Terrafame’s net sales in 2020 were EUR 338.3 million – EBITDA for Q4 was 17.1 % of net sales

(The financial information presented about Terrafame Ltd in this bulletin consists of unaudited FAS figures. The figures in brackets refer to the corresponding period of the previous year unless otherwise stated.)

2020 in brief

• Nickel production increased by 4.6% year-on-year and was 28,740 (27,468) tonnes. Zinc production was at the same level as in 2019, totalling 55,100 (55,222) tonnes.
• The average price of nickel on the London Metal Exchange in 2020 was 13,789 (13,926) USD/t, representing a decrease of 1.0% from 2019.
• The average price of zinc on the London Metal Exchange in 2020 was 2,267 (2,547) USD/t, which is 11.0% lower than in 2019.
• Terrafame’s net sales increased by 9.0% in 2020 and were EUR 338.3 (310.4) million.
• Strong production during the first half of the year and in the fourth quarter was positively reflected in net sales. The coronavirus pandemic did not affect deliveries.
• The full-year EBITDA was EUR 23.8 (32.0) million, or 7.0% (10.3%) of net sales. After a strong first half of the year, a long maintenance shutdown had a negative impact on the EBITDA in the third quarter, but the strong fourth quarter had a positive impact.
• The full-year operating result was EUR -16.9 (-5.6) million.
• Free cash flow from operating activities was EUR 13.8 (-20.6) million.
• The combined rolling 12-month lost-time injury frequency rate (LTIFR) of Terrafame and all its partners was 9.8 (14.2).
• 2020, the focus of occupational safety was on developing partner companies’ safety culture, and good results were achieved in this respect.
• • Due to coronavirus pandemic, there have been some delays in the installations as well as delivery of materials and equipment in the battery chemicals plant project. The recruitment of production employees for the battery chemicals plant was completed, and the first ramp-up measures were implemented in late 2020. Battery chemicals production is expected to increase the company’s net sales from the latter part of 2021 onwards.

Q4 2020 in brief

• Thanks to the strong production, net sales in October–December 2020 increased by 55.2% year-on-year and were EUR 103.7 (66.8) million.
• The fourth quarter EBITDA was EUR 17.7 (0.7) million, or 17.1% (1.0%) of net sales.

 

1) Free cash flow from operating activities after sustaining capex = EBITDA - change in net working capital - sustaining capex without right-of-use assets.
 

CEO Joni Lukkaroinen:

“The annual production of nickel was 28,740 (27,468) in 2020, which is a new record for the annual production. After a strong first half of the year, the production volume in the third quarter was markedly lower because of a long and extensive production stoppage. The necessary connections between the battery chemicals plant and the existing production plant were implemented during the stoppage. High production levels were resumed in the fourth quarter, and we set a new quarterly production record. Zinc production was at the same level as in 2019, totalling 55,100 (55,222) tonnes. Total production volumes were slightly below the full-capacity levels, which are 30,000 tonnes of nickel and 60,000 tonnes of zinc.
 
After a steep decrease in the first quarter, the world market prices of nickel and zinc began to increase in April 2020. Terrafame’s net sales increased by 9.0% in 2020 and were EUR 338.3 (310.4) million. After the weak third quarter, the strong fourth quarter was positively reflected in the EBITDA, which increased to EUR 23.8 (32.0) million. Free cash flow from operating activities after sustaining capex for the financial year was positive for the first time in Terrafame’s history and increased to nearly 14 million euro thanks to the strong performance in the first and fourth quarters. The coronavirus pandemic did not affect deliveries.

In 2018, we made a strategic decision to focus on battery chemicals production, which is proving an excellent choice. The decision was based on the view that demand for nickel for electric car batteries will increase strongly, and it is growing even more strongly than expected. The number of EV’s is predicted to multiply globally over a period of ten years, from around 3.2 million in 2020 to around 30 million in 2030. As a result of the strong growth forecasts, the price difference between our current nickel intermediates and the nickel sulphate used in batteries has already increased since the beginning of the year. The decision to build a battery chemicals plant was also based on the excellent suitability of Terrafame’s current production for raw materials for battery chemicals. Analyses conducted by Skarn Associates and CRU in 2020 show that the nickel produced by Terrafame using bioleaching has the smallest carbon footprint among nickel producers globally. This makes Terrafame’s current nickel intermediate an ideal raw material for battery chemicals. This is very important for the electric vehicle sector, which focuses on reducing carbon dioxide emissions from transport.

