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Rikard Lindqvist - Head, IR

Svein Richard Brandtzæg - President & CEO

Jørgen Rostrup - EVP & CFO


Rob Clifford - Deutsche Bank

Jason Fairclough - Bank of America Merrill Lynch

Owen Scarrott - Goldman Sachs

Tim Jarratt - Redburn Partners

Thorsten Zimmermann - HSBC

Norsk Hydro ASA (OTCQX:NHYDY) Q4 2011 Earnings Call February 16, 2012 10:00 AM ET

Rikard Lindqvist

[Abrupt Start] Fourth quarter results presentation. I would like to welcome those of you who joined us here live in London, but also those joining us on webcast.

Here to present is President and CEO Svein Richard Brandtzæg and CFO Jørgen Rostrup. After the session there will be a Q&A where those of who joined us here and those on webcast will be able to ask questions to Svein Richard and Jørgen. Let me just draw your attention to the cautionary notes in relation to forward-looking statement that is shown on the screen and provided material. Then I’ll leave the floor to you, Svein Richard.

Svein Richard Brandtzæg

Thank you very much, Rikard. The headline for the quarter is first of all that we saw a weakening in the demand of aluminum which again underlines the importance of the repositioning and the cost reduction measures that we have already introduced and with your additional introducing. We had first quarter with steel production in Qatalum and we’ve also good production in both Alunorte, but record production in the bauxite mine Paragominas.

Result NOK 1.1 billion, both NOK 0.5 billion below the third quarter result and NOK 0.5 billion above the fourth quarter of 2010. But the result is influenced by lower volumes and lower metal prices due to weaker markets and lower seasonal demand which is expected but demand was lower than the normal seasonal demand in the fourth quarter.

Again Energy delivered very solid results and EBIT result from energy in 2011 is a record high result. The Board of Directors had a meeting yesterday where they decided to propose to the general annual meeting a dividend of NOK 0.75.

If you take a look at the Downstream business, we saw a weakening in old products of about 6% here in the quarter since the third quarter and definitely foil and general engineering had hit downwards, also automotive and heat exchanger, while we had a stable development in can from the third quarter.

In Extrusion, the Extruded products in Europe especially hard hit but also downward development in North America and also in precision tubing. Stable in South America and also stable in building system, but in building system it was stable at a very low level.

In total, 8% down in the fourth quarter compared to the third quarter. If you take a comparison between 2011 and 2010, the picture is a bit different then if you only take a quarterly look at it. There was a change in the product mix since 2010, a good development in can and automotive and heat exchanger while we had lower volumes in foil and general engineering compared to 2010, 2% down since the previous year.

In Extrusion Eurasia we had positive development in most segments except building systems and the fact that building system volumes went down 12% is one of the main reasons why we are delivering a weak result in extruded products which is not satisfactory.

This is volumes, that has been lost in the high margin market, while we have increased in low margin markets. Also some of our competitors in building and construction are also moving also moving into other segments, which put the pressure on the margins in the other segments. In total, 1% lower volume in 2011 compared to 2010.

So, this means we are continuing to adapt to the market as we’ve done previously. So, we’re restructuring the portfolio in extrusion with the closure of extruded in Karmøy and also in Prague fabrication, mothballing capacity in Spain and in Portugal.

In building system, we announced already in the capital markets that we’re delivering a cost program, reducing the cost with €30 million, but we have increased the ambition level now to €40 million by the end of 2012.

And this is both Iberia and Italy, where the market is especially weak. We’re closing down six production plants and nine distribution centers, which done will reduce the fixed costs. We’re reducing the manning and in general turning around the building system business according to the situation.

We also initiated a cost reduction volume in extrusion in Europe due to the weakening of in this quarter and had speed out of the year of about €20 million in extrusion in Europe. This year we also began reducing capacity, reducing shifts, taking of manning and cash preservation.

But we’re also building up the capacity in emerging markets. We’re investing in China in our plant in Suzhou which is a two hours drive from Shanghai in China where we have a precision tubing plant. We are adding 7000 tons precision tubing capacity for the heat ventilation, air condition and refrigerator market and automotive market in China and on top of that we are building also a press for the high end extrusion market in China.

In addition, we are also building a new press in our plant in Itú, outside São Paulo in Brazil and in Portugal, we are almost doubling the capacity in emerging markets within 2014 which means that the growth in that part of the globe will about 20% higher in next three years.

