Good afternoon, welcome to Boliden's fourth quarter earnings result for 2013. Welcome also to those joining us via the web. My name is Sophie Arnius. I'm the new Head of Investor Relations here at Boliden since beginning of this year. Today, we will have presentations from our CEO and President, Lennart Evrell, and CFO, Mikael Staffas. After their presentations, there will be an opportunity to ask questions. It's a great pleasure to present Lennart Evrell. Thank you.
Thank you. It's a good picture here on Aitik in the winter. Fortunately, it wasn't much of a winter in the fourth quarter, I think we surprised a lot of our investors with the strong results or strong production in Aitik, more about that in a moment. Summarizing the fourth quarter, we had sales of SEK 8.6 billion, which is down from the previous years. In all of the comparisons, whether you look at the quarter or the full year, the profit decline is entirely, more than that, over explained by the weaker metal prices and currencies. We had free cash flow, which was negative in the quarter, it's following the heavy investment period we are in. Also that we had a bit too much working capital in the course of the year.
Mill production in Aitik was 10 million tons, multiplying that with four, it's a big number. We have to be clear on, since we are guiding that Q4, certainly Q1 is lower in production because it's obviously outdoors in the pit. We had a mild winter, we did not have any relining of the mills, we did not have any planned maintenance. It was really a very ideal production quarter despite that it was a Q4. If we summarize the full year of 2013, of course, it's the same explanation as I said. The prices were low. We have a strong Swedish krona. Much of this happened in the early part of the year has been sort of continuing with the main explanation of the profit decline.
We have had a very significant difference from the average year in that we had a lot of maintenance, planned maintenance shutdowns in the smelters. It was an extraordinary year when we had so-called 25-year stops for some of the equipment in the smelters. That is a big negative or profit impact, which was essentially happening in the second quarter. Since then, all the quarters after the relatively weak first quarter has been strong when it comes to production stability. In the full year, I think we're quite pleased and proud of the cost development. Most following us are used to hearing big inflation numbers, we have had a good cost development. Rönnskär is the weak spot. We have no particular new news this time.
We announced this already in the third quarter, the fourth quarter is basically not worse, but it's not better either. We forecasted or guided with the kind of issues we have with process material and process stability problems normally take several quarters to resolve. On the other hand, we have had a very strong development in Harjavalta, so copper production and copper business has been all in all, sort of partly offsetting the weak performance of Rönnskär by strong in Harjavalta. The cash flow I already mentioned are impacted by the big investments dominated by Garpenberg. The zinc-silver mine is in the final stages. Basically, everything is installed, and we are in the production or the starting up of the subsystems.
The board met today, this morning, on a meeting, we propose SEK 1.75 a share, which is slightly over one-third of the net profit, slightly over the dividend policy. If you look at the market development in general, I would say that I think you are all aware we are seeing a continued high level of business in China. We are seeing improvements in the U.S. and Europe. It's basically a better than before picture of the general global economic development. If we look at construction, which is the largest segment for both zinc and copper, it's a little bit mixed feelings here, and you can see the declining light blue line in the middle there, which is the U.S. construction industry. We also have a blow-up, or not a blow-up, but an early indicator of the construction industry in the U.S., which is housing starts.
That has a very positive development, as you can see. I would say on construction, it's the same in China, looks negative in the U.S., but relatively positive development in Europe and good signs also for the U.S. The automotive industry is following in large the general development in the first slide. It's positive trends, and we can see that people in the world are buying more cars again. The market balance, what we have said before is that the demand is good, but we have been somewhat concerned with the supply, in particular the copper supply and the mine supply from the copper mines in the world. The reason being that after many years of high profits and high metal prices or copper prices, it has fueled the market sentiment and many new projects have started over several years.
That took an abrupt halt almost, or at least the sentiment turned very negative because IRRs, the return of investment, have been not brilliant on some of the pre-calculations of some of the large projects. Therefore, many of the super majors or the very large projects have been halting or delayed these projects. The risk of an oversupplied copper market might have eased a little bit lately. I would say that personally, I'm less concerned now than I probably was six to nine months ago. These charts are showing basically a similar demand pattern for both copper and zinc, indicating very clearly that we have strong growth numbers on copper mine supply and very weak supply in zinc mines.
That is both the effect of few starts because the zinc price have not been building the interest in the same way as for copper, but also a number of closures. We are going to see more of that. Many people, many metal analysts, and so do we, are seeing a fundamental market, or the fundamentals for zinc being quite interesting going forward with weak supply and continued good demand. If we look at the price development, it has been both for zinc here on the two slides from here, copper, it's several years of very stable prices. We can also see the shaded curves in the back there, which are the official inventory levels. After many years of increase and increased concern of a flooded zinc market, we have seen the official inventories going down in Shanghai and LME.
The premiums, we have been nervous that the few people having zinc concentrates will hold very hard and be very difficult to negotiate with if you are a zinc smelter. As you can see, the zinc TCs have been holding up and are quite constant. We can see a positive development on the premiums. This is probably better than we had expected. Sorry. All right. Copper, as I said, also here quite strong or quite flat price development, even though it's a slight negative, which is in line with more supply. All in all, I would say that it's more stable than probably many were nervous of not too long ago. If we see the TCs quite as expected, the TC levels are going up, are trending upwards, and the new benchmark levels is 92 and RC of 9.2.
