Fourth quarter 2010 affected by lower prices and higher costs, Vale closing on track

Wednesday, 16. February 2011 07:31
Hydro had underlying earnings before financial items and tax (EBIT) of NOK 588
million in the fourth quarter, down from NOK 965 million in the third quarter.
Lower realized aluminium prices, higher operating costs and seasonally lower
sales volumes weakened underlying results.

* Underlying EBIT NOK 588 million
* Upstream decline on lower realized aluminium prices, partly offset by
Qatalum insurance proceeds
* Mid and downstream down on higher costs and seasonally lower sales, margins
remain firm
* Energy up on high prices and high production
* Primary aluminium demand expected to grow 7% in Hydro's main markets in
2011
* Qatalum aluminium plant ramp-up expected to reach full output from June
2011
* Closing of Vale deal most likely in first quarter 2011
* Proposed 2010 dividend NOK 0.75 per share


"2010 was a turn-around year for Hydro, and 2011 will mark the transformation. I
expect full Qatalum production from June and expect to close the planned
acquisition of Vale's aluminium business in the first quarter, affirming this
bold move," Hydro's President and CEO Svein Richard Brandtzæg said.

"The aluminium price is currently at a comfortable level. We have seen an
increased demand throughout 2010, continuing into 2011, and significant parts of
our downstream businesses have solid order books for first half 2011. Still, the
fourth quarter result confirms that we need to maintain focus on cost
improvements," Brandtzæg said.

Underlying results for Primary Metal declined during the quarter mainly due to
lower realized aluminium prices, partly offset by insurance proceeds relating to
the August 2010 power outage at Qatalum, the joint venture between Qatar
Petroleum and Hydro. Alumina and Raw Materials' underlying results were stable,
supported by firm earnings for alumina commercial activities.

Operating losses for Qatalum increased in the fourth quarter, as expected. Ramp-
up of the plant restarted in the middle of September. At the end of the fourth
quarter, 321 out of 704 cells were fully operational. Final ramp-up to full
production capacity will be hampered by delayed commissioning of the power plant
steam turbines. Qatalum is expected to reach full production from June 2011.

Hydro's mid and downstream operations delivered lower underlying EBIT compared
to the third quarter mainly due to higher operating costs, including costs for
planned maintenance activities and seasonally lower sales volumes. Margins
remained firm. Underlying EBIT for Energy increased substantially compared to
the previous quarter, due to higher spot prices and significantly higher power
production levels.

For the full year 2010, Hydro had underlying EBIT of NOK 3,351 million, compared
with underlying losses of NOK 2,555 million in 2009. The sharp improvement was
driven by market recovery which lifted prices and strengthened demand, as well
as reduced costs and manning. Overall end-market sales volumes increased by 17
percent compared with a decline of 18 percent in the previous year, partly
reflecting customer restocking activities. The overall market surplus was
reduced throughout the year, but inventories remained at record levels.

Underlying results improved substantially for the upstream business during
2010, mainly due to higher realized aluminium prices and improved performance
for Hydro's existing alumina and raw materials operations. Focus on reducing
operating costs in Hydro's smelter portfolio continued. USD 50 per mt of the USD
300 per mt cost improvement program was achieved by the end of 2010. The full
USD 300 program is planned to be achieved by the end of 2013.

Underlying EBIT for the midstream business was heavily influenced by negative
currency effects in 2009. Downstream business delivered substantially higher
underlying results as sales approached pre-crisis levels. Continued focus on
cost reduction measures and firm operating margins leveraged the positive market
developments and the Rolled Products business achieved record results for the
year. Underlying EBIT for the energy business improved in 2010 due to increased
spot prices and higher production.

Net cash from operating activities amounted to NOK 3.6 billion for the quarter.
Investments amounted to NOK 1.6 billion in the quarter including about NOK 0.6
billion relating to Qatalum. Hydro had a net cash position of NOK 11 billion at
the end of the quarter.

Hydro's Board of Directors proposes to pay a dividend of NOK 0.75 per share for
2010 reflecting the company's strong commitment to provide a cash return to its
shareholders. The decision is based on improved earnings and market outlook as
well as Hydro's strong financial position and cash generating capabilities.

