BOLIF - Boliden AB (publ) (BDNNY) Q2 2023 Earnings Call Transcript

2023-07-20 08:44:10 ET

Boliden AB (publ) (BDNNY)

Q2 2023 Earnings Conference Call

July 20, 2023, 03:30 AM ET

Company Participants

Olof Grenmark - Head of Investor Relations

Mikael Staffas - President and Chief Executive Officer

Hakan Gabrielsson - Executive Vice President and Chief Financial Officer

Conference Call Participants

Adrian Gilani - ABG Sundal Collier

Liam Fitzpatrick - Deutsche Bank

Daniel Major - UBS

Viktor Trollsten - Danske

Ioannis Masvoulas - Morgan Stanley

Richard Hatch - Berenberg

Igor Tubic - Carnegie

Angus Poland - Bernstein

Christian Kopfer - Handelsbanken

Tyler Broda - RBC Capital Markets

Presentation

Olof Grenmark

Ladies and gentlemen, I'd like to welcome you to Boliden's Q2 2023 Results Presentation. My name is Olof Grenmark and I'm Head of Investor Relations. Today, we will have a results presentation led by our President and CEO, Mikael Staffas, and our CFO, Håkan Gabrielsson. We will also have a Q&A session.

Mikael, welcome.

Mikael Staffas

Thank you, Olof, and hello everybody out there. It has for sure been a very, very intensive and very special quarter from our side and I'll try to go through all the things that have happened. It's as I said amid a very intense quarter for us. So if we just start going through one of the highlights that all of you know is of course the fire in Rönnskär and I'll come back and talk more about the fire in Rönnskär in a little while, but we had the major fire, and we had the total shutdown of the operations.

We are now, as we're speaking up and running. All the units, except the electrolysis plant are running. We still have some curtailed capacity at some of them, but they are all running and we have good hope that we will very soon be able to run all of them full and thus be able to produce anode copper at full production, but I'll come back to that.

The other big thing for us in the quarter has been the general development of the prices and terms and as you can see when you look at our numbers you can see that we've been hit not just by lower metal prices, zinc prices especially have gone down dramatically. We've also been hit by lower byproduct prices and in our case, and lots of people who are based in Sweden think that we are winning from currency, but we're actually not compared to last quarter because of the strengthening of the Euro compared to the U.S. dollar, we're actually having a negative development in terms of the currency effect as well.

This all led to a situation where we decided to put the TARA Mining Care Maintenance because the escalating costs there and the lowering zinc price, which we decided back in June and we have now effectuated TARA will be down, we will come back when the prices and terms have returned so that we can run TARA profitably, and we do think that we can do that. Otherwise, we of course have another solution and care maintenance for Tara. We are very positive that we will come back in a strong way whenever prices return.

On top of that, we've had low grades in mines. Partially, this has been well communicated far in advance with the developments in Aitik, and then also we had to, because of rock stability issues and changing our mining plan, we also got a lower grade in Kevitsa that we announced in an extra press release a few weeks back.

Then also a very big maintenance stop in Harjavalta, one of the biggest one in many years. We went through the maintenance costed or took a little bit more longer time than we thought, so it was a little bit more expensive than first anticipated, but also feels good that we threw the majority of the maintenance for this year.

On top of that, we can also say that of course, inflation, especially if you compare to last year, is still hitting us relatively hard. Although inflation quarter-on-quarter is very low now. Our major projects are going basically -- all the three going in according to plan and we're developing well, both in Odda, in Aitik and in the Kevitsa byproduct that we're doing.

So all-in-all I will come back to that, this has led to a reduction, sharp reduction in the profitability for the quarter, especially compared to last year. We have a negative free cash flow, I'll come back to that, because of the, partially because of the fire in Rönnskär we also had a higher working capital and CapEx now are up at the levels around what we have guided for.

So if you look at the profitability development, we had a little bit less than SEK1 billion, SEK833 million profit for the group. We'll come back to details around that. There are some one-offs in that number as well. Especially the mines have been struggling with the lower grades. Smelters are also back mainly due to the big maintenance stop, but also the fire at Rönnskär.

On the ESG side we've also had a struggling quarter. The LTI frequency that we for a number of quarter have been coming down to very low levels, and of course, maybe has made us a little bit spoiled. We are now having a setback in this quarter with a number, which is more like what we had a couple of years back. We still feel good about the progress that we have. We still feel good about the general safety development, even though these kind of quarters do unfortunately happens now and then.

The sick leave is going down if you compare to Q1 and we're heading down to lower levels. However, it was not quite as low as we had hoped for and anticipated, and we're working hard to see whether we can get the sick leave down even further. What was good in the quarter is the CO2 emissions are continuing to develop in the right direction. You can see here that we have a lowering of the CO2 emission Scope 1 and Scope 2 from 206 to 190 in the Q2 compared to last year.

The metal or the price and terms especially zinc with 19% down in the quarter is the one that hits us pretty hard. And you know that with our pricing model, what definitely pricing comes up to four months in certain cases after delivery that hits us hard and we have negative development on the prices and terms. We have a strong negative development on the byproduct side, especially sulfuric acid. We also have declining premiums for the spot side which is in line with this. And we have a negative currency development for Boliden as a group because of the strong Euro, even though the Swedish krona is weak in helping us, the strong Euro is actually making it all together a negative currency development compared to last quarter. We can also say that in part of this, this is what we see and this is what comes from LME numbers and so on.

We also see, and we've been open with this, that when we look locally at the markets where we are present, we also see clearly lower activities. We see our customers taking out less volumes than normally, and we can really see that in the sectors that are using our metals. Clearly recession has entered into Europe, and this was also been a discussion as we've been talking about, TARA, because of course, if you believe that the zinc prices would jump up next month, you wouldn't put TARA in care maintenance. But as we see it right now, we cannot foresee that the zinc prices will jump up really in the short-term. We're probably talking into 2024 until we get a good rebound on the zinc prices.