As you can see, the new benchmark level is considerably higher. That is in line with what we have said before. Also for copper, we get a nice premium on top of the LME price. Gold and silver are the problem areas. Boliden, we are very dependent on the three metals together here, we have invested a lot in both silver and gold. Of course, here we have a significant impact on our earnings coming from those declines. Lead is, on the other hand, stable and on a good level, we continue to be optimistic and believe a lot in the lead market. If we go through the mines, the results are following the fundamentals, as I said, with lower metal prices and terms. We continue to have high CapEx because of Garpenberg. We had the very strong milled production of 10 million tons.
In general, we have had a very stable and good production level in all our mines in the fourth quarter. If we add that to the first quarters, I would say that after the first quarter we have had, when we had low production in Aitik, very strong winters, a lot of freezing problems and cracks in steel, we had a lot of things to tell after the first quarter of last year. I would say that production has been going smooth and very well after that. With the 10 million we did in the fourth quarter, we ended up at 37 million tons in Aitik, which is one year ahead of plan. We had announced a long time ago that 36 million tons will be reached 2014. Here we have a project which is advancing faster than planned. We like that.
If we look at the individual mines, basically it's the same pattern in the different mines, but I think that Tara is probably coming out in a good way. We are not earning a lot of money there. We time to time get questions if we have positive cash flows or things like that. As you can see here, we are going up in profit. It's a bit of extraordinaries there. In addition to it, I would say that we have cost plans. We have a lot of buy-in from the unions. We have a lot of work groups and a very strong commitment from the whole company now to lower the price, extend the life of mine, and we are very happy to have an extension of the life of mine in Tara because of exploration result, but also from the cost actions. Good news there too.
I would say Aitik and Tara are the good examples. Boliden is, I think, maybe a surprise to some, but we are very dependent on the other metals, and copper and zinc there, where we have seen declines. The production. Ore production, the light yellow bar in copper, very good because of Aitik primarily or almost entirely. We also had some quite good grades given that we are in low-grade areas for year 2012, 2013, 2014. Both grades and production was, mill production was good. In zinc, I don't think there's much to say else than that it went well. We have also today updated the mineral reserves and resources. The total of the reserves and resources increased by about 8%, and the increases are primarily from the projects which are not sort of near mine exploration. It's Laver the big contributor to the mineral reserves.
In the mines, mineral reserves up in Boliden and Garpenberg. We have a lower grade situation in Garpenberg, which is a bit of a bad news because first of all, we lift resources to reserves, and the resources are lower grades. More important is that the in-field drilling, the detailed drilling, have identified slightly lower grades than we had anticipated before. With a higher degree of knowledge of the deposit, or certainly one of the deposits around the main Lappberget is showing quite a bit lower grade. That is far out in time, so it's not going to have an impact yet. It's going to take a while, and hopefully we can find something higher grade in the meantime. Mineral resources decreased in the areas basically, or partly because we lift resources to reserves.
Laver and Rockliden, also Rockliden is a very interesting case where we are starting to see pretty significant volumes, and its high grades is down to 800 meters, or from the surface and down. It's standing deposits, and if you look at the numbers there, it looks good, but we have some issues also with the metallurgical composition there. It's not only to look at 1.8% copper and a lot of tons. There are challenges which are a bit open there, but it's good news in any case. Exploration of 2013 was a little down from the previous years. We have declining prices. We have held down the cost here as we have in other areas. We're holding a bit lower pace in exploration this year or 2013 compared to the year before.
These following curves are showing a line diagram, which is representing the current speed of production times 10. It's basically 10 years of production at current rate. The dark blue is the proven and probable the reserves. If the dark blue is above the lines, then it's 10 years or more than 10 years production out of the reserve. As you can see in Aitik, we have huge resources, even though they have declined a bit in this year's update because of higher prices and in-field drilling, which has identified some areas which can not be longer sort of qualifying for mineral reserves or mineral resources. Boliden Area, good addition. Basically, as you can see, the light blue is down and the dark blue is up. We have been able to lift resources to reserves, which is good news.
Garpenberg, big tonnage, a bit of a sort of you should be aware that we have a grade decline there, even though it's going to impact the numbers sort of several years from now. And Tara is a decline, but not as much as anticipated, and we have good increases in mineral resources, the light blue there, and the life of mine has been extended from 2018 to 2019, which is very good news because I think you have heard me being nervous rather that 2018 is probably going to be 2017 or so at least that's the sentiment we have had. Now it's the first time in a long time when we're probably being more optimistic rather than the opposite. In the smelters, everything is dominated by Rönnskär. The numbers first, SEK 149 million compared to SEK 202 in Q4. CapEx SEK 254, in line with last year.
