Good afternoon, and a warm welcome to Boliden's Q2 earnings call. My name is Sophie Arnius, and I'm Head of Investor Relations. We will do as we normally do. We will start with presentations from our CEO and President, Lennart Evrell, and CFO, Mikael Staffas. After that, we will open up for questions. Lennart, please go ahead.
Thank you. Very welcome to this presentation of the second quarter results. The quarter was dominated by the maintenance shutdowns, which were planned in the smelters, which cost a lot of money, which is lowering the output from the smelters. That said, I think that we're quite pleased with the smelter results. We are also pleased with the mining business area results. I think according to or in comparison with the market expectations, a big difference or the difference was the internal profit, which was eliminated in the quarter, which was a fairly large minus. Mikael will comment more on that later on. All in all, I would say we have solid production. We are doing basically what we should.
If we look at the numbers first in summary, in the second quarter, we had SEK 9.4 billion in sales compared to eight and a little in the previous year. Earnings before interest and tax and excluding the process inventory revaluation was SEK 374, which was very close to the level of last year. Earnings, including the process inventory revaluation, was SEK 478 compared to SEK -59 a year ago when we had very strong negative impact from the process inventory value. The cash flow was strong. We're almost SEK 1 billion, SEK 920, as compared to a big minus when we were in the middle of the Garpenberg expansion. Production was good both in smelters and mines, and to comment on a few, I think we're very pleased to see Garpenberg ramping up as it should.
A little high cost some consequences on the bottom line in the ramping up is normal, I think that everything is going according to plan. Aitik did 10 million tons in a quarter. That's the highest we have seen so far. It's a record production in Aitik. The maintenance shutdowns were planned to be SEK 140 million, we did them on time and a little cheaper and a little better than planned. The actual outcome was about SEK 120. That compares to SEK -305 a year earlier, which was the biggest maintenance shutdown we have ever done in a quarter. The metal prices have increased, we saw the first effect in the end of the second quarter, the metal prices have continued up since. If they stay on this level, we have an additional good improvement on the market terms.
The Swedish krona is of specific interest. That changed the interest rate. The prime rate cut was in July which reduced the value of the Swedish krona, which has a very good impact on Boliden if it stays. We look at the market in general, I think that we see a slightly improved sentiment, both or several of the large metal and mining analyst houses have updated their forecasts, and I think the general picture is positive. We see a continued recovery in the mature economies, the U.S., Europe. We see continued good growth in China even though some sectors are concerning, the housing sector, for example. Metal markets are dominated by the quite fast change and improvement of metal prices in the end of June, beginning of July. They are back, or the reasons for them are supply disruptions.
Several of the mines have difficulties. We see some metal deficit in the market. We see a lower supply forecast for zinc, which is what we have seen. No change there. It's only that the closing of the Century Mine, the very large mine, is coming closer, and the zinc market tightness seemed to materialize as we have indicated before, and it's coming closer. The bigger difference is that copper, which has been obvious from the fundamentals to be a risk of being oversupplied, that risk is somewhat reduced in the updates because of delays in the startup of new mines, because of some disruptions and problems that several of the large mines are facing. The premiums are stable. The exchange rates, of course, is the most important for us.
Not only does it have a major impact on our earnings, the Swedish krona is moving us to a more competitive position. That is an advantage that we don't share with the whole industry. It is only for ourselves. We are particularly happy to see the Swedish krona moving as a result of the Swedish Central Bank rate cut. This is a somewhat busy slide. It's from CRU as a source. We have the zinc on the top and copper at the bottom. It's a very astonishing reduction of mine supply. I will only comment on the second from the bottom line, mine production zinc, which had a minus 4% year-on-year development in Q1 and another quarter of minus 4%. Of course, the market is growing at around 4%.
Even if it has been an oversupply before, it is the reason why metal markets and metal prices are responding positively. We look at the prices then, this is the zinc price. We can see that it has been going up in the quarter, and we see the blow-up in the past couple of quarters and also beyond the second quarter, we see how it was coming up to 1,300. Today, it's slightly below 1,300, or 23, I'm sorry. A very nice positive price trend for zinc, backed by the fundamentals, but also by the inventories, the official inventories that you see on the shaded graphs behind the line, the price line. The inventories or the official inventories are going down. In copper, it's a more stable situation. Here we have been expecting inventories to go up, but they continue down.
There is a big lack of transparency of the inventories, which are not official here. A number of question marks, but what we see is that the copper prices are holding up. They are stable, and there was a risk for, and there still is a risk for falling copper prices. That's holding up, which is positive. Gold, silver, and lead, fairly stable. Gold fell down in the previous years, but have for 12 months been rather flat. The same goes for silver and lead is a development a bit similar to zinc and copper. If we then go into the operations. In mines, we did 336 compared to 376 a year earlier, and 147 in the first quarter. CapEx was reduced to SEK 657 million. We're coming to the tail end of Garpenberg. It was almost SEK 1 billion a year earlier.
