Paris, 19 February 2020, 6:45 p.m.
PRESS RELEASE
Eramet: EBITDA at €630m in 2019, reflecting good operating performance, in a deteriorated manganese price environment
Christel BORIES, Eramet Chairman and CEO:
"In 2019, we have made major breakthroughs in implementing our strategic roadmap again and we have improved our intrinsic performance. We achieved production records in all our mines and the strong increase in nickel ore exports in New Caledonia demonstrates the relevance of SLN’s business model.
2020 marks a key milestone in our transformation. This year we will start up our plant in Weda Bay in Indonesia; we will expand mining production in Moanda in Gabon; we will continue implementing the SLN rescue plan and a normal level of activity should resume at Aubert & Duval.
In an uncertain start to the year, particularly for China, which is facing a difficult period, more than ever we stay close to our employees and customers; we would like to express our solidarity with the Chinese people. In light of the volatile and deteriorated global economic environment, we have decided to adopt a cautious and controlled strategy for our cash position. We have thus revised the scope and schedule for our investment projects, specifically in Gabon and Argentina. The Group is also considering initiatives to strengthen its financial structure such as disposals or partnerships.
Initial results are on track and the fundamental pillars of our strategy are robust, in particular our ambition to diversify our assets in order to better balance our risks, with a sustainable and responsible approach that involves all of our stakeholders. Now more than ever, agility, responsiveness and control of our financial equilibrium are key to make progress in our long-term profitability targets."
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Eramet’s Board of Directors met on 19 February 2020, under the chairmanship of Christel BORIES, and approved the financial statements for the 2019 financial year5 which will be submitted for approval at the General Shareholders’ meeting on 26 May 2020.
Safety
The total recordable injury rate (FR26) declined considerably again in 2019, from 8.3 to 5.4, down 35%, thanks to increased commitment and vigilance shown from all employees. However, the Group was very saddened to report the deaths of four people during the course of the year, of which one employee of a subcontractor. Safety of each and every one with a zero-tolerance policy for severe accidents remains the first priority for the Group.
Eramet group key figures
(Millions of euros)1 | 2019 | 20182 | Change (€m) | Change3 (%) |
Sales | 3,671 | 3,825 | (154) | -4% |
EBITDA | 630 | 843 | (213) | -25% |
Current operating income (COI) | 341 | 581 | (240) | -41% |
Net income, Group share | (184) | 53 | (237) | n/a |
Free Cash-Flow | (358) | (211) | (147) | -70% |
Net debt (net cash), excl. IFRS 16 impact | 1,207 | 717 | 490 | +68% |
Gearing4, excl. IFRS 16 impact | 74% | 38% | +36 pts | n/a |
Gearing4, incl. IFRS 16 impact | 80% | 38% | +42 pts | n/a |
ROCE (COI/capital employed5 for previous year) | 12% | 22% | -10 pts | n/a |
1 Data rounded up to the nearest million. 2019 figures after application of IFRS 16 on 1st January 2019, except for net debt and gearing. The comparative table is presented in Appendix 7, not significant impact on EBITDA and COI
2 Until 2018, data adjusted from Group reporting in which joint ventures are accounted for using proportional consolidation. The reconciliation with the published financial statements is presented in Appendix 6
3 Data rounded up to higher or lower %
4 Net debt-to-equity ratio
5 Total shareholders’ equity, net debt, restoration provisions, restructuring and other social risks, less long-term investments, excluding Weda Bay Nickel capital employed
N.B.: all the commented changes in FY 2019 are calculated with respect to FY 2018, unless otherwise specified.
The Group’s FY 2019 sales totalled €3,671m, down 4%. At constant scope7,[8] and exchange rates8, the change in sales declined 8%, mainly owing to the decline in manganese ore prices, in addition to the supply chain situation at Aubert & Duval, due to bringing quality processes into conformity.
Group EBITDA ended at €630m, down -€213m, impacted by a -€268m manganese price effect and -€49m due to supply chain difficulties at Aubert & Duval. Operating improvements (+€39m) were also penalised by the strikes in H2 2018 and H1 2019 at SLN, which affected ore supplies and operations at the Doniambo plant, as well as by an increase in transport costs at Comilog. These effects hindered the operational breakthroughs made in 2019, specifically production records in the mines.
The Group’s current operating income ended at €341m, down 41%.
Income before tax amounted to €89m, after recognition of -€118m in non-operating income and expenses, including a provision for an asset impairment at Erasteel (-€25m), and -€134m in financial result.
