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Executives

Stefan Solberg – Head, IR

Joergen Rostrup – EVP and CFO

Analysts

Luc Pez – Exane

Jonathan Schroer – Unicredit

Tony Rizzuto – Dahlman Rose

Norsk Hydro ASA (NHY) Q1 2011 Earnings Call April 29, 2011 8:00 AM ET

Operator

Good day and welcome to the Norsk Hydro Q1 Conference Call. At this time I would like to turn the conference over to your host today to Mr. Stefan Solberg. Please go ahead sir.

Stefan Solberg

Thank you and good afternoon, ladies and gentlemen, and welcome to Hydro’s earnings presentation and conference call for the first quarter 2011. We released our earnings today at 7:30 Central European Time. And the presentation material we will use on this call and the first quarter report is available on our website hydro.com.

Previously today we also held a video webcast where we went through the first quarter results and also on operational and strategic review of our newly established business area for Bauxite & Alumina. This is also available on our website right now and what we will present now is a summary of these two presentations.

The presentation now will be given by Executive Vice President and Chief Financial Officer, Joergen Rostrup. And after the presentation there will as usual be an opportunity to ask questions.

Before we start, I’d like to direct your attention to the cautionary note in relation to forward-looking statements that we have provided in the presentation material. And with this short introduction, I’m pleased to hand over to Joergen Rostrup, who will take you through the presentation.

Joergen Rostrup

Thank you and also from my side welcome and thanks for listening in this afternoon European time. And the Q1 highlight is 1.448 million in underlying EBIT. We have experienced stronger sales supported by seasonally improved markets. We have experienced stable Bauxite/Alumina results, obviously influenced by weak production performance, I’ll revert to that.

Primary Metal is up on higher prices partly offset by increased raw material cost. Down-and midstream is lifted by higher sales and lower costs and we have solid energy results in the quarter one.

If you look at downstream sales, sales are in general seasonally higher. So this is according to our guiding in fourth quarter and according to the normal pattern that we would see. Both our downstream areas are increasing in volume in the quarter between 5% and 8%. So on average 6% increase on the downstream side and slightly higher on the upstream side, obviously influenced by the fact that we have one month of Albras smelter volumes in there and we have increasing volumes from Qatalum while the asset is ramping up.

And we do see softening in the European extrusion market predominantly because of weak construction markets and while on the other side we see the rolling business both in Europe and also overseas being very firm and solid and we are actually in – we are basically sold out and very tight on volumes for the rest of the year actually.

And if we talk a little bit about markets, I think it is fair to say that we have maintained our market outlook for 2011 on the same positive note as we indicated in the fourth quarter last time we spoke. Basically we might say that all key elements are similar to what we had described earlier. We see inventories being fairly stable. They are little bit up on the registered inventory, but they are down on unregistered inventory we believe. So we think it’s such a shift.

We’ll see Chinese production increasing again. If you remember there was fall in Chinese production in the fourth quarter and we said that we believe this production would come back and we think it has comeback. But we still see the Chinese market as being more or less balanced. So, the picture is also there the same. And we see premiums may be leveling out, but at very high levels as we have indicated before, this is a good indication of a tight market and that is also the same. So, we maintain our positive market outlook. We believe in the range of 7% increase for the year, 10% in China and this is basically as we have described it earlier.

If we look at some internal elements, first of all I would like to confirm that our improvement program – cost improvement program is moving according to plan and according to what we have discussed earlier. You would see that we have – had some increase in the estimated cash cost in first quarter. Alumina related cash cost is up some $50 and pet coke energy and the dollar effect is also up some $75.

And then on the other side, the fixed cost improvement and matches that we have taken our self is moving ahead of plan. So, we are well underway to achieve the US$125 per ton improvement for the year as earlier communicated and this comes on top of the 50 last year.

Also interesting to see is that the margin expressed as estimated EBITDA margin is back at levels that we only saw in 2008. So the combination of good price development and measures that we have taken is bearing fruit again.

Qatalum is still schedule to be in full production before summer, and the ramp up has continued in the quarter one, and also as planned after the quarter and we are still in a ramp up situation. And you would also note that we have recognized another $145 million or $25 million from insurance coverage in Q1. So, this is obviously less than what we recognized in Q4, where we recognized in total 300 and 210 sorry on underlying EBIT.

