ERAMET S.A.'s (ERMAF) CEO Christel Bories on Q2 2021 Results - Earnings Call Transcript
ERAMET S.A. (OTCPK:ERMAF) Q2 2021 Earnings Conference Call July 29, 2021 4:30 AM ET
Christel Bories - Chairman, Chief Executive Officer
Thomas Devedjian - Chief Financial Officer
Kleber Silva - Head of Mining and Metals Division
Conference Call Participants
Alain William - Oddo-BHF
Good morning, one and all. Welcome to this presentation of our Half Year Results for H1, 2021. Our performance is robust and promising, running on the back of excellent operating performance and a stronger price environment. So we're optimistic when it comes to the next few months.
So about this presentation, I will start with a short introduction, then I will share with you the progress that we've made in terms of our CSR roadmap. Corporate social responsibility is gaining pride of place in terms of our general roadmap.
Our CFO, Thomas Devedjian will present our financial performance, and then I will be back to discuss our operating performance, as well as the inroads we have made in terms of our strategic roadmap and then the conclusion. By way of introduction…
Obviously, let us zoom in on the performance of our first half strong performance. So revenue is up 11%, so close to €1.9 billion. So 82% of that revenue comes from M&M, Mining and Metals. Manganese accounts for 47% of that business. EBITDA is up the strongly. So, 2.5 times that what EBITDA was in H1, 2020, so close to €300 million. Our operating income close to €160 million.
Net income group share is €53 million and our free cash flow is really good. As you know, there is an unfavorable seasonal effect in terms of our mining operations in Q1 and despite that, there was excellent cash generation. So €111 million in cash generation. This means we've been able to reduce our net debt and we're now back on our bank covenants and within the meaning of our covenants our gearing has been brought down to 92%.
So excellent performance as I said, which is first and foremost the result of our inroads. The inroads we have made in-house intrinsic performance accounts for over two thirds of our improved EBITDA. As you can see, our intrinsic performance exceeds €110 million and this mostly ties in with a growth in volumes, and also cost adjustments, particularly within A&D. And this is true, despite the extremely poor operating conditions in H1 in New Caledonia. So by and large, we've made excellent inroads within the group.
So markets have kicked back up, which means that prices have kicked back up in most of the countries where we operate, but not all and this is one specific feature of our Group. As you will see, manganese ore prices have not increased. So the economic recovery has also led to a strong increase in the price of some of our inputs, including freight costs. And obviously, this has weighed down our cost structure and also the dollar has depreciated against euro which has affected us. So by and large, our external factors have improved our EBITDA only to the tune of €60 million. €60 million is something, but it's not as much as the progress we've made in-house.
As I said, positive free cash flow of €111 million with a high contribution from M&M, Mining and Metals division. And also, this is due to the fact that our HPA Division has strongly reduced is its cash burn relative to last year. So cash burn has dropped by more than three fold. So net debt is €1.2 billion. And also, we have continued to make significant inroads in terms of our CSR roadmap, which is really important to the Group.
Now getting back to our economic circumstances, it's important that we drill down on that. We have enjoyed a favorable press environmental this half year, except for manganese ore, which as you know, is the most important commodity for our Group. So flat manganese ore prices relative to H1, 2020. So, plus 2% in dollars, but minus 7% in euros because the dollar depreciated over the period. However, we have a strong rise in manganese alloys prices over the half year. I'll get back to that later, but the increase ranges between 20% and 30%.
And if we look at manganese alloys along the impacts is in excess of €64 million. So manganese prices are up and also nickel ore, because there's a shortage of nickel ore on the market at the moment prices are up significantly, up 40%. So by and large, the press environment has had a positive impact to the tune of €190 million, which is a considerable impact despite the fact that manganese alloy process stayed flat.
Also, input costs have increased significantly, including freight unit costs. We're talking €55 million and we're expecting this trend to continue to go up significantly over the next few months. Other input costs, such as raw materials and energy, so those input costs are higher to the tune of €24 million and also there's an unfavorable ForEx impact €45 million. So when you add it all up, the impact of net external factors is favorable, but only €60 million over the half year as we will see in our forecasts we expect a much higher impact and much more positive impact of external factors in H2.
Now in terms of our different businesses, M&M is still on an upward track. Operating performance is improving, except in New Caledonia, very poor weather conditions there, difficult operating performance or difficult operating conditions earlier this year. If we zoom in on manganese, organic growth continues at a steady pace. I'm referring to the Moanda mine in Gabon. So up 13%, we're talking 3.1 million tonne of ore produced in Gabon. However, we shipped only 2.9 million tonne of ore out of the 3.1 million tonnes. And this compares with a very high level of shipping or transport; we actually reduced inventories by transporting a lot in H1 2020.
This year, passenger traffic resumed. I'll get back to that in a minute. And we also had railway problems in Q2, which means the transport was impacted. Like I said, the baseline that we're comparing ourselves with is very high. So manganese alloys drove this trend up 16% and the product mix is much more favorable.
In terms of nickel, there are two very different situations. Weda Bay on the one hand is in top form, enjoying remarkable growth. In H1, the mine produced 7 million tonnes of nickel ore which is twice as much as what we produced over the full year last year, so huge ramp up, an extraordinary ramp up of mining operations at Weda Bay and the plant is operating at full capacity.