Prices are down, by-products are down. Many of the small odd metals, some free gold is not very odd, and some of the more unusual small products have had very sharp declines. The products or the metals and by-products we don't normally talk about, many of them have very sharp declines in addition to whatever else. Kokkola Silver project is running on plan. It's going to start in the second half of the year, and basically we are in the sort of running in of some of the subsystems now, and it looks good. We had a little fire in Harjavalta. No one was hurt, but we had to stop production for, what was it? 10 days or seven days or whatever. What was it?
10 days on copper-
I think so
four days on nickel or the other way around.
Yep. On full year, basically a similar pattern all in all. The big thing in the smelters' full year numbers is, of course, the SEK 300 million or even more, SEK 330 million in maintenance shutdown. We announced this well a year in advance, that we are going to have very significant shutdowns in June, in the second quarter of 2013, and that happened. The good news is we did it, we did it on plan, and we started up after very major or significant changes. That went basically well, but it was a big hit on the P&L. Process instability in Rönnskär is the biggest thing, and we continue to have a combination of lower quality copper feed, copper concentrate with lower grade and lower quality electronic scrap, and one negative development plus another negative development created a combination which went a bit out of control.
We have an action plan in place. We're working very hard to implement it and to get results. I couldn't say that Q4 had more than sort of we're not continuing down. We are rather flat, but on an unacceptable level. Rönnskär is our number one problem, and I hope that it's not deteriorating, but I think it is going to take time until we're back to where we want to be. On the good news is that copper production, as you will see on a couple of slides from now, Harjavalta has been having a very good development on free metals, so very much the opposite of Rönnskär. Unfortunately, it's a smaller smelter, so it's not offsetting the entire problem, but still it's going the other way around.
If we take them unit by unit, as you can see here, Bergsöe is a small unit, good development, very good returns on investments, but it's a small unit. Odda is negative. We had this unfortunate collapse of a leaching reactor. We have maintained a good production, but we don't have an entirely ideal production mix. It's not a big thing, but we are struggling with a high-cost unit and the cost plans we have in the action plans are working very well. Despite that, we're on a negative result on EBIT. We're positive, clear positive in EBITDA. Kokkola is moving on like a Swiss clock. It's going real well. Harjavalta too, the Finnish units here are making up the profits. Rönnskär, you can see the big decline, I explained that. The fourth quarter, oops, sorry.
The production, as you can see, is not that hard hit by the problems in Rönnskär, which is probably slightly difficult to understand. The profit generated for copper smelters is not the copper volumes, it's how good the recoveries are, how much free copper and free gold we can generate. That is a relatively modest tonnage. We have too little of that, and that's why we have so much impact on the P&L. In addition, we have the sulfuric acid and the other by-products. Cost is relatively under control. Action plans are going. Results are badly hurt by the continued instability and low recoveries. In zinc, not much to say. It's going well. Now, Mikael.
Thank you, Lennart. I will take you briefly through the financial numbers. If you look at the general financial development, I think that Lennart has touched already on most of these numbers. The profit, including process inventory valuation, was at SEK 548, which is a number that is, we'll come to the bridges in a while, but a number that I think is in line with many expectations. Investments in the quarter ended up at almost SEK 1.3 billion, which I'll come to the full year number in a while, but it's also been in line with what we have guided for. We had a negative free cash flow in the quarter as a combination of that we're having lots of investment, but we're also having a relatively high tie-up of working capital at this time.
We can talk a little bit about what the reasons for that are, the instabilities in Rönnskär is part of the problem why you have higher inventories than normally at this time of year. If you compare the results and do it now against Q3, you can see on this slide that there are not really any comments on it, because lots of things are actually going according to plan. The volumes are higher, that's seasonally expected, the costs are higher. That's also seasonally expected. Apart from that, there's very little news in terms of comparing quarter after quarter. If you look instead year-on-year, I think the more to comment on. You can see that the profits are clearly lower, SEK 291 lower than they were a year ago for the same period.
That is all explained and overexplained by the prices and terms where you have lower prices, especially for precious metals and sulfuric acid and also the currency. Those aspects being the main contributors to the lower profit level. We have a higher production, higher mine production coming from Aitik, but also coming from Tara that's producing better this year than it did last year. Cost development has been good. We've been able to keep a good control over costs compared to last year. Depreciations are up, and that's also nothing strange. We've been investing less for many years, and therefore the depreciations are coming here because of the commissioning of new production facilities, but also the increased mine production and the way that we do depreciation in line with production, it's also showing off here.
We're coming to the full year, I want to just make a quick summary. You might have gotten an English version of the report out very early, unfortunately there was a sign, an error sign. It says here free cash flow on this exhibit SEK -1,466, that's exactly the right number. There was a minus sign missing in the earlier version if you got it very quickly off the net, it's all been corrected by now. This negative cash flow, as I said, it contains some more tie-up of working capital than normal, but otherwise it's been communicated and it's been in line with the high levels of investment that we have had during the year. If you look at the profitability for the full year, you will also have the same discussions as you saw on quarter-on-quarter.
