Norsk Hydro ASA (NHY) Earnings Call Transcript & Summary

Hello, and welcome to the Norsk Hydro ASA Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Ms. Line Haugetraa, to begin today's conference. Thank you.

Thank you very much, operator. Good morning and welcome to this conference call on a very short notice. We apologize for that. We will start with the presentation by our CEO, Hilde Merete Aasheim, followed by a Q&A session, where our CFO, Pål, will also attend. The presentation slides we will walk through can be seen on our webcast. The link to the webcast as well as the slides can be found on hydro.com. [Operator Instructions] If there are any media inquiries for ones-on-ones with Hilde or Pål after the presentation, please contact Head of Media, Halvor Molland. With that, I turn the microphone to you, Hilde.

Thank you, Line, and good morning to the ones for joining us on this webcast on such a short notice. We are very pleased to announce today that we have signed an agreement with Glencore to further develop our Brazilian alumina refinery, Alunorte, together as partners. Glencore will acquire 30% of Alunorte and our 5% ownership of the Brazilian bauxite producer, MRN. Glencore will also acquire an additional 40% of MRN's currently owned by Vale. The 40% stake will be acquired by Hydro from Vale and immediately sold to Glencore on a back-to-back basis. In today's presentation, I will in short go through the strategic rationale for our decision, the transaction details as well as the operational and commercial impact of the transaction. So let's turn to Page 2. So the strategic rationale now behind this transaction is that with this transaction adjust our long position in bauxite and alumina to match our smelter capacity. Hydro will continue to be long alumina, but now more balanced in relation to the demand for alumina from our aluminum smelter portfolio. The proceeds from the transaction will be used for strategic growth investments according to our Hydro 2025's strategy as well as for shareholder distribution. Additional information about this will be provided on posting of the transaction. It's important to say that Alunorte remains a core strategic asset for Hydro and will be the key source for low-carbon alumina supply, including with the adjacent Albras smelter and to the Norwegian primary aluminum smelters. Hydro's 2025 strategy launched back in 2020 outlined a clear ambition to lift profitability and to drive sustainability throughout the company. Part of that strategy has been to develop Alunorte, allocating capital to sustain and improve operations, strengthening the refinery's first quartile cost and carbon position. This has included lifting and stabilizing Alunorte to nameplate capacity, reducing emissions to the fuel switch and electrification as well as eliminating landfilling or waste, protecting biodiversity and increasing community engagement. We are now embarking on the next phase for Alunorte and look forward to bringing in Glencore as a partner with broad industrial experience within metals and mining to further strengthen the position of Alunorte. This will include continuing our ambitious improvement efforts to further position Alunorte as a leading supplier of greener alumina. And we will together continue efforts to reduce carbon emissions from Alunorte through the fuel switch project that will substitute fuel oil with LNG and electrification of the coal boilers, bringing Alunorte to the first decile on the global refinery carbon emission curve already by 2025 and with further improvement in the years to follow. In addition to the decarbonization of Alunorte, the partners are strongly committed to continue the development for social projects to improve the lives and livelihoods in the nearby communities. Let me then turn to Page 3 and more details about the transaction. The transactions will have a total enterprise value of USD 1.11 billion, which shall be adjusted for Alunorte's net debt as of June 30, 2023. Net debt for 30% of Alunorte as of March 31, 2023, was USD 335 million. The enterprise value and the net debt excludes asset retirement obligations of USD 40 million on a 30% basis. The parties have also agreed to report closing price adjustments based on financial performance of Alunorte over the period of 21 months from June 30, 2023. Subject to Alunorte's performance, Hydro may make certain repayments to Glencore but which are capped at USD 55 million. Hydro's bauxite contracts with Vale to Alunorte is by this transaction terminated and replaced with the long-term supply agreement from Glencore. The transactions are subject to customary regulatory approvals. Closing of both transactions is expected in the second half of 2023. Let's then move to Page 4. So after the transaction, Hydro will remain the largest shareholder of Alunorte with 62% ownership. Glencore will own 30% of Alunorte, while the remaining 4 minority shareholders shall collectively own 8%. With this transaction, Hydro will no longer have an ownership in MRN, where Glencore will become the largest shareholder with 45% ownership. The remaining 55% shall be owned by South32, Rio Tinto and CBA. Bauxite from MRN will continue to supply around 1/3 of Alunorte's bauxite need while the remaining share of supply from Hydro's fully owned Paragominas bauxite mine. The transaction will have no impact on the physical supply contracts or cost for Hydro aluminum metal. And from an accounting perspective, Alunorte will continue to be consolidated in Hydro's financial account, and there will be no remeasurement or recognized gains related to this transaction. Let's move to my final slide. Alunorte has an exciting future, and we look forward to embarking on that journey together with our new partner, Glencore. Together, we will deliver -- develop Alunorte reach full potential and ensure that Hydro continues to be the leading supplier of low-carbon alumina and aluminum at the premium pricing. And on that note, I would like to open for questions.

Thank you, Hilde. [Operator Instructions] Thank you.

[Operator Instructions] We will take the first question from line Liam Fitzpatrick from DB.

Two or three questions from my side. Just in terms of, firstly, the use of proceeds. So you mentioned it will be used for your broader growth plan. Can we safely assume that the investment and the CapEx guidance that you've given us for the next 2 to 3 years is going to remain unchanged? Or could these proceeds be used to invest in new businesses, new ventures and so on? That's the first question. The second one, there's just a little bit of uncertainty in the market just over the valuation. I wonder if you are able to confirm based on consensus data for, say, next year, 2024, and what the transaction multiple is? And then the third question, just wanted to hear kind of strategically why you wanted to do this. Is this just about de-risking your exposure to a single asset? And will you be looking to increase exposure to alumina going forward?

