Stefan Solberg - Head of IR
Jørgen Rostrup - EVP and CFO
Rob Clifford - Deutsche Bank
Heath Jansen - Citigroup
Jonathan Schroer - Unicredit
Norsk Hydro ASA (NHY) Q3 2010 Earnings Call October 27, 2010 10:00 AM ET
Good day and welcome to the Hydro third quarter presentation. At this time, I'd like to turn the call over to your host today, Mr. Stefan Solberg, Head of Investor Relations.
Good afternoon, ladies and gentlemen, and welcome to Hydro's earnings presentation and conference call for the third quarter 2010. We released our earnings today at 7:30 Central European Time, and the presentation material we will use on this call and the third quarter report is available on our website, hydro.com.
Today's presentation will be given by Executive Vice President and Chief Financial Officer, Jørgen Rostrup. After the presentation, there will as usual be an opportunity to ask questions.
Before we start, I would like to direct your attention to the cautionary notes in relation to forward-looking statements that are provided in the presentation material.
And with this short introduction, I'm pleased to turn it over to Jørgen Rostrup who will take you through the presentation.
Thanks, Stefan, and thanks to everyone for listening into our conference call regarding the third quarter. I will carry it out in a normal fashion. We will first look at some highlights, market and other issues and then in the end run through the numbers with you.
I think it's fair to say that we are in a fairly exciting period of time for Hydro, and we've tried to outline three elements on the first slide. That is a kind of setting that you've seen a little bit before we enter into the more facts of the quarter.
Obviously, the transforming transaction, as we call it, the Vale asset acquisition, bauxite and alumina and some smelter volumes, is of key importance. We have an ambition to close it within this quarter. And obviously there is a lot of work, but also a lot of enthusiasm and excitement around this transaction and the prospect now of closing it shortly.
Then obviously resuming production and ramping up the production in Qatalum after the very unfortunate power outage in Qatar is of key importance. We are satisfied with the handling of the difficulties that we have had and the progress since the incident in mid-August. We are on schedule, I can say, to ramp up within first quarter of 2011. So we will keep you posted on that. But so far, we are on that schedule as earlier confirmed.
Then there is a third element, which you probably see in the numbers, but would also go throughout our work is the cost improvement work that we are carrying out. We have quite ambitious plans for the upstream area, and we are also successful I believe in holding costs back in the downstream area, while ramping up volumes after the difficult markets in 2008 and 2009. And you will see that through the numbers in the presentation.
For the third quarter, we have the following headlines. First of all, underlying EBIT is just short of NOK1 billion. We are still experiencing fairly tight markets, and our view is that we have seen a somewhat stronger market the first nine months of the year than earlier communicated. So we believe that the year in total will end up at 17% increase in demand versus the 2009 level, which should bring us on the metal side outside China on a yearly consumption for 2010 around 24 million tonnes.
Then if you look at the results, upstream area is somewhat weaker due to results in alumina area in Qatalum. Alumina was expected, and we guided on that in second quarter. Obviously, Qatalum came as a surprise to us with the power outage in August.
Midstream has a stable performance quarter-on-quarter, significantly positively affected by currency effects due to euro sales. Downstream is seasonally weaker, but we still see effects both of the cost measures that we have taken there, and we also see a robust markets going forward. But the seasonality is there and will be there also for fourth quarter. Energy was stable at a low level. So their numbers are low, but as expected from our side, we now have a much better reservoir situation.
If we then take a look at the market and start with the downstream market, we have a 3% downward adjustment in sales third quarter compared to second quarter. This is spread around the different product groups in our system and in our two main areas, rolled products and extruded products according to the slide in front of you.
I think it's fair to say that we see several robust markets in rolled products and particularly the foil business where the thin gauge foil has been quite good. Also, the can market has been very good in the period. But then we see some weaknesses in other markets. In particular, the construction business has been soft, but it is in our view all due to what we could expect was the normal seasonal development.
In extrusion, it's more a mixed picture, partly because of the markets and also then because of our capacities. In South America, we see one new quarter with very healthy markets and no seasonal effects coming through in our numbers, partly because of the good markets, but also because we are running there actually on full capacity. On the other hand, we see softening in extruded products and in particular in building system and also in extrusion Eurasia and North America.