The plant developed 20,000 tonnes of NPI or Nickel Pig Iron in H1 this year. This is in line with its nominal capacity. Now the situation is very different for SLN. You may remember that SLN started the year in very difficult circumstances. The mines were blocked earlier this year and at the end of last year, at a time when we're supposed to put together inventories at the plant for the dry season. So because of those blockades, we have been unable to replenish the inventories necessary to cope with the rainy season and this was true for all Caledonia and operators.
The rainy season was extremely unfavorable. Rainfall was twice what it usually is and the rainy season lasted twice as long as it usually does up until June. So operating conditions were very difficult. This means we weren't able to increase mining production as much as we wanted, but it's still up 5% despite the poor weather conditions. Exports are slightly up, so up 2%. It's mostly the plant that suffered quite a bit because it was purely fueled and supply was poor, inventories were low. So ferronickel production is down 22%.
Now in terms of mineral sands, we still operate at a very high level, hitting operating performance records at GCO. So by increasing efficiency, we're now able to maintain production despite the lower grade of deposits, and also operational performance is strong at GCO. And we're producing quite a bit of CP slag at TTI in Norway.
So we're also making inroads in terms of our corporate social responsibility roadmap, which is very, very important, it is core to our model. And it's also very much in line with our new corporate purpose, which is now been enshrined in our statutes, in our articles of association. So CSR has long been at the heart of our roadmap. And our roadmap is based on three main pillars. We are a corporate citizen committed to a sustainable future. So we have a commitment to people, to the planet, and to responsible economy. So 13 objectives for these three pillars.
With quantitative operational indicators we have made a lot of inroads, making -- made a lot of progress in terms of these 13 indicators. For two years now, we have on-boarded the indicators of this roadmap into our LTIP our Long-Term Incentive Plan for the Group's executives. Also, we recently on-boarded two CSR indicators our targets in our bank documents. I'm referring to Co2 intensity and the need to reduce it and also the need to reduce our LTIR.
So I'm now going to review every single one of these 13 targets. What's really important is safety, safety of our employees and our contractors. We're still getting better on this front. So the TRIR has dropped by 40%, relative to last year. And since 2016, there's been a six fold reduction in the TRIR. So the dynamics are really good. This is true for all of our peers and it's kind of a difficulty for the entire sector; we're still experiencing severe accidents, sometimes even fatal accidents among our contractors. So we have a strong focus.
Our management is strongly focused on daily operations for safety routines. So we pay close attention to the safety of all our employees, as well as all of our external providers and contractors operating on site. And this is quite a challenge because we have a lot of subcontractors. And in those countries where safety standards are always upheld, we need to move forward and make things better and that's going to be a challenge for the Group of the next few months.
Now, if we look at our other key performance indicators in terms of our CSR roadmap and let me say a few words about the climate. We're not just on track, we are ahead of schedule in terms of achieving our 2018, 2023 CSR roadmap. We were planning to reduce our product CO2 to intensity and last year we increased our climate related targets and these targets have just been approved by the SBTi Science-Based Target initiative. So we have received validation from SBTi. We have a credible roadmap. So we're planning to reduce by 40% our scope 1 and 2 CO2 emissions in absolute terms by 2035 and also achieve carbon neutrality by 2050.
Now in terms of the communities we have made a lot of progress. We have set up two CSR funds working together with Gabonese authorities, and they are working really well. In H1, they focused quite a bit on infrastructure, such as access to water, roads, et cetera. And we also broke ground on the very first Biodiversity Foundation in Gabon; it is called the Lékédi Biodiversity Foundation and Eramet Foundation.
Also, we try to maximize our positive impact on local communities. We create jobs around our activities and we also make positive contributions to healthcare and education. These are strategic priorities in our CSR roadmap. I'd like to remind you that 100% of our mining sites enjoy ISO 14,000 certification. Now our CSR performance has been recognized by non-financial rating agencies and our ratings are improving year-on-year. We always stand on the podium, look at our different ratings, we have achieved a score A with the MSCI corporate rating. This means we rank among the top 30% of Mining and Metals operators.
In terms of ISS ESG we ensure a prime status. We are part of the 1st decile in ISS ESG Mining & Metals. We enjoy Score B, but we also rank among the leading companies in this sector; I'm referring to the Carbon Disclosure Project climate change targets and also Vigeo. We also stand on the podium here, we are third out of 44 companies in this panel. We have achieved an advanced level. So we have a score of 66 out of 100 and we are very proud to have received external recognition for the progress we have made. Once again, making such progress is so important to us. It is part of our strategic model. It is part of our management priorities.
Now our financial performance, handing over to our CFO, Thomas Devedjian.
Thank you, Christel, good morning to all. Now, results that are strongly up versus H1. Last year as Christel indicated, you see first of all sales up 11%, EBITDA risen of over 150% close to €300 million as against 120 last year. Income group share positive €53 million. Last year we had major depreciation net debt down by just €100 million and our gearing covenant we asked for two waivers in June and December last year from our banks. And our gearing under the definition of our documentation falls below 100% so no need for a waiver. Roadshow goes from 3% to 11%. So these are metrics that are all improving. Group EBITDA is sharply improved. We have both Mining &Metals divisions that is up strongly €337 million EBITDA alone.