In 2020, we took significant steps towards completing our battery chemicals plant project. Most of the production employees were recruited in 2020, and most of their training was provided during the year. The recruitment process was completed at the end of 2020, and the production personnel now numbers 141. The battery chemicals plant employs around 170 people in total, including maintenance, laboratory operations and logistics. At the end of 2020, the completion level of the construction project was 90%, and the first ramp-up measures were implemented. Commercial production will start in late spring 2021. Battery chemicals production is expected to increase the company’s net sales from the latter part of 2021 onwards.

An externally verified life-cycle analysis published in the autumn of 2020 shows that the carbon footprint of the nickel sulphate produced by Terrafame is more than 60% smaller than average. Concern about climate change is increasing among consumers, and electric cars are a significant way to reduce greenhouse gases. Electric cars do not generate emissions in transport. Electricity production is expected to be increasingly carbon neutral in the future, so emissions from the production of electricity for electric cars will also decrease.

Sustainable business operations are at the core of Terrafame’s strategy. We seek to operate transparently and earn the trust of our stakeholders. In the summer, we published the company’s first sustainability programme (2020–2024). The programme consists of themes that Terrafame and our key stakeholders consider important. Concrete measures have been determined for each theme for a period of five years. We will monitor the implementation of the measures in our sustainability review. In October 2020, Terrafame was approved to join the UN Global Compact initiative. We recognise the comprehensive value of good corporate citizenship, and we want to prove our commitment to sustainable business practices by supporting the ten principles of the Global Compact initiative. We will continue to develop our sustainable business operations in 2021.

Safety is one of our key values. In 2020, the focus of occupational safety was on developing partner companies’ safety culture, and good results were achieved in this respect. The combined rolling 12-month lost-time injury frequency rate (LTIFR) of Terrafame and all its partners improved considerably and was 9.8 (14.2). In 2021, we will continue our systematic work to strengthen our safety culture through a project that aims to develop operating models for our company to ensure the continuous improvement of safety at work and reliable production.”
 

Market developments

Electric vehicle and battery markets
According to estimates by Rho Motion, global EV sales* increased by around 50% from 2019 and were around 3.2 (2.2) million units.

In early 2020, EV sales decreased significantly in China because of the coronavirus pandemic. The impacts of the pandemic were reflected on sales in Europe and North America with a delay. However, sales started to recover rapidly in the spring. Towards the end of the year, sales increased particularly strongly in Europe, and their growth continued steadily in China as well.

The sales-weighted average pack size was 52 (56) kWh in December 2020. The average pack size started to decrease in May as a result of a strong increase in the sales of rechargeable hybrids in Europe in particular. The market share of NCM 811 batteries was 8% (5%) in December 2020. The market share of NCM 622 batteries grew globally the strongest and was 28% (14%) in December 2020.
* includes EVs and PHEVs

Nickel and zinc
The average market price of nickel on the London Metal Exchange in the fourth quarter of 2020 was 15,930 USD/t, which was 12.1% higher than in the third quarter (14,213). The price of nickel in the fourth quarter increased by 3.1% year-on-year (15,450). After a steep decrease in the first quarter of 2020, the price of nickel started to increase as a result of demand for stainless steel in China. The growth of the electric car market contributed to the increase in demand for nickel. However, the full-year average price of nickel on the London Metal Exchange in 2020 was 1.0% lower than in 2019 and was 13,789 (13,926) USD/t.

The average market price of zinc on the London Metal Exchange in the fourth quarter of 2020 was 2,628 USD/t, which was 12.6% higher than in the third quarter (2,335). The price of zinc in the fourth quarter increased by 10.1% year-on-year (2,388). The increase in the price of zinc was affected by the rapid reaction of producers to the impacts of the coronavirus pandemic, as well as the maintenance shutdowns implemented in China. However, the full-year average price of zinc on the London Metal Exchange in 2020 was 11.0% lower than in 2019 and was 2,267 (2,547) USD/t.

