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Executives

Alexey Lukashov - Deputy Director Investor Relations

Evgeny V. Mikhel - Chief Executive Officer

Stanislav A. Ploschenko - Chief Financial Officer

Oleg V. Korzhov - Senior Vice-President for Economics and Management

Analysts

Neri Tollardo - Morgan Stanley

Boris Krasnojenov - Renaissance Capital

Maria Radchenko - BrokerCreditService (BCS)

Sergey Donskoy - Societe Generale

George Buzhenitsa - Deutsche Bank

Mechel OAO (MTL) Q3 2013 Results Earnings Call December 23, 2013 9:00 AM ET

Operator

Welcome to the Mechel Reports First Half and Nine Months 2013 Financial Results. For the duration of the call you will be on listen-only and at the end of the call you will have the opportunity to ask questions. (Operator Instructions).

I'll now hand you over to your host, Alexey Lukashov to begin. Please go ahead sir.

Alexey Lukashov

Thank you and good day, everyone. I would like to welcome you to the Mechel's conference call to discuss our first half and nine months 2013 results which were reported today.

With us from management today are Mr. Evgeny Mikhel, Mechel’s CEO; Mr. Stanislav Ploschenko, Mechel’s CFO; and Mr. Oleg Korzhov, Mechel’s Senior Vice-President for Economics and Management. After management has made their formal remarks we will take your questions to the presentation team.

Please note that during this call management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

We wish to caution you that these statements are only predictions, and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time-to-time with the U.S. Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

In addition we will be using non-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures are contained in the earning press release, which is available on our website at mechel.com.

At this point I would like to turn the call over to Mechel's CEO. Mr. Mikhel, please go ahead.

Evgeny V. Mikhel

Good afternoon and good morning, ladies and gentlemen. Well, let’s welcome you to the conference call to present the company’s financial results for nine months of 2013.

First of all we should note that throughout the year mining and steel companies had to operate in fairly difficult conditions in the key markets. Prices were steadily going down throughout the entire period. It is enough to say that the average coke and coal prices in this year’s third quarter were lower than the third quarter prices by 26%. For iron ore concentrate prices the decrease was 15% while for long rolls, which are our steel division’s key products, the decrease was 5%.

Despite the price pressure thanks to our constant efforts aimed at optimizing costs and increasing production efficiency, in the second quarter and third quarters we managed to retain our EBITDA at the level of the first quarter, which was the most favorable price wise.

Our success at disposal of the assets that do not fit the Group’s development strategy and the majority of which are loss-making in the current market situation, played no small part in it. We may currently state that most of our work on restructuring the Group’s business in accordance with the revised development strategy has been completed. For example, we have recently closed deals or signed agreements on the disposal of our Bulgarian power plant, steel facilities in Romania and Ukraine, ferrochrome assets in Russia and Kazakhstan. The moth balling project for Southern Urals Nickel Plant is in its final stage. This business restructuring let to an improvement in our cash flow which was an important result.

At the same time the downside of this process were one of paper write-offs as the sales price of loss making assets in weak market conditions is much less than the book value. On the whole as a result of nine months of 2013 Mechel’s consolidated revenues was approximately US$6.7 billion, EBITDA amounted to $608 million, net loss was approximately US$2.2 billion, where US$2 billion is the amount of losses due to the aforementioned non-cash write off and ForEx effect.

Considering the protracted price corrections on our key markets and respective fall of profit as well as Mechel’s existing debt burden we paid particular attention to our relations with lenders. Based on the high probability of the lack of tangible positive dynamics in the raw materials market next year we managed to get lender banks agree to covenant holidays until the end of 2014 as well as more comfortable levels of tested financial ratios in the following period. Our success in the talks with lenders was largely due to the acknowledgement of the major progress that we made in implementing our revised strategy of deleveraging through business restructuring and disposal of assets.

After the divestments of assets that put pressure on the company’s shareholder value and having completed the cycle of large scale investment in the projects that are strategically important for Michel’s future development or as was the case of Elga, having ensured the uninterrupted external funding we can confidently say that Michel has returned to a stable business model. This business model is based on our company’s indisputable competitive advantages and enables us to generate stable cash flows even during a protracted slump in raw materials market.

Starting next year investment will be minimized which will enable us to free up additional cash to improve the company’s financial sustainability.