If you look then on the prices, you can see that the prices right now, both for zinc and for nickel, are down at around the cost curve which is usually a sign that the prices don't really go that much further down, but is also not sure that they will jump up very fast. Copper is still developing well, has had a much better development in the quarter, even though the copper price is also down and the copper price is still well above where the cost levels in the industry are.

If you look at production, I must first say that we had a good production in our mines, almost all the way through. We've had good throughput in Aitik, 45 million tons more or less. Apart from the beginning of the quarter, which we guided for where we had problems floating over with the mill issues that we had in Garpenberg, a fter that was solved in April, we've been producing very well, and the throughput has been very good in May and June.

Also in Kevitsa, we are having throughputs very close to the 10 million tons, which is our permit level around there. So throughput and also in the Boliden Area throughput is good. Tara throughput was also relatively decent with the announcement of the care and maintenance the production went down, so looking at it for the whole quarter, it is below what it should be, but it was doing relatively well up until then.

The issue that we've had has to do with grades in Aitik. We are now down to the 0.17 that we have guided for, for the full year. We knew that we were going to come there, and we have also indicated in the Capital Markets Day that this is a level roughly where we could be expecting to stay for a couple of years before we get the grades coming back up again.

In Garpenberg we've had some issues with the grades, we've been in lower areas. That's really a temporary thing, and we should get the grades back in Garpenberg, and we don't have any change in the forecast for the year. Kevitsa, this is quite in line with what we communicated a couple of weeks back. We've had rock stability issues in Kevitsa, which has made it for long parts impossible to mine from the pushback #3 where the high grades are, and we've been mining from pushback #4 instead. We've been able to keep the volumes up, which is good, but of course, it's hitting the grades and we are now at those grades as we communicated there.

On the smelter side, well, the big thing on the smelter side throughput is the very major maintenance shot that we had in Harjavalta, which was well communicated beforehand. It took about a week extra longer than we had in anticipated, a little bit in different parts. That's things that happens when you do these major stops, you only find out exactly the condition of the furnaces once you have cooled them down. It took extra time for us to do this, but we feel good about this. We also had a chance in the meantime to rebuild the nickel concentrate dryer which has been causing us issues, and now it looks better once we've been able to get going with that one again.

In the zinc smelters, we've had relatively good production, even though we had a little bit of an issue with the electrolysis plant in Odda #4, but otherwise the zinc smelters have been doing well. The big thing is, of course, the fire in Odda that totally shutdown Odda on June 13. It was down for about two weeks. To most extent, we have been starting up the different parts. We have been able to start produce anodes. We have actually shipped anodes.

We have developed a limited contract basis for anodes, and we are, as we're speaking, building up the book around how to sell the anodes. We're not really worried about it, but it will take some time to establish this. We are a brand new player in this market, and we need to put a name to ourselves around it, but we're not in any sense worried that we're going to be able to sell the anodes. That's going to be quite possible.

Now, Hakan, I'll leave it over to you to talk a little bit about the numbers.

Hakan Gabrielsson

Thank you and good morning. Well, as you have seen, we have reported an EBIT excluding process inventories of 833, CapEx of SEK4.2 billion. That means that we have now spent just over SEK7 billion, which is in line with the full year guidance of SEK15 billion. And as a consequence, that means that we have a negative cash flow of minus SEK3.8 billion.

If we look at the profit by business area, you can see what Mikael talked about. There is a decline in mines, a sharp decline in mines related to lower metal prices and grades. On the smelting side, we have significant big plant maintenance, and on top of that, the fire in Rönnskär had a major impact. So those will be the main changes in the results.

If we look a little bit more in detail and start down with Q2 compared to Q2 of last year, year-on-year there is a big drop in prices. We have an EBITDA impact of about SEK750 million compared to last year from the zinc price reduction, also price reductions of copper and byproduct sulfuric acid is significant in this analysis.

Year-on-year the price drop is partly, the price drop on metals and sulfuric acid is partly compensated by better premiums and better currencies. But all-in-all, it's adding up to a negative price impact of minus SEK841 million Swedish krona. Volumes are down 2.1. More than half of that is related to metal grades in mines. This is mainly Kevitsa in line with the announcement a few weeks back, and Aitik mining at 0.17% copper, which is in line with the full year guidance. So those will be the most significant ones when it comes to grades.

The Rönnskär fire -- the fire in Rönnskär we estimate had an EBITDA impact of about SEK400 million Swedish krona. SEK200 million of the, or sorry, a volume impact of SEK400 million. SEK200 million of that is direct production losses in the smelter. The other SEK200 million is related to the timing of profit recognition in mines when we've had one smelter closed due to fire and the other one in maintenance, concentrate stocks, concentrate had piled up, and that means that we have not been able to recognize the full profit of the mining production. This is a timing effect and we expect that to normalize during the coming quarter.

We also have a bigger maintenance stop this year, which has a negative impact on volumes. Costs, the main reasons of the cost increase is inflation. We have high single-digit inflation, so a bit below 10% year-on-year and there is of course also a currency component this. Swedish krona has further weakened against the Euro and dollar, which plays into this. In additions, we have slightly higher maintenance cost and higher exploration.

On the items affecting comparability, we have a few components related to Tara and related to Rönnskär. We have made a provision for early retirement in Tara, a SEK53 million. We have a provision for demolition of the cell house that was destroyed, SEK75 million, and we have a write-down of SEK88 million, which is the book value of the cell house, a fairly low book value as it was mostly depreciated.

