Trading update for the first quarter of 2015

Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), today published a trading update for the first quarter ended 31 March 2015.

The information in this press release has been prepared based on preliminary financial results. Intragroup transactions have been eliminated in consolidation. This announcement does not contain sufficient information to constitute a full set of financial statements. The following preliminary results may differ from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The numbers in this press release have not been audited or reviewed.

Metinvest B.V. publishes consolidated financial statements prepared in accordance with IFRS for the six months ending 30 June and for the year ending 31 December.

Due to rounding, numbers presented throughout this release may not add up precisely to the totals provided and percentages may not precisely reflect absolute figures.

FINANCIAL HIGHLIGHTS

Revenues

In 1Q 2015, Metinvest’s consolidated revenues decreased by 38% y-o-y. This was primarily due to a fall in sales of flat (US$329 million) and long (US$230 million) products, iron ore products (US$310 million), semi-finished steel products (US$162 million) and coke and chemical products (US$38 million). The Metallurgical division accounted for 78% of external sales (76% in 1Q 2014) and the Mining division for 22% (24% in 1Q 2014).

 Revenues in Ukraine totalled US$340 million in 1Q 2015, down 54% y-o-y. Sales of iron ore products on the domestic market decreased by 66% y-o-y following lower demand from key domestic customers amid the conflict in Eastern Ukraine. Sales of steel products declined by 44% y-o-y due to lower demand in the major steel consuming sectors (construction, machine-building and pipeline infrastructure).

The share of international sales increased to 81% in 1Q 2015, up 6 percentage points (pp) y-o-y. The proportion of sales to Europe rose by 7 pp y-o-y to 35%, driven by greater volumes of iron ore products, pig iron and flat products. The share of sales to the Middle East and North Africa (MENA) slightly increased by 1 pp y-o-y to 21%. The share of sales to the Commonwealth of Independent States (CIS, excluding Ukraine) was down by 1 pp y-o-y to 6% due to lower volumes of finished steel products, mainly to Russia. The proportion of sales to Southeast Asia, North America and other regions remained unchanged at 15%, 3% and 1% respectively. 

Metallurgical division

Revenues in the Metallurgical division come from sales of steel and coke products. In 1Q 2015, the division’s top line fell by 36% y-o-y to US$1,426 million, of which steel sales accounted for 90%. The drop was attributable to lower prices of steel products, as well as lower volumes of slabs, billets, flat and long products, partly offset by higher volumes of pig iron.

Pig iron 

In 1Q 2015, sales of pig iron decreased by 10% to US$110 million y-o-y due to a slump in the effective average price of 27%, which was partly compensated by an 18% increase in sales volumes. Average selling prices decreased in line with the benchmark quotations for pig iron CIF US, which declined by 15% y-o-y. Despite the 21% y-o-y decline in production in 1Q 2015 due to raw material supply constraints at Azovstal and Ilyich Steel and the shutdown of operations at Yenakiieve Steel caused by the conflict in Eastern Ukraine, sales volumes of pig iron were up 18% y-o-y due to re-sales of 80 thousand tonnes of Zaporizhstal’s pig iron as a result of excessive volumes of hot metal after the major overhaul of blast furnace no. 4 in 2014. Given unfavourable market prices in the US in 1Q 2015, sales were redirected to Europe, MENA and other regions.

Slabs 

In 1Q 2015, sales of slabs slumped by 46% y-o-y to US$83 million, as sales volumes declined by 35% and the effective average selling price by 11%. Sales volumes of slabs decreased by 102 thousand tonnes y-o-y amid lower overall production of crude steel in 1Q 2015. Meanwhile, the geographic structure of sales improved: the share of Europe, a higher-margin market, increased by 10 pp y-o-y to 61%, while that of Southeast Asia and MENA decreased by 6 pp each. The decline in the effective average selling price followed the benchmark for slabs FOB Black Sea, which dropped by 32% y-o-y.

Square billets 

In 1Q 2015, sales of billets decreased by 59% y-o-y to US$57 million due to a 49% drop in sales volumes and a 10% decline in the effective average selling price. Volumes of billets decreased by 129 thousand tonnes y-o-y mainly due to lower production amid the conflict that started in the second half of 2014 and the halt of production at Yenakiieve Steel from 7 February to 16 March 2015. MENA’s share in total sales increased by 14 pp y-o-y to 91%. Average selling prices followed the dynamics of billet FOB Black Sea quotations, which dropped by 25% y-o-y.