This year we gained tangible success in implementing our investment program having completed one of the key projects of recent years, construction of a universal rolling mill. The mill’s launch will enable us to significantly improve our product range giving us access to new and highly profitable markets.

We have also made major headway in implementing our other strategic project, development of the Elga Coking Coal deposit. In particular after creating all requisite primary infrastructure and launching production we made an agreement with Vnesheconombank on further financing Elga’s development through project funding to be provided by the bank totaling US$2.5 billion without recourse to Mechel Group.

This agreement will not only enable us to speed up the development of the deposit but it will also bring the project to a positive free cash flow before repayment of Vnesheconombank credit lines. Vnesheconombank project financing contemplates completion of the Elga Coal Complex first stage development and reaching the annual production of 11.7 million tonnes of coal.

Considering the deposit’s proximity to far Eastern ports and most promising markets it will enable us to take maximum advantage of coal prices recovery, which can happen due to global under investment in the industry.

As a whole despite the protracted stagnation in our key markets mining and steel making remain fundamentally attractive. Large-scale investments made by Mechel in the recent years enabled us to secure our position in the most promising geographic and product segments. Growing demand for metallurgical coal from Asia and Pacific countries as well as growing demand for long rolls from large-scale infrastructure and construction projects create favorable conditions for increasing Mechel’s shareholder value, which is our absolute priority.

And now I’d like to hand over to our Chief Financial Officer, Stanislav Ploschenko, who will further elaborate on the financial performance of all our business segments. Thank you.

Stanislav A. Ploschenko

Good morning and good evening, ladies and gentlemen. Our mining segments demonstrated a relative robustness over the reviewed period. In the second quarter sales to third parties declined by 10% on a 5% drop in the average coking coal price and a 12% reduction in iron ore price. While the sales volumes of coking coal edge slightly up, the sales of iron ore concentrate and other metallurgical coal dropped by 9% and 16% respectively as some of the export sales were on route having been positive to Q3 results leading to 32% rise in other metallurgical coal sales and a 16% rise in iron ore sales in the last quarter offsetting a continuing downward trend in prices and a 6% drop in coking coal sales in the third quarter.

The steam coal held up better price wise in the reviewed period, the seasonal drop in Q2 being fully offset by an increased stock build-up by the utilities in Q3. The combination of these factors resulted in almost unchanged top line for the segment in the third quarter at $695 million. While the sales were affected by the negative trend in the realized price this is no reduction in the cash cost, depreciation of ruble versus American dollar and continuing cost optimization resulted in a 13% drop in the cost of sales in Q2 and a further 6% reduction in Q3 pushing the gross margin from 42% in the first quarter to 46% in the third one.

The most significant cash cost reduction, 19% took place at Korshunov Mining Plant due to increase of sales volumes reaching its maximum in Q3 and a shift to insourcing of certain services. Sales and distribution expenses decreased by 10% to $234 million over Q2 and Q3 due to a decline in coal export sales at Mechel Carbon. On a relative basis S&D expenses remained flat at 34% of the revenue.

Other operational and G&A expenses remained virtually flat. The positive dynamics of the gross profit and the reduction in operating expenses resulted in a steady EBITDA growth through the reported period, up 3% to $128 million in the second quarter and a further 16% in the third one to $148 million, improving the margin from 14% in Q1 to 18% in Q3. The FX losses over the two quarters compounded to $49 million, both Q2 and Q3 positive deferred tax benefits resulting from the tax savings incurred by the consolidated tax payer regime with the majority of that benefit, $28 million posted to the second quarter.

Additional net interest expense increased by $60 million in Q3 being flat in the previous quarter due to a temporary cessation of capital expenditures at Elga which stopped capitalization of the interest expense. The work at Elga was recently resumed as we have secured project financing from VEB. Despite the increase in interest expenses the net loss decreased from $108 million in the first quarter to only $15 million in the third one.

The steel segment’s results were influenced by the seasonal factors on the one hand. On the other they reflected the improved economics resulting from the disposal of the Romanian assets in Q1 and signing of the binding offer for the Donetsk next plant following which we account for it as a discontinued operations. The price trend was largely negative over the reported period with prices for rebar dropping 2% in Q2 and another 2% in Q3. The prices for other products followed the trend. At the same time the rebar sales volumes grew by 16% in Q2 as the construction season was in full swing. The rebar sales in Q3 remained flat.