We were just over €200 million last year. So first off, we have manganese production up sharply and also the price of manganese alloys that are rising sharply, set to continue and we're going to benefit fully from that effect in H2, very strong performance of mineral sands our mine in Senegal, and our plant in Norway.
On the nickel front, we're sharply reducing the nickel loss primarily, thanks to improved nickel prices even if we suffered as Christel said from particularly poor weather conditions this half with exceptional rainfall in New Caledonia. And lastly our high performance alloys division that is to say Aubert & Duval, high steel dividing its loss by six. We go from minus €66 million to minus €10 million EBITDA loss, that’s a strong improvement. This EBITDA improvement comes two thirds from our internal performance and one third through external performance. Internal performance shows an improvement across our businesses, except for SLN where ferronickel volumes are down, but if we leave aside that drop in ferronickel, we're up across the board with volumes that are growing.
Aubert & Duval significant cost reduction and activity improvement the external factors, well in manganese essentially an increase in the price of manganese alloys and we have this strong increase in nickel price. But however, we are suffering from the increase in cost of freight across our seaborne operations. Maritime transport costs are lot more than sharply up, so that deteriorates EBITDA by €55 million, and the slide in the dollar acts in our disfavor, because we went from about $113 to $123 rate so that penalizes us for about €45 million negatively on EBITDA.
So net income group share €53 million last year. We booked as said in performance for 426 and the lithium mothballing costs this year. In terms of one off events, we have the cost cutting reduction planned Aubert & Duval with a charge of some €20 million on that and the benefit and that's consolidated at equity, the performance of Weda Bay that impacts us very favorably very positively, that’s share an income from associated companies plus €77.5 million. And of course we have our taxes paid in Gabon and Norway and the minority interests Comilog positive and SLN negative.
Turning to our industrial CapEx that really under control in 2020, we slowed the pace of CapEx and that was felt fully in Q1. We had a reduction in CapEx of through H1, 2021 on growth, CapEx where and I'm exclude lithium here as that was stopped last year, we're about on a par with last year's level with a split between the growth of Comilog to increase Comilog volumes we need to invest and of course the renovation of the railway in Gabon once we transport. We produce the ore we need to transport it and so we have an investment plan on the railways, current CapEx down 32% and there will almost certainly be a catch up significantly in H2 when we will return to more normal CapEx levels.
This leads us to revise our CapEx down, guidance down. We were at €500 million at the start of the year. We're revising our CapEx guidance down to between €400 million and €450 million. The strong free cash flow generation over the half €111 million to be compared with a cash burn in the first half of last year of €210 million is obviously due to the strong performance of the Mining & Metals division, but the sharply improved performance of assets that underperformed last year, that's to say SLN and to a far lesser extent Sandouville, SLN and essentially thanks to price improvements.
And on the high performance alloys front we divided the cash burn by more than 3 and we have about €50 million of cash burn on HPA, whereas last year we are €165 million, yes so a sharp improvement there. And of course, the major contributors remain manganese and the mineral sands to a lesser extent. And lastly, we see appearing a third big cash generation engine, which is Weda Bay that generates €70 million of free cash flow over the half. So our growth plans, as well as addressing difficult assets is paying off and it's reflected in the free cash flow level. So where does the improved net debt situation come from? Of course, first and foremost from the improved operating performance.
The Mines & Metals division generated €250 million operating cash flow, whereas the high performance alloys division consumed some €40 million in operating cash flow. So, on both divisions, significant improvements have been recorded. And then next we have the Weda Bay dividends, because we're a minority shareholder to the tune of 43% and the company that holds Weda Bay at 80% because we have an Indonesian partner. So we're redistributing the results generated by Weda Bay between shareholders very regular basis. That's the bulk of the improvements recorded.
Our cash position remains very strong. We were at over €1.8 billion at the end of December and at the end of June we're over €1.9 billion gross cash. In July, we did two things given this improved cash position, we seize the possibility of an early repayment of the TiZir bond coupon of 9.5% very costly, we reimbursed it a year early, so we reimbursed $240 million and debt that was costly. And furthermore, we reimbursed over half the drawing of our RCF line that was drawn in total at €980 million. In July we repaid €500 million of that. So the pro forma liquidity of this line that remains drawable is at over €1.7 billion to date.
No major debt maturity short term given the TCM bond early repayment the major milestones are in 24, so no significant maturity before then. Our net debt is including IFRS 16 is of the order of €2.5 billion at June 30 and had about 80% of which at a fixed rate excluding the RCF.
Back to Christel.
Thank you, Thomas. Now let's look at our operational performance starting with the Mining & Metals, M&M and our biggest business which is manganese. Now the underlying factors include carbon steel, and output in H1 boomed up 13% around the world in H1. This ties in with the strong recovery in the economy, so up 12% in China, which accounts for close to 60% of global carbon steel output. That's because the automotive and construction sectors in China have been extremely dynamic.