In building systems, there is a significant decline this quarter. We think that will pick up somewhat in the fourth quarter, but then the fourth quarter last year was extremely good. So we should see some seasonal effects coming out of the quarter.
All in all, we have picked up 21% in the downstream markets so far this year.
If we then look at the markets a little bit more, and this is less for the quarter, but to give you some ideas on what we are working on being new markets going forward, we would in particular guide you or point to two different developments that we see quite clearly.
One is the building systems market that we have talked a little bit about earlier also. Our buildings are consuming approximately 30% to 40% of energy consumed in developed economies, which means that the CO2 and energy agenda can only be solved and really worked at by doing something with energy consumption in buildings.
We are a major global supplier of aluminum-based building systems, and we have worked in particular on energy-neutral buildings with our own building systems.
The picture you see in front of you is the new office building by Vodafone in Milano. There is going to be 3,000 people working here, and it's delivered with our façade systems in aluminum and energy-efficient systems.
The numbers indicate that this building will use approximately 50% or only half of what a normal office building of this kind with the same shape and size would use without this solution in the façade structure. That means that although it is slightly more expensive due to the sophisticated solutions, Vodafone believes that they will have a payback time of the additional investment due to the solution of less than two years. We think this kind of buildings and this kind of aluminum systems will create even more business for us and also work on energy issue of tomorrow.
Then another application is within precision tubing. For several years, in the aluminum industry, and not at least Hydro has worked to take market shares from copper in automotive. This is due to saving space and producing more sophisticated products, but also the fact that aluminum is a less expensive product for the automotive industry to buy and makes this a good solution. You can hardly see copper in heat transfer and heat exchanger system in the cars anymore. Aluminum has replaced a lot of the copper in the cars.
We believe we can see the same development in non-automotive going forward. Copper is dominating product used there. And we believe that in heat exchangers and air conditioner and similar in the non-automotive market also we'll gain market share going forward.
Let's go back to the quarter and take a little step away from R&D and new markets. We have worked hard on continuing our firm cost control in the market in the quarter. In general, this slide is characteristic of the quarter for all areas. And it has been a top priority for Hydro to maintain cost control.
In the downstream area, we said a year ago that the cost position and the cost achievements that we had made, that it was important to maintain this when market turned. And we still believe that we have been successful in that. 37% so far in rolled products, volume effect has been drawn to the bottomline, because cost has only increased 15% versus the volume increase of 25%. So this we are seeing throughout the year and we are determined to maintain this also going forward. You see similar developments in the extrusion area.
And if we look at upstream market and sales, also upstream sales are somewhat seasonally lower, but all in all we still experience a fairly tight market in particular in Europe. We are here indicating upstream sales are down 5%. Some of the decline in particular in sheet ingot is more due to technicalities related to invoicing. So the real underlying physical numbers are probably softer or less decline in sales than here indicated by the 7%.
But more or less, you see a development here corresponding to the downstream changes that we have seen in the market, which means that these are probably at least in our part of the value chain effects that have come through the value chain and have less with the inventory to do.
We have seen an increase in aluminum prices throughout the quarter. The average price is at the same level as second quarter, but starting the third quarter at the low end of less than $2,000 and ending the quarter between $2,300 and $2,400, and that is a level we see as we talk. The currency development has also given us the effect that in Norwegian kroner we have a slight increase in prices in our system. There is a somewhat flatter curve going forward still at contango, but a somewhat flatterer curve going forward.
On the market side and on the supply/demand side, inventory side, I think our message is more or less the same it has been in the last few quarters, except for the fact that we have revisited the demand numbers and indicate that the demand overall in the first nine months of the year has been somewhat higher than previously estimated.
But when we look at the inventory side, there is still a significant inventory when it comes to registered inventory, and we believe that there is unregistered inventory on top of this of some magnitude. It is around 6 million tonnes. There has been a slight decrease, but in large numbers it is more or less stable. This also goes for the aluminum inventory itself.
