Interim report October-December 2018: Improved operating profit despite production loss

February 15, 2019

Market conditions remained good in the last quarter of 2018, with strong demand for highly upgraded iron ore products and a favourable dollar exchange rate. Despite the pelletising plant in Svappavaara being out of operation for the entire quarter, LKAB reports improved operating profit both for the quarter and full year.

Net sales increased in the fourth quarter to MSEK 6,911 (6,208) and operating profit amounted to MSEK 1,900 (1,324), mainly due to the positive contribution of market prices for highly upgraded iron ore products combined with a strong dollar. Operating cash flow amounted to MSEK -1,529 (587), mainly associated with the acquisition of the industrial minerals company Francis Flower and higher expenditure on urban transformation.

Sales for the full year increased to MSEK 25,892 (23,367). Operating profit improved by 15 percent to MSEK 6,869 (5,975). However, earnings were weighed down by negative net financial expense for the fourth quarter, when the return on asset portfolios was affected by negative stock market development. Net financial income/expense for the quarter was MSEK -790 (47). Profit for the year amounted to MSEK 5,274 (4,803).

Competitiveness in a global raw materials market

The average level of the global spot price for iron ore was USD 72 (66)/tonne for the quarter. The premium for sales of pellets has been at a historically high level and 79 (81) percent of the quarter’s total deliveries consisted of pellets.

“LKAB is benefiting from the current global market prices and from the fact that steel companies are prioritizing resource efficiency and sustainability. To be competitive in the long term, however, we also need to increase our volumes. This requires stable, efficient production and that we secure access to crushed ore through increased exploration,” says Jan Moström, President and CEO of LKAB.

Extensive maintenance impacts production

Production in the fourth quarter amounted to 6.7 (7.2) Mt and deliveries to 6.8 (7.3) Mt. The pelletizing plant in Svappavaara was taken out of operation for maintenance work at the end of September and was restarted on 6 February 2019. The loss of production combined with a number of unplanned stoppages in the third quarter and the extensive shutdown in Svappavaara in the fourth quarter had a significant effect on total volumes. Despite this, LKAB was able to deliver 26.8 (27.6) Mt of iron ore products in 2018.

LKAB works continually on measures to reduce the number of unplanned interruptions to production. This involves planning maintenance work in a structured way and reinforcing the production culture, including a focus on safety.

Expansion of exploration

Securing access to ore after 2030, when the current main haulage levels are expected to be mined out, is the basis for the next generation of LKAB. The exploration results have shown that the mineralization in Kiruna is significantly more complex than had previously been assumed, and consequently exploration work has been intensified. Among other things, during the quarter LKAB began driving exploration drifts (investigation tunnels) in Kiruna to investigate the northward and downward extent of the mineralization.

Mining down to the main haulage level at 1365 m in Kiruna is continuing according to plan, which means that the urban transformation of the city is also continuing.

A broader, stronger LKAB

In parallel with the increased exploration work LKAB is carrying out extensive development work for the next-generation production system. The long-term collaborative projects SUM (Sustainable Underground Mining) and HYBRIT (Hydrogen Ironmaking Breakthrough Technology) are continuing according to plan. In addition, alternative growth opportunities are being evaluated and among other things, LKAB is focusing on broadening its presence in the minerals market. In December, LKAB Minerals completed the acquisition of UK industrial minerals company Francis Flower. Integration work is proceeding according to plan.

“LKAB’s ambition is to be one of the most innovative, resource-efficient and responsible companies in the industry. With its unique expertise and experience in mining and processing, the company is in a good position to broaden the scope of LKAB and thereby also make the Group less sensitive to fluctuations in the iron ore market,” says Jan Moström.

LKAB is an international high-tech mining and minerals group that mines and upgrades the unique iron ore of northern Sweden for the global steel market. Sustainability is core to our business and our ambition is to be one of the industry’s most innovative, resource-efficientand responsible companies. The group had sales of more than SEK 23 billion in 2017 and employs about 4,100 people in 13 countries. Other group business include industrial minerals, drilling systems, rail transport, rockwork services and property management.