Risk management

Market and commercial risks are primarily managed at Business Area level. Operational risks are managed by the operating units in accordance with guidelines and instructions laid down for each Business Area and at Group level. Financial risks are managed centrally within Boliden’s treasury function. The treasury function is responsible for identifying and efficiently limiting the Group’s financial risks in accordance with the financial policy set by the Board of Directors.

Market and commercial risks

Global economic trends in general, and global industrial production in particular, affect demand and pricing trends for zinc, copper and other base metals. Boliden’s customers are primarily steel companies and manufacturers of semi-finished goods in Europe who, in turn, sell their products to the European automotive, construction and electronics industries. Activity levels in these industries affect demand for Boliden’s metals and, hence, the Group’s profitability.

Metal prices

Changes to metal prices and treatment and refining charge terms have a significant impact on Boliden’s profit performance. Metal prices are set daily on the London Metal Exchange (LME) and Boliden’s policy is not to hedge metal prices and exchange rates, but rather to allow changes to be reflected in the result. Boliden does, however, evaluate price hedging under certain circumstances, e.g. in conjunction with a major investment project when the Group’s financial effectiveness may be reduced if a major fall in prices coincides with disbursements for the investment. Mining of a limited ore body with a short lifespan when the level of price risk inherent in the project is high is another such circumstance. The smelters are, by and large, naturally hedged against metal price fluctuations, in that treatment and refining charges are the primary components of their income. Some impact does result from the zinc smelters’ price escalators and the extraction of so-called free metals, which are fully exposed to fluctuations in metal prices.

Treatment and refining charges

Treatment and refining charges are the primary components of the smelters’ income. Treatment and refining charge terms are determined largely by the balance between supply and demand in the metal concentrates market. Boliden buys in substantial volumes of metal concentrate for its copper smelters from external suppliers, and is consequently exposed to fluctuations in this market. The terms for treatment and refining charges of metal concentrates are negotiated annually by the major players in the mining and smelting industries and the results of these negotiations serve as benchmarks for other players. In addition, concentrate transactions are conducted at spot market charges. The copper concentrate from Boliden’s mines covers approximately 25 per cent of the copper smelters’ capacity, while approximately 70 per cent of Boliden’s zinc smelter production capacity is covered by concentrate from the Group’s own mines. Changes to copper treatment and refining charges consequently have a significant impact on the Group’s profits under normal circumstances, while changes to zinc treatment charges have a more limited impact.

Revaluation of process inventory

The process inventory is that part of the inventory that is tied up within the smelters’ production process. The prices of the process inventory – approximately 17,000 tonnes of zinc, 29,000 tonnes of copper, 2,200 kilos of gold, 66,200 kilos of silver and 300 tonnes of lead – is not price or currency hedged, and changes in the LME prices for these metals consequently have either a positive or a negative effect on the Group’s profits in conjunction with end of year inventory revaluations. In order to clarify this accounting impact on the Group’s profits, Boliden reports its operating profit both before and after revaluation of the process inventory.

For further information on risks regarding customers, raw materials supply, energy prices as well as financial risks among other, please see Risk management in Annual report 2010, page 40-41 and Note 19, Financial risk management, page 71.