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Costly copper supply needed to cover growing demand. Zinc struggling on weakness in Chinese construction. HOLD.
Boliden Ab Boliden AB
2Q23 results were significantly weaker than expected and perhaps most damaging was that the weakness, relative to expectations, was driven by Mines rather than Smelters which was impacted by the fire. FCF now looks to be negative for 2023 and 2024 with the cell house rebuild at Ronnskar (update towards end of year) presenting additional potential downside to cashflow in 2024. 2Q23 Wrap EBIT excluding PIR of SEK 833m was 50% below COVID lows of 1H20 while FCF of negative SEK 3.8bn pushed gearing (still just 20%) to their highest level since 2Q17. Please see here a more detailed breakdown of 2Q23 results. Smelter rebuild remains an unknown The timeline and cost to rebuild the cell house at Ronnskar is yet to be quantified. A feasibility study has been launched and Boliden hopes to be able to provide an update, along with an investment decision, by the end of the year. Our understanding is that insurance will likely cover a majority of a new cell house but not all of the capex. At this time, we do not factor into our forecasts any additional capex nor insurance proceeds. Cutting estimates and TP We cut forecast EBIT excluding PIR by -22% in 2023 and -11% in 2024. While 2023 downgrades are driven by both Smelters and Mines, it is the latter driving the 2024 downgrades vs our prior forecasts as we see the weaker operational performance persisting. Whereas previously we saw a resumption of special dividends in 2025, this is now pushed out by an additional year with the dividends through 2030 not returning to the bumper years of 2021 and 2022 (average SEK 26.25/sh total dividend per annum). FCF is now forecast negative in both 2023 and 2024 before returning to a high-single digit yield in 2025 on today''s share price. The caveat on 2025 capex would be the cell house rebuild and compensation from insurance which is still unknown. Reiterate Neutral rating with SEK 300 TP (prior SEK 315).
Boliden delivered a very poor set of numbers, with adj. EBIT excl. PIR 43% below Infront consensus, mainly due to the Mines segment.
On the back of extreme endogenous and exogenous headwinds, Boliden reported dismal Q2 results. Disappointingly, the weakness in Mining was worse than Smelting – where a massive fire accident crippled operations. The situation was further complicated by a difficult macro/operating environment. While the issues may not subside anytime soon, today’s colossal sell-off and the significant share price weakness in recent months has opened up an opportunity to bank on a firm that’s capable of gradually addressing Europe’s foreseeable future (critical) metal-sourcing challenges.
Boliden has faced multiple headwinds in short order; Ronnskar fire, weak Kevitsa grades and Tara placed on care and maintenance. These further pressure what was already set to be weak FCF in 2023/2024. We cut estimates but upgrade to Neutral with shares now reflecting the tough outlook. Known 2Q23 Headwinds We previously detailed Boliden''s 2Q23 warning here. The SEK 700m headwind to 2Q23 is predominantly driven by the mining division (Tara and Kevitsa) while Ronnskar is a SEK85m headwind per week while production is totally stopped. In our model, we have assumed Tara remains on care and maintenance for one year and the Ronnskar smelter doesn''t return to full cathode production for two years. We await further guidance, potentially with 2Q23 results on 21 July, on the level of asset impairment, capex required for a new cell house and how much insurance will cover. FCF Generation Will Remain Weak While we leave our capex estimates unch pending firmer guidance on the Ronnskar cell house rebuild, the cuts to our EBITDA forecasts now push our 2023 FCF forecast to be slightly negative (prev slight positive) and 2024 yield remaining 3%. FCF into 2025 will improve (7% yield) but cash conversion of 29% is still forecast below that of 2020-2022 (35% average). Updating Commodity Deck We update our commodity price deck, detailed in the sector note here this morning. For the 2023 metal price forecasts most relevant to Boliden, copper is held flat vs prior, nickel -6% on oversupply from NPI and zinc -15% on construction exposure. Upgrading to Neutral, TP SEK 315/sh Alongside reflecting the revised commodity deck, we have cut our 2023 and 2024 EBITDA forecasts by -13% and -10% respectively, leaving us -14% below a still volatile consensus for both years. We reduce our TP to SEK 315/sh (prev SEK 325/sh) and upgrade to Neutral (from Underperform) as the share price weakness has, in our opinion, reflected the medium-term challenges.
Based on our recent discussion with Boliden’s IR, it is clear that the recent smelter incident has dealt a major blow to operations. A key limitation would be the inability to capture the value of free metals (primarily gold), which is expected to take a toll on profitability. The good part is that the impact of this event is well-insured. Also, drawing a parallel with Norsk Hydro (faced with a similar situation a few years ago), we remain confident of the Swedish firm’s rebound.