If we look sequentially and compare Q2 to the previous quarter, the main components are the same. Prices and terms just below 800 negative impact, base metal prices down, again, zinc is the most important component with about SEK0.5 billion half impact compared to Q1 so significant. Also, the currencies are slightly negative. You can see 120 here, and that is related as Michael talked about to the Euro strengthening against the dollar, meaning that the profitability in our Euro based units, Tara, Kevitsa and the Finnish smelters has had has had a negative impact.

Volumes is 1 billion down compared to Q1. Again, rates are significant, about SEK400 million Aitik and Kevitsa according to the announcements earlier on. Also here we have the SEK400 million impact from the fire in Rönnskär. Same order of magnitude is the volume impact from the maintenance stops primarily in Harjavalta. But on the plus side, we had about SEK300 million improvements due to higher milled volume compared to Q1.

The costs are slightly up compared to Q1 due to maintenance stops. There is no significant inflation that we see compared to Q1. And then we have the same one-offs related to Rönnskär and Tara. Cash flow, well the main difference is a lower EBITDA. We also had high investments, and then we've built working capital roughly at SEK1.7 billion. And the reasons to that are two. We talked about already at the last quarterly report where we had a seasonal working capital build that didn't happen in Q1 and that we guided for would happen in Q2. So there's one background, and the second one is of course the fire in Rönnskär where a lot of concentrated stocks have piled up as we have not been able to process and ship that.

Moving on then to the capital structure, we have a net debt of SEK11 billion. The main change compared to last quarter is SEK7.3 billion dividend payment, including then the redemption of shares and then in addition, the negative cash flow I just talked about. So that adds up to of 11 and a gearing net to equity ratio of 20%. Now, we still have a strong balance sheet SEK14.5 billion in payment capacity and strong numbers.

So with that, I'll hand over to you again, Mikael.

Mikael Staffas

Thank you, Hakan. Let me then just go through some of these situations a little bit more in detail. If we start with the fire in Rönnskär, it was happening in the cell house, we all know that. Production has already, as I said, partially resumed. The first part was resuming, I think after 10 days and then we have been gradually stepping up the different areas. And as I said, now all units except the tank house are operating. They're not -- some of them cannot operate at full capacity yet, but in a month or so we should be able to operate all units at full capacity.

And then we have a commercial setup that needs to be handled around this. We are building a book of anode customers. That is in progress. Some anode contracts are in place, but most are still to be handled. I think that many of you will like to have a guidance regarding what is Rönnskär going to have as a level of earnings now that we don't have a tank house anymore. I will not guide you this time because it is linked to the commercial setup and exactly how well we get paid. But of course, we will have a lower profitability in Rönnskär going forward. I mean, there is a reason why you have a tank house at a smelter and in our setup it is important to have that. So we will be a lower EBIT, but by how much we'll have to come back to you.

In Q2, we had the one-offs of SEK88 million for the actual tank house and 75 for the cleanup after the fire. We have had two different impacts. One is the actual downturn in Rönnskär itself for about 200 million. But then we have the impact from the fact that we cannot ship concentrate. Rönnskär is not only a consumer of concentrate, but also a shipping port, which has backed up concentrates from the Boliden Area, which has not been able to be shipped out to other units. It has also, of course, backed up some concentrate from the Aitik, but also lead concentrate from Garpenberg that has had to back up because of the fact that they were not being processed at this time.

Insurance, we are fully insured. But you know, as everybody with insurance, there's always a discussion around what exactly they will compensate or not, both in terms of the actual lost property and in terms of the disruption, but we will continue to discuss this and at some stage I think we will see a nice one-off positive regarding this, but we'll come back to that once we know a little bit more.

We have also, just as I pointed out before we have started a feasibility study for putting a new tank house in place. We don't know exactly how long it will take until we have a new tank house in place. Our ambition is that we should be able to make a decision on the tank house by the end of this year. But we'll see how quickly we can move on with the feasibility study. It should be mentioned that even though everything looks good, we should be very clear. We have not yet access to the fire site. It is still under control. There are safety issues we're working in there. We need to do lots of preparation before we can start working in. That is important both to understand the root cause of the fire.

It's important to understand what can potentially be used of the old electrolysis plant or tank house in the new construction. And it's also important for understanding how we'll get the processed inventory, i.e. the copper and gold and silver and so on that is in there and get that out. We have not made any provisions. We're pretty confident that we'll be able to get the full metal value out of the tank house, but it will take some time over Q3 and Q4 to get that out and be able to put it back into the process and get it into anodes.

In Tara, as I said before, the main reason for putting Tara into care maintenance is the poor profitability. As you see, we lost €38 million in the quarter, which is of course totally unacceptable. The main reason is the lower zinc price and the higher cost levels that we have, both general cost inflation and higher zinc TCs which has been the main combination, but also energy prices play into this equation. And as I said before, we do not see a quick rebound in this, and we decided therefore to put Tara into care maintenance. That is a better, both short-term but also long term option for Tara.

We have in connection with this also with the union negotiations given offers for some early retirement that we have made the provision for SEK53 million in this quarter. Going forward we have roughly as stands there cost of about €12 million per quarter. This third quarter will be a little bit more expensive because all the costs were not gone as of July 1. So we had some higher cost in in July, which means that were roughly €18 million negative EBIT from standing still in Q3.

We've also decided to put the exploration on Tara Deep on hold. There are a couple of reasons behind this. One is that what we -- is under critical line, what is important for Tara Deep is to do exploration from underground with having the mine into care and maintenance, it is from safety reasons not that easy to be able to do exploration from underground, to have people working underground when the actual operation of the mine is not in place regarding first responders and safety and so on.