And Europe and the U.S. are up between 16% and 18%. Starting from really low levels, they have yet to return to pre-crisis levels, but the recovery is extremely strong there. So the downstream segment is extremely dynamic. So global manganese ore consumption is up 10% so 10.5 million tonnes. And manganese ore output followed, not necessarily at the same level. It is up 9%, so we're talking 9.8 million tonnes. So as you can see there's a slight shortfall between ore production, ore output, and ore consumption.
Now in gray and blue on this curve, you see the ore inventories, which reached record highs and as a result, the deficit had very little impact on prices. So manganese ore prices remained relatively flat, so that's the blue line on the graph, so $5.1 per dmtu in Q1, so barely 2% more in dollars than last year, and plus 7% in euros. Inventories have slightly down but remain relatively high, so 11 weeks of consumption.
On this slide; however, you see that the red line is the manganese alloy ore prices soared because of strong demand and shortage in supplies. Problems with capacity due to COVID and inventories went down throughout the value chain. It's hard to get the entire chain working again. So the market is under supplied, which have pushed prices up. And as I said before, refined products, prices are up 30% and commodity prices are up about 25%. So what do we expect? We expect prices to remain very high over the next half year.
I'll get back to that in a minute. Price levels have already been established in Q3. And they look really promising for Q4. If we look at our own performance, as I said before, we're still growing our manganese ore output so up 13% in Gabon. I talked about the transport situation, which was slightly more difficult, but remained higher than last year. Well, last year's baseline was relatively high, because of COVID passenger traffic was brought to a standstill, which freed up a lot of capacity for freight transport on the TiZir railway. So our baseline was already high and there were railway problems in Q2. As a result only 9 million tonnes were produced or rather were shipped.
Not in terms of the railways, significant works are being done at Setrag level in order to improve reliability of the tracks and increase transport. The seasonal impact is getting better. This is the dry season at the moment in Gabon and as a result of our modular investments into the mine, which will improve output levels due to the favorable seasonal impact and also progress at Setrag.
Our ore production target is 7 million tonnes for the mine and at the very minimum we're targeting 6.5 million tonnes of transported and shipped volumes, now volumes transported and shipped by Setrag. As you can see, we're already seeing improvement in transport levels in June and July. Now there is one aspect that had a significant impact on our ore business, freight. At this juncture, freight is up significantly. And these are the fundamentals of our own transport costs. I'm talking about freight costs per se and fuel costs. These are the two aspects that we need to address in terms of our shipping costs.
As you can see, the blue line is up, so fuel cost is up 22% and freight costs themselves, if we have to ship by road. So, West Africa to China, this is up 153%. And so you can see the curve; the line is growing throughout the half year. So, levels will remain high in Q3 and the impact on H2 will be significant. Regarding H1, by and large, when we factor in these two aspects, transport costs are up 60%.
Now, if we look at manganese alloys, there are two positive impacts. First of all, price stability in terms of manganese ores, and also selling prices have surged, and obviously, this is good for our profit margin when it comes to our alloy businesses. And we're going to maximize that by improving output.
Our capacity, we usually operate at full capacity, but we've been able to improve output by 7% from one half year to the other. We've also been able to improve the mix of refined products, that's the part of yellow is that generates the most profit margin has jumped from 49% to 655% of the total. So that's a 20% improvement from half year to half year, when it comes to manganese alloys.
And as you can see, we're seeing on the right hand side, the price of alloys that is soaring and the price of ore that remains relatively flat and this trend continues into Q3 you have already saw the volumes in Q3 and prices are very high and Q4 is looking pretty good. So we expect this maximum margin impact to continue, be hit a record level at the end of Q2.
Now, nickel again, the market fundamentals are excellent. Stainless steel output has soared across the world up 28% which is amazing. It is true that stainless steel was hard hit by the COVID pandemic in H1 2020. So demand for primary nickel is up by 28%. And primary nickel output is up by only 12%, 12% isn't bad, but only 12%. This is mostly driven by the rapid growth in Indonesia and NPI, Nickel Pig Iron output, so up 81%. So by and large overall throughout the world, if we look at Indonesia and China, NPI accounts for 50% of nickel output globally, which is huge share and the fact that demand is so strong.
And the fact that output is keeping up, but not at the same level, there's a 66,000 tonne shortfall in the first half of the year. And this has led to a 40% increase in nickel prices and LME prices and also a reduction in listed inventories. Now ferronickel prices are also increasing by 43%. Now in terms of LME and SHFE inventories, we're talking more than nine weeks consumption declining.
There's something you need to bear in mind. For about a year now, ferronickels or ferronickel alloys have been sold at a discount relative to LME prices, because there's a glut. There's a glut of ferronickels on the market, so much NPI is available. And even though ferronickel prices have gone up, there's a discount and you can see it on the screen. So the blue line is the LME nickel price and the red line is the NPI price. That's a listed index, so we're able to report it. As you can see, there's a significant discount, even though they follow the same trend, but there's still a gap between the two lines.
Now this discount was particularly strong. See the growing gap in Q1, we're expecting this discount to wane in H2, but we believe this trend is going to continue for some time still. So nickel ore is also at high levels growing from one half year to another, so up 40% almost, so very high levels, $100 approximately per tonne. This level was reached late last year.