The total combined nickel stocks of the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) stood at 267,012 tonnes at the end of 2020. The stocks increased slightly from the end of the third quarter of 2020 (266,608) and significantly compared with the end of 2019 (188,097). The stock level at the end of the year corresponds to demand for around 6 (4) weeks. Zinc stocks stood at 231,304 tonnes at the end of 2020, corresponding to demand for around 1 week (less than 1 week at the end of 2019). The total combined zinc stocks decreased from the end of the third quarter of 2020 and stood at 266,136 tonnes. At the end of 2019, the stocks totalled 79,285 tonnes.

Currency exchange rate
The euro strengthened slightly against the US dollar in 2020. The average exchange rate in 2020 was USD 1.14 (1.12). The average EUR/USD exchange rate in the fourth quarter of 2020 was 1.19 (1.17 in the third quarter). In 2019, the EUR/USD exchange rate was 1.11 in the third quarter and 1.11 in the fourth quarter.
 

Metal production

Nickel production increased by 4.6% year-on-year and was 28,740 (27,468) tonnes. Zinc production was at the same level as in 2019, totalling 55,100 (55,222) tonnes. Total production volumes were below the full-capacity levels, which are 30,000 tonnes of nickel and 60,000 tonnes of zinc.

In the fourth quarter, nickel production increased by 34.0% year-on-year and was 8,600 (6,418) tonnes. Zinc production increased by 17.1%, totalling 15,037 (12,845) tonnes. Production volumes in the comparison period were low because of planned and unplanned shutdowns.

Net sales and financial performance

Terrafame’s net sales increased by 9.0% in 2020 and were EUR 338.3 (310.4) million. Strong production during the first half of the year and in the fourth quarter was positively reflected in net sales. The coronavirus pandemic did not affect deliveries.

Thanks to the strong production, net sales in the fourth quarter increased by 55.2% year-on-year and were EUR 103.7 (66.8) million.

In the 2020 financial period, the company continued to hedge its cash flow against a decrease in the US dollar exchange rate and metal prices in line with its hedging policy.

The full-year EBITDA was EUR 23.8 (32.0) million, or 7.0% (10.3%) of net sales. After a strong first half of the year, a long maintenance shutdown had a negative impact on the EBITDA in the third quarter, but the strong fourth quarter had a positive impact.

The fourth quarter EBITDA was EUR 17.7 (0.7) million, or 17.1% (1.0%) of net sales.

The operating result for 2020 was EUR -16.9 (-5.6) million, and the free cash flow from operating activities was EUR 13.8 (-20.6) million.

The operating result for the fourth quarter was EUR 6.8 (-9.1) million, and the free cash flow from operating activities was EUR 39.7 (-6.3) million.

* Free cash flow from operating activities after sustaining capex = EBITDA – change in net working capital – sustaining capex without right-of-use assets.

Financing arrangements

The Finnish Minerals Group has provided a total of EUR 456.8 million in equity financing for Terrafame from the original financing packages. In addition, as agreed, Terrafame received a total of EUR 191.2 million in equity financing in 2017 and 2018 from the Galena Fund, which is part of the Trafigura Group.

In the first quarter of 2020, Terrafame draw the Finnish Minerals Group’s remaining portion of EUR 30 million and the Galena Funds’ remaining portion of EUR 30 million, after which the company no longer has unused equity financing available from these financing packages.

In addition, the company has received around EUR 166.9 million in debt financing from Trafigura and around EUR 42.1 million in debt financing from Sampo. In the first quarter, Terrafame draw around EUR 18 million in debt financing from Trafigura and EUR 6 million in debt financing from Sampo plc. In August and in October, Terrafame draw Trafigura’s remaining portion of USD 50 million debt financing in two instalments of USD 25 million.

In August 2020, Terrafame and its owners decided on refinancing and additional  financing to ensure its operational development in an uncertain market situation and the completion of the battery chemicals plant investment project as planned. Previous financing and loan arrangements had been negotiated before the decision on the significant investment in the battery chemicals plant was made.

The new financing arrangement consists of rearranging the current loans and a new equity financing commitment as follows:

• The funds managed by Gale

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