We have enjoyed the improved prices and currencies. We have had good production, startup in Garpenberg, but which has also been followed by quite high cost in the ramp up. Record production in Aitik, but slightly lower grade than before. Higher operating cost is basically an effect of the higher volume and the startup of Garpenberg. Increased production, good development with a startup in Garpenberg and in general, the volume which have impacted depreciation, sorry. Copper production was good. As you can see on the bar diagrams, it's the ore production. It has been a good month or a quarter for ore production. With quite good grades, the line diagram. Aitik was high and stable, 10 million tons, I mentioned initially. Boliden Area, slightly lower production, similar recoveries and grades as in the first quarter. In zinc, very good throughput.
We had in the previous quarter some problems in Tara with rock conditions. That continued into the second quarter, but we were fairly soon done with the additional reinforcement of the mine and could continue as planned, and we had good production there. Garpenberg, of course, with the startup is a major contributor now, and we're almost doubling. I shouldn't say doubling, but we're ramping up towards the almost doubling capacity. Boliden, somewhat lower mill production, same there. We're focusing on Kankberg gold ore, which is taking a bit of capacity here. Similar grade and recoveries in the first quarter. In the smelters, earnings were SEK 174 million compared to SEK 199 million in the first quarter, but a minus SEK 30 million last year when we had the big maintenance shutdown. Improved metal prices and improved treatment charges and refining charges are supporting the profits in the smelters.
The maintenance shutdowns I mentioned was SEK 120 million versus plan of SEK 140 million. It went very well. Production in general has been very stable in all the different smelters. The action plan in Rönnskär where we, for several consecutive quarters now have been talking about process instability, and we have been implementing cost reductions and improvement plans for the production. We deliver on the action plan, and we're quite happy. We have released our inventories of these intermediary products being part of it. We have released SEK 200 million in cash flows as a result of this action plan. New environmental permit for Rönnskär is also a very big thing for us. Let us go a bit deeper on that one. For several years, for many years, we have been talking about solutions or improvements for our environmental situation in Rönnskär.
Boliden has suggested different improvements, and we have proposed investments of SEK 1 billion or around SEK 1 billion. We have been negotiating exactly how to do it and where to do it and the terms around it. We have now got an agreement and the environmental permit, and we are happy to invest another SEK 1 billion in improvement of the environment in Rönnskär. It's a very big undertaking. No one should be, or rather, we have had this ballpark investment in our guidelines, so nothing is changing in guiding on CapEx. I think it is a big discussion, a very significant issue, and we are happy to come to an end of that discussion. When you are in negotiations about the terms, obviously, we cannot be too detailed about it. It's like every negotiation.
I think we're happy that we have this, not behind us, but we have the settlement. It can still be changes in that settlement or in that decision in the permit, but we think it will hold. Kokkola silver recovery is also an important new project for us. We have started initial production, and we are on plan. The production in copper, if you compare the light shaded or light colored bars, as you can see, we are a lot better than last year when we had this big shutdown. We are also this year having a shutdown, and that given, we are very pleased with the volume. Recoveries are following, so basically, the metal production is basically following the throughput there. On zinc, slightly lower than the strong Q1. Planned maintenance shutdown in Kokkola here, but everything has gone as planned. Stable zinc production.
We have had good planning around the maintenance shutdown, so we have been able, with some stock of some materials, to be able to supply the zinc metal despite the shutdown. We have done quite good there. Odda, good production, and we are now with four leaching reactors in production. One was collapsing, or we had a problem a year and a half ago. A year or six months ago, we got the new one, we installed it, and then we have maintained the other four, which have been running without maintenance in the meantime. But from now, we are in full capacity when it comes to leaching in Odda. With that, Mikael, if you can take us through the financials.
Thank you, Lennart. Let me just quickly run through the financials for you. Starting looking at the overall summary, I think what the number here that's, of course, the one that we're most proud of in this quarter is the free cash flow number of SEK 920 million, which came out very well. We'll get into a little bit of detail around that in the following slide. The investments were around SEK 900 million, and I'm sure that somebody of you will ask how this rhymes with the guidance that we have for SEK 4 billion for the whole year, as we are now running under that speed for the first half of the year. That guidance is remaining in place.
There are, especially on the development side and on the stripping side, a skew to the second half year, which in some ways compensating, overcompensating the fact that Garpenberg is more or less taken care of. The profit, including process inventory revaluation, looking at these numbers here, extremely stable compared to both periods that we're comparing with. I'll get down into those, and we'll see that there's actually quite a lot hiding behind those numbers. If we start by comparing against last year, you will see first that there's a very small deviation of only SEK 4 million. That comes from a pretty high positive volume effect. The big volume effect comes from the lower smelter maintenance and the Garpenberg production coming online.
Some of you who read the report might argue that it should have been an even bigger number than that, and that there is something that you could discuss around that. It's true that in Garpenberg, although the new concentrator worked very fine and we got very high volumes, the mine is not really up to speed, and we have been taking out of ore storage in order to fill the smelter, and that shows up in the volume that we've been using up the existing inventory. Price in terms plus SEK 90, that's a very good number as such, but actually the terms are much better than so compared to last year, because last year we had a hedge of SEK 156 million in that number in place. Cost slightly above last year. Depreciations are higher, and that's not so strange.