But the other reason is also that of course, while Tara is standing still, we're not taking up space into the tailing pond, then we're also not depleting the old mine, which means that we can move the whole decision making basically one day forward for every day with if stand still and thus the pressure on time for Tara Deep is also a bit less. And that -- in that combination, we've decided to also pause the development of the Tara Deep project.

Kevitsa, the Kevitsa situation we've talked about and we had the extra call around that. We've had problem with rock stability, which has meant that it's been impossible to mine from pushback #3 for a large part of the quarter, and it will continue to be difficult to mine from pushback #3 also for the next coming quarters. We have been able to increase the speed at pushback #4, which means that the total tonnage is saved and we're going to get the 10 million tons for the whole year, but we will get that at lower grades. We had ended the quarter two where we had guided for and the extra guiding a couple weeks back and we are now reiterating the guiding for Q3, Q4 as we did, as we took it out a couple of weeks back.

If we then summarize it, what does that look forward? Well, Aitik is now producing well, is producing at its 45 million ton throughput level. But we are hitting these low grades and we are reiterating the grade guidance of 0.17 copper and 0.07 gold for the year. Garpenberg producing well, 3.3 million tons should be doable. We are -- should come back and get some positive grades around this. And we are reiterating the full year guidance of 3.3, 3.6, I should say percent zinc and 100 grams per ton of sliver.

Kevitsa we are reiterating the 0.25 copper and 0.18 nickel as we communicated a few years, a few weeks back. And in Tara, we are giving the guidance that it's going to cost €18 million and negative EBIT for Q3 and then from there on about 12 million negative EBIT as long as we keep on standing. Maintenance shutdowns, we have done the vast majority of maintenance shutdowns for the year, when we're now down at Harjavalta. We do still have some maintenance stop coming up, especially in Kokkola and we have an impact of 140 million for Q3 and nothing for Q4.

As I said, with Rönnskär, it's very difficult to give you an estimate of what is the earning potential in Rönnskär in its new commercial setup, selling anodes rather than cathodes, but it's of course going to be lower than what we had as a going run rate before the fire, exactly where we'll have to come back to. And regarding CapEx, we are reiterating the previous guidance of close to SEK15 billion for the year. The projects, as I said before, are all moving on relatively well.

With that, I will open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

The next question comes from Adrian Gilani from ABG Sundal Collier. Please go ahead.

Adrian Gilani

Hi, it's Adrian here at ABG. A few questions from my end. First of all on the Garpenberg zinc grade of 3.1%, that was very low, but you still decided to keep the outlook of 3.6 for the full year. I guess, how confident are you in that figure, given that it implies around 4% zinc rate for the second half of the year?

Mikael Staffas

We wouldn't put it out there if we wouldn't be confident.

Adrian Gilani

Okay. Yes, sure, that's clear. And then the 400 million EBIT effect from buildup of concentrate inventories, is that something you will be able to catch up on in coming quarters or some sort of reverse?

Hakan Gabrielsson

Yes, like I said, the 400 was 200 plus 200. The 200 that was lost because of Rönnskär standing still that is lost. That's not going to come back. The 400 that was tied up because of slow deliveries from mines should revert as we get the production resuming at Rönnskär and also the port resuming back to normal operations that should revert.

Mikael Staffas

Just to be clear, the 200 will revert and 200 will not revert, just to be clear.

Adrian Gilani

Yes. And the 200 that will revert, you should see that entire effect in Q3.

Mikael Staffas

That is my expectation. Yes.

Adrian Gilani

Okay, and then I guess finally on the inflation you didn't give us an exact number like you've done in some quarters before. You just say that it's easing. Are you able to say some year-on-year percentage figure on this and perhaps also what you expect going into Q3?

Mikael Staffas

Yes, we can, we can give a number. It's slightly below 10%, so to give a number, if you want to be very exact, I would say 9% year-over-year, and we see a downward trend. The components are coming down in a little bit different pace, but currently in the quarter at 9%.

Adrian Gilani

Okay, perfect. That's all from me. Thanks.

Operator

The next question comes from Liam Fitzpatrick from Deutsche Bank. Please go ahead.

Liam Fitzpatrick

Hi good morning. Three questions from myself. Firstly just on your zinc smelters, can you just give us some guidance on the impact from the Tara closure in terms of how that could impact profitability for your zinc smelters moving forward? Have you been able to secure concentrate both short-term and, and over the medium term?

Second question on Rönnskär, you don't want to say too much at this stage, but can you give us some color in terms of what the potential kind of CapEx ranges and timeline could be in terms of rebuilding the cell house? And is it your expectation that that will be mostly covered by insurance?

And then the third one just on volumes, and I guess this is for Hakan, it's a very complicated quarter for both the mines and smelters with all the moving parts. Could you walk us through on the volume front, what sort of uplifts we should be seeing into, into Q3? I understood the point earlier around the concentrate at the mines and I think the maintenance guidance is pretty clear, but over and above that, are there other sort of key volume movements that you can help quantify for us? Thank you.

Mikael Staffas

I can start with the two first ones and then I'll give the last one to Hakan. Regarding the zinc smelters, yes I would say the following, I'll put the following there. We've been able to replace most of the Tara volumes. We are still working to replace the last ones. We feel relatively confident around it.

Regarding Rönnskär and a new plant and insurance coverage, I have told many people before that this is a bit like when you have insurance for your bathroom and you get a water leak and then you have to rebuild the whole thing and you are fully insured, usually you don't build what you had before, you build something else and the insurance company will argue that they're only liable to rebuild exactly what was there before and then you have a negotiation, how much they should cover the new thing.