Looking at the development on LME, declining prices during the quarter starting with about $2200 per ton down to about $2000 per ton. The realized price was $2429 per ton and of course the market price in the quarter will be reflected in the first quarter result for 2012.

It is interesting also to note that there is quite a steep contango in the aluminum price going forward. This picture shows the market balance outside China and in the end of the quarter, it was a stable production, but less demand. So the gap between supply and demand was widening. Since then and also during the end of the quarter, it was announcements of curtailments. We’ve also announced curtailment and we are taking out 60,000 tons in the quarry. If you add up older announcements that has been made about 1 million tons of capacity will be taken out of the market. We are maintaining the growth of 3% to 5% in the month in 2012. That means that the supply demand balance will be tightening during the year.

The inventories are again picking up at the end of the quarter as a result of the over supply of course but also that due to the contango in the market; 12 million tons if we add up all inventories, which then corresponds to about three months of consumption and with the contango we expect the financial deals to continue and be all forward in the future.

Ingot premium is an important indicator of the tightness in the market. We had to have the record high levels in the Ingot premiums. Some softening at the end of the quarter, which has now picked up again at the beginning of first quarter this year.

This slide we showed in the capital markets day. We demonstrate is in the China is a net importer of aluminum units mainly through the fact that China is importing large volumes of raw material. Quite stable however on aluminum but if you had the aluminum import and bauxite imported to China in 2011 it was 25% higher than the raw material import in the year before. Quite stable and balanced in the primary metals. The export of fabricated products was higher in 2011 than 2012. This goes mainly to the local Asian market around China.

The aluminum price was softening through the quarter, stopping at the 16% to 17% of aluminum, down to 14% to 15% of aluminum. In dollar terms from $360 to $300 per ton and all back to about $320 per ton.

Energy started with low prices at the beginning of the quarter due to high inflow and also high reservoir level. The reservoir level has change quite dramatically during 2011 and now ending up at 80% reservoir filling at the end of the year. The prices were quite stable in mid of the quarter but softening a bit in the end of the fourth quarter due to mild weather, lower CO2 cost, lower toll cost in Europe. But at the beginning of this we have seen quite a good development in prices due to the colder climate.

In the Brazil, we have introduced the Hydro production system in all the facilities both in Paragominas and in Alunorte focusing on operational performance and we have improved our operational performance meeting all volumes in Alunorte with 9% on the first to second half of the year. We have improved the volumes in Paragominas with 23% from the first half to the second half. And going forward we are stabilizing the volumes at around six million tons in Alunorte and going forward around nine million tons in Paragominas. And we are now in the rainy season and there they also in Para province in Brazil and we are stabilizing the volumes in the challenging weather conditions.

In Primary Metal we continued with the $300 program that we have talked about previously. We have now delivered on according plan and we are now at $200 per ton improvement due to operational improvements that also reduced fixed cost in the smelters. The cash cost is still $325 per ton due to higher raw material cost, energy cost and also weaker dollar currency and we have added Albras since March 1, 2011.

Fourth quarter versus first quarter of fuel production Qatalum, we were adding the capacity of the smelter with high current density than previously announced producing now a bit of over 600,000 tons per year. We are very happy about the operational performance in stream lining the smelter, which had additional resources during the repair carried out that was finished at 15th of September last year.

We continue with our active portfolio management. Turning around to building system business, I had already mentioned the cost having $40 million Euro that is going to be delivered this year. We have sold our stake in Alpart, Jamaica aluminum refinery focusing on our Brazilian asset of raw material production and then also curtailing one potline 60,000 tons in Kurri and we are considering a further measures most probably in Kurri-Kurri going forward.

Hydro is much more global aluminum company 75% of Hydro business is now priced on a global basis. Bauxite aluminum that was priced globally means that we are less dependent on the situation in Europe. But if you look at our downstream business, about 75% of downstream business is located in Europe with regional European prices.

So 2011 was the first year, where Hydro was really a fully integrated aluminum company and we have achieved operational improvements in bauxite aluminum. We have completed a ramp up of Qatar. We continue our focus in the cost cutting exercises and the programs we had already introduced.

We’ve also increased out ambitions in some of the areas and we will maintain and we have a good financial situation and we will maintain the financial situation going forward due to the market situation. We have a strong focus on cash preservation and also the cash flow in the company.

So, with that, I leave the room to Jørgen.