The sales of wire rod grew by 10% in Q2 and a further 15% in Q3 in physical volumes. The volumes of billet sales on the other hand fell by 40% in Q2 and another 56% in Q3 due to a rundown of the stock accumulated previously and cessation of trading operations with Estar Mills.

The sales of billets from Sverdlovsk was also affected by the launch of the universal mill which finally closed the gap between the raw and rolled steel production. As a result the third party sales grew by 1% to $1.359 billion in Q2 and dropped by 10% to $1.225 billion in Q3 as the prices continue to retrench and sales of billets continued to fall.

The cost of sales followed the volumes dynamics with a 2% growth in Q2 and a 10% reduction in Q3. Although the cash cost of rebar led this decreased by 5% over the reported period following the trend in raw materials prices.

The gross margin went down from 18% in Q1 to 16% in Q2 and then recovered to 17% in the third quarter. The sales and distribution expenses fell by 17% in Q2 and then by further 9% in Q3 as export sales fell due to disposal of European assets and reduction of stock at our trading operations leading to an increased share of domestic sales. Administrative expenses were reduced by 5% in Q3 in comparison with Q1.

As we stopped commercial relationship with Estar Mills completely and initiated the legal procedures in order to recover as much as we can of our receivables, we had to make the full provision of $633 million on them in the reported period.

The EBITDA of the steel segment dropped by 3% to $64 million in Q2 and then further 23% down to $49 million in Q3 on downward trend in prices and the reduction of trade volumes. The EBITDA margins stood at 3.8% in the third quarter as compared to 4.4% in Q1 which is not a bad result taking to account the negative price dynamics we have witnessed this year.

The reported period also posted a $176 million loss from discontinued operations of the Donetsk Plant and $15 million loss on sale of Invicta, a small mill in UK reflecting the difference between the sale and book value of the assets. The corporate tax expenses of $22 million posted to Q1 turned into an income of $53 million in the second quarter and were around zero in the third quarter as a result of inclusion of some of the profit making steel mills into the consolidated tax payer group offsetting their taxable income against loss of other Group members.

The ruble depreciation resulted in $22 million FX loss for the second period. The bottom line heavily affected by the provisions and write-off on disposable assets in Q2 recovered to $94 million negative in Q3.

The results of the ferroalloy segment after recognition of the ferrochrome and ferronickel businesses as discontinued operations due to signing of sales agreement with respect to the former and conservation of the latter largely represent the results of the ferrosilicon business.

The revenue from third parties remained virtually unchanged at $20 million as drop in sales volumes due to larger output after partial modernization offset a slightly downward pace of the selling prices. The cash cost of ferrosilicon production fell 14% over the accounted period largely due to reduction of the stock with higher production cost and reduction of expenses for electricity and heating.

The gross margin improved to 20%, with the operating expenses relatively stable the EBITDA improved to $3 million or 15% of revenue. The FX effects and corporate tax expense were insignificant. The net result of Q2 was affected by an $881 million write-off of the book value over the ferrochrome assets leveling up with the sales price. That was the only item bringing the segment in to the red in Q2 on otherwise zero net results. The bottom line recovered to $3 million profits in Q3.

The performance of the power segment was not out of the ordinary. After the end of the heating season the revenue from third-parties fell 26% in Q2 and 12% in Q3 to $149 million. The gross margin reduced from 31% in Q1 to 20% in Q3 as lower sales brought up the share of fixed cost in the total. The sales and distribution expenses fluctuated in-line with the revenue, albeit with a lower amplitude bringing the segment’s EBITDA down to just $3 million in Q2 and an exact $4 million in Q3. The net results fell to a $21 million loss in Q2 and remained at that level through the third quarter.

On the consolidated basis the Q2 revenue was 5% down quarter-on-quarter and then further down 7% to $2.089 billion entirely as a result of subdued pricing and seasonal factors. The gross margin remained almost unchanged over the same period at 31% as lower cash cost and efficiency improvements offset lower prices.

Operating expenses, including provisions made for Estar receivables fell 12% in Q3 as compared to Q1 largely driven by lower sales in the steel and power segments and growing share of domestic sales in the steel segment. Despite lower sales we managed to maintain EBITDA almost on the same level as it nudged down 4% to $202 million in Q2 and another 3% to $196 million in Q3.

