Year-end Report 2025: Lower earnings in the quarter, despite stable underlying operations

LKAB reported weaker quarterly and annual profits despite higher production and delivery volumes: Q4 net sales fell to MSEK 8,305 (9,451) and Q4 operating profit to MSEK 986 (2,619); full-year net sales were MSEK 33,325 (33,146) while operating profit dropped to MSEK 3,274 (8,722). Management attributed the profit decline primarily to a significantly weakened USD reducing sales revenue and substantially higher costs tied to the Kiruna urban transformation; production rose to 25.9 Mt (22.7) and deliveries to 25.8 Mt (21.9). The Board proposes an ordinary dividend of MSEK 1,500 (4,400), equal to 50% of profit, while iron ore spot pricing remained lower but stable (Q4 average USD 106/t, year-end USD 109/t) and pellet premiums were ~USD 12/t down year-over-year.

Analysis

Market structure: LKAB’s 2025 shows higher volumes (production 25.9 Mt vs 22.7 Mt y/y) but earnings squeezed by a weaker USD and SEK-translated losses plus a ~USD 12/tonne drop in pellet premiums. Winners are global diversified iron-ore majors (better USD revenue, scale to absorb premium compression) and steelmakers who get margin relief; losers are Sweden‑domiciled, USD-priced miners with SEK costs (LKAB) and pellet-focused niche suppliers. Cross-asset: weaker USD drove SEK revenue risk — expect elevated FX sensitivity for Swedish miners, modest widening of corporate spreads for domestic miners, and muted iron‑ore options vol given stable $106–$109/tonne spot range.

Risk assessment: Tail risks include a large permit or labor stoppage in Norrbotten, Kiruna urban transformation cost overruns (risk: additional billions SEK beyond current hit), and a China demand shock (‑10–20% seaborne iron ore demand scenario). Immediate (days) risks: FX moves and Chinese PMI prints; short-term (weeks–months): pellet premium and spot iron‑ore swings; long-term (years): sustained capex for Kiruna decarbonisation to 2045 increasing structural costs. Hidden dependency: state ownership/political decisions can change dividend/capex priorities quickly; catalyst set: China steel demand data, SEK/USD moves, and municipal permit rulings.

Trade implications: Avoid unhedged long LKAB equity; prefer relative exposure to liquid global miners. Establish tactical long positions in large-cap iron-ore producers (BHP/BHP.AX, RIO.L) and hedge FX exposure (USD/SEK). Use options to express asymmetric upside on diversified miners rather than direct illiquid LKAB options; consider short LKAB equity as a direct play if liquidity allows.

Contrarian angles: The market may be overstating permanent demand destruction — LKAB’s volume recovery (+14% y/y) suggests operational upside if FX and Kiruna costs stabilize. The dividend cut is sizable (4,400→1,500 MSEK) but preserves balance sheet for capex; if USD reverses and pellet premiums stabilize, LKAB upside could be rapid. Historical parallels: miners often rebound once production normalizes even with temporary price pressure; watch for mean reversion in pellet premiums and FX as triggers.

Key Decisions for Investors

• Establish a 2–3% portfolio short in LKAB-B.ST within 2 weeks (use liquid blocks or CFDs), target 15–25% downside if USD remains weak and Kiruna costs continue; place a hard stop-loss at +8% above entry and reassess on quarterly results or permit rulings.
• Establish a 2–3% long position in RIO.L (Rio Tinto) over a 3–6 month horizon to capture scale-driven margin resilience and exposure to any pellet premium recovery; hedge with a 0.5–1% portfolio put (3-month, 7–10% OTM) to limit tail risk.
• Buy USD/SEK (spot or 3‑month forward) sized at 1–2% notional to hedge/benefit from a USD rebound that would restore SEK revenues for Swedish exporters; enter while USD/SEK is within ±2% of current levels, with a stop at −3% adverse move.
• Implement a low-cost 3‑month risk‑reversal on BHP (buy 5% OTM calls, sell 10% OTM puts, size ~1% portfolio) to express asymmetric upside to iron-ore stabilization; only execute if iron-ore futures confirm >USD 110/tonne or China PMI prints >50.