Jørgen Rostrup

Thank you Svein Richard and I’ll take you through the numbers in somewhat more detail. If you look at underlying EBIT, we are at $1.133 billion, down some $500 million from Q3; aluminum prices and lower volumes, obviously as you probably have read about already.

I’ll get back to the business areas as normally later, just comment on that other and elimination reporting segment. It is negative numbers last quarter and then positive numbers at $92 million this quarter. The costs based on the common cost side, staffing, corporate cost and other things are basically unchanged quarter-on-quarter. But there is a 250 million positive elimination effect this quarter.

In very general terms, I would say that increased internal sales volumes and margins will typically lead to have negative elimination on this item. And opposite, decreased volumes and decreased margins internally on inventories would typically lead to a positive elimination effect, it’s kind of taking out the opposite effect on this reporting area and the recent 250 million positive numbers in this underlying $860 million is right there where we are guiding it between $152 million in the quarter negative.

Then to move over to quarterly result in a little bit broader context, it is half a billion than in changed quarter-on-quarter and we got $0.1 billion positive effect from somewhat lower raw material cost. It is divided on different raw materials and in the primary metal part of the business.

Volume side in primary metal and downstream business is down $0.3 billion Two-thirds of this actually is the down stream business. So it is illustrating that the volume development quarter-on-quarter that Svein Richard was talking about. Then the $0.2 billion is the effect of primary metal from lower prices. And the currency development, this is $150 a ton US dollar terms but only $390 Kroner a ton. So the dollar has obviously strengthened mitigating some of this effect in the quarter.

Then bauxite and alumina is delivering a $0.1 billion less and there is obviously many other small elements going against each other so this is mainly the explanation.

The key financials; revenue in 21.700 billion, it is down 9%. Again the same reason prices and the volumes obviously year-over-year volume is off our revenue, south 20% and 15% points of this is due to the inclusion of Vale and the remaining five is due to prices.

Then if we look at underlying and going over to report, we are reporting a negative EBIT due to the fact that we are having negative item excluded of NOK1.5 billion. The impairment is obviously being a major part of this; I will revert to that later.

Fairly stable and neutral financial items NOK26 million in charge, quite different last quarter as you remember where we took a financial item hit because of the strengthening dollar and based on the fact that we have most of our debt in dollar as a hedge to the revenue side.

Income; then reported income minus NOK388, tax expense, NOK361 and the net income of minus NOK749 and underlying basis positive net income of NOK876 in the quarter.

I am not going to comment very much on the other numbers here. Just drawing our attention to the year in total where we have a reported EBIT of NOK9.8 billion versus an underlying lower, so it’s opposite picture then for the quarter. This is obviously due to large item excluding the effect of the write-up of the Alunorte position that we had prior to the Vale acquisition.

If we look at tax and finance expenses, again I think the tables here should give you the yearly picture, fairly adequate. We have an efficient tax rate of 21% on the year. If we adjust for the curtailments, if we adjust for the tax rate gains effects on this; if we adjust also for the write-up of the Alunorte position we had prior to the acquisition, then we are on an effective tax rate of 32% which we believe is more where it should be over a normal year. It is then very low in this quarter, probably because we had two high taxes through the first three quarters.

And as I said finance on the quarter was very minor charge for the year ‘11 it’s a much more significant charge NOK1.3 billion. This is then due to the dollar development and particularly in the third quarter which gave a Forex loss of close of NOK1 billion last year or through ‘10 was opposite when Norwegian Kroner appreciated to the Euro and gave significant gains.

If we then look at item excluded and start with the biggest item on the list, we had impairments announced some weeks ago and the major part of that was the Kurri Kurri announcement that Svein Richard mentioned, NOK970 million in impairments and the remaining book value on those assets is approximately NOK1.2 billion. And as Svein Richard said, we are continuing our effort in Australia and evaluating what to do longer-term with the assets and production there.

Building Systems, we impaired NOK235 million based on the situation that Svein Richard commented on and we have approximately the same book value remaining. And we are quite clear that we will run those remaining assets going forward as we see today at least.

And then Solar business, we had a minor impairment and insignificant book value left on Solar.

Then we have kind of started on the lower side of this table, so why don’t we continue there and say that the gain on divestment is related to the Alpart refinery that we sold in the quarter. Going towards the top, we have rationalization charges of some NOK120 million. This is Building System and some smaller money on the Kurri Kurri. And then we have the three top items being the commodity influenced effects on unrealized LME, power effects and metal effects, approximately NOK0.5 billion in charge; all-in-all NOK 1.5 billion in charge in the quarter.