Ore stores in Chinese ports have reached historically low levels and this is due to the unfavorable seasonal impact, both in the Philippines and in New Caledonia. Now, we bore the brunt of that but at the moment there is a shortage of nickel ore on the free market. And today, inventories come to one month, one month’s consumption which is very low, and this is why prices are up that way.
Unfortunately, we at SLN didn't fully enjoy those benefits as I said, by way of introduction. SLN was severely impacted by the blockades in December 2020 and early January 2020, 2021, which is when we put together inventories and we increase our stocks to cope with the rainy season. So we started with very low inventory levels, almost nil, and the season was disastrous, and everybody suffered as a result.
Our mining output is up by only 5%, up 5% versus 16% last year, so it's still an increase but much lower than last year. And also this affected plus [ph] which received very little ore and low grade ore, so output, plant output volumes are down 22%. Obviously this exploded the cash cost. And as a result, the drop in ferronickel’s, we're talking €70, 17% [ph] and also a negative ForEx impact. So the dollar depreciated relative to the euro and this accounted for $0.50 in terms of cash flow deterioration. So the situation is currently improving.
Finally the dry season has arrived. So since the last few weeks of July, SLN has been operating pretty much normally and we're expecting the cash costs to significantly improve in H2. This being said, the future of SLN is still undetermined that all things we still need to secure first of all the export authorization. As you know, we have a permit to export 4 million tonnes of ore and we are close to saturation this year. If it hadn't been for the disruptions, we have been pretty close to 4 million. So right now we're maintaining 3.5 million tonnes in exports and we're expecting to clear that bar next week, but we have not reached that. We have not received that authorization yet.
We're expecting or we're hoping authorization for an additional 2 million tonnes. There was no government in New Caledonia for about five months, so since February, well the previous government fell and the new government was put together only mid-July. So now finally, New Caledonia has a government that can approve that additional export capacity. So we have resubmitted our request. So we have called upon the new government's sense of responsibility, because, this request is absolutely vital in terms of SLNs future.
Also, reduction in electricity costs, that's something we need to do. We have plans to build a new power plant for Doniambo. The consultation process is underway. Things are proceeding at pace and we are expecting firm bids that we will look at in Q4, 2021. I would like to remind you that when it comes to export authorizations, considering current prices, 1 million wmt of nickel ore means an additional contribution of 30 million to EBITDA. So nickel is very successful, thanks to the market conditions looking up. So Weda Bay, we're very happy with our nickel business in Weda Bay. We beat record mining production levels.
Now I would like to remind you that ERAMET operates this line, this mine as part of a JV with Tsingshan a Chinese group. So ERAMET operates the mine and the plant is operated by Tsingshan, so it's a joint venture. So we're maintaining record production levels, a 7 million wmt of nickel ore produced in H1. So we're supplying not just our own plant, but all of the other plants that are currently being built. There are six of them now that are part of the Weda Bay Industrial Park downstream from the mine.
So these are operations that are extremely competitive with high contributions. Metallurgical operations as well the plant is operating at full capacity. And needless to say, considering this excellent performance, we are revising our guidance 12 million tonnes for the year, we already secured 7 million in H1, but Indonesians in the middle of the rainy season, which may slow down production a little bit. But we're pretty confident that we will exceed the 12 million tonnes over the full year. I like to remind you that cash flow from Weda Bay is €57 million, as Thomas said in terms of dividends paid and the rest is the trading business because we sell ferronickel produced by the plant.
Now mineral sands, market conditions are very good. There's robust global demand for zircon output increases at a slower pace than demand. This leads to a market deficit in H1. This was not really felt in this H1 because the baseline last year was very high. It's a market in which you negotiate prices on a quarterly basis and sometimes on a half year basis with some customers, so there's a lag between market prices and what you would expect. Now prices are expected to rise in Q3, so we're looking forward to excellent zircon business in H2.
Same thing for TiO2, Titanium Dioxide, manufactured in our plant in Norway. Here again prices do not reflect the markets' positive trend. They are expected to increase in H2. Demand is good. Supply does not match demand and our operations are working really well. I won't get back to that. GCO is beating records year-on-year in terms of OEE, Overall Equipment Efficiency, and this is an opportunity to largely offset the fact that well, obviously when a mine starts operating, it starts operating the richest deposit and then moves on to less rich areas or deposits, and output is good, production is good at TTI in Norway. So we fully feel the positive impact of favorable market conditions.
Moving on to HPA, High Performance Alloys. The market conditions for A&D is obviously very different. We're still bearing the brunt of the aerospace crisis. There's a huge decline on the aerospace market. Air traffic is only 60% of what it was prior to the COVID crisis. In H1 last year 70% of A&D sales were as aerospace and now it's only 58% in H1, 2021. And despite the good news regarding single- aisle aircraft, well, that's good news for the future. It's not yet reflected in our order book. So there may be good news in terms of single-aisle aircraft and long range aircraft accounts for 70% of our A&D aerospace sales. And as you know, long range aircraft are struggling, so we're not seeing any recovery anytime soon. And then defense, nuclear and energy, those markets are improving and this helped offset the aerospace crisis.
