than anything else that we can think of. Finally, we have now been spending the afternoon here. It's interesting.
And I think when we compile everything, it's a good story in my opinion. We have some weak points. We have some strong points. But tomorrow we have the big the highlight or the high point of the Capital Markets Day this year. I think what we see tomorrow is a demonstration of years years of upgrading and continuous improvement and improving our project management capacity, our technology when it comes to mines and mining and mine design.
I hope that and for dinner you have to look at the different stands up here. All of them are very interesting. The leaching we'll call Kruger with remote controls which drive sort of a different kind of organizing our company with much flatter organization with people dealing directly with each other, taking the control rooms out in the plants and so on. So, Garpenberg tomorrow is for us sort of a demonstration of everything we have been talking about here basically. So, hope you will like it.
Finally, I would just like to thank Sophie. You have got all the management team here to stand in front of TV cameras looking good. We haven't done that before. I don't know if it helped. But in any case, it has been a good work from you.
And I'm very proud for with everyone in the company. I think the top management here on the front row, I'm very, very happy to be the CEO of Berlin. And of course, everyone out on the stands out there and I hope that you will see smiling faces tomorrow in Garpenberg. I think at least every time I go there, I'm seeing beautiful things, machines and mines and whatever, but I see very dynamic troops of people. I think that concludes our presentations.
And am I going to stand here for another few minutes and take questions or? No. No?
Now we're heading for dinner.
Oh, that's perfect. Okay. So thank you very much.