However, as I said, we are still experiencing a fairly tight market, which is indicated by the slide showing you increased ingot premiums, and in particularly so in Europe. It had a low at the end of 2008, and it has increased significantly since that time. So the overcapacity and production that we have experienced and are still experiencing has remained in stock, and the supply chain to the customers is still viewed as tight.
Again also, we have over time said that we believe China in a longer picture has been balanced and has wanted to remain balanced. Last year was a different situation because of the significant curtailments that was made in China and the opportunity to import low-priced energy, so to say, in fixed form through that period. We think that China is now back to a balanced situation, and that is what we also believe will continue to be the status.
There are announced and also executed production cuts in China, probably also adjusted somewhat with demand. We also know there is new capacity from time to time coming onstream. So basically, we think the picture is more or less unchanged on the Chinese scene, not to say that in the longer picture we still assume that China will seek other sources of metal than producing everything within their borders, but we see not that change happening yet.
So basically, our view is that the market is similar to what we have communicated in previous quarters. This year, with that adjustment of numbers on the growth side will be demand side, expected to be around 24 million tonnes at the end of the year. There is then some overcapacity, stable registered inventories and some increase still in unregistered inventories. And we still see China being in broad terms balanced in primary metal.
Then a very different market for you on the energy side. As you know, we are an active player in the Nordic power market, and there has been two characteristics the last few quarters in that market. And that has been that price is somewhat in excess of last year, but there has been very, very low reservoir levels both on Hydro hands and also in the market in general.
The slide is slightly complex on the right hand side, but it is indicating that the case is still for the market as such that there is a significant under-balance or there is a fairly low reservoirs of water in the Nordic markets, while we must say that our position is more favorable. We believe we have the reservoirs now approaching normal levels. This is obviously due to low production a couple of quarters and also a fair inflow in the last two months. So this means that going into fourth quarter and eventually into first quarter, we expect higher production in both those quarters.
Primary metal repositioning is continuing. We have a cash cost derived out of the numbers that we report to you every quarter of around 1,750. We believe that this level is a level that we need to continuously work on. Aluminum business is obviously a cost game, but we also believe that this gives us a reason to put in extra efforts with the prospect that we see in the market.
In particular day, it is related to the Norwegian smelters, which are technically very good smelters close to a market, but we are working on the cost position here.
We had set out a target for US$100 reduction in conversion costs, and we have said that US$40 of this should be reached within this year. I am happy to say that we believe we are well underway to reaching this US$40 this year.
And if we look to further ambitions, we have seen that there are more opportunities, and we also believe there is a need to take up more. So based on this, we have announced a new and further stretched ambition of an extra $200 per tonne cost improvements also improvements in margins from our metal products from the smelter cost houses.
This obviously also will have to be taken primarily in the next two-three years. We have so far said by the end of 2014, but we are now in the process of detailing out this latter part of the program and we will revert with more details later.
We had a very unfortunate incident in Qatar on August 9. It led to the complete shutdown of the liquid production in the midst of a successful and very tight ramp-up period for their Qatalum smelter. This was due to an earth fault in the grid outside of Qatalum, and it responded the way it should by isolating the Qatalum plant. But unfortunately, it also led to an overheating in our gas turbines which closed down, and that should not have happened.
And then we have had some difficulties and delays in starting of the system and also in finding the reason for the earth fault outside the fences. And that led to five-hour period without power on the cells, which again eventually led to a freezing situation that ended in a full stop.
Very unfortunate situation, but a situation where we now think we have a very good understanding of the root causes of the power outage and the reasons for the technical difficulties in restarting the power plant. And we have done all necessary revisions both of technical procedures and technical setups and also communication procedures and crisis management procedures both internally and also with the external environment in Qatar.
So we are confident it will not happen again. It has lead to a negative numbers obviously, NOK229 million negative share of net income from Qatalum in this quarter, and we have also said that we believe that it could be up to minus-NOK400 million in our share of net income in fourth quarter. This is excluding any revenues from insurance in this period.
We think we have as a target that we will be in full production in Qatar by the end of first quarter 2011 starting off the production in the midst of September.
There has been an incident not on Hydro's hand, but a very unfortunate incident for the industry in Hungary, as you might be aware of. There has been a significant leakage from deposit of red mud, which is the residual from the alumina production. This is not a Hydro company. It's not a Hydro supplier, but obviously it has had an effect on the whole industry, on the market and many other stakeholders for good reasons.