If we look at what this means in terms of sales and EBITDA for A&D, there's a strong contrast between aerospace sales which are down 24%. So 52%, actually when you compare it with H1, 2018. So it's a very strong drop, and again, a 24% drop between H1, 2021. The beginning of the year wasn't impacted by the crisis yet and H1 this year. However, energy and defense sales are up 74%. So, by and large, sales were down by 9%.
The division has worked really hard to address the cost structure; this is starting to pay off. So 35% decrease in commodity costs. Personnel costs are down 15%. And this has led to €33 million in savings on labor costs. By and large, EBITDA is still in negative territory, but much less so than last year, so minus €40 million versus minus €52 million last year. Free cash flow is still negative territory, so minus €38 million and this includes the sale of a small affiliate, a small A&D affiliate called Brown Europe. So there was a positive impact of that sale €13 million.
A&D suffered from the need to upgrade quality processes. This was extremely time consuming. This hampered production, but we're finally seeing the light at the end of the tunnel and by the end of the year we're hoping to be done with that. We're hoping to be done with this quality processes, review process. So hopefully by the end of the year, we will be out of the woodwork.
When it comes to Erasteel, strong momentum in terms of sales. This is due to the market, but other factors as well. Sales were up 20% from one half to the other. The underlying markets, mostly automotive increased less than that. So there's an underlying market on the one hand but also shareholding acquisitions and this means a significant increase in sales. So EBITDA is back in positive territory. Free cash flow is still in negative territory, but this is due to the very strong increase in sales which has increased the working capital requirement despite strong efforts to reduce the number of days of revenue.
So the reduction is 38 days, okay? Despite the minus 38 days of sales improvement. So strong momentum in terms of Erasteel’s recovery, and we're confident when it comes to what will happen in the next few months. So, so much for our operating performance.
Let me say a few words about our strategic roadmap. We're still making inroads; there are three pillars in our CSR roadmap. So pillar number one, as you will know, we need to reposition or fix our least performing assets as Thomas rightly said. We have made progress in terms of improving EBITDA of such assets in H1. We have almost reached breakeven point. That's not our final target, but we are on track. SLN, I talked about it, but SLN's business model has proved relevant in H2 last year, and the process weren't where they were today and yet SLN made money, but we need to manage to operate SLN properly.
Now New Caledonian Authorities hold all the cards. The ball is in their court. Management has done its job. ERAMET has supported its leadership team, its business model. It has funded this subsidiary and for some time now, we said that we would not reinvest into SLN. SLN needs to fend for itself. It needs to secure its own future. And we hope that the New Caledonian Government will give SLN the wherewithal that it needs, in order to implement this new model, which is fully efficient.
When it comes to A&D, selling this asset remains the preferred option and we are currently working to make this happen. This is something that we are focusing our efforts on. And in parallel, of course, we're adjusting A&D's cost structure to match the market situation so as to improve its performance and reduce its cash burn.
The Sandouville refinery, a decision has been made to divest this asset. We discussed this in February already. We are in the advanced stages of negotiation with a potential buyer and we're hoping that the divestment will be finalized sometime soon.
And when it comes to Erasteel, I talked about the recovery process, the strategic review. We need to see how we can reposition Erasteel outside the Group, and obviously that's not our top priority right now. When it comes to the middle pillar, cash generation, and the need to grow our most attractive businesses, now this is fully in line with our roadmap. We're actually ahead of schedule. Manganese ore is up. Manganese output is up. Weda Bay is beating all output records and all are exceeding expectations and mineral sands are on track to meeting their targets.
We've made a lot of inroads regarding the cash generation priority. And when it comes to pillar number three, expansion. Expanding our portfolio to include metals for the energy transition, last year, we mothballed the lithium project. We're currently looking at how we can restart that project, because the strong demand for lithium and prices have increased significantly in terms of battery. But we need to do this in a way that won't weigh down our balance sheet. So no decision has been made yet, when it comes to the lithium project, but clearly this is an excellent project for the group. And if we are able to restart the project without weighing down the group's balance sheet, we will do so, and we're moving forward in terms of a partnership with BASF.
Prefeasibility study is underway, in terms of diversifying Weda Bay operations to include cobalt salts in particular, and also lithium-ion battery recycling. So the R&D program is ongoing. So 2021 will be a key time for repositioning our pillars. We will continue to make a progress until the end of the year. We've made excellent inroads in terms of pillar number two. So this has much improved our financial situation, so that gradually we can restart working on pillar number three, once all the conditions have been met.
So by way of conclusion, thank you for your patience. I know these are long winding explanations. So we create a strong momentum in H1. Market conditions are positive. Prices are up pretty much across the board. In H2, there's a favorable seasonal impact in H2, so we expect to deliver excellent performance throughout the year when our plans for organic growth and the favorable seasonal impact are expected to boost the mining output in H2. Weda Bay is expected to continue delivering high output and cash flows. Manganese alloys will operate at excellent margin levels in H2.