That has to do with the higher mine production in Aitik that also drives automatically depreciation, the way that we account for depreciations. It will be also the Garpenberg coming online in early May and is now fully into the depreciation numbers. Internal profit, I think is the area that most of you might have looked into and maybe not been quite understanding what has happened here. We have a situation where in this quarter, we have put in a reservation of SEK 84 million for internal profit. That compares with last year where we actually could take out SEK 55 million, so the difference is SEK 140 between those two numbers. Where does the SEK 84 come from? Well, this is mainly driven by prices and terms.
As you know, there's a relatively fixed volume of our mine production that goes into our smelters, and when it goes into the smelters, it then stays there for a while until it's a finished product and can be sold off. That volume and the profits associated with that volume cannot be accounted for until it's taken out. When you have increasing prices, you have increasing margins coming in that will show up in internal profit revaluation. You can also change as an inventory, but the larger effect in this SEK 84 million is the prices and terms coming through. Comparing against last quarter, we once again had a very positive Volume. This is, of course, the mine is developing well with Garpenberg coming online and also Aitik producing fine. Price in terms, SEK 237 higher.
Cost higher. This is mainly due to the maintenance shutdowns that come in and to higher mine production in our largely budgeted form. Depreciation is higher, mainly linked to, once again, higher mine production and the fact that Garpenberg is now online and is depreciating. Internal profit evaluation, once again, we have our SEK 84 that we are putting into the reserves this quarter comparing to SEK 52 that we could take out last quarter. Last quarter, typically, as well as the quarter last year, were quarters with falling prices within the quarter. That's when you typically will see internal profit being positive coming out. Now we have a negative number that's built up with the increase in prices and terms.
Looking at the cash flow. As I said before, this is maybe the most positive news that we have in this quarter with a SEK 920 million positive. This largely then comes out of the working capital with a SEK 795 million of cash coming out of the working capital. Out of that, roughly SEK 200 you will see is due to the improved process situation in Rönnskär, where we have reduced the metal content in the intermediary storages. The other SEK 600 is mainly due to timing. I think there will probably be a question around what is a sustainable level. I'll say right now that this level that we have right now is not really a sustainable level.
We had a very low working capital at the end of the quarter, which is linked to a maybe too perfect timing of shipments coming in and maybe a too low level of inventories for safety. Capital structure. This is a slide that we normally don't talk too much about because normally not much changes. In this quarter, it's actually quite a significant change in here, which is linked to the refinancing. If you look first just on the net debt, you see that net debt is reduced. Despite that we paid dividend in the quarter, we still have a positive cash flow even after that, which has reduced the debt and the gearing is down. The loan duration is much longer. We refinanced large part of the debt that we had, the new syndications coming online during the quarter, which has increased the loan duration.
They've also reduced the net payment capacity that you see down on the bottom line, which is all according to plan. We had payment capacity put up very high during the Garpenberg year to have a safety margin in case things will go really sour during that investment. As we now going forward, have less investment and therefore more of our own cash flow, the need to have a big payment capacity is not that necessary. We have therefore in the refinancing reduced our facilities accordingly. Now with that, Lennart, I'll give it back to you. You can talk a little bit about the project and the summary.
The project pipeline, of course, is dominated now by the big Aitik project from Aitik 36 is delivering over plan, ahead of time plan and very satisfactory. We have the Garpenberg, which was the second large project, or the second largest ever, we are starting up and we have the inauguration in August. It looks very good. Ahead of us, we have the Aitik 45 that we're investing in some better uptime or more reliable equipment in order to take advantage of the full capacity that what we think is the finest concentrator in the whole mining world. We know now that if we have ore supply stable and reliable ore supply, we can expand it up to 45 million tonnes. We spoke about that earlier. We have new potentials. We continue with Laver to see if that will make sense.
We are still several years ahead of before any decisions can be taken. We do not, at this point, have any other opinion than to say that it's interesting enough to continue the feasibility study on that one. Of course, we have done something else on the project pipeline. We bought a mine, Kylylahti, in Finland, and I think the story is really quite nice. As a mine, you can say it's nothing to write home about. It's a small little Kristineberg kind of copper or a small copper mine, 650,000 tonnes per year of ore, high grade. The primary reason why we bought the mine is that we have got the permits or the exploration rights in a very interesting part of Finland. The area resembles very much of the Skellefte field. We think there might be very good potential there.
Nothing much has happened in exploration after 1980 when Outokumpu discontinued their exploration efforts. Little Altona Mining of Australia bought the rights and all the documentation and all the mapping of the geology there and invested in one deposit only, which is the Kylylahti mine. It's a well-managed, positive cash flow, well-managed little start-up mine. We like it as a mine, absolutely, but we like it much more because it's a center where we can have some offices, some management, some people, and reallocate our exploration resources in the group and spend more in this quite virgin land that we have in the old Outokumpu field Under 400 meters, because basically Outokumpu has been searching the area above 400 meters, which is typically what you did those days. We have now better equipment. We can look deeper down. We think there might be opportunities there.