So far, I think Hydro and many other companies are primarily occupied with supporting the Hungary government in this situation. In addition, we have obviously taken the situation as an opportunity to once again look closely into our own activity and into our supply base.
We have minority positions in Brazil, Alunorte, soon to be majority position; and in Jamaica, where Rusal is the owner, and that unit is currently curtailed. We have also regular reviews of our suppliers, and we believe we have a different situation from many, many aspects than the one that has been discovered in Hungary.
One key element is that this has been wet deposit where there has been significant elements of caustic in the deposit. On our side, we have dry deposit where the caustic is taken out and in a closed loop recircled reused in the alumina production. And for that reason, it should be of a very different nature. We also believe that the standard at Alunorte is a world industry leader in this respect.
Talking about Alunorte, we believe that the takeover of the Vale's aluminum business is on track. On our side, we feel that integration planning is well underway. And as you might know, we have appointed senior management for the business area to come, which is a good mix of people originating from Vale and people originating from Hydro.
Vale has been granted necessary concessions according to Norwegian industrial law related to taking over their 22% ownership of Hydro as part of the transaction. There are still some approvals. There are also some mining rights that need to be transferred, the mining licenses, but we still have the ambition of closing during fourth quarter this year.
Then if we look at the numbers, there are an underlying EBIT of NOK965 million compared to NOK1.1 billion last quarter, and I will later revert to the different business areas, just take your focus towards the other and elimination area where we have a charge of NOK95 million this quarter compared to NOK265 million last quarter.
The change of NOK160 million in less charge here is partly due to NOK50 million costs that was charged to the second quarter numbers for the Vale transaction, and then there is NOK110 million in differences due to elimination of internal gains and losses on inventories.
Then if you look at the waterfall analysis, there is not a large aggregate change as we had said, but there is a small change positive on aluminum pricing currency of NOK0.1 billion. Then there is a negative development of NOK0.3 billion on volume, as I said in all aluminum business areas, but in particular primary metal and extrusion and much through seasonality.
There are net cost improvements of NOK0.2 billion, a slight increase in variable cost on the smelter side, but more than cover through the fixed cost reductions throughout the business partly for seasonality reason, lower activity in third quarter, but very much also to the programs that we have implemented. And then Alunorte and Qatalum in total implies negative development quarter-on-quarter of NOK0.2 billion in equity accounted investees.
Revenue is down 7% to NOK18.4 billion, partly due to the volume changes with fairly stable prices, but also partly due to derivative changes or changes in the derivative values of our contracts that is also hitting this topline.
Then the item excluded is a negative charge this quarter of NOK690 million. I will revert to that. So reported EBIT this quarter is lower than underlying EBIT as we reported. I will also on the next page come back to financial income or financial expense of NOK280 million and the tax expense of NOK190 million, which seems high in percentage terms here, and I will explain that. Underlying EPS of NOK0.33 is more or less according to expectations.
When it comes to finance, I would just like to draw your attention to one line. Other lines are more or less as you used to see them. We have somewhat higher interest income obviously due to the proceeds from the rights issue, and we have ditto lower interest expenses for the same reasons. Where we have a negative significant charge this quarter is net foreign exchange loss. And that is due to the fact that we are accumulating dollars throughout the quarter.
As part of the Vale transaction, we are to pay approximately NOK1.1 billion as part of the proceeds for the assets. And accumulating dollar in a period where the dollar is depreciating the way it has done is giving us some losses on currency, although not significant.
Then income before tax compared to the 119 in tax expense for the quarter, gives a very high efficient tax rate of 213. But then remember that there are significant charges this quarter of affiliated company's equity accounted investees, in particular Qatalum and Alunorte, and that is an after tax number. So adjusted for that number, the calculated tax rate is in the range of 33%. And in this number there is a surtax on power. So then we are more to the normalized and expected tax level.
On items excluded, I would just draw your attention to two lines. We have in the quarter been in a net short position as a company due to the fact that we are selling the expected metal production on a continuous three-month forward curve. And selling this through contracts to the LME is giving us an LME short position.