Pillar one, that's something that we're currently addressing, as I said before. And as a result, we have confirmed our volume targets for ore manganese, so 7 million tonnes to be produced, and also 3.5 million worth metric tonnes of nickel ore exports at SLN. We have increased our output targets for Weda Bay, so over 12 million worth metric tonnes of nickel ore produced at Weda Bay. So our EBITDA target is above €850 million in 2021, considering this buoyant price environment, both in terms of market conditions and operations.
So that's about it for us and of course, we are now on hand should you have any questions.
A - Unidentified Company Representative
We'll take our first question from the room. There's a question there in the center.
So my question, you have €27 million of non-recurring costs. Could you detail the utilization? Also the question on Weda Bay to know how far you can go in terms of mining production without having major investments? And then far more forward looking on the battery, there's more and more talk about replacing nickel and cobalt with manganese, the batteries based on manganese, you're working on that?
Unidentified Company Representative
Well, that's a great many questions. I hope Thomas jotted those down because I didn't have my pen with me. So first question, because the microphone wasn't switched on and the first part of your, so first question was on manganese alloys, production lower than in Q1 versus Q2. There are two reasons for that. We stopped a furnace I mean, that was programmed, that furnace stopped because we have to realign our furnaces on a regular basis. There was a programmed furnace shutdown that occurred in Q2. And then the mix is important that's to say, the last year and early in the year, we did a lot of commodities, that's a lot of volume, not necessarily margins, refined alloys, perhaps a little less volume, but more margin. We really want here to push, when we can the most to refined alloys that generate far more than commodity, so that's in response to your first question.
Second question, concerned how far we can go and Okuma [ph] without using the track. Oh sorry so that's without the washing unit can, Kléber, Can you speak to that?
Well, for Okuma [ph], actually there's no ladders, that is we can continue to have the dry pricing and the wet treatment goes with it, that's the strategy that delivers the 7 million. And going forward, dry -- first dry treatment that is maintained that really is the bulk of our increase in the modular washing unit. So we'll come on stream the first at the end of 2022. Well, in fact, we can ship everything that is dry process, store what has to be washed, but there are limits to what we can store, when the washing units are there we process the portion that must be concentrated and wet process. There was a question for Tom?
Yes, there was a question on the non-recurring cost if I understood the question here. Are the operating income and expenses minus 27? Is that what you're referring to precisely? So the detail is essentially, as is put in the note, the Aubert & Duval adjustment plan for just over €20 million and there are the remaining costs of the lithium project, that’s the bulk of it. And then there was a question on Weda Bay, how far we can go without expanding major CapEx? Well, we can go quite far is the answer to that. I mean, it's a mine opening. So the CapEx is building roads, exploring mining, planning, et cetera. We're going to continue to make progress without major investment.
Especially given the size of Weda Bay, I mean, that really quite minor investment. Just to follow up on that point, the fine thing is that as Christel said, the investments are marginal. It's -- they have a huge, it's a huge mine reserve with a profile very close to the surface, that is that these mines that give tonnage is with not a big increase in coverage rates and huge investment. So we can go quite far. Excellent quality, very good source of reserves and the associated costs, I mean the profile is very, very, very good.
The final question on the batteries, battery technology today, so I think we have Philippe in the room with us who will be able to, Philippe is our Head of Strategy, Business Development, Innovation, so he's really on top of these issues. The various battery technologies, there are a lot of R&D worldwide. And there are lithium-ion batteries, lithium, some on lithium the takeaway numbers between 20 and 25 we take into account the various battery technologies. Global lithium consumption will increase fivefold, and then for the cathode material nickel, cobalt, iron, manganese, we plan a mix of various battery technologies depending on the utilization capacities and the performance batteries LFP, lithium-ion that’s developed a lot in China for buses for E-bikes and conversely in Europe we're seeing the NMC, Nickel Manganese Cobalt technology, but little lithium manganese alone for reasons of battery performance and all that.
So when we project the future mix in light of those various techs into 20, 30 lithium nickel consumption will increase six fold between 20 and 30. Cobalt consumption with a very cautious assumption on cobalt will increase fourfold. So let me reassure everyone. It's not time takes [ph] global nickel consumption, its nickel consumption in batteries still will continue to represent a bulk of that. So just to conclude on this, we do factor in our forecast and the various players, the OEMs, automotive or up the stream for credit, the metals for battery, we take kind of all these mixes for various batteries. I think we've answered all your questions. There's another question in the room. Yes?
Yes, hi, Alain William from Oddo. I have three questions, if I may, the first I'd like to know the procedure of nickel settlement from SLN, do you have an update for us on that? The second concern, the reduced CapEx guidance, that's pretty significant. Just wanted to know where it comes from and also, what is the level of maintenance CapEx of the Group to distinguish the two buckets? And then the third question on Aubert & Duval, I'd like to know why you rejected the first offer? And the press states that discussions are resumed, what's changed, and can we expect a deal by the end of the year?
Our answer about the amicable settlement on Aubert & Duval. Toma will speak to the CapEx amicable settlement I mean, stopped, it was halted in May because an amicable settlement is limited in time, we lost four months. And in fact, it started at the end of January, aimed at attempting to move the dial in terms of the local authorities because the conciliators clearly saw that the real drivers to improve the SLN situation wasn't really in the hands of management, but rather in the hands of the local authorities via export authorizations, via power and conciliators. were faced with an absence of government throughout the amicable period.