But this is again we believe confirming a robust insurance coverage as we have expressed it. We don’t expect to recognize more now until we have the final settlement with insurance companies. And we don’t believe that will take place in second quarter.

If we look down little bit at the numbers, first, please recognize that we have now launched a new business area of Bauxite & Alumina. And therefore you will find the numbers reclassified all the way back to first quarter 2009. We have then reclassified the numbers for Bauxite & Alumina, Primary Metal and also as a consequence for Others and Eliminations.

The historic numbers for Bauxite & Alumina obviously consist of the Bauxite & Alumina business that was included in the Primary Metal business prior to the merge and to the changes now taking place.

And on Other and Eliminations it is worth wile mentioning that we have now also included the elimination of internal gains and losses on inventories related to Alumina sales between the business areas. Previously this elimination effects has consisted of the metal that has been sold throughout our business and internal inventory effects.

Now it also consist because we are selling alumina from bauxite to Primary Metal and now it also consist of the alumina inventories on this line. That is part of the reason why the eliminations are going up in the quarter. They were negative 160 million and when you see that Other segment is performing 60 million with a charge 60 million higher than previous quarter and we learned that eliminations are 160 million this quarter only 20 last, so there is 140 million elimination effect in the quarter than the underlying cost for staffs and other elements has gone down with 80 million in the quarter. So that is a good development conforming what we said in the fourth quarter that some of the effects we saw in the fourth quarter was one-time effect and as we would bring this cost down again and that’s what we have done.

If you look briefly at the waterfall analysis the NOK 0.8 billion improvement quarter-on-quarter consist of 0.4 billion improvement in LME prices and currency. There is an 11% LME price development in dollars. If you measure the LME development in only Norwegian krone it is only 7% indicating the fact that the dollar is weakening somewhat against most other currencies, right now.

On the volume side there is a positive effect NOK 0.3 billion equally spread on all our businesses and then there is a positive of 0.2 billion on what we call the equity accounted investments and this is due to improved results in Qatalum, due to higher prices, more volumes coming out now of the ramp-up and also lower cost.

The cost picture on the smelters shows a negative development of 0.2 billion and this consists of two elements, variable cost as we guided on the fourth quarter is up in the first quarter with approximately NOK 300 million, but there is an opposite effect and that is lower fixed cost with 150 million confirming our cost program. And then there is the other element consisting of many elements going back and forth of 100 million.

Then I’m not going to take you through a fairly detailed purchase price allocation statement and slides. You’ll find them as Stefan Solberg said on the ramp you will also find a broadcast from this morning there, where I try to go through these in detail and you can have a look at it and obviously please get in touch with us on it.

So it is preliminary purchase price allocation for the Vale assets on the website and also the resulting excess value depreciation, which we are indicating now will be around NOK 1 billion confirming the number we indicated at Capital Markets Day and significantly lower than the number that we had included in the prospectus of the Vale acquisition last summer.

You’ll also hear fine pro formas and financial and operating information and income statements per quarter pro forma for 2010 and for first quarter 2011.

If you then look at the Bauxite & Alumina on a pro forma basis, which then obviously means that we have assumed that the acquisition and consolidation of it took place prior to January 1, 2010, not ‘11, but 2010, meaning five quarters back in time. And then we are analyzing the results based on that assumption. That is how we now are presenting Bauxite & Alumina and Primary Metal; we think that it gives you a better insight and overview of the development.

If you look at Bauxite & Alumina, on a pro forma basis we have an EBIT underlying of 237 million, an increase of only 14 million in the quarter and there are a couple of things that are important. Weak production performance in Alunorte and Paragominas is one of these. This is not particularly weaker than what we had anticipated, but it is obviously a weak performance.

And if you remember and recall our dialogs throughout last year after announcement of the deal we said that we believe we had used assumptions on the market side that was fair balanced and kind of didn’t assume any special development in alumina market, but where we had put in a care ambition was in Hydro’s abilities to move up to stabilize and to move our production. And after eight weeks of ownership of these assets this is still what we believe will be the job to do and what we have set out to achieve, I’ll comment little bit back to this.

Then the higher realized alumina price is obviously driven in Alunorte by the LME-linked, but we also see support from this in alumina prices nominated in dollar and in the stock market there are higher prices also there.

