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Mechel OAO (NYSE:MTL)

Q2 2012 Earnings Call

October 2, 2012 10:00 AM ET

Executives

Yevgeny Mikhel – CEO

Stanislav Ploschenko – CFO

Oleg Korzhov – SVP, Economics and Management

Analysts

Sergey Donskoy – Société Générale

Anton Rumanse – Burbank

Boris Krasnojenov – Renaissance Capital

Dan Yakub – Citi

Stan Goff – Merrill Lynch

George Buzhenitsa – Deutsche Bank

Dmitry Smolin – Credit Suisse

Maria – BCS Financial

Serge Lioutyi – Deutsche Bank

Operator

Welcome to the Mechel Reports 1H 2012 Financial Results Call. My name is Fe, and I will be your coordinator for today’s conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you’ll have the opportunity to ask questions.

(Operator Instructions)

I would now hand you over to your host to begin today’s conference. Thank you.

Unidentified Company Representative

Thank you, and good day, everyone. I would like to welcome you to Mechel’s conference call to discuss our first half 2012 results which were reported today.

With us from management today are Mr. Yevgeny 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 US 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 US 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 US GAAP financial measures are contained in the earnings 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.

Yevgeny Mikhel

(Interpreted). Good day and good morning ladies and gentlemen. Welcome to the conference call where we will discuss company’s performance in the first six months of 2012.

We must admit that on the whole, the first half of the year was rather challenging as regards to price dynamics in the company’s key markets. During that time, pricing adjusting in the Mechel’s target export channels in the Asia Pacific, our mining products and in the Euro zone on steel products. Still in the second quarter, the company took measures to control costs, optimize production and improve sales policy which resulted in the growth of revenue. And despite the noticeable price drop, we managed to minimize the shrinking of EBITDA.

At the same time, a prolonged weakness of the Euro zone countries and absence of positive expectations of their recovery in the foreseeable future, against the background of prices on fuel products in the European markets for quarter on quarter called for a revaluation of some of our investments in accordance with the GAAP rules. This led to one-time write-offs at Mechel’s fuel assets in the Eastern European sales division, Bulgarian Rousse (inaudible) and Euro Mechel combined works. In this connection the group recognized losses due to impairment of long-lived assets and goodwill of about US$471 million at the end of second quarter.

Net income over the reporting period was also negatively affected by a provision set aside for partial impairment of loans to SR companies for US$202 million as a result of depreciation of fair value of SR company stock used as security for the loan due to reduction in sales volume and market prices.

The four of the biggest factors contributing to the financial performance in the first half of 2012 were at non-recurrent accounting of write-offs including ForEx losses due to rubles devaluation to the dollar in the reporting period. In summary, Mechel’s consolidated revenue amounted to about US$6 billion EBITDA was $849 million and net loss US$605 million.

As you know, for the most part of the second and the third quarters, the company’s management was focused on a detailed analysis of the existing structure of Mechel’s assets. And it’s confirmative to the fundamental criteria of the revise strategy. I should note that at the recent meeting of the Board of Directors, in accordance to the proposed strategy the assets where they were write-offs were found to be a subject to A-divestments.

Apart from the sub assets, the resolutions of the Board of Directors, provide for a sale of a number of other entities of the group that do not meet the interest of Mechel’s shareholders in terms of investment opportunity costs and asset management. All in all, as seen, as instructed by the board in May this year, we made an important practical step towards reducing the level of debt, as it is a significant constraint on the group’s development.

In view of the board’s decisions, Mechel’s business model will be centered around the company’s key assets with undeniable competitive advantages that made the greatest contribution to the group’s consolidated operational performance. We’re already in mid-term, prioritization of mining and full cycles of fuel metallurgy with an emphasis on production on long steel and high ended value products will enable us to raise the company’s value as well as improve operational cash flow and reduce debt.

The basis of the reviewed strategy is the need to focus the investment program on implementation of the most promising projects with a maximum return on capital employed. In the course of the year, we made significant progress with such projects, in particular, a seasonal washing plant constructed during the year was launched only yesterday at the Elga projects, one of the key sites for the development of the company’s mining segment.