I think exactly the same thing will happen here. We are fully insured. We are -- we have to know that this plant that was burned down, the newest part of it was almost 25 years old, and the older part were over 50 and so years old as well. So we're not going to rebuild or we don't intend and the intention is not to rebuild exactly what was there, but something different reflecting new technologies and everything else around this. And of course then the insurance cover will say, we're not going to pay for all of that, we will pay for part of that. How that all will work out is all part of the feasibility study that I said we have started and that we hope we'll finish and be able to make a decision how to move forward by the end of the year.

Hakan Gabrielsson

And then when it comes to volumes, I think the main components are related to grades. We just go through the activities one by one. I mean the throughput, I mean the mill volume in mines was good in the quarter. It was a good step up from last quarter. We have reiterated the grade guidance for Garpenberg and Kevitsa, which should be an improvement for the second half of the year.

When it comes to Rönnskär, we were still a couple of weeks, so we will ramp up the anode production in this quarter. So the volumes will be there, but at the lower margin. And then we have about 200 million concentrate that is not increased production volumes, but we will be able to recognize the revenues and the profit of those 200 million in Q3. I think those are the main components that should change between the quarters. For zinc smelters, I don't foresee any major change.

Liam Fitzpatrick

Could I just briefly follow up on those volume points. On the mine grades are you able to kind of quantify that in terms of any ranges? And then on Rönnskär, where I'm struggling is obviously it's returning in terms of volume, but at a lower profitability rate. So when we're thinking about Rönnskär in Q3 versus Q2, is it going to be up, is it going to be down, is it going to be flattish? Any color on that would be helpful.

Mikael Staffas

Okay. I don't, not sure quite how to answer that, but I'm not sure if I can put a Swedish Krona value or a monetary amount to the grade profiles. But I think if you look at the grade guidance that we have provided for the full year, that means a good step up in a couple of the mines for the second half. And again, regarding Rönnskär, there is a big uncertainty in the exact impact until we have established the commercial terms for this. So therefore it is a bit difficult to guide on the EBIT impact volume in production though, should be back, or is back when it comes to the producing anodes. I don't…

Olof Grenmark

No, I think we're, maybe if you're, if that's okay with you, we'll move on.

Liam Fitzpatrick

Thank you.

Operator

The next question comes from Daniel Major from UBS. Please go ahead.

Daniel Major

Hi there. Yes, thanks for the questions. First one is a follow up on Rönnskär and the insurance dynamic. I totally understand the concept you've put forward on the negotiating the absolute amount. I think the key thing from a perspective of your group cash flow and balance sheet dividend for the next few years is how the payment will be structured, i.e. would you expect to receive a proportion of the insurance claim as you rebuild the smelter or would you expect to have to finance the full rebuild of the tank house and then receive a lump sum payment at the end of the construction period once all of the outstanding amount has been determined?

Mikael Staffas

I would say that we are really guessing at this stage, but if you force me to guess, I would say that once we make an agreement with the insurance company, and hopefully we can do that in a time matter, so that we don't delay their construction of a new tank house because of this we should be able to get payout kind of in line with how we build the new tank house proportionally.

Regarding the payments for business interruption, which is also substantial with this and I think that there is a risk that we will be negotiating for a long time and get a long lump sum sometime in the future when we will get covered for the business interruption. As you know, with these kind of discussions, there could be long discussions around what would we have made in terms of money had we not had the interruption. And so that one I expect to come later after the fact.

Daniel Major

That's very useful. Thank you. And then next question just to be clear on some of these one-off items that you've detailed, the SEK200 million for the locked up inventory, was that reflected in the mining EBIT this quarter and therefore should reverse in mining next period? Is that correct?

Mikael Staffas

Partially mining? It's partially mining, but it's also partially in the internal profit elimination. So it ends up, I don't how much is each, do you know that?

Hakan Gabrielsson

The bigger the main part of that, as you say, it's in both, but the main part is in the segment of the business area, other in the internal profit elimination.

Daniel Major

Okay. And then just to follow up to that, if we look at the bridge on the mining business, you did SEK178 million of EBIT last quarter. I think €38 million is about SEK435 million was associated with Tara. So if, we sort of backed that out it would have normalized earnings for the mining business be somewhere in the region of 700, 800 for the quarter as a starting point. And then obviously we've got the volume benefits that you highlighted, but is that the right way of thinking about it, excluding the losses from Tara?

Mikael Staffas

I would say that yes, it's a good start, but there are other things involved in this as well. You have to remember the mining business was also hit negatively on the prices and terms with the definite pricing when you have a relatively low price at the end of the quarter and hopefully, if the prices remain stable, even go up, that effect will also revert.

Daniel Major

Okay. Yes. So can you quantify the provisional pricing impact during the quarter?

Hakan Gabrielsson

About 90 million, negative 90 million, 90.

Daniel Major

Okay. All right. Yes, that's very helpful. Thank you.

Operator

The next question comes from Viktor Trollsten from Danske. Please go ahead.

Viktor Trollsten

Thank you, Operator. Good morning, Mikael and Hakan. Firstly on the grades in the Boliden Area, if I may where we have seen, a bit lower grades in terms of zinc this quarter and also the last, is this sort of in according to plan and how should we think about that grade going forward if I may? Thank you.

Mikael Staffas

Well, the way you should think about going forward is according to the R&R statement, so that's what you can look at. Yes, it's been low at this quarter has to do with the mix of different ores, which means also if you look at, I think believe gold has been higher than the R&R statement because we have been focusing on ores that have been slightly more gold rich and less zinc rich. And all-in-all, you can say that we've had a slightly weaker grades if you take the whole thing together than on an average, but it's maybe not too much to talk about it, it's just below some kind of par.