Moving over to our business areas, Bauxite and Alumina had an underlying EBIT of NOK159 million, a decrease of NOK143. It is significantly lower Alumina prices in the quarter than compared to last quarter. Although, we have had some positive effects from the aluminum hedge that we made related to the acquisition.

We have improved production in Paragominas, 6% increase in the quarter-on-quarter and somewhat lower production in Alunorte. But basically, production came out where we guided in third quarter, fairly stable in fourth quarter compared to the third quarter.

Going forward, again the focus is to stabilize and then gradually continue to improve production for these assets. We are going to realize what we see today, continued lower alumina prices, at least based on what we’ve experienced so far in the quarter and are seeing as we speak.

Remember here that most of the contract portfolio that we acquired from Vale is still based on longer-term contracts. They are gradually terminating around 2015, but they are now as a percentage of LME, with a fairly short response time to the LME. So we see the prices that we see on the curve.

If we then move over to Primary Metal; we had an EBIT underlying of NOK484 million, down 25% or NOK 169 million in the quarter. Of this NOK169 million decrease, NOK300 million was the effect of lower prices, lower volumes and to a lesser degree somewhat lower premiums.

Going the other way around it was somewhat better raw material cost. It was lower alumina and lower energy cost and also some one-off items positively influencing our numbers in the quarter.

Negative Qatalum result and remember then this is after depreciation and also after interest; and minus NOK 8 million our share of that activity this quarter. And minus one, they have a much more LME spot pricing into their numbers in Qatar than the rest of our portfolio.

We have as normal and as operational hedge sold 85% approximately of our production for the first quarter at approximately $2,150 so that is $300 down in the first quarter compared to fourth quarter, as you know we are continuously selling our metal production on three to four months time length forward. And this is obviously growing make our numbers lower for the first quarter reflecting the fourth quarter LME price picture.

I would also like to say that we expect throughout 2012 some relief in the coke prices. We see that market is softening somewhat right now. And then, we will disclose more information on the Qatalum next quarter and we will disclose EBITDA and EBIT now that Qatalum as Svein Richard said is on full production. They had a full production quarter in fourth quarter; we believe it’s a good time to disclose some more information on this metric going forward and we hope you don’t mind if we do that.

Metal markets had a negative result of NOK39 million down from positive NOK93 million in previous quarter. So this seemed like a quite significant change of NOK120 million quarter-on-quarter.

The currency and inventory valuation effect was largely neutral in third quarter. They were negative then approximately NOK120 million in this quarter, so the number is clearly flat if you look beyond the currency effects and inventory valuation effects. Going forward we will see some increased volumes here due to the seasonality. We believe that the premiums are still holding up, as Svein Richard said, but obviously results will continue in this business area to be volatile due to the nature of the business, areas of business.

Rolled Products had a 6% decrease in volume in the quarter compared to last quarter and this is the main explanation explaining probably two thirds of the decrease of close to NOK40 million, down to NOK86 million in the fourth quarter. The other one third of that change is related to margins as we see it somewhat softening in Europe and I think Svein Richard has been through the changes taking place there. It’s a mix of seasonality, obviously where fourth quarter is a weak quarter, but it’s also related to the weaker markets now than time back and also probably some destocking effects in there, but it’s hard to distinguish between these three different elements.

We expect therefore higher seasonal sales, but as I said in a continued probably somewhat weak market as we in particular see Europe being today. Then we are also making a technical change in how we operate things from January 1st, we have moved that Rheinwerk smelter to Rolled products, consolidating our German operation having more management for all our key assets. We have then one German agenda common management to handle the business there. And we also make sure we’re extracting the maximum of synergies with these two plants, the Grevenbroich hot mill and the Rheinwerk smelter being next to it. So Rheinwerk to the extent it will produce will be a sole supplier of liquid metal into the rolling system.

Extruded products, it’s continued hardship for extruded products. We are not pleased with the result obviously. It’s a challenging situation and market that we are facing result is negative NOK91 million, a NOK150 million change over the quarter. You would also see from last year that fourth quarter is typically a weak or the weakest quarter in a normal year, but still this is beyond seasonality effect.