It's not going to be imminent. We're going to start exploration very soon. Of course, if we find something, there might be mine extensions in the Kylylahti mine, which is already operating. If we find something new, it's going to take a long time, as always with mines. What is good here is that we have roads, we have power, we have everything. It's a mining country here, even though most of the mines are closed and have been dormant or closed for quite some time. Finland has low country risk, and we think this is blending very well with our smelters in Finland, with our expertise both in mining and exploration. It's a small thing, but we think it is very exciting.
If we summarize, we have a couple of facts here, or important informations, which are important when you plan for or model Boliden going forward. First of all, Aitik. We are below the average grades 2012, 2013, 2014. We have announced this many years back, but we are coming to the end of the mining high up in the pit. We are coming down lower, and we are going to first go on average grades, and then we are going to go over the average grades when we come deeper down. So we are seeing a positive grade development in Aitik. Garpenberg, I am talking beyond 2014. Garpenberg, obviously the start, I hope it continues. As always, the cost is quite high in the ramping up, but we have been through most of it. The concentrator is doing very fine. The skip, the ore hoist, has been some problems with normal startup stuff.
We are in good pace to be both on CapEx plan, or we can say that we are going to be very close on the plan there. A little over or a little under. I certainly hope a little under. We are ahead of time plan on it. We will, for very independent of the startup of the new equipment, be on slightly low grade in Q3 of this year. Tara had an unfortunate breakdown of an underground conveyor, which stopped basically the mine for a week. That was not a good start of the quarter in Tara. It is not the biggest thing, but since we know it now, we can tell that one. We are more importantly negotiating cost reductions and productivity improvements in Tara.
We have already taken important steps, but we are discussing another or additional steps in order to lower the cost position of Tara, which would be very good if we could achieve the results we hope. Kokkola silver project, full production in the end of Q3, and Q4 as a quarter will be the first of impact of the silver project, of significant impact of the project. Rönnskär, big problems we had a year ago or six, nine months ago. After the first quarter, we could show some initial improvements, and we are seeing additional improvements, and I think we are going in the right direction. SEK 200 million in released capital is one indication of that. Odda, full leaching capacity from now, I said that already.
Maintenance shutdown, we will have also in Q3, lower than in the second quarter, but still SEK 80 million, so quite significant there too. That concludes our presentation, and, well, we have one more thing here, to invite you to a Capital Markets Day on November 10 to 11 in Stockholm, and visits to Garpenberg, day two there. You can contact Sophie Arnius about that or look at the information on boliden.com. Disclaimer, now we are prepared for your questions.
Let's see if we have any questions here in the room in Stockholm.
Thank you. Could I ask a question regarding Aitik reserves? You said that you will be in line with reserves in 2015, 2016. Is that 0.20 or higher?
22. 0.22.
Okay. Thank you. Regarding costs in the mines division, is this quarter a run rate going forward or is it going higher with Garpenberg ramping up further?
No, it's a bit high now because of the startup of Garpenberg, one thing, and then we had some repairs and some maintenance job on some equipment in Aitik, which was a little over the normal. I would say that it's not very representative. It is on the high side, primarily because of Garpenberg.
Do we have any more questions? Yes.
Yes. Just regarding the internal profit elimination, am I understanding it correctly that that negative would swing to a positive then next quarter if we assume constant prices?
If you assume constant prices, you will have a zero next quarter, but you will have a positive in the comparison.
On Kylylahti, how much could you expect to spend, partly on the facilities, kind of on the actual mine going forward, but also on the exploration going forward?
That is a good question, and I don't have an answer on that today. What we are doing, we have a mine which is operating and going well. They have investment plans and things going on there. It's a relatively recent start. We follow their plans, and we think they have done very good so far, and follow that. What Boliden will do in addition to Altona as owners is, of course, to look at what can we contribute with, and we think we have significant synergies. They will cost. What they are, I don't comment on right now. What I can comment on is for sure we're going, as soon as the closing is done, and the deal is not done yet. We have agreed to buy it, but it is conditional to a shareholder vote and competition authorities.
Once we're in, the plan is on the 1st of October. Sorry, to look at exploration, and obviously what we can do as quick improvements, if any, in the mine and the concentrator.
Yeah. Thanks.
Just a question on the environmental permit in Aitik. You're now producing 40 million tons a quarter. Isn't that over and above the permit, and does that cause a problem?
It is causing a problem if we would continue to do 10 every quarter. The permit we have right now is 38. We are touching that level. We know that in a year we have stronger and weaker quarters, and the winter quarters are slightly below. We are right on that level or perhaps even above. This is an issue. We are discussing on how to do it. We think there might be solutions around that. Right now, we're very happy with 38 million tons for the year. If everything goes well, it's really on the limit there.
Okay. Thank you. Let's see if we have any questions from our audience via the telephone.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. That's 01 to ask a question. Our first question comes from Stephanie Bothwell from Bank of America. Please go ahead.