The fire that impacted the Ronnskar smelter last night has been limited to the cell house and adjacent infrastructure but the cell house has been completely destroyed, stopping other production at Ronnskar for safety considerations. Production, except electrolysis, is expected to resume within weeks but each week that all production is stopped, Boliden estimates it to be a SEK85m headwind. The potential writedown of asset values as a result of the fire is too early to be estimated. In 2022, Ronnskar was 21% of smelter EBIT and 8% of group EBIT. SEK 700m Headwind to 2Q23 Boliden estimates the stopped production at Ronnskar and lower than previously expected grades at Kevitsa and Tara to have a cumulative SEK 700m headwind to 2Q23 EBIT (Visible Alpha 2Q23 EBIT consensus SEK 3.3bn). Boliden will report 2Q23 results on 20 July. The mine plan has been adjusted at Kevitsa, pushing more lower grade material into 2Q23 with expected spill-over impacts into 2H23. The expected 2Q23 copper and nickel grades at Kevitsa of 0.21% and 0.16% and materially below the reserve grades of 0.34% and 0.23%, respectively. Tara has also been affected by lower with 2Q23 zinc grade now expected to be 4.7% (1Q23: 5.3%). The impact to the Mines division during the quarter is estimated to be SEK 500m. The total SEK 700m headwind (Mines + Smelters) also includes the impact of underperformance at the Garpenberg mill (previously communicated unplanned repair shutdown in 1Q23) which had affected the beginning of the quarter. Tara Placed on Care and Maintenance Boliden has also placed its Tara mine in Ireland on care and maintenance, resulting in production and exploration ceasing temporarily at the mine. The high-cost zinc mine has struggled with currently negative cash flow driven by a combination of operational challenges, declining zinc prices, high energy prices and cost inflation. In 2022, Tara was 5% of Mines EBIT and 3% of group EBIT. Not Reflected in our Estimates We...
Boliden is unique in its offering of Nordic base metals exposure but low grades and cost inflation which has yet to peak points to continued margin pressure. With a significant y/y increase in capex for 2023 (SEK 15bn, 50/50 projects and sustaining) FCF will be under pressure and while rebounding in 2024 will be just half of the 2021/2022 average. FCF Pinch Point With 2023 EBITDA forecast -17% y/y and capex +50% y/y, FCF is forecast to come under significant pressure (-90% y/y). From such a low base (cSEK700m) we forecast a multiple jump in 2024 (flat earnings, lower capex) to SEK3.4bn but will still be half of the average achieved in 2021/2022. Less to Gain from Energy Cost Deflation Boliden is 60% hedged for its electricity consumption through 2035 and 80% for the next two years at an average price of EUR 35/MWh. This was a tailwind vs peers last year and while not an absolute headwind as its remaining 20% spot exposure will benefit, it has less to gain as prices normalise. Below Consensus for 2023 and 2024 Post 1Q23, we are materially more conservative than consensus. On average we are 9% below on consensus EBITDA for 2023/2024 and 39% below on FCF though in many ways this is the nominal drop down from EBITDA to the lower base comparison of FCF. We are more aligned with consensus for 2025 and forecast FCF surpassing SEK 7bn, returning to the recent peak of 2021 (SEK 7.2bn). Investment Case The Aitik mine continues to operate in a low grade (0.17%) zone as the next pushback should help grades return and exceed reserve in future years. We see 2025 FCF returning more to historical averages, however if further potential projects were to be approved (not in our numbers are Kevitsa pushback and Tara Deep expected to be 2024/2025 FIDs) this could negatively impact this trajectory. Underperform, SEK 325 TP Our SEK 325 TP is derived via a weighted average of ROCE/WACC 2023E (50%) and DCF (50%). See our sector note published today.
2023 began on a weak note for Boliden with the Q1 results missing the street’s expectations. Volumes were a key challenge, especially in Mining. While the stock fell >7% on the day of the results release, we believe that the current level offers an attractive entry opportunity, thanks to intact underlying virtues – including well-balanced Mining and Smelting exposure, FX benefits, valuable precious metal exposure, a strong balance sheet, abating cost headwinds and a unique European metals proposition.