When we have this short position and an increasing LME in the period, that obviously gives us a loss on this, and unrealized, importantly enough, an unrealized loss on these derivative contracts. Also, in the number of NOK549 million is approximately NOK100 million in negative unrealized effects on the Vale hedge that we did in April.
If you remember, we hedged a significant part of the LME exposure related to the Vale transaction for 2010 and 2011 when we announced the deal at approximately a level of 2400. This is partly taken over to profit and loss, and partly taken as hedge accounting directly through the equity on the balance sheet. In total, this gave us a gain of approximately NOK1.5 billion in the second quarter, unrealized. And with the increasing, again, LME up towards the 2400 level, we have a loss of NOK1.2 billion this quarter, partly as P&L effect but more significantly as hedge accounting through the balance sheet. There is a 100 million charge here related to that loss.
Then we have impairment charges of NOK114 million. This is related to primarily the first fill, the metal that is in the cells in Qatar that freezed because that metal is of less value than it was booked at. So we have to take a loss on that metal.
Then the business area, primary metal is down 5% but prices and premiums are somewhat higher. So the total market effect is plus/minus zero. Prices are compensating for the loss in volumes. Also on the cost side, it's a stable situation. Variable cost on several elements is marginally up, but that has been accounted for by lower fixed cost in the period. So the change of NOK250 million to NOK260 million is due to the weaker result in Qatalum of 90 million weaker, and also the alumina commercial activities and Alunorte production.
Going forward, we have sold the metal at 2050 and approximately at the same level for low volumes from Qatalum in fourth quarter. We expect some increased cost picture, and not large numbers, but some increases in the cost side. And then we have also said that we are assuming that our share of the Qatalum result before insurance proceeds could be in the range of negative 400 for quarter four.
If you look at metal markets, this is the marketing of our products and also third party products. And therefore both currency effects and also derivative positions are included in the underlying numbers, because that is right at the core of what this business area is doing. In the quarter, we have had increased result of NOK130 million up to NOK163 million underlying, while the re-melters themselves has a fairly stable result. There we see a 10% reduced production, but that has been compensated for by higher margins and prices.
So the reason behind the 130 million is, on the positive side in particular transaction effects through higher currency. The euro has increased compared to the dollar, and we are having an inflow cost in dollar and sales revenue in euros and are benefiting from this in this quarter on the EBIT line. But if we then look at the other side, we have an unrealized NOK70 million hedging loss on inventories. There are obviously offsetting gains on the physical positions, but they are only recognized when we are selling this or when this material is leaving our inventories, and that will not happen until fourth quarter.
We are going forward and not expecting seasonality effects of any magnitude in this business area. So we are expecting fairly robust volumes in the fourth quarter.
If we then look at the first of the two downstream areas, the explanations in both of them are fairly similar. There are somewhat weaker volumes and somewhat weaker margins, partly compensated for by cost cuts. And they are down less than NOK100 million quarter-on-quarter, Rolled Products is down to NOK227 million and we are still quite satisfied with their performance and the results that this business area is achieving in the market in 2010. It is an all-time high, and it's a significant rebound from last year.
Going forward, we still believe that the market will be fairly solid, but you should account for continuous seasonality. Fourth quarter is always the weakest quarter in the year, and we should be prepared for that also this year. However, we feel that the markets themselves are fairly robust and we don't see significant weakness in the market as such.
The same explanation then goes for Extruded products. There was an underlying EBIT of NOK102 million in this quarter. Volume's down as I said 5%, primarily due to seasonality with a significant impact of NOK120 million. As you remember, building systems was significantly down, and the Extrusion core group somewhat less, but on average 5%. Again, we expect seasonality in fourth quarter to impact the numbers.
If you then look to energy, as I said, very low production and low net spot sales due to the reservoir situation continued from second quarter. More important probably here is that there is no structural change in this business obviously. We still think it is a very sound business, and volatility is to be expected. We think, due to our reservoir situation now, which is more or less back to normal, we see high production both in the fourth quarter and also in the first quarter of 2011.
Then on the net debt cash flow development side, before a NOK1.1 billion investment in Qatalum of the quarter, we were positive NOK200 million to NOK300 million in our business. And then on the right hand side, you see the effect of the net proceeds from the share issue, giving us a cash position at the end of the quarter of NOK8.9 billion.