Thank you, Liam, for this question. In terms of the valuation, I leave that for Pål sitting next to me. When it comes to the strategic -- for the first question, in terms of proceeds, as I explained, we will use the proceed to pursue our Hydro 2025 strategy. And if you recall, we have in the strategic notes that we have defined for each business there as we have highlighted that we would like to explore growth in recycling and also selective growth in extrusion. And so as a proceed, we very much be used to proceed with our Hydro 2025 strategy. Other than that, I think we will stick to the guidance on the CapEx going forward. When it comes to your third question, in terms of why we do this, it's very much again, aligned with our Hydro 2025 strategy in terms of being in sustained and improved mode in the upstream part that are sort of in the strategic mode. It doesn't mean that we will not -- we will exclude to grow in the upstream part. But at this point, we adjust our alumina capacity to the equity of the smelter portfolio. So I think the -- your question #3 is very much, again, related to the rationale for adjusting the long position that we have to the equity position we have in the smelter portfolio.

Liam, when it comes to valuations and market consensus, of course, you are the expert there. And what's important for us is to clarify and to be clear on this, the enterprise value. As we would view it including the ARO, et cetera, is $1.15 billion. And if you look at, for example, the Alunorte earnings for 2021, which were around the $360 million mark, that would translate to a multiple of 10.5. And then as you know, there's a spread in consensus for 2024, but 2021 was a very good year in a historical context.

Sorry, Pål, just very briefly to follow up. Did you say what was the EV? Because I think we're reading it as $1.1 billion. Is that correct? Or did you say this figure?

It's $1.15 billion. So when we went out with the release, we decided with Glencore to communicate the same figure, we include the asset retirement obligations, et cetera, as part of the debt they do note. So you should have the $1.11 billion plus $0.04 billion and then you get $1.15. billion.

We will take the next question from line Amos from Barclays.

This is Amos Fletcher actually here. But yes, I had a couple of questions. The first one was just around how much of the proceeds from this transaction are you going to be paying to Vale for the 40% stake in MRN? And then the second question is just if you read the Glencore release alludes to the potential for Alunorte to grow over time, would you look to sell down further equity interest in the refinery as if and when Alunorte does grow, again, to keep your sort of net long position stable over time?

I can start with the first one, Amos. In the totality of this transaction, the valuation of MRN is very low and insignificant.

And when it comes to the opportunity to expand or to increase capacity in Alunorte, we -- that is good for Alunorte, and we would participate in that in the sense that it will strengthen the robustness of the cost position and to sustain Alunorte as an important asset in our portfolio to secure the alumina for the existing portfolio but then to have the opportunity and the optionality going forward.

Okay. And then I guess just one quick follow-up was just around the contracts that you're shifting, obviously, to acquire bauxite from MRN ownership shifting from Vale to Glencore. Is there any shift in the -- or change in the terms of those purchases that would see the cost position of the refinery change?

No. No changes.

We will take the next question from line Danielle Chigumira from Credit Suisse.

Thank you for taking my question. Actually, Amos just asked it, so there are no further questions from me.

We will take the next question from line Ioannis Masvoulas from Morgan Stanley.

Congratulations to the transaction. A few questions from my side. First of all, Pål, when you talk about EBITDA of $360 million for 2021, this is just Alunorte? This excludes Paragominas, right?

Correct. This excludes Paragominas, and it excludes all commercial arrangements that we have in bauxite and aluminum.

Okay. Perfect, very clear. And then just on the use of proceeds, I think in the press release, you talked about both supporting your strategic growth plans but also looking at shareholder distribution. Do you have an idea or any indication on what that split could be? And the time frame for their cash returns, I guess, would be with full year results given timing of the transaction?

We haven't indicated a split between them, and we will get back to that when we close. And as you say, it's expected in second half, depending on time of this, the later, the more likely it is that it becomes part of the annual distribution. The earlier, we will evaluate.

Perfect. Okay. And just two more questions for me. When you talk about maintaining a net long position, I guess, if I take the 70% equity stake, you're going to be over, I guess, 62% equity stake versus your smelting portfolio is to be effectively balanced from post the transaction, right?

If you take equity to equity, we have a small short but not a small long, but it's largely balanced. Yes. Someone is having problems.

That makes sense. And a very last one for me. When it comes to the court cases related to environmental pollution that have been brought to courts in Brazil and Netherlands, would Glencore have legal indemnity? Or yes, what's the arrangement there, please?

Yes, that's correct.

We will take the next question from line Krishan Agarwal from Citigroup.

Thanks for taking my question. Most of them have been asked. A final one, I mean on a broader strategic basis, have you considered giving a thought that this is probably the start of your exit or rebalancing of the portfolio in Brazil? And then, is there any kind of option for the Glencore to acquire additional stake in Alunorte somewhere down the line, say, 2, 3 years?

As I said in my presentation, Alunorte will be a core asset for Hydro going forward. And so we have no plans to further reduce our exposure in Brazil.

Thank you. There's no further question at this time.

Thank you very much, operator. And with that, thank you all for joining us today on a short notice. And if there are any further questions, please don't hesitate to contact us in IR. Wish you all have a good day. Thank you.