Viktor Trollsten

Yes, okay. No, that's clear. And then we'll be on just how we should think about working capital from here given, call it the balance between mines and smelters now, would we expect similar seasonal patterns as we see working now or will -- is it possible that you tie more working capital in the second half?

Hakan Gabrielsson

In general, I would expect a release. I mean we typically build the working capital in the earlier parts of the year, and then we release it in the second half. In this year, I expect that to be a little bit, how should I say accelerated partly because we've tied more due to the fire and then secondly the metal in the tank house we should be able to realize that number. There is some uncertainty in the timing though because as Mikael said, we have not yet got an access to that area. But the tendency is that rather I think we should be able to deliver a fairly significant release of working capital during the second half. Then beyond that, the long term capital build, I think it's difficult to say again with reference to the discussions on terms for anode sales.

Viktor Trollsten

Okay. No, that's helpful. And then if I may on byproducts and premiums going down, how does that look into Q3? Will that be an additional headwind or are we more on stable levels now?

Mikael Staffas

Yes, this is of course the most difficult thing to predict. If you were to ask me, I don't see byproducts jumping up in terms of price in the short-term. I would expect them in line with the kind of general recession that we're heading into right now to remain low or theoretically become even lower than they were in Q2.

Viktor Trollsten

Okay. So we could see some additional headwind from that perspective?

Mikael Staffas

Possible.

Viktor Trollsten

Yes, okay. And then finally just to try or maybe to push a bit more on Rönnskär [ph] the production loss of SEK200 million and, yes you touched upon this, but anode sales ramping up in Q3 and obviously depending on how we think about the profitability level, I must have a hard time seeing that it will be the negative impact sequentially from the SEK200 million, is that completely off or…?

Mikael Staffas

I would prefer not to comment on that.

Viktor Trollsten

Okay. Yes, that's all from me. Thank you.

Operator

The next question comes from Ioannis Masvoulas from Morgan Stanley. Please go ahead.

Ioannis Masvoulas

Hi, good morning. Thanks for the presentation. Just a few questions left from my side. Starting with the first one, do you think you could place the entire copper anode from Rönnskär to the market and therefore at what capacity utilization could you run the smelter? An earlier press release said that you said that you might not be able to run it fully, so keen to hear your latest thoughts on that?

Mikael Staffas

I would say from a commercial point of view, we don't see any risk of being able to place the anodes as such if you just want to have somebody who's going to accept them. But you know that with anodes given that there especially in our anodes is a very high proportion of precious metals, given that we have such a portfolio of concentrates, we of course need to make sure that we get well paid for those precious metals in the anodes and that's of course a commercial discussion that's ongoing. Another commercial discussion that's ongoing is linked to the question that came a little while ago, it has to do with the working capital. Since this is not a set business model in the sense as cathode sales was, there are still, you can say some contracts that might give you better profitability but will tie out more working capital.

We are looking into tolling solutions, for example, that we were told the material ourselves at third party tank houses that will probably be more profitable, but tying out more working capital compared to straight sales of anodes. But to come back to your initial question, we don't see any reason that it will be difficult to sell the anodes as such is just a matter of how much money we'll make on them. The curtailments that we talked about and that should be easing off during Q3 and should not be major part, but we have had problems running certain, especially the precious metal plant full because of where it was physically at and some of the media that went into the precious metal plant came from the tank house and we have established that on some level, but not fully.

Ioannis Masvoulas

Okay, very clear. Thank you. Second question on Kevitsa, do you have line of sight on next year's grade profile? Basically, the question is whether you think the challenge around the pushback #3 will be fully addressed in the second half or maybe there is a spill off into next year?

Mikael Staffas

Of course there's a plan, but I prefer not to comment regarding that plan because as you can understand we are having pretty big discussions around this internally, both. Now, the major reason why this happened is rock instability. We had fallouts in certain parts of the mine, which made it safety -- impossible from a safety point of view to work below. Will we be able to get out of those? Are we entirely sure exactly if this is possible to happen again? And then what is happening? We prefer not to comment on that. We will get back to guidance exactly on how, well, I mean the guidance for the life of mine is of course what is in the R&R statement, but how that the timing of that, what happens in 2024, 2025 and so on we'll come back to that later in the year.

Ioannis Masvoulas

Okay, very clear. And the last question on Tara, are there any cost improvements or other operational improvements here that could help you boost the economics of the asset, whether it's power or labor or anything else, or is it purely a function of a housing price that will drive the restart decision?

Mikael Staffas

I mean, there's always a full slate of things, where the zinc price is the most important one, but we have been hit by very high power prices. If there is some way to sort out that we can get lower power prices on island [ph], of course that's going to make us sooner come to decision to restart and if you were not, and we have the general cost inflation with quite a lot of the chemicals used in the process have been very high. If those come down, that will also make it easier. So there are things that could make it faster, but the zinc price is the most important part.

Ioannis Masvoulas

Okay, very clear. Thank you very much.

Operator

The next question comes from Richard Hatch from Berenberg. Please go ahead.

Richard Hatch

Yes, thanks. And good morning, and then thanks for the call. Just a few questions on grades to start with. If I kind of look at the grades at what you've been doing at Garpenberg and guidance this year is 3.6 reserve statements anywhere between 3.1 and 2.5%, and over what kind of time period do you think that we move towards that level? And then the same goes for Kevitsa, but the other way around, you're mining at 0.25% copper pit and reserve statements sort of sitting at 0.33% copper approved and 0.38% probable? So when are we going to see that grade sort of reversion for Garpenberg and then improvement for Kevitsa, please?

Mikael Staffas

Well, regarding Kevitsa, I think we just had that in the previous question. We will come back to that later. The issue there is how do we think that these rock stability issues, these wedges that you get into the wall of the open pits, how prevailing will they be going forward and so on. That's what we're looking into. So it's going to be difficult to tell exactly.