We have in total a lower earning of SEK 1,770 or SEK 1.8 billion, that's almost exactly explained by prices and terms. That's again, is especially the lower precious metal prices and some other metal prices and the currency and also sulfuric acid playing into that. Year-on-year, we have a higher volume. It's also in line with the new production we've put in place and the higher production in Aitik. We do have higher costs, if you look at these costs, a very large part of that increase is actually electricity cost and the electricity cost for us, some might wonder why are your electricity costs going up when the general electricity price in the Nordic market is going down.
We have long-term agreements with our suppliers that are linked to other events in the market price, that are linked to indices, they're also linked to the tax burden that our suppliers have for their production of electricity. Since that has increased over the year, that is pushed onto us straight off. Therefore we have seen increasing electricity prices over this year. Depreciations are higher again with all the investments in the last few years coming online. Looking at cash flow in the whole year, you can see that in total, we have a buildup of roughly half a billion SEK in working capital, something that we would like to see reversed, and we hope to see reversed, in 2014. We have investments of close to SEK 5 billion, which is right in line what we have communicated and guided for.
That gives a total free cash flow of minus SEK 1.5 billion. On the capital structure, I think the most interesting part here is the bottom part, bottom line. We have a net payment capacity of SEK 6.4 billion, which is lower than it was last year, but is in line with what it's been the last few quarters. Looking a little bit further up, you will see that the interest rate that we're paying is 1.8% roughly. You'll also see that the total net debt is about SEK 8.7 billion, which is a little bit higher due to the negative free cash flow that we've had in the quarter. With that, I will give it back to you, Lennart, to summarize.
Looking at what is going on now and important for 2014 is obviously what is happening with Aitik, and what is more important is the silver project and the Garpenberg project. We have reported today that they are both on plan. I have said many times that when you're five years after or five years before you start a production or a big project, you will know almost exactly when it started or when it will start. When you are in the middle of it, you don't know has it started, and you can sit with the project management and no one can tell because it's a process. It's a process where we are starting bit by bit. We're first running all the sub-segment or sort of parts, mills, and flotation and the pumps and all the subsystems one by one.
You start to fill up with water because you don't want to have abrasive stones in the system. You just run everything on water. That is the first real acid test altogether and control systems and things like that. Gradually you start to put waste rock through the system, and when everything is running, you start bit by bit to add a bit of ore because you want to see if some zinc or silver is coming surfacing in the flotation cells. It's really hard to say when you start. I know for sure that we have a startup process, which is the first half of this year, and we're absolutely committed to have the first production before the turn of the half year. It's an amazing project right now.
The project leader is more pale than ever before. Every second day is bad news or it's good news. I got information today it was very good news. Yesterday he was pale again. It's normal. It's always happening. I think my own takeaway is we have a solid team, and I think we have every chance to start as we have indicated. I don't think there will be big production volume or production sort of numbers in the first half, but I certainly hope that we're going to be there. The target is to be within the framework of the CapEx. We don't have a lot of margin, but we should be there, and we should have the first product coming out in the first half. Kokkola Zinc Smelter is almost exactly in parallel with the Garpenberg project.
If I talk with one or the other and don't know exactly what they're talking about, it's exactly the same kind of phase they are in. Going forward, of course, we have a big thing happening hopefully this year, and we plan to have a decision on Aitik 45, 2014. It's the next development step or stage for Aitik to go up to 45 million tons a year, and we hope to take a decision later this year. If we summarize what we have said here and focusing in on what is important for analysts and what kind of facts shall I bring with me and plug into my models. Well, first of all, I think it looks obvious that the general demand is solid and, if anything, improving. I think so. The global market is developing well.
A lot of people need the metal in order to reduce poverty and have food to eat and roads to drive on. I think we are in an industry which is doing great support to a very sound development with less inequalities in the world. That will probably continue. The prices have been flat, and I don't know what we shall say about it, but I think the risk of falling copper prices is there. I think if anything, maybe less than it used to be. We have a benchmark set for copper, but we don't have one for zinc 92/9.2. We have a dollar, which is having a significant impact on us, as you know.
If we look at the events internally here, we have the plan to be reaching 36 million tons next year, and we did 37 million this year and with a very strong finish of the year. I think it is dangerous to put too much into it. Of course, we reached the target one year ahead of plan, and that's good news, no doubt. Garpenberg, we spoke about the Kokkola startup, we spoke about Rönnskär. I think it's going to take a while for us to fix it. I'm convinced we are going to do it, but it's going to take some time. At the same time, we have Harjavalta on partly extraordinary high levels of free metals, which should probably be expected to fall back a bit. That concludes our fourth quarter result. All in all, we're happy with Aitik. Thank you.
Thank you, Lennart and Mikael. Let's open up for questions, please state your name and company. We start with questions here in the room.
Ole Strømodden, Swedbank. When it comes to smelters and the outlook for 2014 and the increased copper treatment charges and increased premiums, are we going to see some of them in Q1 already?
We have a time lag there because we have material, and as Mikael said, if you combine huge volumes, unexpected huge volume from Aitik with the fact that Rönnskär is having problems with supporting or supplying. We have too much inventories, which you saw on the cash flow in the fourth quarter, and they are on old terms. It will take a while until that will filter through. Premiums will come sooner.