Lower sales volume in Alunorte is a consequence of the production predominantly and then there are some cost elements with some increase to it. Going forward, we believe in higher LME-linked alumina prices that is more or less given due to their contract structure. We do believe in improve the production on both Paragominas and Alunorte and we see traces of that already now in April and we expect that will be the picture for second and third quarter. And then the reduced unit cost due to higher utilization. So obviously embarking on the very important work of stabilizing and improving production is job number one as expected.

If you then look at Primary Metal also from a pro forma basis and then reclassified as I mentioned in the beginning, which means that we have taken out for the whole period now the Bauxite/Alumina results as they were and we have included the smelter Albras in all numbers on a 100% consolidated basis in order to create comparable numbers for you. You will see that the result is 592 million underlying, an improvement of more than NOK 360 million. The price in premiums lifted the result by close to 500 million, while the raw material cost to get down partly offset by lower fixed cost as I said and the net effect of this was NOK 150 million negative.

And then as I said the insurance compensation of $25 million included in Qatalum gave a positive result for the quarter of $20 million. But here it’s important to remember the insurance compensation made the number positive this year. We believe next quarter again we should be prepared for negative charge in the ramp-up phase. But improvement in Qatalum of 150 million quarter-on-quarter is not due to the insurance compensation because the insurance compensation is as I’ve said lower this quarter than previous quarter and the improvement is entirely due to volumes, prices, and lower cost charge and this is how it should be obviously.

Albras contributing only 50 million in the quarter compared to 145 million in Q4. This is predominantly due to timing issues. There is a much lower off take from the cast house in the quarter of 30 kilotons, we don’t put much into it, it is more influenced by the timing of off-takes. And we expect is to change again next quarter and to stabilize and we will learn this smelter to operate it as we move forward.

Then look at the outlook, we have sold most of the volumes for second quarter at 2450 a ton, this is excluding Qatalum volumes, but including Albras. We see continued some increase alumina and pet coke costs due to the pet coke contracts that are in the market now and also the alumina-linked to the LME.

And then we have announced that we will have a trial startup of 15 kilo tons of metal from some of the parts at the Sunndal 3 production line. This will take place we assume in June and it should be viewed as a pre-start of an ambition to start up the full production line and hopefully within the end of 2011 the full capacity of Su 3 is set 100 kilotons and that is what we are aiming at restarting within the end of the year. We will obviously confirm this later.

Right now we are starting up 15 kilotons. 100 kilotons at Sunndal will not consist the net increase in our sales volumes. We will with for part of this production replace coal metal that we use in our casthouses. So we could assume that approximately 50% of 100 kilotons will be kind of the volume, the net volume increase. But obviously replacing coal metal should also improve the margins.

If you then briefly look through the different – the other business areas, I think they are quite transparent and easy to understand this quarter. Metal market has currency – positive currency effect and inventory valuation effect of 50 million. So that’s a – this quarter that’s a 60 million change from previous quarter. So the remaining improvement in total 81 million, 20 million is performance related and that equates the resulting total of 143.

So it’s a better performance both when it comes on the margin side from remelters and also higher sales volumes in particular on the third party products and include here obviously the Qatalum volumes. We will see – if you look at volumes there is a 12% increase in sales this quarter, partly market, but also obviously the fact that Albras and Qatalum volumes are coming in harder now. And you will also see effects from this in the second quarter. So our Metal Market Organization is now busy moving out to the volumes that we are increasing in production.

And yeah, I think that is what we need to say on that markets. If you then look downstream and start with rolled products, I would say it’s another good quarter. It is 127 million up from fourth quarter till 232 million underlying. That number is better than first quarter in 2010 as well.

Volumes improved by 80 million and the remaining 50 million was predominantly due to higher margins, in particular in general engineering applications which has much shorter contract periods than the other product segments.

Going forward I think it’s fair to say very solid order books for 2011. We don’t expect any sales increase in Q2 at the same level as Q1, hopefully we will see some better numbers, but we will probably not see the results as we did in Q2 2010 at above 300 million. So short of Q2 2010 we believe.

If we then look at Extruded Products, it has an improvement of 81 million up to 105 million shown in that underlying. Here I think it is obviously we have seasonally higher volumes and somewhat lower cost, but I think the key exclusion is to talk a little bit about market side. And we see very mixed markets in particular within this business area. We see weakening European markets primarily dominated by weak European construction markets in particular in Southern Europe. This has – this will bring two effects to our business.