Regarding Garpenberg, the general thing on how quickly will decline, I've said this many times that when you have an underground mine like Garpenberg, you will always mine above the reserve average because you can especially when you have long life of a mine, you will go to the good parts first and you'll leave the less good part for later. That means that you're mining over the average, but the average will go down over time.

We have not really guided how quickly that is likely to happen, but we said that, over the next kind of five years, there will be nothing really kind of very big, even though we might see lowering grades, but not to any -- and we're not heading down close to the R&R averages for the next five years.

Richard Hatch

Okay, thanks. And then just on Kevitsa first I think, so I can just push you a bit on it, I mean so forgive me if I've missed this, but so are you now undertaking geotech drilling to just kind of get your, get a better understanding of the ore body and your ability to access those areas?

Mikael Staffas

Yes, the issue just to be very clear, is that we've had fallouts from the walls and we've had fallouts of when we do blasting on the upper levels, i.e. pushback #4, which has been not the way that we thought. And we have had fall downs going over the side and going down and starting to roll down towards the bottom where pushback #3 is and thus we cannot work there. We are now going through the information that we have to see whether this thing that happened was just something that could not have been foreseen, could have been foreseen, could we have done something in a different way? Could we have blasted in a different way to make sure this doesn't happen? And all those things I think that we're now working into the, the new mine plan as we're doing it, as we're speaking, that we will finish during the fall and therefore I think it's a bit too early to tell exactly how that will conclude.

Richard Hatch

Okay. Do you think that might mean that you have to ease the slope angle then?

Mikael Staffas

I don't think it's an issue of slope angle because it's -- you have a stability that's good over time. So I don't think that a slope angle is the way to go at it. I think it's more a discussion of the mine design. It's not just that we have pushback #4 on top of pushback #3, we have pushback #4 for a while, right on top of pushback #3. And if you can move that a little bit to the side, you will have increased degrees of freedom, even though it is also affecting the ramp what is happening now at pushback #4.

Richard Hatch

Okay, right, thanks. And then, sorry, just last one is on Rönnskär. I think we're all trying to kind of get it from the same, from different angles, but perhaps if you might be able to help me in any way, shape or form on just any kind of margin differential between your anodes and the cathodes that you were previously selling and just so we can kind of try and get a handle on what the EBIT impact might be whilst you go through this period of rebuilding. Thanks.

Mikael Staffas

I will not comment on the margins at all because this is due to commercial discussions that I don't want to foreclude. They're ongoing as we're speaking and we are of course doing our utmost to make sure that we use the situation to our advantage and not to our disadvantaged by telling others what we might expect. But it's of course I think it's been mentioned before, this is not my number, but I, somebody else has said that it might cost SEK3 billion to build a tank house. It's not my number. We haven't done the pre-feasibility, we don't know. But if you just do that one as a kind of mine gaming, we say that in operations in a copper smelter by Rönnskär, it surely makes sense to have a tank house. And if it's going to make sense to tank house, you're going to have to have at least SEK300 million return per year to meet our 10%. If you say that's going to be by a margin, you might need to have something like, 500 and that might be then some 300 to 500 that we're losing in the meantime to be able to come back to where we were. But once again, this is not a guidance, this is just a way that you can start playing with numbers.

Richard Hatch

Thank you very much for that color. I much appreciate it. Cheers.

Operator

The next question comes from Igor Tubic from Carnegie. Please go ahead.

Igor Tubic

Good morning. Thank you. Just two questions from me. The first one is around Garpenberg and the grades. I'm just curious to see if the lower grades that you had this quarter in primarily zinc were expected. And the second question refers to the CapEx and the stronger Swedish Krona. Are all costs hedged in terms of CapEx going forward for all your projects or how should we think about that? Thank you.

Mikael Staffas

Garpenberg grades, we thought that we were going to come in lower than the 3.6 in Q2, which is by the way related to the problems that we had with already back in Q1 that we have problems with the hoist and when we had problem with the hoist, we in order to get the tons up, we decided to move tons to the surface from close to surface and close to surface we have lower grades and therefore that came into there. So we were expected to be lower. They came a little bit surprisingly low for us as well at 3.1. But it's a little bit difficult, especially when you kind of have to deviate from your original mine plan and get into stopes that you had not to really any planned to do, it's a little bit difficult to have full control of this. So we had expected in our self, in our own management to have lower grades, but maybe not this low.

And then CapEx and exchange rates, that's a very good question. We can spend hours on talking about this way and how it's accounted for and everything else. Regarding hedging, we hedge the big packages that are within, but we only hedge the package from where we make the decision on that individual package. In a investment like Odda, there are quite a few big packages and they're hedged when we step into the actual fixed contract, and then they run for that. So then you have all kind of ifs and buts around this thing around what happens. And at one day we'll come back and give you some kind of post calculations on the big projects, but so far we are just reiterating the guidance that we've given before.

Igor Tubic

Okay, thank you.

Operator

The next question comes from Angus Poland from Bernstein. Please go ahead.

Angus Poland

Hi, good morning. Just going back to Rönnskär insurance, last call you mentioned that insurance should cover the profit losses from the fire. Are you hoping that's also going to include the loss CapEx premium or is it just going to be from the loss of volumes? Thanks.

Mikael Staffas

Well, this is where insurance negotiations start. It's always when you have a business interruption, we will claim that this interruption made us lose this and this and this and the insurance company will question those calculations and say it's that and that and that. And in the end of the day we'll agree to something. Exactly what those details are, but in theory, we should get compensated for the business interruption.

Angus Poland

Okay, thank you.