Yes. Hi, everyone, and thanks for the presentation. My first question is on Garpenberg. We've obviously seen a positive development in grades during Q2. Are you able to give us a sense on where this will trend for the rest of the year? My second question is on cost inflation. We've seen the devaluation of the SEK over the last few weeks, which should be a tailwind for your earnings. I wanted to get a sense from you of whether you expected some additional cost inflation to creep in, and whether this would essentially offset that positive impact to profitability.
Okay. On the first one, on Garpenberg, we are indicating a slightly low or lower than average grade in the third quarter in Garpenberg. We have not been guiding for a low fourth quarter, that means that for your modeling, you should plan for reserve grade in Q4.
We should make sure that just the guidance for Garpenberg is the old reserve grade for-
Yeah
14, 15, and 16.
Yep.
Okay.
On the Swedish krona, what was driving the change in the value of Swedish krona was a primary change. I don't think it was more than the market expected. I don't think the sentiment now is that anyone will increase in our interest. I think there is a good probability that the Swedish krona is somewhat weaker. We have our revenues in US dollars. We have some imports of some different things. Most of that is in dollar, was before, and is now when it comes to concentrates for our smelters and so on. I don't think there is a major risk for inflation. Of course, there is a degree of it on what we import. Basically, I think this is very good news to us.
Okay. That's very helpful. Thank you very much.
Our next question comes from Liam Fitzpatrick from Credit Suisse. Please go ahead, sir.
Afternoon, everyone. I've got three questions. Firstly, just on working capital. I know it's a difficult one, but you're saying with the low trend at the moment, can you give any sort of rough guidance on where that should normalize in the second half? Adding on that in terms of sustainable working capital reductions, you did SEK 200 million in Q2 from Rönnskär. Is there further reductions to come from that over the medium term? Second question is just on Garpenberg unit costs. You're saying they're elevated in Q2, will come down in the second half. Can you be a little bit more specific in terms of potentially percentage terms, H2 versus Q2? Finally, just on Tara, can you confirm whether it's cash flow breakeven at the moment?
What sort of order of magnitude we could be looking at in terms of cost reductions if you are successful with your negotiations there? Thank you.
On working capital, basically we have a level which is not very high. We are quite good in framing our working capital, and at times it's going down, and at times it's going up. What happens now of a more structural nature is Rönnskär, where we had not a huge capital value, but more indications of a poor performing process. To release SEK 200 million there is sustainable, very important for the bottom line, for reliable production, for environment, for safety, for every reason. I think that we have elements there which are to stay on the level and which are indicating something good. The variations, I think you can take more on that, what are normal variations.
I was going to say, the normalized working capital is difficult to say. The only thing that's for sure for us is that we will never be on the normalized. We do have events that happen just in terms of the batch sizes we deal with, in terms of the size of the boat shipments and so on, that will always play around. What we said that what we have achieved in this quarter is probably on the very low side of what we can do in that cycle. We had relatively high last time. That's where we got that SEK 600 coming out on top of the SEK 200 Lennart just talked about. Let me comment on the SEK 200.
We have previously announced that Rönnskär has somewhat in the order mindset of SEK 600 million too much tied up working capital, SEK 200 that came out now, that means there's still SEK 400 there, we're not giving any guidance on when that is going to happen because there are more ifs and buts around the timing there's still too much working capital there, sustainable, tied up.
The easy stuff first. It's going to be a bit of a slope down. You also asked about the Tara cash flow positive. Yes, Tara is cash flow positive and break even. What was it? Could you repeat your question on Tara?
I guess there's two parts maybe on Tara. One, H1 you've had a number of operational issues. I know that's continued in early Q3. Should H2 be fairly similar cost-wise to H1, I guess is the first part. The second part, you mentioned you're in negotiations, I think with the union to realize sustainable cost reductions at that asset. Can you give any guidance at this stage what sort of order of magnitude we could be looking at there?
I think we are a bit careful in doing that because we are negotiating and looking at different alternatives. The plan is to reduce headcount, to reduce the number of vehicles and machines underground, increase productivity and reliability of the mine. If we are successful or the plan we have right now, if that materializes, we're going to see for Tara a quite important cost reduction. We will have one-time cost associated with it, which will probably come in the second half. We don't guide too much about it because we are looking at different options as we speak.
You had a question about the Garpenberg unit cost. I'm not exactly sure what you mean, but if you look at the unit cost pre-depreciation, it has already come down, but it hasn't come down to 25% that we have guided for when we started the Garpenberg project. That's the 25% we're still standing by. We have not guided exactly how quickly that will happen, but the end goal is still the same.
We are right in the beginning of the ramping up now. We are in full production, but it's still a lot of work and we're fine-tuning, and the improvement is coming in the following quarters.
Okay. All right. Thank you.
Our next question comes from Mr. Gustav Sandström from Danske Bank. Please go ahead, sir.
Thank you. Good afternoon, congratulations on a very sound operational quarter, I believe. First question on the internal profits. Could you remind me, are those also reflected in cash or is this a pure P&L statement?