If you remember couple of years back to 2008, 2009 and in to 2010 we had a very good performance by Hydro Building System, the Building System provider and we are good at it, it was late cycled, it was kind of doing business on old contracts and now that has obviously changed for the whole industry.

We see no changes in the construction and building market in Southern Europe as of now and we are incurring weak results in Hydro Building System. In addition also the general Extrusion business in Europe has construction market as an important part of its market and with the weakness in Southern Europe we see a tendency for products that was intended to that segment to go into other segments either geographically or product segments. That creates some margin pressure on the general extrusion side not significant, but some tendency to some margin pressure.

On the other hand we see very solid results in precision tubing in particular related to automotive due to the high demand for higher end higher segment cars and also extrusion South America is operating very well and reflecting the surge in markets in particular in Brazil. We expect conditions to continue. We don’t see very much changes, there should be seasonally higher sales and improve the result in second quarter due to the seasonality.

Energy, the last business area, but not the least, it is performing very well. It is delivering 573 million underlying EBIT and improvement of 91 million and at the same level as first quarter 2010. This is also according to our indications in the fourth quarter it has been high and stable production with even higher net spot sales than in fourth quarter.

We have also seen strong spot prices NOK 16 per megawatt hours higher than in Q4. And we have good cost control and also see lower transmission costs in the Norwegian system. So that is all benefiting us. The outlook here we will obviously see clear seasonality in this business as usual and we should expect significantly lower production in spot sales in second quarter. The Norwegian market in total has in the range of 20 percentage points lower water reservoirs than normal levels at this time of the year.

Hydro’s water and snow reservoirs this took – the total reservoirs of snow and water for Hydro is in somewhat better position than the industry average, but still well below a normal position. We do expect as I said lower prices although we think there is a support for crude oil prices in second quarter partly due to the reservoirs and partly due to all the other things that is going on in the world whether there is concern for nuclear production in Germany, unrest in different parts or the – for the oil surge as you see it.

This imply that we have a – when we put everything together the cash generation from operation investments and not at least the fact that we have paid the cash contribution to Vale and also incurred debt from the Vale consolidation in the period. We are now in a net debt situation as anticipated of NOK 2 billion, which I would still argue that we have a robust financial position and if we look at adjusted net debt, there are just two changes I want to point to, one is NOK 0.5 billion in reduced share of net debt in the companies that we do not consolidate. This is simply due to the fact that we used to include Alunorte due to our 34% ownership of that on this line and now that we consolidated we have then obviously move this up in our balance sheet if we have reduced the number here with NOK 0.5 billion.

The other effect is on other adjustments. Here we have included 1.5 billion, 1.6 billion in effect for the fact that we in the future are going to buy the last 40% of Paragominas. So, it’s our obligation to take that 40% that is reflected in this adjustment. In total 20 billion on an adjusted level.

If you then allow me to move on I would like to give some comments on the Vale transaction and where we stand. We closed deal in February, end of February, February 28, so we have a month of result effect on our real numbers and we have eight weeks of ownership as we speak. We think it is a tremendous important deal for us, which is positioning us as a leading player in the industry and we believe that integration process is well underway both from a management perspective and also from a stakeholder perspective.

Key priorities for 2011, I was almost going to say the only priority for 2011 is to increase production in Alunorte and Paragominas, which has reached production performance in the quarter, more assets we had anticipated it to be and as I said in my introduction this is where Hydro needs to confirm that we are the best owners of these assets and we strongly believe we’ll do so.

We had the team in place. Obviously we have a structure with most of the operation in Brazil headquartered in Rio and the significant operation up North and then the commercial organization out of Switzerland. We have spent a lot of time besides getting our grip around assets also on stakeholder management and we are quite pleased with the start of our ownership from that point-of-view.

I won’t spend much time on the rationale for this. I believe everybody that who are listening in are fairly well aware of the rationale for our acquisition. I just remind you that we at least believe bauxite reserves are scarce resource. It is constrained material with only three main countries keeping large resources, Australia, and Brazil where we have taken position and then you have Guinea, which is yet to be developed with a significant work to be done before that is any near availability in the market.