Till the end of the year, we’re planning to complete construction of the power lines to supply Elga with electricity by connecting the deposit with the (inaudible) station. With the new washing capacity and power supply to Elga, we have a fully featured production facility with all required infrastructure. This dramatically improves the project’s economics and enables industrial scale production of coal lead deposit over the next year.

Work in underway as per schedule to upgrade and widen pull to push up to safeguard fields of Mechel’s coal products to the export markets of Asia-Pacific. This November, we plan to commission the first phase of this investment project to print the pull’s throughput capacity to 7 million tons a year.

Construction of the Universal Rolling Mill is nearing its completion. Presently equipment is being mounted and setup work is conducted. Till the end of the year, we plan to complete construction in assembly and in the first quarter, we will conduct setup and coal testing and we will begin production.

Over the year, we have advanced substantially in the execution of our investment program along all strategically important projects and end up strengthening company’s leadership in mining and steel.

Despite persistent signs of crisis in the global economy and an uncertain environment in the key sales markets which affects our company’s financial results. We have every confidence in the shows and strategy and we will spare no efforts to ensure its success. So, this ends, we rely on the support of our shareholders and the board of directors. We are convinced that actions taken by the management to implement the strategy will achieve stable development of the group in the short run and provide a basis for its dynamic progress in years to come.

And now, I pass the floor to Stanislav Ploschenko, who will cover financial results of all of our business segments. Thank you.

Stanislav Ploschenko

Good morning and good evening ladies and gentlemen. We will begin the review with the mining segment as usual. As you’ll likely realize the difficult operating environment which we have been experiencing over the last several quarters, continued into the second quarter of this year.

On an FCA basis, coke and coal, and coke prices were down by 9% and 10% respectively with the falling coke prices in line with the decrease in the price of feedstock, both our own and purchase from third parties.

Prices for other main selling groups stayed relatively better quarter-on-quarter increasing by 1% for Anthracites and PCI, 4% for thermal coal and 3% for iron-ore.

Overall revenue in our mining segment was down 6% to $881 million in Q2, the decreased revenue was in turn largely driven by 14% decrease in sales of coke and coal. The lower quarter-on-quarter coke and coal revenue was roughly halved due to a negative volume variance and halved to an 8% decrease in realized pricing.

Most of the volume shortfall was experienced at our US operations. The North Atlantic sea-borne market continues to be severely impacted by a decrease in European steel plant utilization.

The Anthracites and PCI market at the same time has held up better than coke and coal market. In addition to the slight increase in average FCA prices we just noted, volumes were up 11% due to continued relative strength in Asian markets.

An 80,000 ton quarter on quarter increase in PCI sales were more than upset a slight softening of demand in Europe. With respect to steam coal, sales were down by 10% with slight quarter on quarter increase in FCI pricing offset by 10% decrease in volumes. The up-tick in realized prices was due to an increase in the percent of thermal coal sold in the export market where prices are generally higher.

Coke sales increased by 23% on the back of a 34% increase in volumes, offsetting the lower FCA pricing. In nominal terms the volume increase was 75,000 tons, two thirds of which was our own production and one third the trading of third party.

Iron-ore sales were up by 3% in ore, a 3% increase in export pricing and an increase of export volumes from 63% to 85% of the ore sales mix at the expense of the sales to the steel segment more than offset at 2% volume decrease. Naturally that was the remaining reason for 7% quarter-on-quarter pull in inter-segment sales to $207 million.

As we have noted before, the difficult operating environment heightens the importance of controlling cash costs. We feel like we can report a reasonable success on that regard. At Bluestone we were able to bring cash cost per ton down to $88, a decrease of $12 quarter on quarter. The decrease there was generally along all cost items with common denominator being the temporary closure of high cost mines as we have previously disclosed plus a, sales pick up in the second quarter.

At Southern Kuzbass and Rostov iron ore mine, cash cost held relatively steady quarter on quarter at $42 and $45 per ton respectively. In both cases, a slight decrease in exchange rate was offset by somewhat higher maintenance expenses.