Flat products

In 1Q 2015, sales of flat products decreased by 27% y-o-y to US$867 million, of which 15 pp was attributable to lower sales volumes and 13 pp to a lower effective average selling price. Despite an increase in Zaporizhstal’s share in total sales of flat products by 5 pp y-o-y to 39%, total sales volumes decreased by 293 thousand tonnes y-o-y due to a 26% decline in the output of flat products at Metinvest’s operations. At the same time, sales volumes in 1Q 2015 included 66 thousand tonnes of flat products sold from stock. Sales to all regions fell, except Europe. Effective average selling prices were largely in line with the benchmark quotations for HRC FOB Black Sea, which were down 23% y-o-y

Long products

In 1Q 2015, sales of long products decreased by 62% y-o-y to US$139 million due to a 50% decline in sales volumes and a 12% decline in the effective average selling price in all regions. Sales volumes of long products decreased by 285 thousand tonnes y-o-y, following lower production amid the conflict in Eastern Ukraine, issues with shipments from the conflict zone and difficulties with supplying billets from Yenakiieve Steel to Promet Steel in Bulgaria.

Tubular products

In 1Q 2015, sales of tubular products decreased by 10% y-o-y to US$25 million due to a 4% drop in sales volumes and a 6% decline in the effective average selling price.

Coke and chemical products

In 1Q 2015, sales of coke products – which include coke, coke breeze, nut coke and chemical products – decreased by 29% y-o-y to US$92 million due to a 31% decrease in sales volumes and a minor increase of 2% in the average selling price. Sales volumes of coke and chemical products decreased by 185 thousand tonnes y-o-y, primarily due to slump in coke output in 1Q 2015 following the limited operations at Avdiivka Coke starting July 2014.

Mining division

Revenues in the Mining division come from sales of iron ore products and coking coal concentrate. In 1Q 2015, the division’s top line dropped by 44% y-o-y to US$395 million, mainly because of a collapse in prices of iron ore products coupled with lower sales volumes.

Iron ore concentrate

In 1Q 2015, sales of merchant iron ore concentrate declined by 47% y-o-y to US$160 million, of which 3 pp was attributable to declining volumes and 44 pp to a lower effective average selling price. A decrease in sales volumes of 94 thousand tonnes y-o-y was lower than a 14% drop in production due to destocking of 202 thousand tonnes during the reporting period. Domestic sales of concentrate fell by 65% y-o-y, driven by a 34% decline in average selling prices and a 31% drop in volumes. As such, volumes were redirected from Ukraine to Europe and Southeast Asia. Despite an 11% increase in sales volumes in Europe, revenues from the region declined by 41% y-o-y due to a 52% drop in prices. The Group redirected 388 thousand tonnes from Ukraine to Southeast Asia in the reporting period. The effective average selling price decreased by 44% y-o-y, following the dynamics of the benchmark, Platts 62% Fe iron ore fines CFR China, which decreased from US$120/tonne in 1Q 2014 to US$62/tonne in 1Q 2015.

Pellets

In 1Q 2015, sales of pellets decreased by 51% y-o-y to US$162 million due to a 16% decrease in sales volumes and a 35% decline in the effective average selling price. Pellet sales volumes decreased by 375 thousand tonnes y-o-y due to an accumulation of 124 thousand tonnes of stock in 1Q 2015 and destocking in 1Q 2014. Sales to Ukraine decreased by 846 thousand tonnes due to lower consumption by key Ukrainian customers as a result of the conflict. Volumes were partly redirected to other markets: 190 thousand tonnes to Europe, 93 thousand tonnes to MENA (mainly Turkey), and 188 thousand tonnes to Southeast Asia. The effective average selling price in Southeast Asia dropped by 46% y-o-y in 1Q 2015 as a result of Platts quotations declining by 48% y-o-y, which was partly compensated by signing contracts with a higher premium on pellets of about US$8/tonne, compared with the average market premium. In Ukraine, the effective average selling price decreased by 44% y-o-y, largely in line with the Platts benchmark.

Coking coal concentrate

In 1Q 2015, sales of coking coal were stable y-o-y at US$46 million. A 13% drop in volumes was compensated by a rise in the effective average selling price. Sales volumes declined by 59 thousand tonnes y-o-y, primarily due to the redirection of United Coal’s volumes from sales to third parties for internal consumption as a result of logistical disruptions in supplies from Krasnodon Coal caused by the conflict in Eastern Ukraine. The effective average selling price increased by 13% y-o-y, driven by an increase in the average selling price in Ukraine from US$99/tonne in 1Q 2014 to US$184/tonne in 1Q 2015. This was partly offset by a 13% y-o-y decrease in the average quarterly contract price for hard coking coal in North America.