And I think also here Svein Richard was quite clear where we see the challenges. We see no relief in the market. So we cut cost in the units and adapt to the situation that we see. We should again see some seasonality uptick, but we expect continued weak markets going forward. Energy, fantastic year for energy in 2011, it was a historical all-time high in EBIT earnings of NOK1.9 billion almost. We’re very happy with that and with the fact that we still have very solid reservoir positions in spite of the high production and good earnings in 2011, we still have solid physical position going into the new year.

The quarter ended at NOK449 million, somewhat down NOK65 million compared to third quarter primarily due to lower spot sales, just the way we are ending up with our own production, contracts in and contracts out and the spot sale was somewhat lower this quarter, but basically very much the same performance in both these quarters.

Going forward we expect high production, we are at very high reservoir levels. So there we expect high productions first quarter and if nothing change significantly also in second quarter. Average prices will therefore have a natural kind of pressure downwards with good reservoirs in Norway. Nevertheless we have certainly seen cold weather and some uptick in prices lately. So we just had to follow the weather development to see how this continue to develop.

Cash flow fourth quarter NOK1.8 billion in total change to a positive net cash position of NOK1.7 billion, NOK3.5 billion including generated cash from operating capital. It’s the operational situation and then we have invested net NOK1.3 billion and we have some currency effects on the dollar converting to Norwegian kroner strengthening dollar which adds then in the end 1.7 in net cash position. For the full year, cash flow from operation is or if I start on that right hand side of this chart may be, we are then at 1.7 still and if we then adjust in our discussion, adjust for the effect of the Vale purchase itself, that is a total effect of NOK11.5 billion this year. Half of that number relates to the cash part of the transaction with Vale. And the second half relates to the debt that we have consolidated from those assets that we have acquired. Those debt numbers of 5.7, half of that 11.5 includes then the consolation effects of minority possessions in Alunorte and Albras.

So if we exclude that, we have a change of NOK2.2 billion generated from 11 to 13.2, cash flow from operations NOK7.6 billion and net investments of NOK3 billion and then we have pay dividends and we have the same currency translation effects as the last element.

Some what increased net pension liabilities, these are slightly, we have slightly less liabilities than what we’ve talked about at Capital Markets Day. So, they are coming in at a change of NOK1.3 billion. The net liability after tax is now 6.9 and this is entirely due to a reduced discount rate on the Norwegian pension liability. So there is nothing new there from what we talked in December.

Then if we look at adjusted net debt, we recognize the 1.7 on our balance sheet as a net cash position. Our change, our share of debt in non-consolidated companies has increased slightly, again due to a stronger dollar, so translating into Norwegian Kroner. Than we have a 6.9 in net pension liabilities after tax as we explained on the previous page and then we have added a lease arrangement of two ships, two vessels that we will receive during 2012 on the [Alders] line. These two ships will be used for transporting bauxite to Alunorte so it’s a 25 years lease and I believe in the end when we receive the ships during the year it will be capital lease arrangement and we will most likely add it to the balance sheet at that time.

Then the Board of Directors have proposed 75 øre or 0.75 kroner share and dividend and I believe this will be subject to approval of course by the annual general assembly. It will be due for pay outs in May in total $1.5 billion kroner and basically it is in our view confirming the share holder dividend policy or the cycle payment the number seems to be higher than the policy itself but here we should first of all remember the extraordinary dividend in the beginning of this five-year period and also the differences this year between underlying and reported numbers.

Then Svein Richard will leave us to the summing up.

Svein Richard Brandtzæg

Yes. The priority this year is to continued effort in repositioning, the smelters cost curve. The $300 program continues. We are going to deliver additional contribution to through that program. We are focusing on the streamlining of the Qatalum smelter. We are focusing on operational performance in Brazil, in Paragominas and in Alunorte, stabilize the production in six million tons at Alunorte and nine million tons of bauxite in Paragominas and we are also adapting to the market in downstream maybe on our cutting capacity and cutting cost and adapting to the demanding situation especially in Southern Europe.

We have a strong financial situation and we maintain focus on cash specialization, which means that we are focusing strongly on net operating capital of course but also then on capital expenditures going forward for the potential projects evaluated including the copper project in Brazil regard to timing of our execution of these projects.

So that concludes the presentation. Thank you so much.

Jørgen Rostrup

Should we then check if there are any questions either here or I will also guess in the room?