At Yakutugol, we managed to bring cash cost down $4 per ton to $32 due to switch back from winter fuel exchange rate and increased output. A lower cash cost were almost compensated for growth in sales of PCI and coke, resulting in only marginal 3% increase in cost of sales.

The combination of lower sales and almost flat cost of sales resulted in a 14% quarter-on-quarter fall in the gross profit to $516 million or 47% of the revenue versus 52% in the previous quarter.

Sales and distribution expenses decreased over the quarter by $35 million or about 14% in spite of an increase in the ratio of export to domestic sales. So, this decrease was driven by several factors, the most significant of which were relative decrease of export sales to Ukraine versus sales to China and the Southeast Asia, which have a shorter delivery basis and an increase in the percentage of coke sold on an FCA basis.

All of the above factors plus an additional $19 million provision for accounts receivable contributed to a 16% decrease in quarterly EBITDA to $302 million. Net interest expense changed insignificantly. At the same time, profit tax expense decreased by $78 million or 81%.

The decrease in profit tax was a disproportionately large relative to the change of on the mining segment overall performance due to the fact that the Russian tax code requires at FX gain and losses even if unrealized to be included in the tax base.

The weakening of the ruble against the United States dollar during Q2 resulted in $300 million FX effect. Largely due to that factor the segment finished the quarter, with the net loss of $30 million.

The beginning of the new construction season was marked to a sales growth in almost all products groups in the steel segment. So, the sales of billet and wire rod grew quarter on quarter in physical volumes by 53% and 33% respectively as rebar and wire sales grew by 15% and 14%.

Negative dynamics were demonstrated only by flat products, down 17% quarter on quarter and engineering steel down 6% due to continued suppressed demand in Europe, for their main sales market.

The seasonal market uplift in Russia also led to an increase in third party sales volumes which grew by 9% quarter on quarter including the increase in resale volumes of Estar products by 15%.

The re-sales dynamics coupled with virtually flat sales prices led to 15% quarterly growth in the revenue from third parties, to almost $1.9 billion.

Inter-segment sales on the other hand had decreased by 16% due to season driven lower purchases by the power segment. It is worth noting that even the first half of 2012, is compared to the similar period of 2011, we can witness a significant change in the product mix. Sales of semi-finished deals such as billet and wire rod fell in physical terms by 19% and 50% respectively.

Well, sales of processed steel such as rebar, carbon fled steel and engineering steel grew by 14%, 13% and 7% respectively. That change is largely attributable to ramp up of production on new processing facilities. The biggest contributor was Estar, where the new modernized rolling mill was working at its full capacity in the first half of the year. Whereas last year, when it was still undergoing modernization, Estar was exporting billets from the new smelting and casting facilities commissioned earlier.

As revenue grew, the cost of sales on the contrary fell by 11% which is explained by two factors. The decrease in billet and rebar production cash costs, which you can see on slide number 7, reflects decrease in price of coke, iron ore feed and scrap we have been witnessing in the last month.

At the same time, significant production cuts implemented by the management in order to slash costs of an efficient manufacturing and reduced stock also resulted in the visible impact on the P&L. First of all, this production cuts took place at our Ukrainian and Romanian businesses, whereas certain production adjustments were also implemented at our Russian facilities which have proven to be more competitive cost wise.

The combination of growing top line and the following cost resulted in a 32% jump in the gross income and gross margin, which improved to $327 million or 17% of the revenue.

Selling and distribution expenses grew by 7% to reflect high sales, but it’s a lower rate than the later, which resulted in their share of revenue falling from 10% in Q1 to 9% in the reported period.

The segment posted a $14 million bad debt provision expenses in Q2, which reflects growing sales against an increased volatility and is largely attributable to our European receivables.

As I mentioned before, we implemented significant cuts at our non-Russian facilities to keep production costs under control. In some cases, it leads to idling entire workshops with headcount reduction or idle leaves.