 Key
financial
information %
% change
NOK million, Fourth Third change Fourth prior
except per quarter quarter prior quarter year Year Year
share data 2010 2010 quarter 2009 quarter 2010 2009
--------------------------------------------------------------------------------


Revenue 19 406 18 424 5 % 16 427 18 % 75 754 67 409



Earnings
before
financial
items and tax (1
(EBIT) 768 274 >100 % (938) >100 % 3 184 407)

Items
excluded from
underlying (1
EBIT 1) (180) 690   287   167 148)
--------------------------------------------------------------------------------
Underlying (2
EBIT 588 965 (39) % (651) >100 % 3 351 555)
--------------------------------------------------------------------------------


Underlying
EBIT :

(2
Primary Metal 191 399 (52) % (717) >100 % 1 198 556)

Metal Markets 62 163 (62) % (20) >100 % 321 (83)

Rolled
Products 105 227 (54) % 57 84 % 864 26

Extruded
Products 24 102 (77) % 68 (65) % 444 (67)

Energy 482 169 >100 % 295 63 % 1 416 1 240

Other and >(100) (1
eliminations (277) (95) % (334) 17 % (893) 114)
--------------------------------------------------------------------------------
Underlying (2
EBIT 588 965 (39) % (651) >100 % 3 351 555)
--------------------------------------------------------------------------------


Net income
(loss) 658 (63) >100 % (587) >100 % 2 118 416
--------------------------------------------------------------------------------


Underlying
net income (3
(loss) 376 545 (31) % (791) >100 % 1 852 066)
--------------------------------------------------------------------------------


Earnings per
share 0.39 (0.07) >100 % (0.45) >100 % 1.33 0.24
--------------------------------------------------------------------------------


Underlying
earnings per
share 0.21 0.33 (35) % (0.61) >100 % 1.14 (2.50)
--------------------------------------------------------------------------------


Financial
data:
--------------------------------------------------------------------------------
Investments 1 613 1 591 1 % 2 371 (32) % 6 231 5 947

Adjusted net
interest- (15 (6 (15
bearing debt (6 427) (8 280) 22 % 645) 59 % 427) 645)
--------------------------------------------------------------------------------


Key operational information


--------------------------------------------------------------------------------
Primary
aluminium
production                        1      1
(kmt)        360   355 2 % 332 8 % 415 396

Realized
aluminium
price LME            2                  1
(USD/mt)        2 074 179 (5) % 1 804 15 %  2 113 698

Realized
aluminium
price LME                10      10
(NOK/mt)       12 436 13 503 (8) % 452 19 % 12 674 764

Realized
NOK/USD
exchange rate      6.00  6.20 (3) %  5.80 3 %  6.00  6.34

Metal Markets
sales volumes
to external                            1
market (kmt)        417  429 (3) % 375 11 % 1 717 468

Rolled
Products
sales volumes
to external
market (kmt)       234  239 (2) %  211 11 %  945   794

Extruded
Products
sales volumes
to external
market (kmt)        127  134 (5) % 119 6 % 529   463

Power
production              2                            7
(GWh) 263     1 479 53 % 1 929 17 % 8 144 897
--------------------------------------------------------------------------------
See "Fourth quarter report 2010" for footnotes.

About Hydro's reporting
To provide a better understanding of Hydro's underlying performance, the
following discussion of operating performance excludes certain items from EBIT
(earnings before financial items and tax) and net income. See "Items excluded
from underlying EBIT and net income" for more information on these items.

Reported EBIT and net income
Reported EBIT for Hydro amounted to NOK 768 million in the fourth quarter
including net positive effects of NOK 180 million. These effects were comprised
of net unrealized derivative gains of NOK 132 million, positive metal effects of
NOK 92 million, insurance proceeds of NOK 90 million relating to the Qatalum
power outage and other net negative effects of NOK 134 million including
rationalization and closure costs.

In the previous quarter, reported EBIT for Hydro amounted to NOK 274 million
including net negative effects of NOK 690 million. These effects were comprised
of net unrealized derivative losses of NOK 524 million, negative metal effects
of NOK 52 million and impairment charges relating to Qatalum amounting to NOK
114 million.

Net income for the fourth quarter amounted to NOK 658 million including net
foreign exchange gains of NOK 232 million. In the third quarter Hydro incurred a
net loss amounting to NOK 63 million including net foreign exchange losses of
NOK 246 million.

