Mechel's (MTL) CEO Oleg Korzhov on Q4 2013 Results - Earnings Call Transcript

May.15.14 | About: Mechel OAO (MTL)

Mechel OAO (NYSE:MTL)

Q4 2013 Earnings Conference Call

May 15, 2014 10:00 AM ET

Executives

Vladislav Zlenko – Director, IR

Oleg Korzhov – CEO

Stanislav Ploschenko – CFO

Analysts

Dan Yakub – UBS

Sergey Donskoy – Societe Generale

Dmitriy Kolomytsyn – Morgan Stanley

Barry Ehrlich – Citigroup

Neri Tollardo – Morgan Stanley

Irina Trygub – Raiffeisen Bank

George Buzhenitsa – Deutsche Bank

Alexander Levinskiy – Sherbank

Operator

Welcome to the Mechel’s Full Year Financial Results Call. (Operator Instructions). I will now turn the conference over to Mr. Vladislav Zlenko. Please go ahead, sir.

Vladislav Zlenko

Thank you and good day everyone. I would like to welcome you to Mechel’s Conference Call to discuss our full year 2013 results which were reported today. With us from management today are Mr. Evgeny Mikhel, Mechel’s Chief Executive Officer and Mr. Stanislav Ploschenko, Mechel’s Chief Financial Officer. 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. Korzhov, please go ahead.

Oleg Korzhov

Ladies and gentlemen, good afternoon and good morning welcome to the 2013 full year performance of conference call. The past year proved to be quite challenging for mining companies and steel makers particularly for those whose financial performance to a great extent depends on the price of metallurgical coal. Suffice to say that in 2013 the average coke and coal price dropped by 33% year-on-year, prices for long steel products did not fare much better for example average rebar prices going down by 11% year-on-year.

Throughout the year we invested significant efforts into adapting the company’s business model to new realities by divesting several assets that did not meet the group development strategy. Due to weak prices and market volatility those assets were cash flow negative or cumbersome for the group from the opportunity cost stand point. The divestments were successful, however the downside associated with the divestment of loss making assets was a significant non-cash write-off.

As a whole in 2013 the company’s consolidated revenue was some $8.6 billion with EBITDA at $735 million and net loss of $3 billion where $2.5 billion is the amount of the aforementioned write-off and the Forex difference.

During the year our top priority was reduction of the Group debt burden. We managed to make a significant progress into deleveraging strategy. As a result thanks to divestment and shutting in or mothballing loss making facilities, we have an up-to-date business structure that makes it possible to maximize operational cash flows in an environment characterized by a lingering weakness of our product market.

Given the existing debt burden we drastically revised our investment program cutting back investments almost by half compared to the previous year. Among other things completion of the investment cycle of our major investment projects was also helpful. This year our investment program will down to the bare minimum largely investments to maintain our existing capacity and insignificant amount of carried over payments and a recently launched project financed by loans.

The curtailed investment program will make it possible to free additional funds to increase our financial soundness. At the same time it does not in any way impact the company’s key strategic project development of the Elga Coal Complex. This project is going full steam ahead as planned with project financing provided by Vnesheconombank.

It should be noted that starting this year we’re already getting returns from projects implemented over the past few years such as the rolling mill at Chelyabinsk Metallurgical Plant or upgrading train shipment facilities at Port of Posiet up to 7 million tonnes a year.

In particular the project implemented at the Chelyabinsk Metallurgical Plant made it possible to almost fully abandon selling low profitability and significantly broadened the range of shaped roll for construction thus consolidating our leadership position in the Russian long roll segment.

In the nearer future we will send a batch of rolls produced at the mill to the Russian rail road company for certification. Once we have all the required approvals our rail supplies to the Russian rail road company will be 400,000 tonnes per annum.

Since the beginning of the year record volumes of coal have been put through Posiet which facilitates a gradual expansion of our ties with metallurgical coal consumers in the Asian and Pacific region. We were particularly successful with Chinese steel makers who generally involved long term contract preferring spot deals.

Last year we managed to send a number of one year contract with such major global steel makers as Baosteel and Shaft [ph] Steel. Earlier this year we consolidated our success by signing another one year contract with Baosteel increasing our supply to this customer by 25%. As whole suffice to say that last year our supplies to China amounted to some 7.5% of the total metallurgical coal import to China.

Despite our successful expansion into the Sea Trade co-markets in Asia, the pressing environment for mining companies continues to be complicated. Coke and coal prices have long been at the seven year minimum, this in its turn leads to major underinvestment in the industry and will ultimately lead to a drop in supply to the coke and coal market and a subsequent price recovery.

Given the above our efforts focused on improvement of production efficiency, cost control, optimization of our product range and diversifying our plant, base and market are more important than ever. I’m confident that as we go ahead implementing our deleveraging strategy, our efforts will be a value driver to increase the company’s shareholder value.