And this is obviously an important basis for our acquisition. We simply believe that alumina demand will develop in a good way, whether it will be 80% or 70% is not that important. We believe that this will be a fairly balanced and fairly tight market going forward. We know that within this 10 years not insignificant new volumes will be needed if anything near the market’s expectations on alumina consumption growth in the period is going to take place. So we believe our assets are well positioned in this situation.

Then if you look at the two core assets, one is obviously the bauxite mine, Paragominas it’s an open pit mine, it produced 7.5 million tons in 2010. It is in the midst of ramp up of the second leg of the mine. We are targeting a significant production increase over the next periods and in the longer haul there is a possible expansion opportunity up to 15 million tons, good reserve life we believe and good potentials beyond the current reserve lines.

We are not or the mine has not been reaching full capacity yet and that has not been the plan either, but I guess everybody would now like to see it moving above the yearly production of first 8 million tons and then improve from there. There has obviously been a steady output growth over the period.

We will simply have to and that’s what we have been planning for, for several months to be very operational oriented and focus to our maximum on operational improvements and this is also what we anticipated when we acquired the assets. And it might seem like somewhat simple expression to talk about housekeeping and safety. You all bear in mind not talking right now to the key expert in this area, but the case is that this is a very, very large asset and we think it has significant potentials by actually working on safety and housekeeping issues and getting the asset in a more structured way we think it should be operated and so this is where we’re putting job number one and we expect to see quick wins from that.

And then we have starting to identify and also act on obviously different parts of the plant in order to improve stability and improve output. Also we have a very, very long experience in should we say implementing and running a fairly rigid production systems. And we also believe that asset will benefits from that and those improved – those production systems are also an important part of the success we now have on Primary Metal side in improving output production and reducing cost. And we will use same methodologies broadly speaking but obviously tailor made for the use at assets in Brazil.

Then Alunorte has a fairly high production of 5.8 million tons last year. But now the aim is to target to stabilize this production above 6 million tons and getting it up there towards nameplate capacity. We think it has a good – that the whole system we believe has a good conversion cost position, it’s a world class system. And we think that when we get these two assets to work as they are well operated integrated system, we will see the good effects of that. Bauxite is obviously supplied from MRN sourcing and from Paragominas.

As I said again we believe in moving in our production systems and have started working on some identified bottlenecks that we will work hard to improve as quickly as possible. And we should see improvements from both these assets already in next quarter, but let’s be very frank about it. There are large complex assets. We are in here for the long haul and to get them up nameplate capacity will take time.

If you look at the cost position from an integrated bauxite/alumina point of view you will see that the far largest part of the cost position is bauxite. We think that cost position can then be improved as Paragominas improve capacity and we fully utilize the pipeline. Another important element is Energy obviously. The good thing is that we believe our assets has the first quartile energy consumption position. It might be in the range of actually two thirds of where you would see many other assets in the industry here named through the 8 megajoule per ton number. There is an energy mix of heavy fuel oil and coal and obviously being able to run it as much as possible on coal will let us avoid the more expensive energy resources. Caustic soda is also an important input factor.

We have an integrated cost position in 2010 of $238. This includes everything. It includes also cost associated with marketing of the products and it’s also a number that is an average between our own sourcing and also the bauxite sourcing from MRN. So obviously our own sourcing is on the lower side of those two sources.

If I then look at the volume flows within this new business area we have on a 100% basis and we have 100% volumes from Paragominas available for our use. We have here in 2010 pro forma picture said that’s 7.5 million tons of products and then we have 6.7 million tons at least from MRN also going into the refinery Alunorte.

In addition, we have bauxite available close to 1 million ton, which we’re also marketing on a global scale. On the alumina side, we have in 2010 pro forma an output of 5.3 million and this number is increasing. This is 91% Hydro availability of the 5.8 million ton production of Alunorte.

In addition, we have contracts in the range of 1.5 million tons adding to that. So, commercially available, we have 6.8 million tons of alumina and 0.9 or around a 1 million ton of bauxite. 60% of the alumina goes in external contracts and the remaining goes internally to our own 100% owned smelters.

If we then look at this in a somewhat longer perspective, you have in the beginning of the time period the equity in the dark green color and then you have the sourcing contracts on top of that and then we have also illustrated the cost equity assuming that we will invest and go ahead with that project and that is obviously our intention.