Net income, Group share reported a loss of -€184m, after writing down a -€227m tax charge. This charge is largely owing to taxes in Gabon (-€147m).
Capex has been focused on modernising industrial tools and preparing strategic projects. Related cash outflow totalled €423m, of which €132m in preparation work for the two strategic projects in Gabon and Argentina.
Free Cash-Flow (FCF) ended at -€358m at end-December 2019, of which -€274m in non-recurring items. This includes the -€160m non-recurring effect related to supply chain difficulties at Aubert & Duval, of which -€80m due to the strong increase in work-in-progress inventories. FCF was also penalised by a -€114m payment made to the Gabonese government related, on the one hand, to the advance and exceptional payment of corporate income tax, and on the other, to the payment of a tax audit.
Finally, dividends paid to Eramet shareholders and Comilog minority shareholders in respect of the 2018 financial year amounted to €20m and €86m respectively.
Net debt stood at €1,207m, excluding the IFRS 16 impact. Eramet has applied IFRS 16 since 1st January 2019 with a simplified retrospective application, resulting in an increase of €97m, with no impact on cash, and total recorded net debt of €1,304m.
Financial strategy
In 2019, the Group set up a Term Loan, with a 2-year maturity and an option that can be exercised by Eramet to extend it to January 2024. The financing amounts to €350m, thanks to participation from eight French and international banks. It’s the first time two of these banks are working with Eramet.
At 31 December 2019, Eramet’s financial liquidity remained high at €2.3bn, including available cash of €848m in the balance sheet.
The evolution in the Group’s financial ratios (gearing at 74% excluding IFRS impact and gearing at 63%9 within the meaning of the financial covenants) drove management to start an action plan. The Group took measures to maintain cash position, including strict industrial capex control, with the aim of controlling the level of net debt and preserving gearing. The Group might also plan initiatives to strengthen its financial structure such as disposals or partnerships.
Moreover, a proposal not to pay out any dividends in respect of the 2019 financial year will be made at the Shareholders’ general meeting held on 26 May 2020.
Key figures by activity
(Millions of euros)1 | 2019 | 20182 | Change (€m) | Change3 (%) | ||
MINING AND METALS DIVISION | ||||||
Manganese BU | Sales | 1,765 | 1,857 | (92) | -5% | |
EBITDA | 560 | 784 | (224) | -29% | ||
Nickel BU | Sales | 778 | 738 | 40 | +5% | |
EBITDA | 38 | (18) | 56 | n/a | ||
Mineral Sands BU4 | Sales | 286 | 212 | 74 | +35% | |
EBITDA | 106 | 62 | 44 | +70% | ||
HIGH PERFORMANCE ALLOYS DIVISION | ||||||
A&D and Erasteel | Sales | 847 | 1,020 | (173) | -17% | |
EBITDA | (26) | 46 | (72) | n/a |
1 Data rounded up to the nearest million. 2019 figures after IFRS 16 application on 1st January 2019. The comparative table is presented in Appendix 7
2 Until 2018, data adjusted from Group reporting in which joint ventures are accounted for using proportional consolidation. The reconciliation with the published financial statements is presented in Appendix 6
3 Data rounded up to higher or lower %
4 Mineral Sands activity fully consolidated in the Group’s accounts as of 1st July 2018, versus 50% previously
§ Mining and Metals Division
Manganese BU
The Manganese BU’s sales, which accounts for 48% of the Group’s consolidated sales, fell by 5% to €1,765m in 2019, compared with 2018. Despite significant increases in ore production levels (+10%), ore and alloys market prices declined considerably, particularly at year-end, generating EBITDA at €560m, down 29%.
Market trends & prices
Global production for carbon steel, the main end-market for manganese, reached a record level of 1,86710 Mt in 2019, up 3.6%10, despite a slowdown in H2. This growth was almost exclusively driven by strong demand in China (+8.3%10 at 996 Mt, representing 53% of global production), supported by the construction and infrastructure markets. Production was down across the rest of the world (-1.3%10), most notably with a sharp decline in the European market (-5.1%10), whereas the Indian market trended upwards (+1.8%10).
In order to respond to growing ore consumption, and considering that manganese ore prices were kept at high levels for the first nine months of the year, all producers continued to operate at full capacity. This resulted in a slightly surplus supply/demand balance over the 2019 financial year. As a result, ore inventories in Chinese ports amounted to 4.7 Mt10 at end-2019, up 1.6 Mt10 versus end-2018.