The second last picture then also show you the NOK8.9 billion, and put this into a balance sheet and an adjusted net debt figure. We have repaid some loans in the period. We also have a currency translation effect on the debt that is our share of the debt in the non-consolidated companies, lowering that debt in the quarter from NOK9.1 billion to NOK8.1 billion. That is then more of a technical reason. And we have an adjusted net debt of NOK8.3 million at the end of the quarter.
So to summarize, we are experiencing a seasonality. We still think that the market has picked up significantly from last year, and there is a fairly tight market, in particular in Europe. And we believe that our prime job in that respect is to continue to capture the market opportunities.
And then obviously the cost program in upstream, the Quatalum ramp up and not at least to integrate and to close the Vale deal is on our prime list of tasks. We will do this and still maintaining a firm cost control and good operation.
Thank you, again. Then we are ready for questions.
(Operator Instructions) We'll move to our first question today from Rob Clifford from Deutsche Bank.
Rob Clifford - Deutsche Bank
I just wanted to talk about Vale. You talk about it being a transformational acquisition, which it clearly looks to be, but you appear pretty comfortable about a fourth quarter close. The Brazilian system, though, seems to be throwing up a number of issues in terms of getting the approvals through for a number in this industry. Why are you so comfortable about a fourth quarter close in terms of the approvals out of Brazil on this deal?
Well, being extremely confident about anything in our business is of course a challenge, because things are happening. But we have, the whole time since we agreed with Vale, had a target and the joint belief that we should be able through hard work to close the deal within the fourth quarter. And I think it is still both parties' belief that we should aim at that.
And then we have more tasks on our list that would need to be sorted out technically before we are closing. And as I said, we believe we will be able to do this within the quarter. But of course it still remains to be.
Rob Clifford - Deutsche Bank
And the hurdles, you said there were a few other technical issues, are they relating to government requirements or are they other than government requirements?
They are no hurdles the way we see it today that are related to significant elements around the deals. So it is more related to the first element that you are mentioning. But as they said, our belief today is that we should still be able to close it within fourth quarter, but it's a full job.
(Operator Instructions) We'll move to our next question today from Heath Jansen from Citigroup.
Heath Jansen - Citigroup
Just a question, you talked a bit about additional aluminum demand coming through from substitutions, particularly in copper and precision tubings. I was just wondering whether you sort of could quantify exactly sort of what demand you're actually seeing coming through with that substitution away from copper into aluminum in terms of tones per annum and also whether you're seeing a pickup in demand in other key markets for aluminum, where those markets might actually lie?
I will be very careful mentioning number at this stage. I think it is fair to say that one of the illustration that I gave you on the building systems side, they are already numbers in our books and in the industry that makes it significant. And even more important, the nature of that business has a very different margin profile and premium profile than what you see from more commodity oriented products in the aluminum business. So obviously for us for sometime a billing system has been of a value, and we are keen to develop that further.
When it comes to other the element, the precision tubing system within the Extrusion group is working on the replacement of the copper at precision tubes. There are low volumes, again with good margins; and this development is obviously starting from a very low level. May be we are talking about an industry number around, let me say a couple of 100,000 tonnes up to 200,000 tonnes in that range, but again, a small part of the market. This was more to point at the fact that when we are now talking about downstream activities going forward, we should be prepared for talking about a more diversified product application range, so to say.
And then, Heath, you had a second part of that question, was that marketing in general?
Heath Jansen - Citigroup
No, I just thought you identified a couple of areas where you're seeing substitution in copper for aluminum. I'm just wondering whether you're actually starting to see that come through in other products or other demand avenues?
We see it coming through in what we call non-automotive heat application or heat transfer applications. This could be, as I mentioned, one example is air conditioners for residential or office buildings, where size and weight is not necessarily the key element, but where they ability to transfer heat is a key element. And where also cost and design capabilities is a key element. And there we think aluminum has increasingly an advantage.
Obviously, another example would be within electrical cables where you could see some increase in substitution going forward, but we'll work on that.