When it comes to the lower grades in Garpenberg, how many years according to the current mine plan will this materialize?
Okay, the question was the mine plan of Garpenberg, when will we see better grades and so on. I think that we have announced low grades now for a while, and we are going to see that in the first quarter. I think we have guided for, and therefore, we have not guided. That should be coming back to better levels thereafter. Thank you.
Yes. Oskar Lindström from Danske Bank. I have a couple of questions, maybe I can take them one after another. The first ones are on Aitik. You mentioned that the mild winter weather here during Q4 was important. How important, if we would have had a normal winter weather, what would you say about production? Should we have been at a 38 million tons per annum run rate, or what's the magnitude of the impact of the mild winter?
I think that the guiding, if you are 36 million tons, we're approaching that level since we're going into 2014. An unexpected level. If I had been an analyst, I would have said, okay, 36 divided by four, that's nine million tons in the quarter. Then as winter condition, maybe eight or something like that. We should ask you. You have your models, you tell me, but something like that. That's one thing. With the fact that the cold winter wasn't there, well, then we're back to nine then. Then, we had, and we knew that we had a couple of good things in That we didn't have any relining.
We have relinings and stuff coming three or two, three quarters of the years, and they're coming a bit random, and we try to pile up as much as possible and try to short or to speed the production at the same time. But it has a normal quarter. It's more normal to have something like that. We didn't have that. On top of that, everything went well. It went very, very well. I think that's how much I can say. We didn't have the bad news that should have been expected. Everything went very well, and we didn't have any plant stops.
A follow-up question on Aitik. You have an environmental permit allowing you to produce 38 million tons per year at the moment, I understand. I think that's also actually a temporary exemption from the sort of underlying permit of 36. Is this something that you could get another exemption from easily, or is it out of the question, or what's the status of that environmental permit issue?
We have applied for permits to pave the way for a 45-million-ton plan, which will take several years to come. In the meantime, we saw that we have a chance actually to come to 36 or even a little bit more next year, or if everything was fantastic, probably we could surprise the market already or 2013. We applied for a margin there. Well, now suddenly we are very close to the margin already. Could we get further? I don't think we would get more than 38. I don't think we would need more than 38. I would certainly hope that we're not falling back to 36 again. That I don't think. I think that the permit levels hopefully can be 38, and I'm not suggesting we're going to necessarily do it, but on the permits, I hope so.
Okay. I have another question on the mining side. In the Boliden Area, we see now that you had a fairly weak result during this year. How much of that is caused by the decline in the gold price or precious metal prices, or are there operational issues underlying which are behind this weaker earnings?
You saw a decline in the Boliden Area of roughly SEK 350. Prices in terms of roughly SEK 300 out of SEK 350. There's SEK 50 more to be explained, and that can be rather easily explained by the phasing out of Maurliden Östra open pit and being replaced by Kankberg, which is a great investment, but being underground is higher cost. That's basically the summary of the Boliden Area.
We milled a bit more of slag and stuff.
Yeah.
Basically it's terms, and it's on gold.
It's terms and raw mix.
Yep. All right. If I may, a question on the smelter side and on Rönnskär. You talk about this action plan. How confident are you about resolving the stability issues, and when should we expect to start seeing a slow, if sequential, steady improvement? Or will it come all of a sudden, or will we?
I wish I could tell. I think there is a degree of uncertainty. I don't think you should plan on deteriorations from this level, but when the improvements will come and how it will come, I think it will go step by step, and I think you will hear it as it happens. Because the nature of instabilities. Stable is in control, unstable is out of control to an extent, and therefore it's very hard to say what the impact or the action. I can tell what we're doing in quite a bit of accuracy or certainty, but I cannot tell the results to the level that I would like to or would wish to guide the market.
A final, more general question on acquisitions. You say here that you're now slightly less worried about oversupply in copper. Is this or any other factors that are making you more or less interested in making acquisitions, I suppose, outside of Sweden? Are you-
We are in good control, but we have quite adapt in the company after the investments we have been doing. We are looking at investments, and we think that Boliden could potentially be a more interesting and a better company if we could increase the portfolio of assets a little bit more to be not too dependent on Aitik, Garpenberg, which we are, and certainly will be. I think it would be good. We continue to be of the opinion that organic growth project or own investments are safer, and as long as we are having a portfolio of internal projects, we are going to, in most cases, favor them. We are going to compare. Some assets are potentially cheap, and if they are blending very much with our really the best knowledge we have in certain areas, then we will be tempted.
We're following the market, and maybe not. We have, as you know, not been focusing on acquisition, or we have focused on acquisitions, but we have all the way given priority to the internal projects.
Okay. Thank you very much. Questions I had.
Hello, Johannes Grunselius, ABG. A few questions on the smelters first. You mentioned, Lennart, that free metals at Harjavalta will probably go down year by year, and you had SEK 100 million or something like that in positive contribution. Can you elaborate on that and what we should expect there?