We also made a stapled sort of an indication of when and to what degree we get available alumina for the market again. Remember what we have said that during the first couple of years we have locked up the alumina in contracts taking over those contracts from Vale, but after in particular through ‘15 and going forward we are freeing up more and more Alumina and eventually we have two time alumina if everything goes as planned compared to our own captive use.

We have discussed this before and I have also mentioned it when we discussed the results. We’re seeing some shifts in the market now we think and we are working towards total contracts, which is probably the most important element in this picture. So more securing that the alumina part of the industry is earning what it should earn compared to the asset availability and the cost of producing alumina.

So we think that the market is moving towards more Index pricing and we are not currently offering medium, long term alumina linked contracts. We are participating in the market making it liquid and we are moving towards the next pricing. We are focusing on shorter duration and we’re also focusing obviously on selling to end consumers.

Then the important comment that most of our contracts are set at 13%, 14% of LME contract structure, so this will only influence us in a big scale when we release volumes and then I’ll refer to the one of the previous slides.

Okay I’ll start to land my comments by saying that bauxite/alumina priorities are very clear. We have put up six bullet points here. I would say that increased capacity utilization and operational excellence are dominant on this list and we are quite confident that we will succeed in this, but we are also confident that it will take a lot of hard work and some time. But we should see gradual effect of this and we should see them already hopefully in second quarter.

So that ends my presentation. I appreciate you listening in, by the final bullet points reminding you about – then also the cost programing and Qatalum ramp up and staying focused in our markets. I’ll leave the word back to Stefan Solberg.

Stefan Solberg

Thank you again. Now we are ready to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question today from Luc Pez from Exane. Please go ahead.

Luc Pez – Exane

Hi gentlemen few questions if I may. First of all I was wondering if you could perhaps elaborate a bit more on the actual ramp-up you do see for the Alunorte and Paragominas assets and enough guidance you could provide for either this year on next or anything we would profit and what kind of first guidance you could (inaudible) on the impact for the cash cost?

And second question would be related expansion project for Qatalum and Alouette, which you want to understand the Capital Market Day and wondering whether you have made any move – advancement on the development of these two projects? Thank you.

Joergen Rostrup

Thanks Luc for your questions. And let me start with where you started in Brazil and Paragominas and Alunorte. And as I’ve said this is a question about improving production gradually and it is what we’ve been prepared for would be the case. So except from some pipeline maintenance in February that made February a very low production number, so it’s a little bit atypical. There was nothing in first quarter 2011 that surprised us in this context.

I’m hesitating to give a very clear guidance quarter-on-quarter and for the year, simply because now we’ve been on the ground for eight weeks. I’m very impressed by the speed the team has setup and obviously they had time to prepare. So, it’s good that they have setup a higher speed on it. But I’m hesitating to give a too clear guidance partly because I would like to see that it is developing as we planned first and also let’s face it eight weeks is not a longtime.

But we have said that we will improve volumes in second quarter and as I said as soon as possible to bring Alunorte above and stabilize it above 6 million tons that should be very feasible and then we just need to make sure that the bauxite is sourced efficiently from Paragominas to support that stabilization of Alunorte.

Then on your question regarding new projects I think you mentioned Qatalum II and Alouette and I don’t have any new information for you on that note and we are happy to confirm that Qatalum I is ramping up as planned and as soon as we can finish up the commissioning of the power unit in Qatar we should be in full production shortly after that, but we are not working and I am very concentrated now on Qatalum II and Alouette. They will come we believe in due time, but the world doesn’t need new capacity and we need to concentrate on the assets we have at hand and I would very like to keep us focused on those costs.

Luc Pez – Exane

Excellent.

Operator

(Operator Instructions) Our next question comes from Jonathan Schroer from Unicredit. Please go ahead.

Jonathan Schroer – Unicredit

Hi yes hello. I have two additional questions to that. You had mentioned, it sounds like you’ve changed around your structure for how you treat the eliminations going forward, so and I was wondering if you might have a new guidance on what the figure should be. My understanding was sort of a long run figure that we should be factoring in for a whole year; it would be around NOK 550 million, but this looks – the number that you reported today looks like it would be quite a bit higher than that or should we expect this to reverse?

