LKAB Sticks to its Guns but Keeps the Safety On
Iron ore producer LKAB’s progress through the slough of despond clearly illustrates the evolving situation.

The company performed exceptionally well through the first three quarters of 2008, which doubtless encouraged its board of directors to approve development of a new haulage level at the Kiruna mine, in addition to that already agreed for Malmberget (See E&MJ October 2008, pp. 76-77). By this time too, LKAB had invested SEK4.6 billion (1 Swedish kronor = $0.1429) on the new pelletizing plants, improved logistics and other assets and paid SEK1,950 million in compensation to the Swedish Rail Authority, Banverket, for future rerouting of the railway in Kiruna.

Even so, operating income for the full year 2008 increased by 68% and amounted to SEK10,327 million. This was the best result in the company’s history and the board suggested that dividends paid to the owner, the Swedish state, for the year 2008 should total SEK2,800 million. The year’s production of crude ore in both of LKAB’s iron ore mines was a record too: nearly 43 million mt of crude ore, 27.5 million mt at Kiruna and 15.4 million mt in Malmberget, was produced. This represented a total increase of almost 2 million mt compared with 2007. Pellet production also rose to new record levels following the major investments in new pelletizing plants in recent years. The production volume reached 19.9 million mt, over 1 million mt more than LKAB produced during the previous year. In addition, the company matched its 2007 record for pellet deliveries of 17.9 million mt.

But the good times ended in the last quarter and LKAB was forced to sharply apply the brakes. Operating income for the fourth quarter of 2008 declined by 63%. Management reacted swiftly to the downturn and in late November 2008 announced the closure of pellet plant MK3 in Malmberget for four months, starting December 1, 2008. The Svappavaara plant would be closed from the start of the New Year until the end of May. In other pelletizing plants, production would be stopped for shorter periods during the spring of 2009. Maintenance and renovation would be carried out in all plants. However, recruitment of personnel for rock reinforcement work, as part of LKAB’s long-term safety-improvement program, would be carried through as planned and long-term expenditure plans remained unchanged.

Deliveries remained low during the first quarter of 2009 and LKAB trimmed all of its operations and reviewed cost structures. In early March the company decided to stop virtually all iron ore production for five weeks in summer. Operations at both iron ore mines and five of the six pelletizing plants would be suspended during the month of July. Stockpiles would allow LKAB to meet delivery commitments. Operations at stock facilities, on the railway and at the harbors were to continue throughout the summer to ensure ongoing transport and shipping of iron ore products. Investment in the new main levels would still proceed as planned, and no redundancies of permanent employees were slated.

But the devil drove on and on March 31 LKAB announced an extension of the summer production stop at the mines and pellet plants to eight weeks and the closure thereafter of the Svappavaara plant and pelletizing plant MK3 in Malmberget until mid- 2010. The rate of production in the mines in Kiruna and Malmberget will also be slowed for the first half of 2010. Management also decided to reassess LKAB’s future investment plans, although the long-range outlook remained unchanged.

Commenting on the second quarter 2009, acting President and CEO Lars-Eric Aaro* described it as one of the most dramatic in LKAB’s history. Although Mining Division deliveries were marginally better than through January–March, the first half still saw a 42% drop as compared with H1 2008. Worse, iron ore price negotiations resulted in an effective 50% reduction so that the 2009 price was just under the 2007 level. Income was immediately affected and April–June operating income fell by 119% to –SEK558 million. For January–June the decrease was 10% to –SEK486 million, as compared with SEK6,111 million in first half 2008. First half 2009 cash flow from operating activities amounted to –SEK2,480 million.

More recently, however, orders for deliveries in the second half picked up and LKAB reached agreements with Chinese customers for deliveries during 2009–2011. Sales in the Middle East also improved and in Europe some producers’ ore stocks now needed replenishing although their rate of steel making was not increasing yet. Aaro also confirmed that the long-term strategic investments in logistics and new main levels at the mines were to continue, even if commissioning dates may be postponed.

While the MK3 pellet plant at Malmberget was inactive for much of 2009 work on the new mining main level continues.