Harjavalta is a smaller unit. Therefore, problems in Harjavalta, which we had, did not impact the group in the same way as in many ways, the biggest unit we have in the group is Rönnskär, or at least it used to be Rönnskär. When we had a similar problem in Harjavalta as we're now facing in Rönnskär, consequently, we had poor performance for quite a time. We had inventories building up with a lot of free metals. We resolved the situation. When it was resolved, we produce and we process those difficult materials. Out is coming the periodic system, not least the most expensive part of it. There's a lot of expensive and exotic metals coming out. They are all free metals. They have a significant impact.
That we have been doing for a while. We are happy that it coincided with the problems in Rönnskär. That was pure coincidence. It happened. We have to be fair and say that these inventories are not going to last forever. I think on the other hand, that we have learned something. We have a very good recovery or good production in Harjavalta. It's declining.
On one of the details in the Q4 report, it says that costs at smelters were up SEK 40 million quarter-over-quarter. Was that due to the production issues in Rönnskär, or was it other stuff?
I would say that the main part is vacation effects. The personnel costs are quite cheaper in Q3 when you don't pay anything for the white-collar people for a month.
Right.
That comes in every year.
The reason I'm asking is I'm after how we should view the cost development at the smelters for 2014, would you say it's a small inflation there?
I would say a very small inflation, hopefully.
I have a question on Aitik as well. Surprisingly good volumes, obviously. Congratulations. Can you elaborate on the mix there? Because I know you have the satellite deposit next to the big pit. Did you take out anything from the small deposit this time?
We have an online system now, we can follow Aitik very carefully. This week, we have been cut off. They are not telling us. They say, "Lennart, we have to have some secrets here." They are trying to balance the lower-grade parts with the higher grades. As you can see, we have had a slightly higher grade than probably anticipated. We have basically been running a lot in Salmijärvi, the satellite pit, and high in the main pit. I would say both are in very heavy production.
Would you say that 0.22 is the lowest level that we will see, or can it possibly go lower?
The average is we have pointed at down towards the 0.2, if we are high one time, it's probably going to be low next time. We have had some positive surprises, fundamental surprises, that we're milling, we're seeing slightly better grades than we anticipated. It's a lot where we are mining. I wouldn't say that we have said that 2014 will continue to be on the low levels and improvements beyond. I don't think we are not prepared at all to change that view.
Okay. Thank you very much.
Any more questions from the room?
Rutger Smith, Revolta. Just a question on the CapEx for 2014. Have you mentioned any figure?
We have guided for, as we've said, between SEK 4 billion and SEK 5 billion and closer to the lower level, closer to SEK 4 billion than SEK 5 billion. That's what we've guided.
When will the CapEx significantly diminish?
We have not guided for CapEx beyond 2014. There are reasons for that, and it is one thing that Lennart was just alluding to, which is the Aitik 45 decision that we will have done sometime during this year. Therefore, we have not guided for any CapEx beyond 2014.
Then on the Aitik 45. Last time around, I got the impression that you had looked into Aitik and the logistical situation didn't permit a profitable increase from 36 to 45. What has changed since then?
I don't think we ever said that. I think you're mixing. At the time, we looked at an even higher expansion, and that is the one where we have said that doesn't look like a good idea. Aitik 45 is going to be, as far as we can see, a good step to take. However, it can be taken in many different ways. There are big calculations and a lot of quotations and a lot of plans to evaluate the different things. Depending on our price scenarios and everything else, they are coming out probably with a similar IRR or NPV, but in a different way. Shall we focus or prioritize high priority or high profits earlier or late, even if it is bottom line, giving the NPV the same? It's more like that. On the logistics in particular, we are looking at, well, it's very clear.
We are looking at three in-pit crushers. We are going to continue to have three in-pit crushers. I do not think we will have four. We will rebuild them for better reliability and lower cost. The big question here is whether we put them there or there. If we put them there, it is going to cost us enormous amount of investments. There, it is a lot cheaper investment, but higher cost because the trucks have to drive further distances. Basically, the big question here is an underground three-kilometer conveyor, because it is costing a freaking fortune. We will do it if it is paying off, but I prefer not to do it and find a better way. We will see. That is why we are calculating and working on it.
Operator, do we have any questions from our audience participating via phone?
We have a question, and it comes from Mr. Owen Skerrett from Goldman Sachs. Please go ahead, sir.
Hi there. Just a quick question. On my numbers, and hopefully on yours as well, you will be generating quite a lot of cash in 2015 and 2016. You mentioned M&A earlier, but assuming you want to give cash back to shareholders rather than do M&A, what would you prefer? Special dividends, or do you see potential for buyback, or is it still too early to say? Thank you.
We're struggling with a big debt and a lot of CapEx. Those are good thoughts. No, we haven't started to think about that. We probably should start doing that. I don't have an answer. I think we will listen with our shareholders, and we will look at the consequence. I don't think we have a clear answer on that, or would you say something else?
No, we don't. I can, to some extent, agree with that the cash flow situation looks better when you get better grades in Aitik, exactly how they will be spent is, of course, also due to another previous question, what will happen on new projects and what will happen on M&A, therefore, I think it's premature to speculate what we'll do.
Got it. Thank you, gents.
The next question comes from Mr. Amit Bansal from Societe Generale. Please go ahead.