EBITDA

Metinvest’s consolidated EBITDA totalled US$341 million[5] in 1Q 2015, down 61% y-o-y, resulting from a decrease of US$668 million y-o-y in the Mining division’s EBITDA to US$106 million, which was partly compensated by an increase of US$116 million y-o-y in the Metallurgical division’s EBITDA to US$253 million. The reduction in consolidated EBITDA was primarily attributable to a decrease in sales of steel and iron ore products by US$1,106 million y-o-y due to lower sales volumes (US$584 million) amid a collapse in selling prices (US$523 million). Other key drivers that impacted EBITDA were:

• a decrease in the cost of raw materials due to lower consumption (US$270 million) and market prices (US$39 million);
• the positive effect of the hryvnya devaluation (US$197 million);
• lower expenses on natural gas due lower consumption (US$38 million) and prices (US$16 million);
• higher expenses on electricity due to increased tariffs (US$61 million), partly offset by lower consumption (US$43 million);
• the positive JVs contribution to EBITDA (US$84 million)[6].

EBITDA margin decreased by 11 pp y-o-y to 19% in 1Q 2015.

Debt management

At the end of 1Q 2015, total debt was down by 3% (US$93 million) year-to-date to US$3,139 million. This was mainly due to the repayment of US$81 million of pre-export finance (PXF) facilities in January and February 2015 and a decrease of US$16 million in trade finance lines.

As of 30 April 2015, total debt had further decreased by 5.4% year-to-date to US$3,059 million, mainly due to a further loss of US$87 million under the trade finance facilities.

In February 2015, Metinvest obtained a waiver from the PXF lenders with regards to a one-month deferral of 75% of the monthly principal instalment falling due on 10 February 2015. In March 2015, the Group tried to obtain another waiver with a partial deferral of the March and April instalments until May. This waiver request has been approved by the majority, but not by the requisite 100% of the PXF lenders. As a consequence, a default under the PXF facilities on the payments falling due in March, April and May, totalling around US$243 million, has occurred and is continuing. On top of that, US$413 million of further debt repayment will come due by 31 January 2016, which Metinvest does not expect to be able to pay in full. In this context, Metinvest is currently discussing principles of a standstill agreement with the PXF lenders to cover the period until 31 January 2016.

As regards its bonds, on 8 April 2015, Metinvest launched consent solicitations with respect to its 2015, 2017 and 2018 guaranteed notes. The quorum required for the meeting of 2015 noteholders was not reached. Metinvest resolved to withdraw the proposals set out in the initial consent solicitation memoranda and launched new ones on new terms on 7 May 2015. Metinvest asked all 2015, 2017 and 2018 noteholders to waive existing and related future event of defaults until 31 January 2016 as well as, specifically to the 2015 noteholders, to extend the 2015 note maturity from 20 May 2015 to 31 January 2016 in exchange for a redemption of 25% of the nominal in June 2015. Noteholders meetings were held on 1 June 2015, following which the 2017 and 2018 noteholders consents were obtained while the quorum was not reached with regard to the 2015 notes. The 2015 noteholders meeting will be adjourned to a later date to allow for remaining holders to express their vote. Pending an approval of the consent solicitation, a payment default on the 2015 notes totalling around US$114 million occurred on 20 May 2015 and is continuing for the time being.

Metinvest is making best efforts to find a new and fair debt repayment schedule acceptable to all holders of the outstanding notes and PXF lenders with a view to consensually agreeing on a comprehensive rescheduling by  31 January 2016.

The Group’s cash balance at the end of the reporting period was US$189 million, compared with US$114 at the end of 2014.

Capital expenditure

Capital expenditure decreased by 69% y-o-y to US$38 million[7] in 1Q 2015. The Mining division accounted for 64% of capital expenditure (52% in 1Q 2014) and the Metallurgical division for 30% (33% in 1Q 2014). The expenditures on maintenance projects equalled 65% of total investments in 1Q 2015.

Metallurgical division

Major investment projects in 1Q 2015 included the construction of the PCI facility and the infrastructure for a new air separation unit (ASU) at Yenakiieve Steel; preparations for fitting new filters to the existing sinter plant at Ilyich Steel; and the major overhaul of blast furnace no. 4, replacement of a turbine air blower and engineering works on the PCI unit at Azovstal.

Mining division

Metinvest continued to implement investment programmes at Northern GOK, Ingulets GOK and Central GOK. These included the development of a deep-quarry crusher and conveyor system at Northern GOK and Ingulets GOK, along with the construction of the required facilities. The reconstruction of the Lurgi 278-B pelletising machine at Northern GOK was suspended in 1Q 2015 due to limited funding.