Second of all, I was hoping that you could clarify two of the figures for cash cost in alumina on slide 13 of the bauxite presentation and then on slide 26, you had somewhat different numbers, it looks like the cash cost is right around 200 on slide 13 and then on 25 it’s more 236 or something and finally the rather large revaluation gain that you reported today had any implication for dividends, if I understand it’s not taxable or will it just be accounted as an accounting gain that then you would have no impact on dividend policy or anything like. Thanks.

Joergen Rostrup

Yeah, thanks Jonathan for those questions. And I trust also Stefan will join in if he wants to complete my answer, but to take your questions and please correct me if I didn’t understand him properly. On our structure and in particular pointing through Other and Eliminations, you were asking about the guidance and the level that we should expect from that.

I guess I would like to answer that there are – first of all the change for that segment that has taken place in this quarter is simply that due to the fact that we have established two business areas as opposed to one previously, one coal box at alumina and the other Primary Metal and therefore taking out the bauxite/alumina part of Primary Metal.

Now, there are sales between these two business areas and this was obviously due to the increase in size of our Bauxite/Alumina business, which means that we have sales between these two business areas.

And then there will be associated to that kind of sale several effects including internal gains or losses I should say, gain or losses on inventories related to this activity. Previously we had elimination effect in other segment for the same elements, but then related to their Primary Metal sales between the business areas and for the downstream.

Now, we will also include in this line the similar effects from sales or inventory effect from sales of alumina from Bauxite/Alumina to Primary Metal. So, there is no change except that we have greater two business areas under this elimination of internal effects will then hit this line as opposed to be taken within the Primary Metal area.

Then you were asking about the levels. And I think the numbers you are referring to are okay that they were probably 2010 numbers, I would say if you estimate around 200 million charge a quarter, but then remember that we are not here indicating the level of the eliminations because they will definitely as we know go up and down depending on what the inventories look like, the volume looks like and evaluation of those inventories.

So you have to keep that out of the equation and they are also temporary effects that goes up and down, but the charge for the remaining part Other and Eliminations is obviously related to corporate cost and the pension charges and so on and there I would offer you a number of around 200 a quarter that you could use.

And on the cash cost you were pointing to a couple of slides, one is – it’s slightly different slides if I may say. The first one I believe is the one showing CRU numbers and the cost curve for the industry. Here we are indicating to US$208, US$201 per ton. This is focusing on Alunorte stand-alone and for 2010.

Then if you look at the other number that we gave that is a cash cost number as we see them in our books now including also administration cost and some sales cost and even more importantly being on an integrated basis with Paragominas included and also including the sourcing of alumina in to the Bauxite & Alumina area. So this is the total alumina cash cost according to what we have available for further sales from Bauxite & Alumina. So they are obviously to some degree linked to each other obviously, but there are different content to it nevertheless.

The last comment, no I don’t think anything that happened in first quarter and in the consolidation with the purchase price allocation is influencing – definitely not the proposal or the likely dividend for this year nor the dividend policy. We have said previously that we have not so far considered changing our dividend policy although we’ll recognize that there is a higher depreciation level included now in our earnings, but so far we maintain our 30% over the cycle and from the Board of Directors point of view there is no indication that they will propose a different proposal than the already stated one of NOK 0.75 per share for this year.

Jonathan Schroer – Unicredit

Okay all right great thank you very much.

Operator

Our next question comes from Tony Rizzuto from Dahlman Rose. Please go ahead.

Tony Rizzuto – Dahlman Rose

Thank you very much. Hi gentlemen. My question is on the Chinese aluminum smelter market and I am wondering how you see that capacity growth playing out, do you think that the policy initiatives then construction of redundant capacity will have any traction and I also would like to ask how you feel about their own capabilities to meet their needs from a Bauxite & Alumina standpoint on a going forward basis?

Joergen Rostrup

Yeah, thanks Tony for those questions. Obviously very important issues for us as an aluminum player and I would first like to say that we are careful anticipating very much about China on a forward-looking basis except from a few basic strong views that we have. First of all, we think that China over time has made sure they have been balanced in aluminum and that there has been good reason for them being so. And we still feel they are more or less balanced on a yearly basis in aluminum.

We had a situation as you might remember Tony in the fall where they cutback fairly significant volumes of production. We did not interpret that as a lasting situation. We thought that was part of some restructuring in the industry and adapting to some target and goals and ambitions on the energy side according to the longer term plans for the Chinese government.