Hi, this is Amit from Société Générale. I have three questions, if I may. The first one is on your tax rate for fourth quarter 2013. I calculate tax rate as 8% compared to corporate tax around 22%, and much lower than what you had in the previous three quarters. Could you have some color on that? My second question is on Tara. Looking at the annual numbers, the Tara revenue was down SEK 185 million, and EBITDA was up SEK 124 million, implying a cash benefit of SEK 360 million year-on-year. I understand SEK 171 million is one of gain that you recorded in first quarter. Can you explain the rest of it? Finally, just for my understanding, why is it that spot TCs for zinc are always lower than the contract TCs? Thanks.
Well, the first one, you take.
I'll take the first one, because they're relatively easy. There has been a lowering of tax rate in Finland from I think 25% to 20%. When you lower the tax rate, you get to reevaluate what you have in the balance sheet, therefore the tax rate will be apparently low in the quarter, and that explains the whole difference that you have on taxes. We're done with that question. The other two ones, I think.
No, the Tara question, what was that? Can you repeat it, please?
Yeah. The question on Tara was we see a revenue decline of SEK 185 million and a EBITDA increase of SEK 124 million year-on-year. Which implies a SEK 360 million roughly cost reduction. What is driving that cost reduction of SEK 360 million in Tara?
The cost reductions are basically driven by, we have reduced the headcount from 700 to 650. We are trying to reduce the contractors for mucking and for development of new mine areas, and do more in, so both insourcing, if you like, as well as reducing the headcount. That's what we are trying to do. What is coming out of the numbers in the actual quarter and forecasting into the next one, I don't think we do. Do you have more to say about Q4?
No. Are you talking about Q4 year-on-year? No, I will rest my case. I have to get back to you, because I have to look at the numbers.
Sure. In the full year, we had an extraordinary plus, but that's well described in our presentation.
My last question was on spot TCs for zinc, which is always lower than the benchmark, or rather the benchmarks are always higher than spot TCs. What is driving that?
Well, what we have said a long time for our main metals is that we see quite a lot of supply coming on copper concentrates, which will make or ease the TCs for copper, and we see a lot of closures from mines, which is giving the opposite impact on the zinc TCs. That's basically what is the situation. I don't think the forces or the situation is very clear. That is basically the fundamentals, and the benchmark level has not yet been set. Those are my comments to that question.
If I may have a follow-up on zinc TCs. What I was trying to understand, on slide 10, you saw zinc TCs both spot and benchmark, and over the last four years, the benchmark has been much higher than spot TCs. Just wanted to understand what is the reason for the difference, why we always have a higher benchmark than a spot TCs.
Wow. It is depending on when you have volumes available in the market. The spot TCs are reacting very quickly on shiploads and basically the very short market availability. I wouldn't, and we are buying basically all the material, or at least most of the material, on benchmark levels. I think it is difficult to read too much into it.
Okay. Thank you.
The next question comes from Mr. Julien Bair from SEB. Please go ahead, sir.
Thank you very much, and thank you very much for taking my question. I'd like to understand a bit more the trend in falling smelter income for the quarter sequentially. I think if we look at the EBITDA adjusted for inventory revaluation and maintenance costs Q3 to Q4. Q3 we're at SEK 513 million, we're SEK 125 million lower in Q4. As you answered Johannes, SEK 40 million of that change is due to seasonal cost differences. That's leaving an SEK 85 million drop, which is SEK 340 million annualized. Could you break down that a little bit more between issues such as lower sequential acid income versus further Rönnskär issues, and then anything else?
It is on free metals and byproducts. It is not coming from cost and the volumes you have in the charts. You can probably look at the details of it.
I was also going to say, don't forget the high level of the fire.
Yes, absolutely. That was EUR 4 million. We're still talking about SEK 250 million annualized sequential drop in free metals and byproduct income.
Yeah. I will have to sit down and then together we maybe do the numbers, that might be the case, I'll have to look into it.
I'd appreciate that. On the issue of sulfuric acid, I think I'm correct in recollecting that you sell something like 70%-80% of your acid on term contracts, which get renewed on a sort of biannual basis. What's the sort of year-on-year fall in those acid contracts that you've renewed so far this year?
I think I revert to the previous question in order to put some more light on it. I think the recoveries in Rönnskär are the big number. The recoveries are giving a significant negative on that sequential development that Mikael is coming back to. When it comes to sulfuric acid, we are having the long-term prices. They are often, they can be two years fixed, they can be one year fixed, or they are just volume commitments. We cannot push volumes on customers who cannot buy or do not need it and have no storage. Even though we have fixed contracts, when the market is down in Scandinavia, to a large extent, the pulp and paper and chemical industry, then we have to sell the balance on the stock market. In addition to low prices, we also get the transportation cost.
It's quite a bad exchange when you have to sell it at lower price and further away. The balance is coming up because of low demand in the near market or in-
That's very clear. Thank you for that, Lennart. Do you see that situation continuing into 2014?