Now let me hand over to Stanislav Ploschenko, the Senior Vice President for Finance who will present our financial results across all business segments in more detail. Thank you.

Stanislav Ploschenko

Good morning and good evening ladies and gentlemen, our financial analysis we will as always begin with the mining segment. The fourth quarter saw the average realized price from third party sales relatively well around the levels of Q3 or even higher in case of iron ore up 7%, 9% for Anthracite and PCI and 8% for thermal coal. The volume of sales however were lower than in the previous period affected by generally slower processing on the rail road and in the ports due to weather factor occurring every winter. That led to 4% decrease in sales volumes of coke and coal whereas steam coal volumes dropped by 8% and largely as the expense of the domestic sales.

The same factors stood behind the 15% drop in other metallurgical coal sales. The third party sales volumes of iron ore concentrate were down by 52% only due to the fact that we directed some of the export and domestic volumes to supply our steel segment due to better relative pricing versus third party contracts. That is mirrored in the 35% quarter-on-quarter growth in the intersegments revenue.

The decrease in third party sales could not be entirely compensated by higher sales prices which resulted in the revenue from third parties and drift 10% lower than in the Q3 to post $626 million. Higher intersegment sales almost restored the top line to the third quarter levels short only $30 million. The cash cost experience usual seasonal inflation as a result of higher energy cost and usage of winter type fuel. It was more pronounced a quarter ago where cash cost were up from $32 a tonne in Q3 to $37 a tonne in the fourth quarter and caution of mining plant with an $8 increase whereas cash costs at Chelyabinsk were only $1 up to $35 a tonne. The high cash cost were compensated to certain extent by the $15 million positive difference in inventory write-down as compared to the third quarter due to the fact that in Q4 it was relatively clean of write-downs to net realizable value.

That's going to help the cross income hold up at $360 million only 6% below the third quarter and as a result with a gross margin only slightly down to 45% of the top line versus the 46% in Q3.

The selling and distribution expense has changed insignificantly. The beginning of utilization of Elga’s infrastructure incurred $11 million increase in land and property tax at Yakutugol driving the non-profit tax expenditure up 49% quarter-on-quarter to $10 million. Bad debt expense grew to $8 million largely as a result of a change in receivable turnover period.

Administrative expenses grew 49% to $87 million, the biggest item in this increased being the write-off of fixed assets at Yakutugol and Southern Kuzbass resulting from the annual fixed assets appraisal. Other items behind the growth of administrative expenses were higher audit and advisory costs related to preparation of project finance. At Elga the sale of Bluestone and transfer of some of the audit fees from the third quarter to the fourth one due to later half year reporting last year. As a result the operating expenses increased 19% quarter-on-quarter to $370 million.

All these dynamics especially with the growth in operating expenses led to a 44% drop in EBITDA which posted only $83 million in Q4, with EBITDA margin dropping to 11% from 18% in Q3. The profit tax expense grew by $42 million quarter-on-quarter predominantly due to write-off of the deferred tax asset at Moscow and Mechel coke in the amount of $45 million recorded on tax loss of the previous periods which increased our deferred tax expense.

FX gain of $9 million in Q4 was much lower than the $45 million won in the previous period as the ruble dollar exchange rate demonstrated less dynamics in the reported period. These factors combined in the bottom line of the mining segment dropping to $131 million in the fourth quarter as compared to just $15 million in Q3.

For the year 2013 the revenue from third parties dropped by 18% to $2.784 billion as a result of a combination of lower prices especially for metallurgical coke and lower sales volumes of thermal coal and iron ore concentrate, the last one nevertheless being fully compensated by shipments to the steel segment. The EBITDA hopped to $482 million or 15% of the top line versus 25% in 2012.

The net income of $357 million of 2012 reversed into net loss of $364 million as a result of lower EBITDA, FX loss and provision for profit tax liability. The prices in the steel segment demonstrated a mix trend with the average rebar sales price down by 2% driven by lower sales season, wire rod price down by 8% whereas wire price was up 2%. The physical volumes of sales continued to fall for the second consecutive quarter as a result of the termination of the partnership with Estar Mills and hence the end to resale of Estar goods coming to our top line in the previous year.

In numbers that shows up in the 20% quarter-on-quarter fall in rebar sales, 56% for in billet and 27% in flat product sales. That resulted in a 16% quarter-on-quarter decrease in the revenue from third parties to $1.29 billion. The intersegment sales grew by 44% to $73 million which is explained by the increase of blast furnace and gas supplies from Chelyabinsk to the power segment in winter months.