Question-and-Answer Session

Rob Clifford - Deutsche Bank

Two questions, so the reason for the loss at Qatalum was higher interest and higher depreciation which basically points that the capital cost was too high, does this mean that its not feasible to do, modern smelters in that part of the world? That was the first question. The second was just on the ramp up in the extrusion capacity in China that you talked about, what sort of margins you think are sustainable in the extrusion capacity in China and can you compete in that market versus the local opportunities.

Jørgen Rostrup

Okay, should I go for the Qatalum question and you go for China.

Svein Richard Brandtzæg


Jørgen Rostrup

Well, then I was maybe not clear enough and I am sorry for that. My intention was just to say that the number that you see minus eight million in result for the quarter on Qatalum is not an EBIT number. It is a number after interest. And obviously it is a higher share of debt in that company and there is a fairly a significant depreciation level based on the investment. Nothing has changed in our view on the assets and on the cost level of the assets. What we are still working on is to use 2012 to get down to the targeted cost level for that and that is still what we have said earlier, a cost level of between cash cost of level between 1400 and 1500 US dollar a ton. Based on metal prices around 2000 - 2500 approximately.

Rob Clifford - Deutsche Bank

So where is that running at the momentum the cost, where would they run in the fourth quarter?

Jørgen Rostrup

Well, I don’t have that comment for you but obviously we believe that getting to this level being through this optimization, we still have people packing up their stuff after the investment project. So it still closing down the last tents and buildings and getting the trucks out of the sites. So we are then having our first quarter, fourth quarter being in full production. Its producing above the designed capacity, it produced at a level of 600 kilotons annualized production versus the defined capacities, it think is kind of 585. So during the year with the stream lining that we are talk about, we believe, we will at to this number that I referred with. Then we will get back based on first quarter numbers because this is the first full year in operation which saw detailed numbers on it.

Svein Richard Brandtzæg

Then we go to the question margins in China. First of all we are not competing in the commodity extrusion market in China. We are talking about high end first of all the precision tubing market in building extrusions and tubes in aluminum which is targeting now the automotive business in China but also the heat ventilation, air condition and refrigerator market which is a high-end market with good margins. This extrusion press that we are adding on to product is for the high end extrusion market where we are nowhere and in fact we have sent our profiles from Norway to China to supply the mobile communication market in China which is (inaudible) very advanced. That has not been able to produce in China but we see that doesn’t work for the local production also in China. So this is the high end extrusion market and the high end precision tubing market in China, not in margins. Better margins although it’s not far away from what we see in European market.

In Brazil the picture is also similar. We are targeting also the high end market and we have the position to being business in Brazil and we are heading at the high end extrusion capacity through this investment.

Jason Fairclough - Bank of America Merrill Lynch

Jason Fairclough from Bank of America Merrill Lynch. Two questions, if I may. Just on Kurri-Kurri, you aid you have taken the write-downs obviously opposed one line, there is two more lines there and there seems to be a bit of a hint difficult financial position, should we expect another write down and two more line closures at Kurri-Kurri, and that’s the first question. The second question is on Qatalum you said you don’t hedge, selling mostly of that on the spot. I applaud that. Would you consider doing that for the rest of the business?

Jørgen Rostrup

Okay. First on the Kurri-Kurri Jason, I think you should read out of it exactly what we are saying. We have taken down one production line and close to 1 billion in write-down. This was the most urgent thing to do simply because this was the less, least efficient production line and because we also get curbs on investments that way. And we are using very little money now on realigning in the plant. And this line is already out.

Unidentified Analyst


Jørgen Rostrup

I don’t want to be that specific but of course the dilemma in the plant hasn’t been taken away by taking out one line and having fix cost distributed on less volumes. So we are evaluating the situation, turning every stone and then we will notify you as soon as we have made any conclusions.

Then on the second question, I am sorry, I might disappoint you somewhat, and I know, you were, and for us, operational hedging works perfectly fine. It’s a reflection of the fact that we’re not in the standard ingot business. We are in the metal products business. So we are through this operational hedging, reflecting more or less the pattern of our customers, buying three-four months ahead of their, when they need the products.

It works well. It has this advantage that we are able to inform you about what our prices will be next quarter and you are obviously benefiting from that because you can understand more where we are coming. And we believe that you are well aware of this. So we don’t believe this will change.

Unidentified Analyst


Jørgen Rostrup

Until that is changed, Qatalum will stay on spot.

Owen Scarrott - Goldman Sachs

Owen Scarrott, Goldman Sachs, just a quick question. Now that you have improved the assets in Brazil, your mining assets, are you now looking at expanding Paragominas 3 and then CAP refinery construction?