And what we see now is that they have freed up production again as we assume. Nevertheless, we think the reasons they do it, (inaudible) same reason is that eventually would make them – bring them in to a more diversified portfolio including import of network from outside China simply because it is today the aluminum industry is consuming some 5% to 7% of energy, of electricity in China and with all the issues around energy we think that they will have a more diversified sourcing in the future. When that happens we don’t know. We don’t think it happens in very near term, but we think it will happen

We think they are quite – it looks like this is an important topic for the Chinese authorities and that they are working on how to structure this going forward. And when that happens it will probably create sourcing opportunities and then we’ll also fight around the same projects outside China and that would be interesting.

On the Bauxite/Alumina side, they have a large dependence on import of bauxite. They still have a dependence of alumina import much smaller in absolute numbers more or less the same over the last five to ten years, but percentage wise obviously much less dependent on alumina import now than it used to be due to the growth and to the fact that they have built alumina assets.

But again there are quality issues, there are severe issues and there are logistical issues related to this. So we think the underlying effect here is that the raw material play for in aluminum industry is a key play in order to have a strong position in the industry and that has obviously been a very important part of behind what we did last year and I don’t know if you are actually getting on.

Tony Rizzuto – Dahlman Rose

Joergen, thank you and if I may just ask a quick follow-up and do applaud your move into Brazil, I think that is a masterful decision and I wish more of the western producers would realize how important it is to gain more control over the raw material side of the industry. The question I have here for you the follow-up is do you see the same types of pressures on the bauxite quality and resources that we see on the iron ore side, I mean the very rapid deterioration in quality and grade of those ores.

Joergen Rostrup

Tony, I would be very careful here. First of all you’re talking to CFO and second you know I would be so much careful here. There are many views on quality aspects of bauxite and alumina in different parts of the industry in general, but also not at least when it comes to the Chinese sources. I would be careful being too clear about this. I can assure you that quality matters. We see it and we see it very clearly than when we are targeting the high end, high margin products for aluminum, actually what kind of bauxite you have is a key issue, not only obviously the electrolysis process is also important, that is a key issue.

I can also tell you that we believe it’s a fact that Alunorte has one of the best qualities of alumina actually in the world. And whether there is a general issue on other sources I would hesitate to be to firm on, but there has historically been quality issues around this sources. So there might be point there.

Tony Rizzuto – Dahlman Rose

Thank you very much Joergen. I appreciate your insight.

Operator

(Operator Instructions) We have a follow-up question from Jonathan Schroer from Unicredit. Please go ahead.

Jonathan Schroer – Unicredit

Yeah just one follow-up question. I was wondering in terms of the cash cost for Alunorte, how much control do you actually have over that, is that something where we expect the cash cost to rise basically along with the input cost or is this something where you can imagine over time you might be able to have a positive effect on this, even the same whether you’re trying do for your smelters?

Joergen Rostrup

Yeah thanks Jonathan again. Well first of all if you remember I showed you a slide where we broke down the cash cost in a few elements and I think I would like to point to a couple of things. The two dominating elements on the cash cost side for alumina in Hydro we spend obviously the bauxite cost and energy part. On an integrated basis first of all energy in Alunorte is fairly efficient, but whether we use the coal boilers in a stable manner or we have to use more of the fuel oil driven boilers is one issue and the more we can stabilize the coal boilers will make any impact on this.

Second, the bauxite is a large part of the cash cost obviously and there we really – at least Jonathan we have really assume that I strongly believe we can influence this through the performance in Paragominas.

So, I believe that there are several important elements here we can influence. We believe that the system when we make it work in a stable fashion and as an integrated system, which I believe it doesn’t fully work today and we can again significantly form that.

Then obviously you have other elements. You have the general energy cost picture and you have the caustic soda market etcetera, etcetera and there it will follow other price drivers obviously.

Jonathan Schroer – Unicredit

Okay, great. Thank you very much.

Operator

There are no further questions in the queue at this time.

Stefan Solberg

Thank you everyone for joining us on this call. We hope that the material we have provided with you today will give you more clarity on our new Bauxite/Alumina business and we look forward to continuing the good dialog with you going forward. Thank you.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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