The downward revenue trend continued in the first and second quarters of 2009 but operating profit in Q2 was higher than that in Q2 2008, mainly because Boliden was able to reduce the cost of goods sold. Operating profit for the first half of this year was SEK1,442 million compared with SEK1,637 million in January–June 2008. Cash flow in first half 2009 was sharply negative, down to –SEK1,908 million compared with SEK1,488 million in January– June 2008. But the deficit in the second quarter was only –SEK97 million. Liquid assets decreased by SEK486 million for H1 2009 as a whole but increased by SEK290 million in the second quarter.

Boliden says cost-cutting measures in 2009 have mainly achieved lower costs for external services and personnel so that, excluding raw materials purchases, operating costs in the second quarter were lower than in January–March 2009 and also lower than in April–June 2008. The company noted that activity levels in the Chinese economy improved in the second quarter this year, to the extent that the country’s base metals demand was as great as the combined demand from the USA and Europe. Global demand for zinc and copper increased by 7% and 5%, respectively, in the second quarter relative to the first while the equivalent figures for Chinese demand were up by 11% and 7%. Global demand for both metals was still well down on the April–June period of 2008, although in China restocking in H1 2009 helped copper demand to reach a level 19% better than that in first half 2008. Weak demand for sulphuric acid has been a limiting factor for smelter operating rates, Boliden says.

In May of this year Boliden announced a reorganization aimed at generating further efficiency improvements within the group’s material flows. The bulk of the operations carried out by the former Business Area (BA) Market, comprising raw materials purchasing and metals sales, will be integrated with the Smelters Business Area and responsibility for concentrates sales will be transferred to BA Mines. Boliden President and CEO Lennart Evrell explained that creating BA Market had achieved significant improvements in these material flows but the need to make further improvements requires this area of responsibility to be tied even more closely to the production units. Svante Nilsson is now president of BA Smelters.

The Mines segment revenues in January– June 2009 were, at SEK3,069 million, ahead of first half 2008 and so was the operating profit of SEK891 million, which was also greater than that for the whole of 2008. On the other hand, Smelters segment revenues and operating profit were well down on first half 2008’s SEK17,465 million and SEK903 million, reaching only SEK12,041 million and SEK689 million.

Smelter zinc production tonnages in H1 2009 were also down compared with first half 2008, reduced from 147,506 mt to 138,516 mt at Kokkola in Finland, from 73,949 mt to 65,248 mt at Odda in Norway and from 21,564 mt (clinker) to 19,347 mt at Rönnskär in Sweden. Copper cathode production was also cut back from 114,009 mt to 93,406 mt at Rönnskär and from 62,955 mt to 46,363 mt at Harjavalta in Finland. Lead and gold recovery also declined at the Swedish facility but silver production was significantly higher. Similarly, at Harjavalta gold output fell but silver went up. Sulphuric acid production at Odda, Rönnskär and Harjavalta was reduced.

January–June mines output relativities also varied. In Ireland, Tara produced less contained zinc and lead in first half 2009 but Q2 output was up on that in April–June 2008. In Sweden, Garpenberg produced more contained zinc, lead and silver in the first half of this year compared with H1 2008 but less copper and gold; the Boliden area operations produced less contained zinc, copper, lead and silver but more gold in January–June 2009. Aitik again produced more copper, although head grade was down; more gold, at a slightly higher head grade; but much less silver, on account of a sharp drop in head grade.

Despite the trauma of fourth-quarter 2008, Boliden has continued to develop all of the mines’ mineral assets, although with a less intensive approach than previously planned. Favorable results were achieved at all four. New Group environmental goals have been set for 2009–2013 in respect of metals emissions into the air and water, energy consumption levels, and SO2 and CO2 emissions into the air.

The aggregate accident frequency for 2008 was 9.1, corresponding to a decrease in comparison with 2007 as a whole, when the accident frequency was 9.9. A fatal accident occurred at Tara in October. Boliden has an established zero accidents philosophy at work and has now further intensified its focus on reducing accidents by setting a goal of zero accidents every month for all units, as of 2009. Boliden’s goal was for all of its production units to be certified in accordance with the work environment standard, OHSAS 18001, by the end of 2008. The goal was achieved at all units with the exception of Rönnskär, which was to achieve its certification in the spring of 2009.