We'll now move to our next question from Jonathan Schroer from Unicredit.
Jonathan Schroer - Unicredit
The first one is, do you expect your hedging policy to change at all in 2011 in terms of hedging your production? I understand you have one policy right now for Qatalum that's ramping up, but would that change to selling the production forward the way you do for the Norwegian smelter system? And will the Brazilian smelter also be selling its production forward according to that schedule that you have?
Secondly is, do you expect any significant new investments in the Vale assets starting in 2011? For example, you mentioned that Alunorte had a problem in this quarter with some boilers and, as I understand it, Alunorte is basically state of the art, but is there something, maybe we don't know that you need to invest in, in these assets in order to bring them up to Hydro's standard?
First of all to the hedging policy. I think the basic answer to that in broad terms is that, no, we don't expect any changes in our hedging or sales policy for metal. But let me then spend a little bit more time on it. We are, from our smarter system today or of course so to say fully owned smelter system today, selling on a three month forward continuously basis. And this we have done for a long, long time.
Which is means that, eventually we are exposed to Alumina, but we have a certain time delay compared to Aluminum spot market and may be also compared to some other players. But you will see the same numbers coming through in our books with our competitors.
Then Qatalum has so far, sold on a shorter time line. They are approximately on a one month delay to the spot market Alumina compare to our three months. We don't expect any material change in that right now. What will happen in the future will have to wait and see. The Brazil hedging part are to be excluded from this. This was a strategic hedge that we did in order to create some initial robustness in the section and to kind indicate a level of where we had kind of viewed the transaction at.
We assume that when we take over the Vale assets, primary metal products, and start marketing of that, eventually it will fall into our three month profile. When that will happen and what kind of disturbances we can see initially on that, we'll have to wait and see and we will work with that.
When it comes to Alunorte and investments, I think first of all, yes they had some boiler challenges. In particular, switching or moving there energy mix from oil to more coal based fire boiling fuel. This is related to number of boilers, but in particular, the first boilers that they installed. The last boiler that they installed, coal based has been with a much better performance.
They're working on that and they are discussing it also with a supplier of those boilers. And there has been periods with very good performance and then there has been setback again. What kind of final measures we need to take, we will have to revert with and until we are kind of taking over the lead on the assets, we are not 100% able to tell you. And also hesitant because we are not the operator of the assets.
We don't foresee large investments as of today for these reasons. But, again, we will have to revert to that when we are in control of the assets.
(Operator Instructions) We'll now move to our next question today from (inaudible).
I've just got a question that pertains to the payoffs that you are hoping to get to cover the loss from Qatalum. How is that negotiation progressing? You spoke about being able to recover the majority of the loss under the insurance contract. Can you provide us with any more guidance? And also, in terms of timing, when do you expect to start receiving payment under the insurance contract that you have there?
You know we have carefully thought through how we can discuss this issue with the market. I think we have said two important things. And one is that the management of Qatalum and also supported by management of Hydro believe that the insurance coverage of Qatalum is robust.
It is a robust good coverage in insurance terms of these assets and of this situation that we have. And then, we also said that we expect to recover a majority, meaning more than 50% and above, coverage related to the cost of this incident. And then we have a third element giving some guidance on our share of the results in Qatalum, both for third and fourth quarter.
And finally, we have said that we expect to be able to request payment during fourth quarter. Which also, primarily and most important, that is what we believe. And again, we have said it that way to give the market a guidance of the latter part of your question which is requesting payment, should indicate that we at that time has a fairly good and joint understanding of the situation, the cost and the insurance conclusions around that.
And then the cash effect will come whenever this is paid off after that request is sent out. That is the best indication I can give you. We have, Qatalum I must say, Qatalum has what we believe is a good dialogue with the insurers. And then we'll conclude when those discussions are finalized.
(Operator Instructions) It appears we have no further question at this time.
Okay. Thank you, everyone, for joining us on this call. We look forward to continuing the dialogue with you. And also, I would like to remind you that we are arranging our annual capital market today here in Oslo on January 13. We will update our website, hydro.com with more information about this event within the next couple of weeks. And we hope to see you there in January.
Once again, thank you and have nice afternoon and evening.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentleman. You may now disconnect.