Challenges at mines, while smelters performed robustly. Limited on capital returns Q4 EBIT excluding PIR at SEK3.2bn was a 4% miss to consensus, mainly driven by weak production at mines on lower grades. As flagged at the CMD at the end of last year, weak grades at Aitik are the current challenge (as low as 0.17% potentially, but temporarily). Smelter production was stable, helped by record high gold production. The balance sheet has improved sequentially with a small net cash position after a large working cap release in Q4 (cSEK3.2bn), driven by a reduction in inventory of nickel and precious metals. Inflation pressure is expected to extend into 2023 but taper off. With Boliden pursuing multiple (medium sized) projects at the same time, its capex profile looks to remain busy for the next couple of years, weighing on the group''s ability to surprise positively on capital returns. Company update and market outlook Boliden has a commodity suite well suited to the future energy transition and has seen its pricing basket aided by some supply-side disruption. A short mine life and flooding impacting underground exploration at the Tara zinc mine in Ireland could have a knock-on impact on the Odda zinc smelter expansion. Capex is guided to increase c50% YoY in 2023 while Aitik faces further low mined grades, creating headwinds for FCF and dividends. We structurally like copper and nickel as commodities while zinc has also done well on European production suspensions. The smelting business benefited from the rise in TCs, metal prices, and acid prices, but spot TCs have softened and sulfuric acid has come down materially, suggesting smelting earnings have likely peaked. Both Class 1 battery grade and stainless steel Class 2 grades have been weak over the last 3+ months. Valuation revised to SEK384 on lower mine production and higher discount rate. Increasing risk in Latin America reflects favourably on Boliden''s Nordic presence in terms of copper...
2022 ended on a mixed note. A combination of volume challenges, moderating prices and higher costs restrained the Q4 results. While the 2022 results were at record levels – which also fuelled an impressive shareholder rewards package – and Smelting outperformed Mining – something which may continue in the near future – a normalising medium-term earnings trajectory seems inevitable. Moreover, with aggressive spending plans, rewards too should normalise. But given Boliden’s unique metals proposition (very valuable for Europe), the stock should be bought/accumulated at lower levels.
Despite healthy prices, Boliden’s Q2 results missed street expectations. Besides guided maintenance shutdowns, the impact of spiralling cost inflation was evident in both divisions. Moreover, given the ferocious commodity pricing correction underway since late Q2, further operating performance normalisation in the coming quarters seems inevitable. However, by virtue of its smelting exposure, precious metal diversity and valuable SEK-driven tailwinds, Boliden seems ‘relatively’ better positioned to withstand the market challenges. While our recommendation is reiterated, more near-term share price volatility still cannot be ruled out.
On the back of war-induced pricing euphoria, Boliden reported exceptional Q1 22 results, with both divisions performing well. While prices helped dwarf cost concerns in Q1, this may not be the case in the coming quarters. Moreover, with serious growth concerns in the Swedish firm’s focus markets, the sustainability of the current results looks increasingly difficult. While Boliden is an apt and well-balance proxy for Europe’s long-term metal demand, it is also risky given the brewing challenges.
After a disappointing Q3, Boliden has reported impressive Q4 results and summed up to healthy 2021 results. Broad-based price gains (and Q4 FX tailwinds) overshadowed volume disruptions and (brewing) cost challenges. Management again announced attractive shareholder rewards. However, various cost risks and pricing vulnerabilities lie ahead. While Boliden by virtue of its business model remains well-positioned to withstand market volatility, for now, the downside risks are higher and, hence, we maintain our cautious stock recommendation.
Although Boliden reported soft Q3 results – largely due to guided maintenance shutdowns and some unexpected production issues – the firm remains in a strong position to leverage favourable market dynamics. Besides the near-term disruption in (European) zinc markets, the recovery in smelting charges is a good omen. Furthermore, the firm’s strong positioning in Europe – where demand fundamentals are ‘relatively’ more stable vs. the likes of China – makes the Swedish firm a good sector bet.
On the back of healthier prices, this time Boliden reported decent Q2 operating results. Although the performance fell below expectations. Mining continued to do well, but Smelting came under some pressure. While Boliden remains an attractive European bet, the near term is likely to be restrained by market volatility, planned maintenance shutdowns and growing inflation risk(s).
Continuation of price tailwinds supported Boliden’s Q1 results, despite production challenges in mining, TC worries in smelting and FX headwinds. Both divisions managed healthy results. While eventual commodity market normalisation and guided smelter maintenance should gradually result in capped/retreating margins, Boliden’s (cash) return generation capabilities should remain intact. Hence, the Swedish miner-smelter remains attractive, but with limited upside.
Despite the pandemic, Boliden posted healthy results. Interestingly, the performance resilience was led by both divisions – which typically exhibit contrasting fortunes. These intriguing dynamics translated into healthy cash flows and, hence, impressive shareholder rewards. While commodity markets seem expensive at present, the group’s ability to limit performance erosion in weaker markets and the added benefit of sizeable precious metal exposure are valuable virtues. Hence, our positive recommendation should be maintained.
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