P&L.
P&L. Great. Also, Lennart, you mentioned on another question that there might be solutions on the Aitik production. Is there any way that you would be able to produce, say, 40 million tons this year at current operation?
No, I don't think so.
All right. Then the depreciation was quite high in the quarter. Is there anything else besides Garpenberg and Aitik volumes behind this figure?
No, those are the two main deviations that we have. Everything else is relatively small.
Okay, great. That's all from me. Thank you.
Our next question comes from Mr. Ola Södermark from Swedbank. Please go ahead, sir.
Yes, good afternoon. Question on TCR. Are there going to be any more positive effects in Q3 from the higher TCRs we have seen this year given your contract structure?
We saw the TCR improvements in Q1. What we said is it's in the inventories and the throughput or the lead times will have no impact. Basically it has been in the second quarter, so I don't think there is much more to expect from that.
Okay, sorry to bother you with one more question about costs in the mine division. Is it possible to quantify the higher costs compared to when the production is running in normal or the Garpenberg ramp-up is fine-tuned?
What do you think, Mikael?
SEK 50 million.
No, I wouldn't want to give a number right now because I don't have it on top of my head. Regarding Garpenberg, I will repeat that the 20% cost reduction guidance that we gave basically based on 2010, because it was given early 2011, of 25%, that one still stands. The unit cost as you see right now is not anywhere close to that, but we are aiming for that number as we're coming into the fine-tuning. That will take several quarters until we're fully fine-tuned.
I think it is a member of the right ballpark, but it's on the high side you mention here. I think it is somewhat lower, but it's only my quick comment on it.
Okay, thank you. That's very good.
Our next question comes from Mr. Rob Clifford from Deutsche Bank. Please go ahead, sir.
Good afternoon, gentlemen. Three quick questions. The billion-dollar investment in Rönnskär in environment over 2015 to 2018, is that evenly split, so about SEK 250 a year? Second question, the Tara mine life, if you do get the costs out that you're hoping for, how long you think you'll be able to run that operation, or when will you stop it? The third question, Aitik 45, can you just remind me what the milestones from now are in terms of decision points for the remainder of the CapEx on that?
If we take it, well, to start with the SEK 1 billion, we are planning that. Obviously, that decision is not 100% firm yet. We are planning along the SEK 1 billion and we prepared for the question, we expect it, and we said the guiding at this point is evenly split. We think so. Starting up in, if you take it by quarter or something, we will have the first cost in all this year and then even split. On the Aitik 45, we do not have any additional information right now. We are working on the stage 1 investments we have set, and the guiding for the coming investments have not changed. You had a question in the beginning or in the middle.
The Tara mine life.
Yeah, the life of mine on Tara. We have extended it from 2018 to 2019 and with a good development on cost reduction, and if the market sentiment of a higher zinc price would come, well then there is a chance of additional extensions.
Are you talking a small number of years, or are you talking sort of somewhere nought to three or five years sort of extension?
I don't know what we're going to do. If we're successful, we're going to spend a lot of money on exploration, near mine exploration. The answer is we don't have an answer. There are probably a couple of years clear, and then is there a significant increase? That I don't know.
Great. Understood. Thanks.
Our next question comes from Mr. Julian Beer from SEB. Please go ahead, sir.
Thanks very much. Good afternoon, everyone. Three quick Garpenberg questions. Could you please remind me what is the reference year for unit cost from which you target the 20% reduction?
2010.
Secondly, what was the Garpenberg depreciation in absolute numbers in Q2? If the ore rate is unchanged in Q3, will it be the same in Q3?
I don't have the exact number, it will be more in Q3. You can basically FIFOs are more because there's only two months that have been taken in Q2. The way we've said that we have SEK 4 billion, let's assume that we're going to depreciate this SEK 4 billion over 20 years just as a number. That means SEK 200 per year, means SEK 50 in a typical quarter. If that's true, that means that we would have had around SEK 35 extra in this quarter. That's how far as we have guided you.
Okay. That's based on mine rate or mill ore rate?
That was Bill's. The depreciations are different in the different parts, depending on, for the mill on the milled and for the mine on the mined ore rate. Therefore, yes. That is what it is.
Okay, I've got that. Ore rate Q2 536 KT using a bit of backlog. What should we expect for Q3?
Sorry, once again, Julian.
Yes. Your milled ore rate in Q2 was I think 536,000 tons.
Yeah.
What sort of mill rate can we expect for Q3 with the full quarter?
What we have guided for is 2 million tons in a year. Part of that is coming from, the mill is doing one thing, the mine is ramping up more gradual. We have some stockpile of ore. Some will come from the piles and some from the ground. Then you can model an increase from second quarter to third and fourth quarter. I think you have all the elements to do your estimates there.
Okay. About 570 then. Okay, great. Then for Rönnskär, what was your Q2 run rate of E-scrap, and how would you expect that to trend during the next few quarters?