CIF China 44% manganese ore market prices trended very negatively in Q4 (-34%11 vs. average for first 9 months of the year) resulting in an average price of $5.63/dmtu11 in 2019, down 21% on 2018 ($7.16/dmtu11). In euros, the decrease only amounted to 17% over the year, given the appreciation of the dollar.
In 2019, the market environment also remained unfavourable for manganese alloys, which were adversely impacted by a slowdown in Europe, linked on the one hand to the sudden decline in the automotive market and on the other to protectionist measures taken by the United States, which are weighing on European steel production. Manganese alloys’ prices fell in Europe, particularly for refined ferromanganese (-7%11) and silico-manganese (-5%11).
Activities
In Gabon, Comilog set a new record for ore production at 4.8 Mt (+10%), greatly exceeding the target of 4.5 Mt set for 2019. This excellent performance reflects continued operational improvements in mines, complying with CSR standards. It was achieved thanks to the new dry ore processing process started end-2018, which extracted approximately 0.5 Mt of ore during the year.
Thanks to logistics improvements, produced and transported manganese ore volumes increased by 17%, to 4.6 Mt. The renovation programme for the Transgabonese railway has shown signs of success. Global freight volume (mining and others) increased 22% in 2019 from 2018 (+70% since the programme started end-2016), benefitting all Gabonese economic stakeholders. 2019 marked a key milestone with the establishment of the new traffic control centre equipped with digital communication resources with mobile trains. A total of €166m in capex has been made as part of the programme since its launch in 2016, with €19m paid for by the Gabonese government.
Thus, external ore sales grew 15% to 3.9 Mt over the same period.
Manganese alloys production totalled 740 kt in 2019 (+3%). Sales volumes were up 4% to 733 kt, propelled by standard alloys (+16%), with a decrease in refined ferromanganese alloys (-8%) due to a sharp downturn in the market. This unfavourable mix in addition to the margin squeeze for manganese alloys - particularly due to the downward momentum in sales prices - adversely affected performance in this activity.
Outlook
The growth outlook for global carbon steel production remains favourable in the short and medium term.
Mine reserves in Moanda, Gabon, allow a manganese ore production capacity of approximately 7 Mt in the long-term. In 2019, Eramet thus continued its brownfield expansion study for the mine aimed at the development of the Okouma plateau, in parallel with the Bangombé plateau currently in operation. Cash outflow for preparation work in 2019 totalled €51m. The target set for manganese ore production in 2020 is more than 5 Mt.
The expansion project was reviewed based on a new modular approach. This approach optimises capex and is based on the start of production at the Okouma plateau and on the intensified use of the alternative dry processing for the entire mine. This process gives greater flexibility in mining operations and extends the mine life.
Looking ahead, the modular approach shows an initial production improvement phase of around 25% on 2019, representing approximately 6 Mt. This phase will account for overall capex estimated at €150m over a 2-year period. The schedule for roll-out is being finalised with our partner, the Gabonese government.
Nickel BU
The Nickel BU’s sales increased 5%, ending at €778m in 2019 with EBITDA of €38m. SLN12 EBITDA stood at €59m, up 74% from 2018. In a favourable price environment, SLN recorded the initial effects of its rescue plan, despite operating performance that was strongly impacted by a decline in ferronickel production due to disruptions and strikes in the mines. At the same time, the Sandouville plant’s operating loss was halved, with EBITDA of -€21m.
Market trends & prices
The 2019 financial year was marked by continued trade tensions between the United States and China, as well as the September announcement in Indonesia to ban exports of nickel ore that has not been transformed locally, effective 1st January 2020. This measure is aimed at profoundly affecting market equilibrium for the various players.
After slightly increasing in H1 (+2.1%13 vs. H1 2018), global stainless steel production grew considerably in H2, reaching a record level of 51.7 Mt in 2019, up 4.2%13. Production in China increased from 12.2%13 to 29.6 Mt and slowed in the rest of the world (-4.8%13). Indonesia continued to present a unique situation with stainless steel production up 4,7%13, due to the start of locally integrated production upstream from NPI (“Nickel Pig Iron” [14]).
Demand for primary nickel was up 3.6%13 over the period to 2.4 Mt, boosted by both stainless steel and the development of electric vehicle batteries, which grew by 30%13 in 2019 (to 176 kt of primary nickel).
In parallel, global primary nickel production was up significantly (+8.9%13) to 2.3 Mt at end-2019, driven by continued growth in NPI (“Nickel Pig Iron”14) production in Indonesia and China (+30%13), whereas traditional production was down slightly.