We’ve used this implementations to have a medium to long-term character unless the market situation improves significantly. This cut backs also concerned businesses, which we identified as non-strategic and consider to divests as we do not expect to reverse this production cuts in the foreseeable future. We are required to impair these assets accordingly onto US GAAP.

The operating expenses posted $316 million of this impairment in the reported period, $94 million of goodwill and $222 million of long lived assets.

All of these related only to our East European assets. On top of these expenses, we also recognized a loss from partial provision for the loan issued to Estar of $202 million following the decrease of the fair value of the pledged assets. The main reason for that are negative trends in macroeconomic conditions which affect the performance of the Estar companies whose shares are pledged to secure the loan.

The positive dynamics and gross income which outpaced growth in SG&A expenses, resulted in doubling of the segment’s EBITDA quarter on quarter to $91 million, which is unaffected by one-off impairment charges and provisions for Estar loan.

The EBITDA margins are also improved to about 5% of the revenue. Net interest expenses increased by 10% reflected in growing interest rates. Income tax expense of $31 million posted in Q1 resulted in gain of $32 million in Q2. This is largely attributable to the fact that Q1 saw a bigger run down on stock at lower prices resulting in the release of unrealized margin leading to an additional income tax of $23 million, which was not the case in Q2.

Another $21 million of decrease came from Chelyabinsk Metallurgical Plant as a result of an adjustment of property plant and equipment tax base as well as an increase in the deferred tax asset due to tax loss carried forward.

In addition, remaining companies deferred tax liabilities decreased by about $15 million following the fixed asset impairment charges. The reevaluation of dollar versus ruble in Q2 resulted in $116 million of FX loss for the segment versus $92 million gain in Q1.

All these factors combined into $137 million net loss before the impairment of goodwill and long-lived assets and provision for Estar loan, and $625 million loss with it.

The financial performance of the Ferroalloy segment was driven by different dynamics in the main products. As demand in Asia remained robust and prices notched up, we undertook a significant reduction of chrome stock, increasing our third party sales by 43% tonnage wise quarter on quarter due mainly to China and Japan. As a result of that, the share of the Asian markets in the ferroalloy segment revenue increased from 4% in Q1 2012 to 18% in Q2, as you can see on slide number 10.

Sales of ferrosilicon and nickel decreased by 7% and 12% in physical volumes respectively as prices were down 6% and 10% on FCA basis. The reduction in ferrosilicon sales however were not affected by the price dynamics as the production actually grew on the back of the launch of the modernized furnace much in 2012. And at these price levels, the sales remained comfortably profitable.

This reduction was only due to a late title transfer on CAF sales resulting in higher carry over tonnages in Q3. Nevertheless, lower sales in nickel and ferrosilicon were not enough to compensate for a jump in chrome sales, which drove revenue from third parties, 6% up quarter on quarter to $132 million.

The decrease in third party sales of ferrosilicon, were more than compensated by growth in inter-segment sales overall sales growing by 2% tonnage wise.

At the same time, inter-segment nickel sales were also down by 8% as economics of nickel production remained to be loss making, and its production was hot. So, the inter-group revenue thus decreased by 20% quarter on quarter to $22 million.

It is notable that even despite the reduction, nickel production in Q2, the sales of nickel in the first half of 2012 were 26% higher tonnage wise than in the same period of 2011, which was due to the increase of third party sales at the expense of inter-group sales.

The continuing growth of chrome production resulted in almost double sales of that product in the first six months of 2012 than during the same period a year ago. Only volumes of ferrosilicon sales were down by 34% in the compared period due to the furnace refurbishment ended in March 2012.

The cash cost of production demonstrated downward dynamics, partly due to ruble depreciation, partly due to reduction in prices for input materials, in particular coke, which so cost of nickel production reduced almost by $1,700 a ton by $19,700.

Cash cost of ferrosilicon was also impacted by growing production due to full ramp up of the modernized furnace and went down to $845 a ton. The cash cost of chrome concentrated production fell by 13% to $149 a ton due to increase in production volumes. Only the cash cost of ferrochrome production slightly grew as the purchase price of concentrate moved higher.