Well, what happens with E-scrap right now, as you have seen from our comments and also from competition, is that there is a soft market on the supply of electronic scrap. For us, it's not a bad idea. We have reduced our volume of E-scrap, but we have retained some of the high-quality feeds which we need to have in order to get our process control improvements. That is part of the action plan. I can say that we are partly lucky here that the shortage of electronic scrap is coming in quality and quantity quite well timed with what we are doing anyhow. I think the impact on us is not as great as one would probably think. I think we're maneuvering quite well here. There is a shortage of material in the market.
We would like to have more of good quality. We can have that. We are not paying higher than we want.
Okay, that's great. Finally from me, if anything has happened regarding the environmental court hearings for Aitik 45, could you please give us a quick update on what has happened?
Can you do that, Micke?
Well, I think the update is that the court hearings have taken place, and we are now waiting for the court's decision. Sorry about that. I don't think there's much more to it.
Okay. Did anyone present any straight appeals?
Well, no, appeals will only happen once there's a court decision. Of course, there were comments, and there are other sides or other stakeholders that are, you could say, either opposed or at least have different ideas about emissions standards and other things. Yes, there are other people with other points of view than us.
Okay, fair enough. Do you have any idea at all when the court will make its preliminary decision?
Do we have it? Is it early fourth quarter somewhere? I don't know exactly.
In the second half of this year somewhere. You can call us and we have a date somewhere.
Gentlemen, thank you very much indeed.
Thank you.
Our next question comes from Mr. Christian Kopfer from Nordea. Please go ahead, sir.
Thanks. Good afternoon. Just some follow-ups. Firstly, on treatment charges, you enjoyed higher earnings in the smelters because of the treatment charges. On the other hand, you show minus SEK 33 million on higher treatment charges in the mines. the net effect on the higher treatment charges are almost zero. How should I interpret that?
Well, first of all, in zinc, we are very balanced. A plus for a smelter is a minus to a large extent in the mines. In copper, we buy the majority of the copper come from external suppliers. An improvement of copper TC is clearly much more positive than negative for basically Aitik. The exact breakdown, I don't have the analysis by heart, but I think that's the main thing. We like improved or higher TC's in copper more than high in zinc, because high in zinc is just changing the internal pricing. In copper, it's real impact. We think the TC improvements there are good for us.
There is no extraordinary thing or so in the impact from treatment charges for the full term, so to speak, in the second quarter?
With the inventory changes and stuff, it's never easy to be too detailed. I don't know if you have a comment.
As in now, there are timing differences because increased TC's will hit the mines right away as a negative, but it will only come into the smelters with a delay as it flows through the process. With increase in TC's, you can see these kind of effects.
Okay, that's good. finally then, if I look at the EBIT bridge between quarters on the smelters, you have a volume effect of almost SEK 40 million negative and minus SEK 100 million on costs. If I add those together, it's SEK 140 million negative, but the maintenance only was minus SEK 120. what is the additional SEK 20 million negative coming from?
The cost.
Cost.
Yeah. As we said, in addition to the maintenance shutdown, we had some repairs in the mines, which are a little bit higher than normal.
this comes with only on smelter.
Was it only on smelter?
Also in smelters, the costs are a little bit higher than they were in Q1. We had a very good run in Q1 on cost, and now they're a little bit higher this quarter.
Do you think the cost, if we just exclude the maintenance part, are the costs representative in Q2?
As I think Lennart said in the beginning, we are slightly high on cost in Q2, and that's true for smelters and mines.
Okay.
They should be slightly reverted. It's not a big thing, but it's a slight high.
That's understood. Thanks.
Our next question comes from Mr. Alain Gabriel from Morgan Stanley.
Yes.
Go ahead, sir.
Good afternoon, everyone. Lennart, I have a quick question on your comments regarding the grades at both Aitik and Garpenberg for the second half of this year. Is it possible to put some numbers behind those comments that the grades will be below average grades or below average metal grades on both mines?
We had a guidance on 0.20 in Aitik, and we were on 0.21 in Q2, and if we don't adjust anything, we will have an average, and that means that we have to go down a bit in the second half in Aitik in order to get that math to work. On Garpen, we have in the startup ramping up of the mine. In a normal sort of ongoing operations, we have high-grade and low-grade areas, and we try to mine such that we can even out the differences and have as smooth as possible grade over time. in the starting up here or the ramping up we will be slightly less good in balancing and having a very strict or a very stable grade. what we're saying is we are going to be on the lower side of variations in the third quarter in Garpenberg.
More than that, we haven't guided for.
Okay. Thank you.
Our next question comes from Mr. Johannes Grunselius from ABG. Please go ahead, sir.
Yes. Hello, everyone. Johannes Grunselius here. I have a question on your realized prices throughout the quarter, because we started in Q2 with relative low prices, and then we ended the quarter with very relative high prices. Were your production and shipments sort of evenly spread over the quarter, or what can you say there for me to understand how you realized prices were sort of matching LME prices?
I think it is relatively stable. If anything, slightly sort of heavy towards the end of the quarter with higher price. What the impact is there, I cannot say. I think it is small. Perhaps a slight direction of volume of high price, but fairly stable.