As the EBITDA dynamics were less pronounced as that of the top line the EBITDA margin grew slightly from 8.9% in Q1 to 9.4% in Q3. The net interest expense decreased by 3% in Q2 versus Q1 to $162 million but increased to $211 million in Q3 as we reclassified the capitalized interest on financing of Elga due to a halt in the construction works. As mentioned above the works resumed in the fourth quarter as we began to receive financing from VEB.

The FX effect for two periods resulted in a $71 million loss. The income tax expense of $48 million in Q1 turned into a gain of $71 million in Q2 and another $8 million in Q3 as a result of the application of the consolidated tax payer regime for the group. The net loss from discontinued operation posted $1.086 billion in Q2 resulting with other items in $1.799 billion net loss. The bottom line for the third quarter posted only a $127 million loss.

Overall for the first nine months of 2013 the Group’s revenues stood at $6.692 billion, down 19% year-on-year, the EBITDA fell by 24% to the same period last year to $608 million, the net loss totaled $2.247 billion, largely affected by impairment of goodwill and assets due to divestment and the closure of loss-making assets and creation of the full provision on operating with Estar due to the start of bankruptcy procedures at its plants.

Now let us turn to the cash flow analysis. Here we can see that our efforts to optimize the working capital and improve the cash flow through disposal of loss making assets paid back allowing us to generate $244 million of operating cash flow in Q2 and Q3. $231 million there of came only from working capital management and $273 million just from inventory management. And the stock decreased by 16% to $1.481 billion in the second and third quarters largely in the steel segment, where we focused most of our asset optimization efforts.

The investment stood at $199 million in Q2, almost the same expenditure as in Q1. But then sharply dropped to just below $100 million in Q3 as we temporarily stopped the works at Elga and investments into the universal mill and modernization of Port Posiet were drawing to an end.

The capability to generate cash has helped us despite downward price trends during the reported period to maintain the net debt at the stable level. In fact it even fell by 2% to under $9.5 billion as of the end of Q3 as compared to Q1 but that was largely influenced by the exchange rates.

The reported period was also marked with major achievements on the front of debt structuring which has considerably alleviated the pressure on the balance sheet in 2013 and 2014. We have agreed refinancing with Gazprom Bank and Sberbank shifting the repayments to these two beyond 2014. We have achieved an extension of the grace period on the international syndicated loan by one year equally extending the maturity. We have received similar refinancing from other Russian banks, all of the above totaling around $1.5 billion repayments shifted into 2015 and beyond.

As you can see on slide 14 of the presentation this process is not over yet as we have around $2 billion of repayments due next year. We are going to continue our refinancing exercise in 2014 which will be assisted by four factors we did not have the luxury of this year. Firstly, with the sale of our ferrochrome business we expect to receive enough funds in the next few weeks to own other public debt falling due in 2014. This will also reduce our debt portfolio by around $0.5 billion.

Secondly in 2014 we are planning to complete the restructuring of the Group, selling non-strategic assets which will bring us additional cash to reduce debt and renegotiate the maturity schedule. Thirdly, we have agreed covenant holidays with our creditors which will alleviate negotiations next year, taking the focus off potential waivers. And last but not the least, the completion of our investment program and sectional and off-balance sheet project financing for Elga will take the pressure off our cash flows next year allowing us to use all the cash beyond maintenance CapEx for debt repayment.

Thank you for your attention, ladies and gentlemen. We will be welcoming your questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Alexey Lukashov

Thank you. We will now take questions. We would ask the participants, please state their names and company before asking their questions. And allow some time after for translation. When questions are asked in Russian they will be followed by translation. So you may ask your questions in Russian also and we will translate.

Operator

Thank you. Our first question comes from the line of Neri Tollardo from Morgan Stanley. Please go ahead.

Neri Tollardo - Morgan Stanley

Thank you, gentlemen. This is again Neri Tollardo from Morgan Stanley, got a couple of questions. First I’ll start off, if you could share with us the long-term plan or say the strategic initiatives that Mechel shared with its creditors to effectively convince them to delay the maturity and give the economic breaks that you’ve mentioned? And as a consequence is the sale of a stake in Mechel Mining still on the cards?