These above factors all combined resulted in virtually flat cost of sales quarter on quarter which along with growth of sales led to 14% decrease in the gross loss to less than $14 million.

The operating spent in the ferroalloy segment insignificantly reflecting slightly higher sales of ferrochrome and higher export sales of nickel. We continue negative price dynamics of nickel led to increasing loss on its production even despite falling coke prices.

As we do not see a reason for significant improvement in this market, we have cut nickel production by more than half in Q3 and recently idled the plant for at least one month in order to use the market downturn to execute all necessary maintenance.

Since we expect that even when the production is restarted, the plant will work with significantly subdued capacity, we took an impairment of $101 million of the fair value of this asset, of which $7 million of goodwill and $94 million of long-lived assets. That impairment was fully reflected in the operating expenses.

This did not affect the segment’s negative EBITDA which improved by 2% to $7.4 million loss. The FX gain of $23 million almost mirrored the FX loss in the previous period and it was due to revelation of inter-company loans extended in appreciating currencies such as dollar and tenge, and loans attracted in depreciating ruble.

The income tax turned from $7 million gain in Q1 to $3 million expense in Q2, mainly due to the recognition of the evaluation allowance for deferred tax asset from tax losses carried forward at the nickel plant following to the market downturn and idling the plant as described above.

The net loss before long-lived assets and goodwill impairment decreased by 57% quarter on quarter to $24 million, after the impairment charges of this segment finished the report at period with $107 million net loss.

The performance of the power segment was none of the unordinary. The revenue from third parties declined by 28% to $175 million as heat in season ended. Inter-segments revenue also decreased by 17% to $113 million. Consequently the gross income fell by 39% to $62 million or 22% of the revenue compared to 27% in Q1.

Selling and distribution expenses decreased accordingly by 24% to $56 million. Bad debt provision of $3.5 million was created as receivables grew on a slower market.

At the call dedicated to the release of full year accounts of 2011, we announce that we have earmarked our power station in Bulgaria Toplofikatsia Rousse for sale. Accordingly we cut any investment in the power plant which is now operating only for heat generation as economics based on semi-coal heat continued to be negative.

We do not see any improvement in the highly regulated European environment, power generation, which would make this investment profitable for us, and therefore decided to take a partial impairment of the goodwill on these acquisitions totaling $54 million, which was posted to the operating expenses. The resulting EBITDA stages marginally positive at $0.6 million.

The $6 million income tax expense posted in Q1 reversed to $2.7 million gain in Q2, as the taxable income of Mechel-Energo decreased. The FX effect was negligible as always. As a result of lower sales in low season, the bottom line posted a $6.2 million loss before impairment of goodwill versus an $11 million income in Q1.

On the consolidated level, the positive dynamics of the steel and to less extent ferroalloy segment compensated a decrease in the revenue of the mining and power segments resulting in a 5% quarter on quarter growth in the revenue to $3,086,000,000 in Q2.

The gross income was down 8% quarter on quarter, as adhering to lower profitability in the outperforming steel segments relative to mining, diluted the overall profitability while the margins in the mining segment were also decreasing.

The gross margin reduced to 29% from 33% in Q1. The SG&A expenses increased significantly as lower selling and distribution expenses were settled by slightly higher administrative expenses and allowance for doubtful accounts.

The EBTIDA decreased accordingly by 17% to $385 million or 12% of the revenue. Net interest expenses remained almost flat at $146 million. The FX loss of $292 million can be compared to $171 million gain posted in Q1.

Income tax expense of $103 million for the first quarter was replaced by $36 million gain in the second one, due to the effects explained in the discussion of the mining and steel segments.

Net loss before asset impairment and provision for receivables due from related parties posted $177 million.

Goodwill and long-lived assets impairment together with a provision for syllabus due from related parties before the income tax and share of non-controlling interest effect contributed to now $694 million to the bottom line.

If we compare half yearly periods of 2012 and 2011, the revenue decreased by 6% to $6,036,000,000, the gross margin down from 34% to 31%.