Okay. On CapEx, because you've been explicit about CapEx guidance for this year and 2015 on SEK 4 billion, right? Now you're talking about an environmental investment in Rönnskär, but that was already in your budget and so forth. Could you sort of indicate how we should see your CapEx for the group for 2016, 2017, et cetera? I mean, excluding, Aitik 45.
The answer is that regarding 2016, that will be one of the topics on the Capital Markets Day that you just got a date for. Otherwise, we will just revert to what we said before, that we state that we have a maintenance CapEx level around SEK 2.5 billion. That's kind of the basis. You know that there is an, I think, 45 number out of 600 that will be split, and most of that is happening in 2015, but there will be an Aitik 45 part two that will happen in 2016. It's a little bit question of other things, and it's a question of this Rönnskär divided on four years and so on. More than that, we haven't said.
Okay.
We bought a copper mine for USD 95 million too, so.
That's in this year.
Yeah.
That's in this year.
maintenance CapEx was 2.5, yeah?
Yeah. That's the guidance we've given.
Okay.
If any more comment to that question, I think the Rönnskär, it's a very important thing. We have now the direction to do this investment that we have wanted to do, and we know now how to do it. I think there is a bit of an unknown which have been sort of moving around, which is now much more concrete, or we know what we're going to do. I think even though it's a big number and it's a big sort of burden on our balance sheet, a billion is a billion. The uncertainty is, I hope, gone now, and that's good.
Okay. Thanks very much for that.
Our next question comes from Mr. Jatinder Goel from Citigroup. Please go ahead, sir.
Good afternoon. Just two questions. On Tara negotiations, if you don't succeed, what are the consequences? Would you step back from the operation, or would you reduce the mine life, and what are the implications on Odda smelter? Secondly, there is a comment about additional crusher and conveyor belts for Aitik. Is that for 45 as well, and how much additional money are we looking at beyond 600 million approved CapEx? Thank you.
First of all, on the life of mine, if we don't succeed. Of course, we succeed. We are not planning on not succeeding. The question is more, what kind of variations could I think of? I don't have an answer to that. The life of mine plan is based on the things as they stand right now, and what we're talking about is planning for improvements. That's giving the flavor of the impact there. On Aitik 45 and underground conveyors, what we have said is that we have a crusher in the pit, deep down on 285 meters. That we'll need to change. When we are going into the deep or high grades we talked about, we mine deeper down in the pit. Well, unfortunately, or not unfortunately, just as planned, we have to change the position for this crusher.
When we do that, we're going to upgrade it to a better quality and more robust and reliable equipment. Together with that, we're also going to do the conveyors, and we have been quite open that we have not decided exactly where to put it, and the variations are quite wide between low cost, high CapEx, or high operating cost, low CapEx, or the other way around. We have not decided yet.
Is it possible to get both the options, how much CapEx versus cost are we looking at here, so that we can at least look at the sensitivity on both options?
Once we decide, we will come back to you with what the impacts are. Before that, we can only say to you that we're working on this and we're modeling this, and it's not kind of an option A or an option B. There is a gray scale here about different options that we're working on.
Okay. Thank you very much.
Our next question comes from Aleksandra Bukacheva from BMO Capital Markets. Please go ahead.
Hi, Lennart. Thank you very much for the update. Just wondering, if you were to extend Tara mine life that maybe two or three years extension that you've alluded to, what sort of grade profile would it have, at least relative to the reserve grades?
You talk Tara now?
Yes.
Yes. I don't think the grade will differ much. The trick here is we're going deeper and in less massive ores or ore bodies. It's going out in veins and in smaller rooms. It's more a productivity and cost issue than a grade issue. Obviously, as you understand, we don't have the plans and we don't have the numbers because then we would comment much more about it. We see there is an opportunity to extend. If we can lower the cost, then it becomes economical to take more ore, which is going down in smaller veins at depth.
Understood. Sort of order of magnitude, what sort of cost increase would you potentially look at, like 10% or 50% or somewhere in between?
I don't have that number.
Okay. Thank you. That's it for me.
We have time for one more question. The last question comes from Mr. Gustav Sandström from Danske Bank. Please go ahead, sir.
Yes. Thank you. Just one quick follow-up. Regarding Kokkola silver recovery, did you have any positive impact from that for this quarter? also could you point us in the direction what sort of impact that will have going forward?
Would you like to answer?
If you care to look, I think it's page 25 or page 26 of the report, you will see that there is a silver production in Kokkola. You can see that that's a little bit less than two tons. You know that the guidance is for around 25 tons per year once this thing is fully running, which is six or six and a half tons in a quarter. We did have production and it has played in to that, whatever, 25% or 30% extent. We had then also guided that it's not going to be a full production in Q3. It will be on a lower level because there are certain things in that has to be changed.
We're waiting for some equipment that will come towards the end of the quarter, and once that is in place, we hope for a relatively quick ramp up towards Q4.
Great. Thanks.
Thank you so much for coming to our call here in Stockholm and also participating via the telephone. Thank you.