My second question is that whether you’ve negotiated any interest expense changes with the banks, either breaks or even increases to compensate for the long maturity of your debt? Third question, back in June you announced the $100 million buyback, if you could give us an update on that? And then if you could guide us for CapEx in 2013 and ’14 and production guidance for both mining and steel division for the remaining of this year and 2014. Thank you.

Alexey Lukashov

The first question will be answer by Stanislav Ploschenko

Stanislav A. Ploschenko

The milestones of long-term plan that we shared with our creditors were that next year the Group will complete the restructuring of its assets, selling off the remainder of the non-strategic assets, which will bring around $1 billion of cash and that includes a divestment of a minority stake in Elga. We have put some divestment of Mechel mining off the table since we have much more attractive offers for a minority stake in Elga. And all that money will be used to reduce the debt portfolio. But we don’t have any fixed commitments or timelines for that.

Even barring these divestments the Group is confident of generating enough cash to service the current debt, the interest on the current debt without its reduction. Therefore the main point of negotiation with our creditors was to postpone the debt repayments beyond 2014.

We did not renegotiate the interest rates. They remain at the same level and we did not negotiate any holiday or postponement of interest payments. Although some of our agreements with creditors even before the negotiation started, included certain capitalization of interest, but that did not have anything to do with the negotiations we undertook with our creditors in the last couple of months.

As far as the buyback that we announced in June is concerned we have postponed it definitely.

Alexey Lukashov

The next question will be answered by Oleg Korzhov

Oleg V. Korzhov

In 2014 the cost that the company has planned amount few of the maintenance cost, that will be about $110 million-$115 million and we plan to spend a similar amount to complete our key investment projects that were launched earlier. I am talking about completion of the funding of the universal mill and the Posiet Port. The bulk of the work have been completed but the accounts payable that has accrued as a result of the construction will would be repaid in 2014. We have to note that as far as these two projects are concerned we have sources of funding as borrowed funds and we made the decision earlier.

As to 2014 so far the estimates are rough and we believe that the maintenance cost would be about $153,000 million. At to investment project the company is not planning to launch any new projects or re-animate any old project. But at the same time I would like to note that Elga is our key investment project is financed on the basis of project financing and it is not incorporated in these numbers quoted above.

Alexey Lukashov

The next question will be also answered by Oleg Korzhov

Oleg V. Korzhov

So I will answer the question regarding our production plans for next year and expected production guidelines for 2014. I’ll start with our key segment, which is mining. This year the production will be about 27.5 million tonnes. Next year we have planned production at 30.5 million tonnes. And the increment of production is mostly thanks to the ramp up from the Elga deposit.

As far the company’s Usinskaya in Southern Kuzbass will be flat in 2014 as in 2014 about 15 million tonnes at Yakutugol and Neryungrinsky as the key assets will produce about 10 million tonnes, which is comparable to 2013. The company is running at almost full capacity. That’s why we plan it to be able to produce the same amount next year.

Elga, this year production is about 153,000 tonnes. For next year we have planned 3.2 million of production. And our U.S. assets will produce about 2.5 million tonnes this year and next year we plan a flat production of about 2.53 million tonnes. Speaking about the question of milling plant -- mining plant this is also this year a stable company and it is running at full capacity and this year we will sell about 4.3 million tonnes of concentrate. For next year we have planned 4.5 million tonnes.

In STV, our steel segment the situation is approximately the same. Next year we do not plan any deviations from 2013 in terms of pig iron production. It will be flat in an amount of about 3.8 million tonnes, 3.9 million tonnes. And in terms of steel production the situation is analogous. The production is about 4.5 million, 4.6 million tonnes this year and planned for next year.

Alexey Lukashov

Next question please.

Operator

Thank you. Our next question comes from the line of Boris Krasnojenov from Renaissance Capital. Please go ahead.

Boris Krasnojenov - Renaissance Capital

Yes, good evening, gentlemen. Thank you very much for the presentation. It’s Boris Krasnojenov from Renaissance. So, two questions from my side. First question about SG&A in the nine month accounts. Our understanding was that you’ve been in process of separating the non-core and quite dilutive loss-making assets like Romanian steel assets. Also according to your press release you are selling some warehouses in Europe. However we see that SG&A little bit, quarter-on-quarter basis comparison, sorry year-on-year basis if you take SG&A in the second quarter versus second quarter of the previous year or for nine months they are even slightly up. Why we don’t see any reduction in terms of SG&A on the year-on-year basis in nine months account?