The cost of sales fell by 9% which is less than the reduction revenue and is largely explained by the growth in iron ore price and the growth in gas tariff in Q4, that resulted in a 5% growth in cash cost for rebar and consequently at 37% quarter-on-quarter decrease in the gross profit of the segment to $134 million. The selling and distribution expenses decreased by 13% to $104 million due to the previously mentioned fall in sales as well as the reduction in the head count at our European arm of Mechel Service Global due to slimming down of its operations.

As a result of the initiations of bankruptcy procedures at Estar Plants in the fourth quarter we increased the bad debt on Estar receivables by another $70 million. On the other hand we reversed $14 million of the bad debt provisions on other accounts made in the previous period due to repayment of the receivables from third parties. The administrative expenses were down by 36% largely due to reverse of $14 million environmental provision at Beloretsk created in Q3 and cancelled in Q4 due to a settlement agreement with the environmental authority.

As a result this segments EBITDA decreased by 28% to $35 million in Q4, or 3% of the revenue versus 4% in the previous quarter. The depreciating ruble added a $17 million FX loss. It is worth mentioning that the second quarter [ph] at a $16 million quarter-on-quarter increase in other income which came from a repayment of part of the previously provisioned receivables from Romanian mills disposed-off in Q1.

The income tax expense increased by $43 million quarter-on-quarter mainly due to write-off of a deferred tax asset at Izhstal in the amount of $37 million recorded on tax loss of the previous periods. The low gross income, higher interest expense, the negative FX effect and an increasing profit tax liability resulted in $206 million net loss for the segment in Q4 versus $94 million loss in the third quarter.

If we compare the full year results of 2013 versus 2012 the steel segments revenue decreased by 22% to $5.2 billion due to lower prices and more pronounced full in volumes of goods sold due to the termination of the commercial relationship with Estar. The EBITDA decreased by 44% to $210 million or 4% of the revenue as compared to 5.7% a year ago. At the same time despite the negative FX effect of $49 million in 2013 versus a positive $46 million in 2012, the net loss was reduced by 24% to $1.294 billion due to the fact that most of the bad debt provisions are related party receivables had already being made in 2012.

After the successful sale of the ferrochrome business in December 2013 the ferroalloy segment is only represented by the Ferrosilicon business in Bratsk. If we compare Q4 to Q3 the priced dynamics were insignificant. The volume of sales went down by 6% to $19 million due to furnace repairs. The intersegment revenue decreased by the same rates, the cash costs was 5% up mostly due to the drop in electricity utilization in winter periods.

The resulting gross income was 13% down to $5 million, the operating expenses grew by 89% to $8 million largely due to write-off of withholding tax assets on intercompany loans and advisory fees both related to the operations done for the purpose of the execution of the sale of the ferrochrome business.

The resulting EBITDA was almost zero in Q4. The FX loss was $6 million in the reported period, that was less than 1 million in Q3. The resulting net loss of $283 million versus $3 million net income in the third quarter was largely the result of the balance sheet adjustment for the discontinued operations of the ferrochrome business.

For the full year of 2013 the segment increased its third party revenue by 19% to $82 million, thanks to the 28% growth in Ferrosilicon sales volume. The EBITDA grew by 76% to $8 million or 7% of the revenue that is only 4% in 2012. The net loss of $1.171 billion in 2013 versus only $213 million in the previous year was only due to the balance sheet adjustment for the sale of the ferrochrome business in particular the impairment of long lived assets.

The fourth quarter was traditionally high season for the power segment which saw its top line grow at 31% to $224 million, $209 million was contributed by third party sales whereas sales to other segments also grew by 17% to $115 million, that resulted in a 7% rise in the gross income and $11 million of EBITDA for the quarter which can be compared to $4 million negative result in the previous periods. The SG&A expenses grew by 31% quarter-on-quarter partly due to the growth in selling and distribution expenses proportionally to the growth in the turnover.

The rest was contributed by the $28 million impairment on Kuzbass Power Distribution Company’s goodwill and a $14 million bad debt provision predominantly on the receivables from Estar plants which underwent insolvency procedures. These one off in entries resulted in an increase in the net loss of the segment to $54 million in Q4 as compared to the $20 million loss in the previous quarter. Overall for the year 2013 the power segments revenue remained almost unchanged at $1.190 million as intergroup sales contributed $436 million and third party sales recorded $755 million flat year-on-year.

The EBITDA went down by 20% to $33 million largely due to bad debt provisions on Estar receivables, the net loss decreased by 40% to $96 million which was largely due to the absence of the negative results of discontinued operations of Toplofikatsia Rousse recorded back in 2012.

On the consolidated basis, the Q4 revenue was 10% down to $1.885 billion as the downward trend in the mining and steel segments was only partially compensated by seasonally better results of the power segment whereas the contribution of the ferroalloy segment was negligible. The EBITDA dropped by 38% to $122 million a largely driven by falling margin in the mining segment. The net loss of $681 million was a combination of negative $14 million FX effect versus $54 million gain in Q3. Provisions for profit tax liability and adjustments for discontinued operations resulting from asset disposal. Similar segmental dynamics stood behind the 19% decrease in the consolidated revenue for the full year versus the previous periods. As steel and mining revenue was on the downward path and the power segment demonstrating a stable result only the ferroalloy segment managed to push its top line by 19% which however could not change the big picture.