Inmet Plays Patience
One of Toronto, Canada-based Inmet’s international spread of operations is the Pyhäsalmi mine in central Finland. Like Boliden, Inmet had a tough year overall in 2008 and has faced challenges in 2009.

At Pyhäsalmi the target set for tons milled per day last year was exceeded by 100 mt at 3,850 mt. The mill had a record availability of 96% and the total tonnage processed reached over 1.4 million mt. Mining efficiency also improved. The operation contributed 23% of Inmet’s overall revenue. However, the fall in copper prices from $4.00/lb in March 2008 to $1.32/lb at year-end reduced earnings and the Inmet share price tumbled from $81 to $19. Net income last year was C$217 million below the 2007 figure.

In the first six months of 2009 the amount milled per day improved again to 3,900 mt/d, but cost per ton milled also rose slightly. As compared with H1 2008, contained copper output increased 11% for the six months to 7,300 mt but rose 19% in the second quarter. Contained zinc production on the other hand fell by 40% over the six-month period though only by 26% in the second quarter of 2009. This was due to lower grades. Pyrite output in H1 2009 rose by 6% to 132,200 mt but persisting weakness in pyrite demand reduced sales returns and volumes. The pyrite target output has therefore been reduced.

Inmet says increased ground support costs in the first half this year put pressure on mine operating costs but mill operating materials costs should be lower in the second half. Pyhäsalmi has introduced remote controlled drilling rigs, which are able to work in the vicinity of the mine’s automated loading and haulage areas, and will add new bolting rigs.

Overall Inmet believes that its strong balance sheet, low operating costs and consistent long-term focus on cost control will enable the company to pull through the downturn and possibly gain a strategic advantage. But continuous review of discretionary spending levels will be essential. Petaquilla in Panama will be maintained as a “ready-to-build project.”

Lundin Hangs In
Like Inmet, Lundin Mining has corporate headquarters in Toronto but operational headquarters near London, U.K. Like Boliden, the company saw some rebound in the second quarter of 2009 from the low point in the first quarter. However, sales in January–June this year fell from $599.8 million in H1 2008 to $318.2 million and operating earnings were slashed from $320.1 million to $129.2 million. But net income recovered from $29.6 million in first half 2008 to $34.9 million in January–June 2009. And in the second quarter this year net income was $43.5 million.

Lundin President and CEO Phil Wright remarked: “We ran cautious in the short term with a continuing focus on tight expenditure controls.” Investment in the copper project at Lundin’s low cost Zinkgruvan mine in Sweden continues. The aim is to access the copper orebody and improve zinc mining flexibility by installing a second underground crusher and a daylight ramp access.

Outokumpu Holds Back
Finland’s stainless steel specialist Outokumpu also had a difficult year in 2008 but has seen some encouraging signs recently. Operating profit fell from €589 million in 2007 to –€63 million in 2008 and in December through January 2009 Outokumpu moved to reduce costs, reduce working capital and postpone investments in 2009 such that the amount invested could be reduced by over €500 million to €300 million. The first quarter this year saw an operating loss of €249 million but this was reduced to €94 million in April–June.

Some workers at the stainless steel plant in Tornio were laid off and the project to double ferrochrome capacity was postponed in December 2008. Closure of the Kemi mine, which supplies Tornio’s chromite feed, was announced in February 2009. Outokumpu saw signs of recovery in June and says that employee lay-offs at the Tornio steel operations will end at the end of September. Lay-offs at the Kemi mine and the ferrochrome works will end in early October, as previously scheduled.

Euro Mine Expo
From June 8-10, 2010, Nolia AB and Georange are organizing a second event at Skellefteå—the Euro Mine Expo 2010. It will be an international trade fair and conference though doubtless with a large contingent from the Nordic mineral exploration and development community. The conference will have three themes: securing Europe’s mineral and metal resources; the Mine of the Future and mining and society.