And relative to revenue this year looked really high compared to industry averages. So that’s the first question and the second question according to your maturity profile in the presentation you have $429 million of bond expiration with put options in 2014. Do I understand correct that all these bonds so it’s ruble denominated bonds and all these bonds they have a put option, they are due to redemption in February this year. And because on bond -- may be some type of misunderstanding, Bloomberg reports some kind of four tranches financials of ruble denominated bonds of total amount of around 20 billion rubles may be just misunderstanding. But do you have any other bonds with put options that expire in say into the first or second quarter?

Alexey Lukashov

Both questions will be answered by Stanislav Ploschenko.

Stanislav A. Ploschenko

Concerning SG&A expenses as a matter of fact they are more or less stable and we’re even showing a downward pace if we take away bad debt provisions which incur high fluctuation. Apart from that I am not sure what you take for the comparison basis because after the sale of the assets or certain assets and accounting for a number of the assets as discontinued operations we recalculated the P&L according to the discontinued operations accounting. So if you compare the G&A expenses this year using recently published accounts and the P&L from the last year, where these companies were still consolidated in Group, it is not correct to compare these two.

As far as the question about the bond is concerned indeed we have four tranches about, exactly 20 billion rubles to where we -- where the put options expire; 5 billion in January and 15 billion rubles in February. But part of those bonds were bought from the market or delivered to the company at the time when the new coupon were set during the last put option expiration. Therefore the balance still outstanding in the market is exactly what you can see in the presentation.

Boris Krasnojenov - Renaissance Capital

Thank you very much.

Alexey Lukashov

Next question please.

Operator

Our next question comes from the line of Maria Radchenko, BCS Financial Group. Please go ahead, Maria.

Maria Radchenko - BrokerCreditService (BCS)

The question is from Maria Radchenko from BCS. The first question relates to bank loans that are due next year. If we look at your presentation then the amount shown there is $1.3 billion. But today you have announced that you would -- you have agreed with Sberbank the rescheduling of your repayment till 2015 for an amount of 25 billion rubles. Is $1.3 billion included into that deferral or not.

Unidentified Corporate Participant

The answer was yes.

Maria Radchenko - BrokerCreditService (BCS)

Sorry, I need to check. $1.3 billion to be repaid. There is some difference in the notes in the presentation which reads us which we said, you mean the VTB and Gazprom Bank financing. Does the $1.3 billion include the Sberbank debt of 25 billion rubles.

Unidentified Corporate Participant

It does not.

Maria Radchenko - BrokerCreditService (BCS)

Now it’s clear.

My question is about the bond offer. You have announced a disposal of assets for $425 million and he expects receipts from divestment which can be used to repay your public debt. Did you mean this very amount?

Unidentified Corporate Participant

Yes. We do not have any public debt except for the bond dept.

Alexey Lukashov

Next question please.

Operator

Thank you. Our next question comes from the line of Sergey Donskoy, Societe Generale. Please go ahead Sergey.

Sergey Donskoy - Societe Generale

Thank you very much. I first have a few follow-ups. First on CapEx and I am sorry if this issue was covered during the presentation. Could you explain the decline in third quarter CapEx which dropped by about $100 million from the level of second quarter and what can be expected in the fourth quarter of the year?

My second question also on CapEx could you give us an idea what was the amount of capitalized interest in Q2 and in Q3 of the year? Thirdly on production we know that steel, cold steel production at Chelyabinsk plant declined significantly in the second half of the year from approximately 400,000 tonnes amount at the beginning of this year to slightly more than 300,000 in October and November, what was the reason for such a decline?

And yes, what’s your outlook for the next year? And finally you have already mentioned that no changes to interest rates followed from your negotiations with banks. Could you just give us an approximate amount of quarterly interest payments according to your current loan agreements? Thank you.

Alexey Lukashov

The question regarding capitalized interest will be answered by Stanislav, charged interest will be answered by [inaudible].

Stanislav A. Ploschenko

The capitalized interest in Q2 stood at the level of $72 million. In Q3 that fell to $20 million because as I mentioned before, we halted production or construction at Elga. So about $60 million of capitalized interest roughly went -- or was taken off the CapEx and added to interest payments. As far as the interest payment projection for 2014 is concerned if we take into account the cash interest payment which consists of what you will see in the P&L and the capitalized interest that’s going to be roughly $800 million next year, although in the P&L you will see less because the balance will be the capitalized interest which is difficult to predict as of now.