Market developments and outlook
Upstream
LME prices continued to increase in the fourth quarter. Average three month
prices started the quarter at a level of around USD 2,370 per mt and ended
around USD 2,470 per mt. Market volatility continued with prices fluctuating
within the range of USD 2,250 - 2,500 per mt in the quarter.

Global demand for primary aluminium excluding China increased 4 percent in the
fourth quarter compared to the third quarter partly due to customer restocking.
Annualized consumption and production amounted to 25.3 million mt and 25.7
million mt respectively. Primary aluminium consumption outside China grew 19
percent from 2009. We expect corresponding growth of about 7 percent in 2011 and
somewhat slower growth in 2012. The market is expected to be within a manageable
surplus in 2011.

Production in China declined in the fourth quarter by around 10 percent compared
to the previous quarter, assumed to be due to the need to meet energy saving
targets. Total production amounted to about 17 million mt for 2010. Demand
increased by around 2 percent in the fourth quarter resulting in a decline in
inventories.

LME stocks were relatively stable around 4.3 million mt during the quarter.
Global inventories days have been falling as a result of improved demand.

Demand for metal products, in particular extrusion ingot and sheet ingot was
strong and unchanged from the previous quarter. Demand for primary foundry
alloys improved in Northern Europe, in particular in Germany and was also
stronger in export markets in Asia.
Rolled products
Consumption in the European rolled products market was seasonally lower in the
fourth quarter compared with the previous quarter. Demand increased around 17
percent in 2010 compared to 2009, but remained below the peak achieved in 2007.
We expect a healthy demand to continue into the first half of 2011.
Extruded products
European demand for extruded aluminium products improved significantly compared
to fourth quarter of the previous year, but remained weak within the building
and construction sector. In North America demand was seasonally lower compared
with the third quarter of 2010, and also lower than the fourth quarter of 2009.
Developments in South America continued to be positive, especially in Brazil.
Demand for precision tubing remains strong. Overall demand in the European and
US extrusion markets is expected to continue to grow into the seasonally
stronger first quarter of 2011. Recovery in the building and construction
segment is expected to remain slow.
Energy
Nordic electricity spot prices increased during the fourth quarter in parallel
with deteriorating hydrological conditions. Water reservoir levels in Norway
declined to about 45 percent of full capacity by the end of 2010. Snow
accumulation levels were 50 percent below normal. Colder weather beginning in
the middle of November lifted spot prices further due to very high demand.
Prices declined in January due to milder weather and more stable nuclear output,
but reservoir levels remain at historically low levels. Prices are expected to
remain fairly high throughout the first quarter of 2011.

Additional factors impacting Hydro
Hydro has sold forward substantially all of its primary aluminium production for
the first quarter at a price level of around USD 2,325 per mt, excluding
expected Qatalum production.

Qatalum is expected to produce roughly 500,000 mt of primary metal in 2011

Hydro's water and snow reservoirs were lower than normal at the end of January
and also lower than the corresponding period in 2009. Due to the high spot price
levels, Hydro's power production during the first quarter of 2011 is expected to
be at same level as for fourth quarter 2010.

Primary Metal
Underlying results for Primary Metal declined during the quarter compared to the
third quarter mainly due to lower realized aluminium prices partly offset by
insurance proceeds relating to the power outage at Qatalum in the previous
quarter.

Alumina and raw materials underlying results improved slightly in the quarter
compared with the third quarter. For Alunorte, positive effects of higher
realized alumina prices were partly offset by lower sales, higher bauxite,
caustic costs and other operating costs. Underlying earnings for our alumina
commercial activities were somewhat higher than the previous quarter driven by
higher volumes and good margins on third party sales contracts.

Lower realized aluminium prices had a negative effect on underlying results for
Primary aluminium amounting to about NOK 350 million in the quarter. Our cost
improvement program continued according to plan, however, fourth quarter
operating costs were somewhat higher than in the third quarter due to seasonal
effects.