The EBITDA for the year hopped to $730 million following the similar trend in the mining results while steel and power EBITDA dynamics were less pronounced and again the ferroalloy segment challenging the overall picture with an EBITDA increase.

The net loss increased by 76% to $2.9 billion on asset disposal write-offs, FX loss and provisions for bad debt.

Turning to the cash flow analysis, we can see that the potential of the working capital divestment reached its combination in Q4 impacting $108 million into group operations which helped to keep cash flow from operations positive at $10 million in Q4 despite the low season characterized usually with annual reinvestment into working capital.

Inventory reduction only brought $100 million as management of accounts payable and receivable contributed another $134 million. Settlements with the related part as we acquired another $108 million as we withdrew our relationship with Estar and initiating bankruptcy procedures with respect to most of them.

And increase in unrecognized income tax benefits of $28 million in Q4 was a result of the intercompany loans increase which resulted in additional amounts of interest expense deductions for income tax purposes.

Cash flow from investment contributed for the first time since 2004 to the Group’s cash position $306 million despite PPE investment of $130 million. That was entirely due to the cash flow from investments predominantly the ferrochrome business and the Toplofikatsia Rousse. Overall the cash flow from operations and investment brought $316 million to the business in Q4 used entirely for debt reduction in Q4 and Q1 of 2013 which you can witness by the growth of the cash and cash equivalents item to $269 million on the balance sheet as of the end of the reporting periods.

Overall for the year of 2013 the operation has generated $324 million of cash which was a challenge in the atmosphere falling commodity prices and worsening payment terms, $180 million therefore were used in investment activities leaving the balance for the debt management.

But that situation improved significantly in Q4 and to the reporting date. In the end of December 2013 we received the consideration in the amount of $425 million for our ferrochrome business with another $15 million following in Q1, 2014 for the working capital adjustment all used entirely for debt reduction. The working capital management in Q1 most importantly the continuing run-down on stock at our European Steel Distribution operations generated extra cash which allowed us to reduce debt further to $8.67 million as of May 14th.

Simultaneously we have undertaken steps to reduce the debt due in 2014 from $2 billion as of December 2013, to $800 million as of May 14, 2014 this year by repaying the debt coming due as well as agreeing the terms with our second largest creditor VTB on a refinancing the repayments of 2014 or full year term.

We have already signed agreements totaling $260 million of the rescheduling which showed some debt to the reporting date with another $275 million worth of rescheduling to follow in the next few weeks.

And with that ladies and gentlemen I would like to thank you for your attention and welcome you to open the Q&A session.

Question-and-Answer Session

Vladislav Zlenko

Thank you. We will now take questions. We would ask the participants, please state their name 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. Please go ahead.

Operator

(Operator Instructions). Our first question will come from the line of Dan Yakub with UBS. Please go ahead.

Dan Yakub – UBS

I really have just one kind of overall broad question, it looks like the EBITDA is not really covering either interest expense or if annualizing the fourth quarter, it's probably not even covering the CapEx levels that the company looks like cutting CapEx at absolute minimum cannot be used any further. So my question is what will happen going forward? Will the company be growing debt if the situation doesn’t change? Or the company will potentially try and really go and see the interest rates with the banks maybe reduce interest payments. Just trying to understand how to match the cash that the company is earning with the mandatory payments that the company has to do on a regular basis? Thank you.

Stanislav Ploschenko

So, interest related to our loan portfolio are financed from the operating cash flow rather than EBITDA and the operating cash flow as we have seen has been positive over the recent reporting periods. In addition to the above we do indeed see some signs of opportunities for reduction of our investment spend and as you could and may have seen uptil today we have managed to significantly reduce our loan portfolio and we keep reducing the amount of loans and that undoubtedly effects interest payments downward. Besides we’re in the process of negotiations with our lenders, so that the interest rates if not the reduced in absolute terms then we negotiate rescheduling or restructuring of interest payments in such a way that there is a lower interest payment burden during those years when the EBITDA is low and at the same time a certain percentage is capitalized -- certain interest is capitalized to be paid at the maturity date and that elevates the burden on us and bigger portion of interest payments is deferred to a later period which we expect to be more positive from the market environment perspective.

We believe that this year we will have enough operating cash flow and EBITDA to service our interest payments.

Vladislav Zlenko

Next question please.

Operator

Your next question comes from the line of Sergey Donskoy with Societe Generale. Please go ahead.