Alexey Lukashov

Next question will be answered by Oleg Korzhov.

Oleg V. Korzhov

In terms of steel production at the Chelyabinsk plant the main reason for the reduction in Q2, the volumes in Q2 were about 1.2 million. In Q3 the volume was a bit more than 1 million tonnes. The main reason is associated with the plant itself. In Q3 there was a plant turnaround of one of the blast furnaces and simultaneously with this turnaround we replaced one of the converters at the Chelyabinsk plant and therefore this reduction in the throughput was planned and was done as planned.

Basically we did have options to offset the decline in the converter steel production not at the expense of electric steel shop but it was more expensive and we decided not to do that and that’s why the sales of throughput reduced in Q3 compared to Q2. Speaking about next year’s plans as I said we plan to be flat against 2013 in an amount of about 4,500 tonnes, 4,600 tonnes of steel.

Sergey Donskoy - Societe Generale

Thank you. If I may, two small follow-ups on Elga. First of all is it correct that the financing of the project was resumed in the fourth quarter? And what amount of CapEx went or is going to be spent on Elga this year and what is your plan for 2014? And secondly out of the two million tonnes of mine output in 2014 how much do you think will be coking coal? Thank you.

Alexey Lukashov

The question will be answered by Oleg Korzhov.

Oleg V. Korzhov

In Q4 we did resume the Elga construction project and as of today in everything the preparation is in progress and we have already started excavation to complete construction of such facilities as the rail road and bridges. This year we plan to finance the Elga project in an amount of $50 million to be provided by Vnesheconombank. At the same time we have to note that this is the Q4 amount. The question was about the 2013 amount spend. This amount will be about $80 million, $85 million without taking into account $50 million in Q4, because throughout the first three quarters we partially financed this project using our own resources. So that we have $80 million, $85 million thanks to our own resources and about $50 million as the amount to be provided by Sber.

Next year we plan to finance the project using Vnesheconombank resources. The amount that was negotiated with and agreed with Sber is about $780 million. Originally we planned this amount to be $830 million but we have a bridge loan of $50 million in Q4 therefore the remainder will be about $780 million.

Alexey Lukashov

Second part of the question will also be answered by Oleg Korzhov

Oleg V. Korzhov

As I said the Elga production next year will be about 2.2 million tonnes and given that the coking coal is planned to be used for coking concentrate production the total shipment will be 1,300 million including concentrate of 500,000, 600,000 tonnes.

Alexey Lukashov

Next question please.

Operator

Thank you. Our next question comes from the line of George Buzhenitsa of Deutsche Bank. Please go ahead.

George Buzhenitsa - Deutsche Bank

Good evening, gentlemen. Thank you for the presentation. I have a couple of questions. First question is on ferroalloy assets. Can you remind us please is there a binding bid with your Turkish partner on those assets and if so is there a break-up fee in case the buyer decides not to proceed with the acquisition of those assets?

The second question is on Donetsk, your Ukrainian asset. I can see from the cash flow statement that you continue paying for that asset, despite the fact that if I remember correctly you have agreed with the former owner of Donetsk, Mr. Varshavsky that the plant will be transferred to him. My question is that deal still alive, what is the status of that deal, please?

The third question is on your borrowings. Do you have any limits on any additional borrowings to be raised next year? And the fourth question is on VEB project financing. So as I understand you’ve received the first tranche of project financing, and you expect to receive the second tranche, which is a bigger amount as far as I understand, something between $700 million and $800 million. So do you need any additional approvals from VEB to get that money?

Alexey Lukashov

This question will be answered by Evgeny Mikhel

Evgeny V. Mikhel

Speaking about the deal with our Turkish partners we expect to close it by the end of this year and actually the contract does have a clause where a break-up fee is provided in case of refusal to close the deal. Speaking about the Donetsk Plant, as we previously announced we have signed agreement with Vadim Varshavsky and this agreement is in the process of being implemented.

Could you please clarify your question about the borrowings, I didn’t hear it completely?

George Buzhenitsa - Deutsche Bank

Yes, of course. The question is do you have any restrictions in terms of raising additional borrowings next year?