Operator

The next question comes from Christian Kopfer from Handelsbanken. Please go ahead.

Christian Kopfer

All right, thanks operator for that. Just a few follow ups. I came in very, very late to the call. I'm so sorry if you have already answered these questions. First one Kevitsa, you keep your grade guidance for the year despite all these uncertainties. So maybe you are very certain still then on the grades of second half, that's good. But so grades should improve dramatically here in the second half. Hope for that to happen then. And then on the recovery side recoveries came down to really low levels here in Q2. Do you also expect recoveries to come back to say historical collaborators for Kevitsa in the second half?

Mikael Staffas

You're asking good questions. Regarding the guidance, I don't think that you, we need a drastic jump out in grades to get to our annual guidance, but we need to have a little bit of a step up. So yes, we will have a little bit of a step up, but we will still be mining below our reserve grades.

The issue that you're bringing up regarding recovery is a good question which is a little bit separate. We have experienced, as you know, problems with recoveries and they're also continuing in, they're not getting worse, but they're continuing into this quarter. We have some idea what this is about, but we can say that we have it fully under control. There is talc involved in this and there are other things around the fine graining, grinding of this and how to make sure that you get also the fine particle and recoveries there. We have ordered some new equipment that will come during, after the summer. So we have plans, but I'm not going to stand here and say that we have figured out the recovery problem. We are working on it.

Christian Kopfer

But is it fair to say still that the recoveries will come up slightly due to better grades?

Mikael Staffas

Yes, they should come up due to that part, but and hopefully they'll also come up due to the fact that we've gotten our arms around some of the issues there. But that is a very, very weak guidance.

Christian Kopfer

Okay. But going into next year, you expect the mine to perform?

Mikael Staffas

Going into next year? Yes, going into next year things should look better, but as I said, regarding the grade, we had this question before regarding the grade profile and exactly what to expect for 2024 and 2025, we'll come back to maybe at least 2024, we'll come back to later in the year as we get our mine plan in order.

Christian Kopfer

All right. And then for mines in general, I think you had this question just to sort this out to understand what is the underlying profitability of the mines here. So if you add, so if we just say that Tara is not there, you don't have an extra cost for Tara and you don't have any definite pricing effects. Is it fair to say that if that should be the case, mines should have been able to deliver between SEK800 million and SEK900 million in EBIT for Q2?

Mikael Staffas

I'm looking at my CFO just to make sure that we get the number right there.

Hakan Gabrielsson

Oh I mean, there are many parts in this, but we said that we had a one off effect of final pricing of SEK90 million, so that is one improvement. We had about €38 million negative in Tara, which over time should go to 12 as long as it is in care and maintenance, so that's an additional improvement. And then as your first question, both Tara and Kevitsa are looking at better grades during the second half in relation to our grade guidance. So those would be the moving parts as I see it.

Christian Kopfer

Yes, okay. I don't, I was just talking about Q2, so if you, if you didn't have Tara and Q2 and if you didn't have any indefinite pricing effects in Q2, I just wonder what the base I should have. We're looking at the Q3, so is that correct, between 800 and 900 in Q2?

Hakan Gabrielsson

Well, we -- the negative impact of Tara was SEK38 million, in Euro sorry, €38 million in Q2. And the final pricing impact was minus 90 million in Euro. Then there is a small bit that we had some cons still in the books of Boliden Area and Garpenberg, but that's a relatively small amount. Most of that is in the mining profit already, but not in the group profits, the 200 million that we referred to earlier.

Christian Kopfer

Okay. And the item affecting comparability of 50 million, should I add that -- is that in addition to this, to those, that's…

Mikael Staffas

That's part of the 38 million in Tara.

Hakan Gabrielsson

Yes.

Mikael Staffas

So you can't add it again then you're double counting.

Christian Kopfer

Okay, okay, okay, okay, all right, all right. Okay. Sounds really complicated. Okay, but alright, thank you for this and I'll let next one in.

Operator

[Operator Instructions] The next question comes from Tyler Broda from RBC Capital Markets. Please go ahead.

Tyler Broda

Great. Thanks very much for the call. My question is probably one more of a higher level, I guess. You know, this is an elevated CapEx period, metals prices where they are, some of the operational issues. Going forward it's, I think it's, we would get negative free cash flow for the next sort of up to 2024. How do you sort of look at the balance sheet here? Obviously starting from a strong position, but you look at the balance sheet here and then, then whether there's any flex and CapEx or how are you thinking about the CapEx program in light of this, these circumstances? Thank you.

Mikael Staffas

Regarding the CapEx, there is of course maybe some flexibility regarding new projects as we move forward, but regarding the existing projects, we do not, we are not in a situation where there's any benefit for us in trying to be aggressive in cutting any CapEx. I think it's good that we move these projects forward. And then when it comes to that, we'll have to see what will come as we start adding up for 2024. But I would say generally we do have a strong balance sheet. We do believe that the CapEx that we are spending is value added, so therefore we, even though we have questioned it, have come to conclusion that it's the best thing to move ahead with it.

That, I'm getting signals here that we have to wind up because the hour is finished. So with that, I would like to thank you all for listening in this morning. As I said in the beginning, this has been a very, very eventful quarter. Trust me. It's been new information, new things to deal with every day. I personally feel very good about how we have handled this difficult situation, how we very quickly came to decision to minimize the losses in Tara, how we have been able to get back after the devastating fire in Rönnskär. I think both these things show that we have a resilient organization that can manage and deal with also very odd situation that we should probably not get too often.

With that, I wish you all who are not already on summer vacation, I wish you all a very good summer. Bye.

Hakan Gabrielsson

Thank you.

For further details see:

Boliden AB (publ) (BDNNY) Q2 2023 Earnings Call Transcript