Sergey Donskoy – Societe Generale

I’ve several questions. First of all, could you please comment maybe in more detail, in the fourth quarter gross profit of the mining segment declined by 25 million, EBITDA growth by 65 million which means about 50 million difference, you mentioned during your presentation a number of extraordinary factors that affected performance in the fourth quarter but could you just summarize those which contributed to this particular discrepancy or what was this 50 million difference? What were the main contributors?

And second if I’m not mistaken in my calculations there was a $46 million outlay in the fourth quarter to acquire non-consolidated interest and subsidiaries, could you please remind us what was it about? What was the reason and the purpose? And maybe who were the parties that benefited?

Third question, could you please give me the amount of capitalized interest in the 2013 and also the total interest paid and if possible same numbers for the fourth quarter. And lastly a question on your universal mill, could you provide us a number, what was the production in the 2013 and what is the production plan for 2014 separately, rails and sections if possible. Thank you.

Vladislav Zlenko

The first three questions will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

Speaking about the EBITDA trend in Q4 in the mining sector. So basically if we look at the EBITDA from Q3 to Q4 then EBITDA profile from Q3 to Q4 the biggest impact was caused by the gross profit reduction by about $40 million, we also need to add the increase in operating and G&A general and administrative expenditures of 4 million, a 6 million increase in commercial expenditures, other taxes of 9.5 million impairment of goodwill in the segment of 5.5 million and the increase in the bad debt provision of 8 million. At the same time there was also a positive effect related to other non-operating expenditures of about $10 million all this taken into account explains the difference between the Q3 and Q4 EBITDA. Regarding your question about the buyout of minority stakes for an amount of about $45 million – $46 million in Q4. We consolidated the shareholding in the Kiselevsky mining company that we had.

We had about 85% prior to the consolidation, given that last year our Group ended the consolidated tax payer group, one of the conditions precedent was direct ownership of more than 90% of the subsidiaries. So that the Kiselevsky mining plant to make sure that the Kiselevsky plant was included, we had to consolidate our stake up to 90% and $46 million was the amount that we paid to have a more than 90% shareholder interest in the Kiselevsky mining company.

I can tell you that after the consolidation of Kiselevsky the positive effect that is derived from that company alone in terms of profit tax is about RUB100 million per month, so these investments will be repaid in less than a year and half.

Answering your third question, in Q4, interest payment that you see in the P&L amounted to $196 million and $66 million was the amount of interest capitalized as you can see in the investment cash flow and if we take 2013 then according to your P&L it was a $743 million and $331 million of capitalized interest.

Vladislav Zlenko

Next question will be answered by Oleg Korzhov.

Oleg Korzhov

Last year in terms of the total output of rails from the universal mill it was about 5.5 thousand tonnes, this was not in our interest output but our objective was not to maximize the production. Our principal objective was to learn how to manufacturer channels bar and beams, so it was trial and error and it was our first attempt to see how well we would be about to succeed. This year’s plans for today are as follows, we are planning that later this month early next month we will sure that we have the required batch of rails to send the rails to the Russian Rail Road Company for certification, judging by prior experience due to required activities to be performed, certification of rails, usually it takes from 6 to 8 months. So it is quite a challenge to forecast the throughput this year because everything will depend on two factors. The success of the certification process and consequently our capability to produce the required volume of rails but we will keep exercising verbatim. So we will keep learning, this year pending the completion of the rail certification.

Over the first four months of this year we manufactured about 10,000 tonnes and we produced 5.5 thousand tonnes of rails in April and we plan that given the uncertainties associated with 2014 will produce a rail product from 20,000 to 50,000 depending on when we will be able to complete the certification process. And as it is Russian Rail Road Company, we have an agreement with them that once the rails are fully certified they will off take all our volumes.

Vladislav Zlenko

Next question please.

Operator

Your next question comes from Dmitriy Kolomytsyn with Morgan Stanley. Please go ahead.

Dmitriy Kolomytsyn – Morgan Stanley

I would like to ask a question firstly, about Elga, whether you’re able to tell us about your plans for this year and next year or maybe for the next -- for the few coming years in terms of production and with a breakdown into steam coal and coke and coal concentrate? Thank you.

Vladislav Zlenko

Oleg Korzhov will answer the question.

Oleg Korzhov

This year we have planned to produce 2.2 million tonnes of coal from the Elga field, we proceeds from the assumption that we would be able to complete upgrading our seasonal washing plant that it would run year around starting in October. We launched in the second half of April this year. In terms of the breakdown, steam coal versus coke and coal this has been mentioned and the current breakdown is 50:50, 50% is the share of steam coal and 50% is coke and coal and therefore we plan that we will be able to produce about 1.3 million tonnes of product and the breakdown will be approximately the same in terms of product for energy product and coke and coal products.