Stanislav A. Ploschenko

No, we do not have. Well we do have a limit on the maximum borrowing installed by our creditor, and this is slightly more than $10 billion of debt.

As far as VEB is concerned I need to clarify the arrangement so it’s understood by everyone because I feel there is still confusion about our arrangement. We have received $100 million or we have signed an bridge agreement for $150 million with VEB which will be completely taken out by the main ring fenced project financing of which a number of condition precedents has to be fulfilled like the transfer of the license and fixed asset to the project company and the pledge of the 49% of the project company. They both take time and it will take another a couple of months in order to bridge the financing of the construction at Elga. It’s a 150 million bridge facility was arranged.

So we do not need any further approvals to draw on this $150 million but as far as anything on top of that is concerned we need to sign the main agreement for which the condition precedents are being fulfilled at this time and we do not expect that there will be any set back in fulfilling them in due course.

George Buzhenitsa - Deutsche Bank

Thank you.

Alexey Lukashov

Next question please.

Operator

Next question comes from the line of Neri Tollardo of Morgan Stanley. Please go ahead.

Neri Tollardo - Morgan Stanley

Yes, thank you. Just two follow up questions. One regarding the interest payment I want to just make sure that I understand correctly. You said that you expect $800 million of interest payment but you are not sure of how much that will be capitalized and then how much will be in the profit and loss statement, is that correct?

Stanislav A. Ploschenko

Yes, that’s correct. It’s difficult to predict 12 months ahead what part of the interest is going to be capitalized.

Neri Tollardo - Morgan Stanley

Great, thank you. And going back to the iron ore cash cost, it declined 19% quarter-on-quarter, is that a new sustainable level of cash cost or should we expect it to go back to first half levels?

Stanislav A. Ploschenko

Yes, this is sustainable level for the warm season. As you understand when we drill closer to the winter season and of course in the first quarter the cash cost is usually higher because of extra expenditure on electricity and heating.

Neri Tollardo - Morgan Stanley

Thank you.

Alexey Lukashov

Next question please.

Operator

We currently have no questions coming through. (Operator Instructions). And we have a follow up questions from the line of Sergey Donskoy, Societe Generale. Please go ahead.

Sergey Donskoy - Societe Generale

Yes, just one small follow-up. Could you give us some idea what was the dynamics in average coal prices for Yakutugol and Bluestone in the second and the third quarter? Thank you.

Alexey Lukashov

The question will be answered by Oleg Korzhov.

Oleg V. Korzhov

Speaking about Neryungry, Yakutugol, I am going to see -- quote numbers and people ask different questions so I’ll give the shipment basis and the tariff rate. So Neryungry coals are sold to few key markets China, Japan and Korea. So to China we sold coal at the Q2 prices were $145 at the beginning of the quarter and went down to $127 at the end of the quarter. In Q3 the dynamics were very good, starting with $125 and up to $142 and the tariff was about $50. Shipments to Japan and Korea, so we are -- ship that coal on free on board conditions and the prices were quarterly and our contract was $144 and $152. In Q3 the prices were $125, $126. Details of logistics cost amounted to $35-$40.

Speaking about Bluestone coal, so we have several types of coals high and low ash coal, so speaking about high ash coal, the export prices amounted to $125, $150 based on fee for logistics is about $50. In the Q3 the prices were about $115-$120. So I am talking about exporting this type of coal. Besides we also sell this coal on PCA in the U.S. and the fix price is fixed for the whole year and we have annual contracts and the price was about $95 on PCA.

Low volatility of Bluestone coal we exported it in Q2 for $151, $157 FOB and the logistics were $50. In q3 the prices were also lower than in Q2 and amounted to $131, $135. We also sell it domestically and the contractual volumes are annual, the basis is CCE and the price in 2013 was about $130.

Alexey Lukashov

Next question please.

Operator

Thank you. Because we have no further questions coming through (Operator Instructions). We have no further questions coming through. So I hand you back to your host to wrap up today’s call.

Alexey Lukashov

Ladies and gentlemen, thank you for taking the time to join Mechel’s first half and nine months 2013 financial results conference call today. The replay of the call will be available on Mechel’s website. If you have any further questions please contact the IR office. Thank you again from all the team here.

Operator

Ladies and gentlemen, Thank you for joining. You may now disconnect your lines.

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