Operating losses for Qatalum increased in the fourth quarter due to higher
depreciation charges and higher fixed costs including costs relating to restart
of the ramp up at the plant. Insurance proceeds amounting to NOK 300 million
were recorded in the fourth quarter of which NOK 210 million was included in
underlying EBIT. Ramp-up of the plant restarted in the middle of September and
at the end of the fourth quarter 321 out of 704 cells were fully operational.
Final ramp-up to full production capacity will be hampered by delayed
commissioning of the power plant steam turbines. It is expected that the plant
will reach full output from June 2011.

Metal Markets
Underlying EBIT for Metal Markets declined in the fourth quarter. Currency and
ingot inventory valuation effects were relatively neutral in the fourth quarter
compared with substantial net positive effects in the previous quarter.

Excluding currency and ingot inventory valuation effects, underlying EBIT for
Metal Markets also declined in the quarter. Our remelt operations delivered
lower underlying results during the quarter mainly due to planned maintenance
activities. Lower sales volumes for resale of third party products also had a
negative impact on underlying results for the quarter. Underlying results for
our metal sourcing and trading activities continued to be firm.

Total metal product sales excluding ingot trading was slightly lower mainly due
to seasonally lower shipments of extrusion ingots in all markets.

Rolled Products
Underlying EBIT for Rolled Products declined compared to the third quarter of
2010 due to higher operating costs, including costs for planned maintenance
activities, and somewhat lower sales volume.

Volume developments varied between our different business sectors. Lithography
shipments increased together with a good production performance. General
engineering sales were stable while automotive, heat exchanger sales were
slightly higher supported by continued firm demand. Volumes for our thin gauge
foil, beverage can and other packaging and building products declined mainly due
to seasonal maintenance and other capacity constraints. Margins remained firm.

Extruded Products
Underlying EBIT for Extruded Products declined compared with the third quarter
of 2010 mainly due to higher operating costs and seasonally lower volumes. The
cost increases were due to planned maintenance activities and charges for
ongoing improvement programs mainly related to rationalization initiatives, the
implementation of a new IT system and increased marketing efforts. In the
previous quarter, operating costs were positively impacted by seasonally lower
employee related costs. Margins were firm for most business sectors in the
fourth quarter.

Volumes for our European, North American and South American extrusion operations
were all seasonally lower in the fourth quarter. Recovery in the building
systems markets continued to lag the general extrusion market, in particular in
southern Europe, where demand fell in the fourth quarter due to reduced public
spending and increased uncertainty concerning economic developments. As a
result, we have initiated further rationalization programs to improve the
results of this business.

Energy
Underlying EBIT for Energy increased substantially compared to the previous
quarter due to higher spot prices and significantly higher production. Cold
winter weather, marginal precipitation and outages of nuclear power in Sweden
resulted in high spot prices during the period.

Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of NOK 277
million for the fourth quarter compared with a charge of NOK 95 million in the
previous quarter and a charge of NOK 334 million in the fourth quarter of 2009.
Eliminations included in underlying EBIT amounted to a charge of NOK 12 million
in the fourth quarter compared with a income of NOK 39 million in the previous
quarter and a charge of NOK 108 million in the fourth quarter of 2009.

Underlying results for the fourth quarter included increased costs for
integration planning and other transaction costs relating to the Vale aluminium
acquisition, as well as year-end adjustments for employee and pension costs.

Items excluded from underlying EBIT and net income
To provide a better understanding of Hydro's underlying performance, the items
in the table below have been excluded from EBIT and net income.

Items excluded from underlying EBIT are comprised mainly of unrealized gains and
losses on certain derivatives, impairment and rationalization charges, effects
of disposals of businesses and operating assets, as well as other items that are
of a special nature or are not expected to be incurred on an ongoing basis.

Linked to the agreement to acquire the majority of Vale's aluminium businesses
in Brazil (Vale Aluminium) it was decided to hedge the majority of the net
aluminium price exposure in Vale Aluminium until the end of 2011. The hedges are
aimed at mitigating the risk of a weaker aluminium price and will secure a
robust cash flow from the acquired assets in the transition phase. The hedges
are not conditional upon completion of the transaction. The significant part of
the positions expiring after closing of the transaction are subject to hedge
accounting and included in other comprehensive income. Recognized unrealized and
realized effects of positions not subject to hedge accounting are classified as
items excluded from underlying EBIT.