So they closed in May without really, I mean there was an ad hoc mandate where a diagnosis was made. Everything was shared with the locals, but the amicable settlement procedure was unable to unfold because of absence of negotiating partners. It doesn't mean it won't be resumed at some point, but it's true that the LME price has risen. SLN even if it's burned some cash with all its problem, the cash burn wasn't that significant thanks to the nickel price, the financial situation isn't alarming to date, but problems are unresolved. So the conciliation is over and can be resumed at any point in time if SLN deems that necessary.
Now part of the answer that might give you is that in our CapEx, we had ramp up CapEx for the 6 million tonnes at SLN and these CapEx, we didn't get the green light, we're not doing those. So some of the SLN CapEx that haven’t happened are the part of the reduced CapEx guidance. But Tom I'll let you answer the other points. Maybe there's a slide we can return to the CapEx slide.
Yes. So on CapEx, we've said that we would do 500 million in 2021 and we're going to deliver between 400 and 450 as I indicated last year, we gave strict cash rules, so that kicked in cash containment rules that impacted fully the first and then the 6 million tonnes of SLN. We don't commit CapEx if we don't have the go ahead. That's fairly logical. And then traditionally, H2 is far stronger then the first in terms of CapEx commitment that's fairly straightforward and the bulk of our growth CapEx, as I said, around Comilog to support its ramp up and to support the rail transport that goes with that.
In terms of splayed its marked majority of a maintenance CapEx, as far as I can say, well on this slide are shown on screen you have this slip because what we have the recurring CapEx, well they are essentially the maintenance CapEx, et cetera and not necessarily these CapEx that have the most delayed. On Aubert & Duval, I'm not going to give you all the details, as you of course will appreciate, but we refused, rejected the offer because it really wasn't satisfactory and not just for questions of evaluation. There were a great many terms and conditions in the offer that didn't, that were unacceptable to us.
Quite simply, simply put, it doesn't of course, prevent us from working to resolve a number of the outstanding issues reflected in the offer. That's why I'm saying we're working on the conditions of the disposal, the divestment, so that we can have a divestment in better conditions over the coming months.
Unidentified Company Representative
So no further questions from the room. We can take questions on the web.
Yes, first question. on manganese alloys, what are the sectors that are driving demand and prices?
Answer, well, on manganese alloys. Well, manganese alloys are sold in steel, carbon steel. So that's in steel and notably, I mean, you saw the very sharp production increases of steel output in the U.S. and Europe. And it's the areas where we sell 80% of our manganese alloys. So we're very good. I mean, our plants are in Norway, in France, in the U.S., and a small plant in Gabon.
So we're essentially selling in European and North American markets. And these are markets that are boomed with local players, who had more difficulty than we did to get started again. So ERAMET is truly seen as a very reliable supplier for manganese alloys, and really the benchmark supplier of steel producers of Europe and U.S. So we benefited strongly from the strong recovery of the restocking of Europe and U.S. On manganese ore, given the health situation in South Africa, we are going to face supply issues problems from South Africa? Answer, on the face of it no, but Kléber maybe you can speak to supply. I don't believe…
Well. We're very vigilant on port loading, but you've seen that South Africa has significantly upped its output. We're not in a situation that we're at during COVID, where ports were totally shut down. Sure, there were a few days of disruption of loadings, but to my knowledge, we haven't had the problems of supply of our Norwegian plants from South Africa the past few months. I'm confirmed that, that is indeed the case.
Unidentified Company Representative
Do you have any more specific guidance on the cash cost of SLN and on the contribution of Weda Bay to Q2 as compared to Q1? Tom would you like to answer those questions?
Answer, so on the cash, we weren't any more specific than that. You must realize that we've carefully calibrated our guidance and we'll add the cash calls for SLN is obviously very linked to the output volume and should improve significantly in H2, that's our target, because output volumes are also set to rise in H2 on Weda Bay we also expect an increase. You’re good began to decline in H1, what's your debt, your deleveraging target at the end of the year, have you begun to consider your dividend policy.
On net debt, well, we haven't given any guidance on that. We said that we would do -- in excess of €800 million EBITDA and between €400 million and €450 million in CapEx, that gives you a first idea about cash generation. EBITDA you add the free cash flow generation from Weda Bay. So I'll let you estimate that on the basis of everything I've just said. In light of all that, one can expect a reduction in net debt. That's fairly logical. We won't give any more guidance than that. And then the question of the dividend, well we'll start off by looking at the results at the end of the year and the balance sheet situation is really to consolidate it before asking that sort of question, I believe.
Concerning your Sandouville business. Can we hope for a disposal between now and the end of the year?
Possibly we could indeed is the answer to that.
Unidentified Company Representative
Thank you, no further questions on the web.
Very good. If there are no further questions in the room, I'd like to thank you all very much for your attention and for those of you who are going on holiday, have a great summer. Thank you.
- Read more current ERMAF analysis and news
- View all earnings call transcripts