The sulfuric acid is extremely volatile. We all know from metal and mining that if you have byproducts coming out, the output, the supply is a function not of the demand of the very product, but the demand of zinc or copper. The sulfuric acid is coming out in a constant stream. When that is more than what the buyers are wanting to see, you see a sharp decline. You see that in molybdenum, for example, a very important byproduct, not for us, but for other mining companies. Acid is even worse because it cannot be stored. Metal, you can put in the shelf and wait for better times. You have very significant difficulties with sulfuric acid, and that's why this is a super volatile material.
Okay, that's great. Finally from me, I'm sure everyone was very happy to see a 37% payout ratio on the dividend. When you discussed this in the board this morning, did you view this as a one-off increase in payout, or is this something we can expect more of going forward?
My suggestion was SEK 1.58 because that is 33.0%, or 33.3%. The board informed me that, "Hey, you cannot have a dividend of SEK 158." After a lot of discussions, we discussed different levels, but we have been a little bit short of the exact one-third for the previous years, when we said, "Well, let's be a little bit on the high side." You should not read into it in anything else than that this was as close to a third we wanted to go, and we didn't want to be below one more year. That's the discussion we had.
Well, that's decision to take, thank you for that. Thank you very much for taking my questions.
Julien, I will revert on this. Two comments. My brain is a little bit slow, on the sequential on smelters, Harjavalta, I think it's important to point out, we have in the report said that basically, we have one-offs during the full year. Those one-offs were, to a large extent, in the previous three quarters and not so much in the fourth quarter. You see some of that lowering of free metals in Harjavalta came already in the fourth quarter. That's one. The second thing, I'll just point it out to everybody, because when you read the report, you think that we're stupid, because we're saying regarding sulfuric acid that the market is stable, we're saying that we're having lower profit because of it.
Well, for new contracts, the level is relatively similar in Q4 as opposed to Q3, we do have this delayed effect coming to us when old contracts are moving out, we had some relatively good contracts that expired after Q3, where we've seen lower prices in Q4. That's also part of it.
Thank you.
We have a question, it comes from Mr. Christian Kopfer from Nordea. Please go ahead, sir.
Thanks, operator. Just to follow up on Garpenberg. I think you said that, Lennart, that you expect the grade to come down during this year. If you look at the reserve report, the weighted average grade seemed to be in the region of 4.6%. Is that kind of the grade we should look for this year?
The grades we have, we spoke about is first quarter, nothing else. I think that we are lifting up and what is happening with the reserves and resources, I think is a more long-term development. When you set up a mine plan, you do it for Garpenberg for 20 years, we are doing developments, we are doing sequence, which are very stiff or we don't change them. I think that in the near term, you should not read much into this. You should look at lower grades probably later on, and that will impact your modeling in later years, I would think. Then, of course, our guys, they are suddenly figuring out a new, smarter way to do it, that might change. Right now, I don't think there is any major change in the short or medium term.
Okay. You also mentioned that you have a for a-
We added a lot of tonnage, if it was lower grades, it is also a lot more tons. Of course, that goes without saying.
Okay, sure. In the very short term, then, you had 4.9% grade during the fourth quarter. You still expect that to go lower sequentially in the very short term?
I don't know. I must say that what have we guided on here? Sophie Arnius or Mikael or someone help me here, because we don't have any more news, you should go back to the capital market, what we said there. I don't think we have any more information right now.
The guiding has always been that over time, you cannot plan for anything else that was in the reserve. The reserves are down, so you have to plan with the lower. We're adding a little bit of information saying that this lower grades that are coming in now should not come in right away from this year. On top of that, we have said that Q1, we said that Q4 2013 and Q1 2014 will be slightly lower. That is on a separate note that has been graded before, or had been advised before. We have not really said anything for, as you say, for Q2, Q3, and Q4 this year, you should probably work on the old average.
Okay, cool. You mentioned, Lennart Evrell, I think it was about the environmental permit of the 45 million tons, you said that that's going to take a couple of years. How should I interpret that? Is that environmental permit to get fixed for 2017 first, or is it already by 2016, you think?
I think we have two things here. The permit, we hope, if things go well, it's going to come soon, or probably this year. We have our ramping up ourselves, what I think I heard on a previous question, if that is delayed and if you want to extend the 38 temporary permit, will that be possible? I think so, hopefully the permanent permit on 45 will come sooner. Of course, it's a question of our own investments and planning and ramping up. It's a lot of things that needs to be done in order to gradually, step by step, over a period of some years, arrive at 45. The permits, if it is going well, is not going to be a limitation.
If it is going wrong, if it is delayed, we don't know what kind of. These are very hard to forecast. I think that we will anyway be able to produce at good levels.
Okay, fine. Finally, on exploration spending, I think you spent some SEK 400 million for last year. Is this representative for this year as well?
We were around SEK 300 or SEK 330.
Remarks?
I repeat for the third time that we're happy with Aitik. If I shall say something more, it's that many years of high cost inflation turned into a much better level. I think we have done a good job there. We have a new organization in procurement. We're really happy with the development. A lot of people have been working hard here. Obviously the market is soft. A lot of suppliers, well, they don't have too many customers for some of their products. I think we've done a good job there. That can be my concluding words. Thank you very much for attending this call.