Considering a nickel supply/demand balance with a high deficit in 2018 (- 141 kt13), this production increase was nevertheless not enough to satisfy the change in demand, resulting in a further deficit of more than 31 kt13 in 2019. Nickel stocks at the LME15 and SHFE15 continued to fall, amounting to 191 kt at end-December 2019 (-31 kt vs. end-December 2018, i.e. -14%), equivalent to slightly more than 7 weeks of consumption (including nickel producers’ inventories), the lowest level since end-2006.
The average LME price was $6.31/lb in 2019, representing an increase of 6% from 2018 (average of $5.95/lb), largely owing to the early September announcement that the Indonesian ban was being reintroduced16. The average H2 price ended at $7.03/lb, up 26% from H1 ($5.59/lb). The increase in LME prices in euros was +12% on an annual basis, factoring in the appreciation of the dollar.
Parallel to this, the price of nickel seaborne ore (1.8% CIF China) also rose sharply in H2 compared with H1. The average price went from $50.68/wmt17 to $66.58/wmt17, an increase of +31%.
Activities
In New Caledonia, after a difficult first-half, impacted by strikes in one of the main mining centres, the second half of 2019 was marked by the continued implementation of the SLN rescue plan, whose effects were achieved in part.
In 2019, despite large-scale strikes in the first half, nickel ore production was up 15%, achieving a record18 of 4.7 Mwmt19. This was attributable to the new mine schedule working times applied since mid-May on all mining centres. The volume of low-grade ore exported exceeded the target set, ending at 1.6 Mwmt19(+32%). The new mine schedule working times in addition to further discussions with local inhabitants should confirm the target of reaching the 4 Mwmt export rate of ore in 2021.
Given the blockade of mining centres on the East coast, supply to the ore smelting furnaces at the Doniambo plant remained disrupted for the entire year, with a 13% (47 kt) decrease in ferronickel production in 2019. Ferronickel sales volumes also fell by 15% to 47 kt over the same period.
Despite the implementation of new organisations at the mine and plant, the considerable decrease in ferronickel volumes weighed on SLN’s cash-cost, which ended at $5.91/lb in 2019. Cash-cost substantially improved in H2, at $5.74/lb ($6.05/lb in H1), particularly due to export volumes and the increase in the market price of ore following the announcement of the Indonesian ban.
On this basis, SLN generated cash in H2 2019, specifically in the fourth quarter.
In November, the Group achieved a third milestone20 in the implementation of the rescue plan by signing an agreement with Enercal, SLN’s electricity provider. Through this agreement, Eramet achieves a third21 of the required target to reduce energy prices. Other options are still being discussed with local partners in order to identify additional initiatives that will be key to achieving the overall objective of SLN’s rescue plan.
The intrinsic reduction cash-cost target of $1.30/lb22on a full-year basis in 2021 remains dependent on the plan being rolled out without disruptions, especially with regard to social and societal aspects.
Moreover, digital transformation, specifically connected mines, should improve productivity. It is also a lever for performance improvement at SLN.
In addition, SLN’s newly-established business model significantly increases the company’s mining reserves and resources, particularly following the integration of lower grade tonnages for exports. SLN’s mineral resources increased approximately fourfold (~4), amounting to 19.4 Mt of contained nickel, with an average grade of more than 1.85%. This makes SLN one of the world’s leading mining operators.
At the Sandouville plant in Normandy, progress continued thanks to technical corrections implemented by an expert task force and strengthened site management. Nickel salt and high-purity nickel metal production roughly doubled (~2), versus 2018. This resulted in the plant doubling its sales to €90m. The loss was halved and cash consumption significantly reduced, with FCF of -€32m in 2019 (vs. -€54m). Factoring in the progress made in 2019, 2020 EBITDA should be close to break-even.
Outlook
At Weda Bay, Indonesia, as part of a partnership with Tsingshan, mining works started end-2019, with 900 employees currently working at one of the largest nickel deposits in the world. This mine will provide ore for several NPI14 plants situated on the island of Halmahera. The target for nickel ore production is 6 Mwmt in the long-run, with more than 3 Mwmt as early as of 2020. To allow the start-up of calcination and smelting operations at the JV plant with Tsingshan at Weda Bay, more than 0.5 Mwmt19 of nickel ore inventory was built up at end-2019.
At the same time, construction of this plant is in its latter stages. Production at the plant should start in H1 2020, ahead of the initial schedule. However, the Coronavirus epidemic could affect the activity’s launch schedule.