Svein Richard Brandtzæg

I mentioned already that we are evaluating all projects including the CAP project with regard the timing and so I cannot give you more specific now on the CAP project today. But definitely we are evaluating it. With regard to Paragominas, the main priority now is to stabilize the production on the level that we have reached, because we have done substantial improvement in Paragominas and we want to keep the level going forward so that is the first priority in Paragominas.

Unidentified Analyst

You mentioned that you will get two new ships on a 24 years lease for shipping bauxite. Does this really makes sense because if you look at the Nordic exchange, the freight rates are down too very much, wouldn’t it be cheaper to charter the ship to meet on the spot?

Jørgen Rostrup

I must probably be a little bit more careful here because I am not a vessel expert and logistical expert and obviously we see a lot of volatility and also in the freight market that you are pointing to. These are obviously contracts that had been entered into long time ago. It is efficient and tailor-made ships for transport of bauxite from MRN and down to Alunorte. And as far as I am concerned that arrangements makes sense, but I am not able to bring any light on what that long-term arrangement was entered into in this market or that market and how that compares to today.

Tim Jarratt - Redburn Partners

Tim Jarratt from Redburn Partners, just two questions; firstly on growth, is it basically your focus going to be on aluminum and bauxite now and very little efforts on expanding primary aluminum (inaudible). And secondly, you keep mentioning that the Albras smelter is now included in your cash cost slide, so how big the damage that would do to the overall picture, what would it look like if you didn’t have the Albras smelter that?

Svein Richard Brandtzæg

Yeah, we do really get the priorities. It’s not necessarily to add more capacity to market than primary smelting. We have already increased our volumes in bauxite and alumina and we will continue to operate the aluminas and at that level we have now reached and we’ve got Albras, we have included that to the acquisition. Albras is in a more challenging situation of course due to the currency, but Albras is a very well operated smelter that we believe could be developed further in a positive way, but the currency in itself is of course impacting the performance of Albras smelter.

Unidentified Analyst


Svein Richard Brandtzæg

In the current pricing yes, but of course this is again depending on the total development of the currency.

Thorsten Zimmermann - HSBC

Thorsten Zimmermann from HSBC; had a question on working capital use. You had a very nice free cash flow in the fourth quarter a lot of it seems to come out of working capital. So the key question is now, aluminum prices rising and (inaudible) in the first quarter how much do you expect to have to plough back into the business in the first quarter?

And then maybe two questions on Alunorte; how much of EBIT is moving from one segment into the other and roughly could you remind us what the book value for Alunorte?

Jørgen Rostrup

Yes, let’s start last, I need to look at still and I think I’ll hear and seek advice, but its very, very low book values on Alunorte, I would stop there. I would almost say next to only the land, and land in Germany is valuable, but not to that extent that that is a significant number I would assume.

And then your second question was on the P&L EBIT effect, and given that we have said that basically we have run Alunorte and had our effort on running Alunorte at cash neutral basis and if we assume that [Svein] is correct on owning the land there shouldn’t be much depreciation in it either. There are minor EBIT effects of moving this up till now, moving it over to rolled products. And we haven’t changed the production output from that either as if now.

It makes sense for us to do it regardless or what is going to be the end game for Alunorte; if we are going to run it, it is clearly best to run it as integrated as possible with large growth scale rolling mill that we have there, both from a management point of view and also from a metal float point of view.

If we are going to close it down, it makes sense to do that with a present bigger system around it in order to do that closure as efficient as possible, because they are literally neighbors. So regardless what the outcome is, this is a good thing to do, but we obviously hope that we will be a part of the sourcing of metal to rolling mill.

And the first question was working capital, thank you. Yes, we had a release of working capital this quarter and we don’t expect any significant uptick in first quarter, but you never know; it’s definitely based on those factors that you are mentioning besides how much production we run and we have done at least in the fall what we could in order to adjust production to lower sides. The way we have done, core metal ingot, re-melting etcetera, we have taken that down in order to take down production with somewhat softer markets.

So we will continue to strive for that. We are busy working on working capital and it is one of the topics that we feel are important and we feel we still have a way to go. So let’s see.

Okay. If there are no more questions should we call it a day or…

Svein Richard Brandtzæg

It looks like there are no more questions. So thank you very much for your attention.

Jørgen Rostrup

Thank you.

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