Speaking about the future periods, for next year we have planned to produce 3.7 million tonnes, again we perceive of the assumption that the washing plant would run all around the year and basically we will keep our production flat at 3.7 until through the end of 2016 until we have built and completed construction of our principal washing plant.

Vladislav Zlenko

Next question please.

Operator

Your next question will come from Barry Ehrlich with Citigroup. Please go ahead.

Barry Ehrlich – Citigroup

These are forward-looking questions, so give us some idea of how the business is developing this year by May. How did EBITDA margins drop in the first quarter? And what was total capability and CapEx on Elga related projects in the first quarter? Thank you.

Vladislav Zlenko

Stanislav Ploschenko will answer the first question.

Stanislav Ploschenko

Unfortunately I cannot say much to the first question because we have not reported the first quarter so therefore we cannot comment on any -- give any forward-looking statements about our financial metrics for the first quarter. I guess you will have to wait until we report sometime late June.

Vladislav Zlenko

The remaining part of the question will be answered by Oleg Korzhov.

Oleg Korzhov

In 2014 our CapEx in Q1, 2014, our CapEx without the Elga project that is CapEx -- that is financed by the company from its own resources using its working capital, the total amount was about $27 million including $9 million allocated as sustained expenditures and $18 million was spent to make payments in connection with completed investment projects where we have accounts payable, outstanding accounts payable. Speaking about the Elga project that is not financed from our working capital but financing is provided by VTB, CapEx in Q1 was $48 million.

Vladislav Zlenko

Next question please.

Operator

Your next question comes from Neri Tollardo with Morgan Stanley. Please go ahead.

Neri Tollardo – Morgan Stanley

A couple of more questions from our side. Considering all the refinancing that you’ve done in the interest adjustments that the CFO mentioned earlier in terms of grace periods, how do you see your interest expense and interest payments changing year-over-year in 2014 and if you can give us a bit more detail on your VTB refinancing deal that was on the news today and the second question is on the Nizhnetagilsky Metallurgical Plant. We know that the deal fell through I think it was December of last year, is there any update on the sale of that assets and there any other non-core assets that you’re planning to sell and on that front do you’ve a timeline on the sale of an Elga stake, would you be able to give us an update on the negotiations there? Thank you.

Vladislav Zlenko

Stanislav Ploschenko will answer the first one.

Stanislav Ploschenko

In terms of interest cost this year, the negotiation process with our lenders is far from being closed or completed that’s why I’m reluctant to give any specific information to this effect since this situation may change. I would like to go back to the response that I have already given to a prior question that we expect to be able to generate sufficient EBITDA and operating cash flows to cover our interest spend this year and in terms of the specific amount of interest spent in addition to the fact that it may change I cannot quote the amount since it is a forward-looking statement speaking about the refinancing with VTB, the refinancing deal with VTB as I said before we have reached an agreement to refinance that portion of repayments that are due and payable in 2014, this is an amount of $0.5 billion, we have signed some of the agreements fixing our average months for a total amount of $360 million and we expect to be able to sign the remaining agreement within the next few weeks for an amount of $375 million.

Vladislav Zlenko

Next question will be answered by Oleg Korzhov.

Oleg Korzhov

Speaking about the divestment of our asset in Ukraine, the current political situation in the region is quite complicated but despite that we’re still in the process of structuring the deal there was some parties who have expressed the interest and we’re negotiating with them. It is hard to give you any deadline or time period because the process is underway and ongoing and we hope the outcome would be positive. Speaking about other non-core assets, I would like to remind you that these are the assets that we have put on the list as companies that we’re ready to divest. Companies that do not have a strategic fit that we spoke about before. These are our U.S. mining company, Bluestone that’s most is coke that is brass, ferroalloy plant, (indiscernible) goes with and we keep divesting our metal trading Eastern European assets.

And the third question regarding the sale of a stake in Elga. Actually we’re going along two parts, the first one is a potential sale of portion of share in the business and the sale of the rail road that we have been building recently. So we’re in the process of negotiations and trying to reach an agreement, again it is hard to give you any idea of the plant period, hopefully we will be about to get it done by the end of the year.

Vladislav Zlenko

Next question please.

Operator

Your next question comes from Irina Trygub with Raiffeisen Bank. Please go ahead.

Irina Trygub – Raiffeisen Bank

Just several questions which I would like to ask, the first question is can you possibly say what is the current capacity load at Port Posiet at the moment and if you’re planning to increase the capacity going forward into the year. Second question is what are the current covenant requirements with the lenders and does Mechel plan to renegotiate its convenience again in the course of the year and if possible what is the debt reduction target for the full year 2014 if any I’m sure that you have planned at least for yourself maybe to reduce the total debt exposure as well and also I noticed that in the fourth quarter the general and sales and administrative expenses was relatively high. Do you plan any reduction in G&A expenses in the course of the year and each year the expense of which activities basically Mechel will do this? Thank you.