Items excluded from underlying net income Fourth Third Fourth
quarter quarter quarter Year Year
NOK million 2010 2010 2009 2010 2009
--------------------------------------------------------------------------------


Unrealized derivative effects on LME
related contracts (162) 515 (728) 489 (2 630)

Derivative effects on LME related
contracts (Vale Aluminium) 55 99 - (166) -

Unrealized derivative effects on power
contracts 151 (25) 318 609 (198)

Unrealized derivative effects on currency
contracts (20) (65) (19) (50) (345)

Unrealized derivative effects on raw
material contracts (156) - - (156) -

Metal effect, Rolled Products (92) 52 (157) (560) 588

Significant rationalization charges and
closure costs 131 - 65 130 518

Impairment charges (PP&E and equity
accounted investments) 12 114 138 187 438

Pension - - - (151) (52)

Insurance compensation (91) - (13) (91) (152)

(Gains)/losses on divestments (7) - 684 (74) 684
--------------------------------------------------------------------------------
Items excluded from underlying EBIT (180) 690 287 167 (1 148)
--------------------------------------------------------------------------------
Net foreign exchange (gain)/loss (232) 246 (216) (513) (2 774)

Calculated income tax effect 129 (328) (275) 80 441
--------------------------------------------------------------------------------
Items excluded from underlying net income (282) 608 (204) (266) (3 481)
--------------------------------------------------------------------------------
See "Fourth quarter report - 2010" for footnotes.

Finance
Financial income amounted to NOK 292 million in the fourth quarter compared with
Financial expense of NOK 218 million in the previous quarter.

Financial income was relatively unchanged in the fourth quarter compared with
the previous quarter. Interest expense in fourth quarter is lower than previous
quarter due to lower interest on tax claims in Germany.

The net currency gain in the fourth quarter included gains amounting to NOK 274
million relating to intercompany balances denominated in Euro due to a weaker
Euro against the Norwegian kroner.1) Other net currency losses amounted to NOK
42 million.

Tax
Income tax expense amounted to a charge of NOK 401 million in the fourth quarter
compared with a charge of NOK 119 million in the previous quarter and a credit
of NOK 183 million in the fourth quarter of 2009.

For 2010 income tax expense was roughly 43 percent of pre-tax income. The tax
rate for the year was influenced by the effects of power sur-tax and results
from equity accounted investments which are recognized net of tax.

Investor contact
Contact     Stefan Solberg
Cellular    +47 91727528
E-mail     Stefan.Solberg@hydro.com

Press contact
Contact     Halvor Molland
Cellular    +47 92979797
E-mail     Halvor.Molland@hydro.com

*********
Certain statements included within this announcement contain forward-looking
information, including, without limitation, those relating to (a) forecasts,
projections and estimates, (b) statements of management's plans, objectives and
strategies for Hydro, such as planned expansions, investments or other projects,
(c) targeted production volumes and costs, capacities or rates, start-up costs,
cost reductions and profit objectives, (d) various expectations about future
developments in Hydro's markets, particularly prices, supply and demand and
competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk
management, as well as (i) statements preceded by "expected", "scheduled",
"targeted", "planned", "proposed", "intended" or similar statements.

Although we believe that the expectations reflected in such forward-looking
statements are reasonable, these forward-looking statements are based on a
number of assumptions and forecasts that, by their nature, involve risk and
uncertainty.  Various factors could cause our actual results to differ
materially from those projected in a forward-looking statement or affect the
extent to which a particular projection is realized.  Factors that could cause
these differences include, but are not limited to: our continued ability to
reposition and restructure our upstream and downstream aluminium business;
changes in availability and cost of energy and raw materials; global supply and
demand for aluminium and aluminium products; world economic growth, including
rates of inflation and industrial production; changes in the relative value of
currencies and the value of commodity contracts; trends in Hydro's key markets
and competition; and legislative, regulatory and political factors.

No assurance can be given that such expectations will prove to have been
correct.  Hydro disclaims any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

This information is subject of the disclosure requirements pursuant to section
5-12 of the Norwegian Securities Trading Act.



Q4 report:
http://hugin.info/106/R/1489372/424735.pdf

Q4 presentation:
http://hugin.info/106/R/1489372/424736.pdf




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Source: Norsk Hydro via Thomson Reuters ONE

[HUG#1489372]
Related Links: Norsk Hydro ASA
Author:
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