The ramp-up in the plant’s production is expected to be fast, with 80% of nominal capacity by end-2020, thereby benefitting from a favourable NPI environment thanks to the introduction of the Indonesian ban. The plant is expected to be well positioned as far as production costs are concerned with a cash-cost consistent with the best Indonesian producers.
Mineral Sands BU
This activity now contributes approximately 17% of the Group’s EBITDA, demonstrating the success of the Group’s strategy in mineral sands. TiZir’s sales grew 5% to €286m in 2019 (at comparable scope, full basis). EBITDA was up considerably by 32% at €106m, thanks to good operating performance and favourable prices.
Market trends & prices
Global demand for zircon decreased by 10% on 2018, largely due to a decline in the ceramics market (~50% of end-products for zircon). The other application areas (mainly chemicals and refractory materials markets) were stable overall during the year, with a year-end downturn for refractory materials. Zircon supply remained strong, generating a surplus zircon supply/demand balance for 2019.
Compared with levels at end-2018, prices gradually lowered in 2019, albeit maintaining a high level. On an average annual basis, premium zircon market prices rose to $1,575/t23, up 7% on 2018. Factoring in the currency effect, the price increase in euros was +13%.
Global demand for TiO2 pigments (~90% of end-products for titanium-based products) remained stable in 2019. Demand for high value-added raw materials producers bolstered demand in CP grade titanium slag as produced in Norway. The average price of CP grade titanium slag thus increased by 10% to $752/t 24 compared with 2018. Factoring in the currency effect, the price increase in euros was +16%.
Activities
Upstream, in Senegal, thanks to further improvements (+6%) in operating performance25, annual production for heavy mineral concentrates26 at the Grande Côte (GCO) site reached 735 kt, exceeding the target set. The decline in production (-5% vs. 2018) is an expected reflection of the lowest grade (-11% on average in 2019 vs. 2018) for the deposit area currently in operation following the mining plan.
Zircon sales volumes were down 11% in 2019 at 58 kt. H2 offset part of the decline of the start of the year (- 16% in H1).
Downstream, in TiZir’s Norwegian plant, titanium slag production remained stable at 189 kt, penalised by a metal casting incident, which resulted in a production shutdown for 4 weeks. Sales volumes decreased by 10% to 180 kt since the 2018 financial year benefitted from destocking effects.
Outlook
With the medium-term in mind, the Group is reviewing options to debottleneck mineral sand production in Senegal, with a focus on organic growth for GCO production. Initial results for this study should be available in H2 2020. The aim is to optimise the use of available capacity in ore beneficiation plant as well as in transport, leading to step-by-step increases in production.
Furthermore, following a global international tender procedure, Eramet secured exploration permits on the rutile block of Akonolinga, in Cameroon. The three-year long permits will allow the Eramet teams to conduct the necessary fieldwork and feasibility studies. This long-term project, which is fully in line with Eramet’s exploration strategy, would provide a diversification of the Group product portfolio on the particularly attractive rutile market.
Lithium BU (Project)
In 2019, Eramet continued development works for its lithium deposit in Argentina, with an annual production target of 24 kt in LCE (Lithium Carbonate Equivalent). Capex for preparation work ended at €81m for the year, including the pilot plant on site. This pilot is currently operating in real conditions, confirming an excellent yield level to date, leading to a first quartile cash-cost position, amongst the most competitive in the industry.
The project is currently on hold and expenses have been reduced to a minimum, since required conditions for launch have not yet been met. This specifically applies to the Argentinian regulations’ context and to the economic environment.
§ High Performance Alloys division
The High Performance Alloys division’s sales were down 17% to €847m and EBITDA showed a loss of -€26m. This underperformance results from delivery delays at Aubert & Duval, in turn caused by bringing its quality process into conformity, and particularly deteriorated market conditions for Erasteel’s activity.
Market trends
In the aerospace sector, which accounts for more than 70% of Aubert & Duval’s sales, the market environment remains stable. Through a diversified product portfolio that covers medium and long-haul aircraft, the company was little affected by Boeing’s situation in 2019. The reduced Boeing 737MAX production rates and the announced Airbus A380 production shutdown were offset by record deliveries for the Airbus A320 aircraft and maintained production output for long-haul planes at Boeing.
Moreover, Aubert & Duval recently signed contracts with leading players in the aerospace and energy sector, paving the way to medium-term growth outlook and market share gains for the single-aisle programmes, landing gears and gas turbines segments.
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