Vladislav Zlenko

The first question will be answered by Oleg Korzhov.

Oleg Korzhov

By the end of last year we completed the first phase of the Port Posiet upgrading. This spring we completed all startup and commissioning operations and within a pretty span of time in two months we managed to reach the design capacity as planned. As to any further increase in the throughput capacity this year there will be an increase compared to the last year, last year we put through 4.1 million tonnes whereas the target for this year given that it was not during the first months when we reached the design throughput capacity but in April, therefore our target for this year is about 7 million tonnes but as I’ve said even now the port is running at throughput capacity higher than the design one. In April we put through 600 in fact 40,000 tonnes and basically if we multiplied by 12 it will be about 7.7 million tonnes. Naturally given the winter seasons and issues related to the winter season, traffic issues and cold freezing issues, well in principle we can be bold enough to say that we’re already at the design capacity and we will undoubtedly try to ramp it up and further increase.

Vladislav Zlenko

The remaining questions will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

In Q4 last year we agreed with our lenders covenant holidays with respect to net debt to EBITDA for 2014 then this particular indicator will be tested for the first time only after 2014, as still to make sure this indicator should not exceed to one end we expect to be there to meet the covenant and therefore we do not have any plans to have any near term negotiations with the lenders to amend the covenants. The second indicator is EBITDA to interest costs, it should not be less than one and we also plan that there should be no problems there as well in terms of meeting this covenant as well. And SG&A I guess you mean the mining sector? Since in the metallurgical segment this indicator was G&A spend was even lower than in Q3 and the changes in the ferroalloy and energy sectors were not material.

As I mentioned above the principal reasons, the main reason behind the increase in G&A in the mining segment in Q4 is the fact that there was revaluation of fixed assets and some of the fixed assets value was written off in Yakutugol and Southern Kuzbass. This is something that we do on an annual basis when we reevaluate our assets, to get net realizable value and besides audit fees and consultancy expenditures. Speaking about these cost line items, the audit costs last year were rescheduled from Q3 to Q4 because of the half year review was completed as late as December that was quite late because we had been in the process of negotiations with lending banks to restructure our debt. Therefore some of the payments for audit services were delayed from Q3 to Q4, besides there were some extra cost related to consultant fee services in connection with the project financing structuring for Elga and speaking about any subsequent, any future trends in terms of G&A we will keep reevaluating our fixed assets every year and a lot will depend on the depreciation and the market conditions and speaking about the auditors and consultancy services, they will be quite stable.

Auditor’s fees are stable because we have our accounts audited every year. Consultancy fees will depend on projects in the mining segment that we plan to execute. And asset divestment you know that we have quite a broad scope of workforce this year.

Vladislav Zlenko

Next question please?

Operator

Your next question comes from Sergey Donskoy with Societe Generale. Please go ahead.

Sergey Donskoy – Societe Generale

I have a few follow-up questions, firstly when you were discussing my -- answering my question regarding your load -- the rolling mill capacity load you did not cover that portion of your production that is related to bar and shaped roll production. As far as I understand more than half of the capacity of the mill is years to produce bars and shaped products, what are your plans for this year and more long term wise? Are there any constraints? Restraining factors? If there are such constraints what are they? My second question is related to CapEx, could you please give us this full CapEx number in accordance with your 2014 budget including the Elga CapEx and if I understand it correctly last year you spent about $6 million in connection with payments for the purchase of the (indiscernible) plant. Do you plan to make any payments of the kind this year and what is the total outstanding amount that is being stable all in all? And the third question, do you have any plans to restart production at Bluestone? If my understanding is correct it was completely shut in last year if yes and under what conditions and last but not least taken Q4, and Q1 what were the coke and coal prices at Yakutugol? Thank you.

Vladislav Zlenko

Oleg Korzhov will answer.

Oleg Korzhov

Well try me to answer the question, it will take up more time to read out the questions. Speaking about the bars and channel bars, let me give you an answer in accordance with the same (indiscernible) that I used. We produced a bit more than 40,000 tonnes of bars and channel bars last year over nine months end and this year during the first four months our throughput is 33.5 thousand tonnes and reaching the maximum output in March we reached at March and it is 11.3 thousand tonnes. Of course everything will depend on the market environment. As you understand this is special purpose of product but we plan to produce from 120,000 to 150,000 tonnes. To-date we have capability to produce about 13 types of shaped products and maximizing output is a constraint by our narrow capabilities to broaden the range of products produced and this is the issue that we’re currently addressing and we hope that by the end of this year we will be able to get some tangible results in this particular respect.

Well this year without the Elga project we plan to spend $322 million as CapEx including $114 million as sustained CapEx at about $128 million [ph] for investment projects but I would like to repeat what has been said that these are not new investment projects but these are payments for projects that were implemented in 2013. As to the Elga project we plan to spend -- a bit more than $720 million, this is the Elga CapEx.

Well speaking about the prices, I should say that we have few shipping destinations or markets. The first is the Chinese market, the prices in the Chinese market, we sell on the safe basis was about $141 to $145. In Q1, 2014 the prices went down and we at the beginning of the quarter the prices were $130 and by the end of the quarter the prices went down to $110. As for the second market, it is Japan and Korea and we sell our products to them on four basis. In Q4, the prices were $126 and they were almost flat in Q1 and were $124.

Last year a settlement with -- for the acquisition of the asset we paid $66 million, there will be another payment this year and it will amount to about $85 million. The interest is driven by the deal structure assigned earlier.

Sergey Donskoy – Societe Generale

Is it possible to say how much total remains to be paid including 2014 and subsequent years?

Oleg Korzhov

As I said in 2014 we will pay $85 million and within the period from 2015 up to 2018 we will pay another $282 million.

And regarding Bluestone, coal production was suspended later last year, this was related to the fact that production of coal under the pressing environment and given the cost incurred by the company was not viable or economically efficient. This year the pressing environment has not yet changed and we do not see any point or practicability in restarting the production from this asset. If something changes, if the prices move up we will reconsider it. As of today there is no production but as of the beginning of the year we had inventories of coal produced before. So therefore this year we’re processing and selling the product that were stored earlier this year.

Vladislav Zlenko

Next question please.

Operator

Your next question comes from George Buzhenitsa with Deutsche Bank. Please go ahead.

George Buzhenitsa – Deutsche Bank

I’ve few questions, first on your equity on the balance sheet which is now approximately $800 million. I remember you had a covenant which related to that level of equity. So the question is how the covenant has changed then whether it exists or it has been abandoned all together? Second question was on the second tranche from BB for Elga financing. Can you please update us when do you plan to receive it? And third question is on lease back business, well currently there is a $74 million I think of cash inflow from that business and I was just wondering what exactly you do there? Thank you.

Vladislav Zlenko

Stanislav Ploschenko will answer.

Stanislav Ploschenko

Speaking about the equity covenants, we do have a covenant at the group level which should and the equity should be 4 billion as minimum as of the latest reporting data, equity went down to $800 million but 4 billion is a covenant is adjusted equity that does not take into account all non-cash write-offs and if we calculate adjusted equity then as of the reporting date it is 4.5 billion and we do not have any plans to revise or change the covenant at the moment.

Now regarding VEB financing, the latest draw down was in the second half of April, so far, this money is sufficient and we are in the process of complying with all conditions precedent to get the second chance from Vnesheconombank and hopefully closer to June or the conditions precedent will be met and will start -- will do the next draw down.

Speaking about lease back, last year as part of our investment program we purchased mining transport equipment for Southern Kuzbass and Yakutugol which we leased back, which is quite a standard financial operation to finance CapEx.

Vladislav Zlenko

The next question please.

Operator

Your next question comes from Alexander Levinskiy from Sherbank. Please go ahead.

Alexander Levinskiy – Sherbank

I’ve two questions from our part, the first question relates to the bonds, do you consider any bond redemption given that they are traded at EBIT discount at the par value, if so then what would be the source of funds to finance the bond? And the second question relates to your assets expenditures forecast for 2014 and if possible could you please show us the cost versus the ruble exchange rate? Thank you.

Vladislav Zlenko

The first question will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

We’re aware of the fact that our bonds are traded at big discount and from time to time we do targeted redemptions but unfortunately as you know the company is cash strapped and if it were not the case there would be no such discount if we had money to buy out our deeply discounted debts, there would be no discount.

Vladislav Zlenko

Next question will be answered by Oleg Korzhov.

Oleg Korzhov

In terms of question of coal assets or mining assets costs, when we are doing some budget process for 2014 we were guided by the following logic. There will be inflation, natural monopolies, tariff rates will grow, we actually assumed an about 5% – 7% tariff growth rate but thanks to optimization and cost savings we have planned to offset the inflation, thanks to planned savings, cost savings. Therefore in ruble terms we do not foresee any major increase in the cost incurred by our coal assets especially the sensitivity of our cost to the ruble exchange rate. All our mining segment costs are ruble denominated. If we conduct rubles into dollars then naturally with ruble depreciation dollar expenses go down as well.

Vladislav Zlenko

Next question please.

Operator

That is all the questions that we have for today. I will now turn the call over to management for any additional comments or closing remarks.

Vladislav Zlenko

Thank you. Ladies and gentlemen thank you for taking the time to join Mechel’s 2013 financial results conference call today. The replay of the call will be available at Mechel’s website. If you’ve any further questions please contact the IR office. Thank you again from all the team here. Good bye.

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