Operating expenses grew by 5% largely due to selling and distribution expenses and provision for doubtful accounts as general and administrative expenses fell by 2%.

Consolidated EBITDA fell by 28% to $849 million or 14% of the revenue versus 18% in the compared period. Net interest expenses remained almost unchanged at $288 million. $121 million FX loss can be compared to $164 million gain in the first half of 2011.

Income tax expense fell by 72% as profitability decreased. The result in net income before asset impairment and provisions for syllabus due from related parties posted $41 million in the first six months of 2012, versus $501 million in the similar period of 2011.

The goodwill and fixed assets impairment and provision for syllabus due from related parties before the income tax and share from control and interest effect, reduced the bottom line by now the $694 million resulting in the net loss of $653 million for the reported six months period.

Now, let’s turn to the discussion of the cash flow and balance sheet. The production adjustment changes and sales and the inventory management undertaken by the management since the last quarter 2011 continued to deliver results in the second and third quarters.

The operating cash flow before changes in the working capital improved to $170 million over the previous quarter at sales in the steel segment group. The working capital release nevertheless was slower in Q2 than in the first three months as cash was reinvested and growing sales taken advantage of the higher season in construction.

Inventory and third party receivables to run down released $329 million. For the same time, $252 million were reinvested in stock and receivables due from Estar. This decision was taken consciously as growing market in construction steel offered a great opportunity to take advantage of high demand and prices at the time when the cost of raw materials was falling.

We managed to utilize this opportunity throughout exclusive commercial agreement with Estar, also taking the company from the security over its assets by increasing sales of its products. That nevertheless required an investment in its working capital in order to boost production which was subdued in Q1.

The financial results of the steel segments above to prove that that was a timely decision, looking beyond the reported period as the construction season is droving to an end and steel markets are slowing down, as sales volume decrease, we begin to divest our exposure to Estar towards the end of the Q3, returning to our previous natural syllabus position.

Overall, cash flow from operations brought $304 million to the business in Q2. Cash flow from investments required $303 million, almost all of it for new property plant and equipment. For the first six months, our operations generated $649 million, $579 million thereafter used for investments, the rest applied towards the debt reduction.

On the balance sheet side, the net debt improved significantly from $9.2 billion as of the end of the first quarter to $8.7 billion ending the reporting period. Most of that reduction is attributable to ruble depreciation. However, at least part of that reduction came from the excess of the cash flow from operations of investments that the company generated in the first half of 2012, demonstrating that company is capable of not servicing its debt, but reducing it even at the time of higher market volatility.

As reported in the results of Q1, the company had negotiated around $1.7 billion of new long term facilities from Russian banks, that exercise has been taken place throughout the second and the third and into the fourth quarter as part of the short term debt was refinanced outright and part of it is being replaced as its full due, each case depending on the terms of the financing.

The fact that as of the end of the reported period, the company stayed well within its pre-negotiating covenants helps us to enjoy good credit with our banks.

Besides the accretion of cash and under-owned credit facilities of $1.5 billion as of September 01, provides a solid security for debt repayments falling due in the next six months.

Nevertheless, we continue to work on our target to reduce the short-term debt, to a run rate of below $1 billion for the consecutive 12 months which we believe is essential for better visibility into our cash flow and investments planning in the current market conditions.

For that purpose, we are currently negotiating another $1 billion worth of new long-term money and $500 million worth of refinancing of the existing loans. We expect that negotiations will be concluded within the next two months.

Separately I would like to comment on the loan extended to Estar in the first quarter of 2012, which expired on September 30. And as we disclosed one week ago, the Board of Directors had been presenting the management’s plan of restructuring the assets of the group, based on a thorough analysis of each asset according to its place in contribution to the group strategy.

The plan was unanimously approved by the board. All the Estar assets were also subject to this analysis in the course of the due diligence according to the same criteria. At the same time we realized that as the maturity of this loan was drawing closer, though the negotiations of Estar onus on a after disposal we’re underway, not definitely it could be concluded at this time.

As the result the management has recommended the loan in the amount of $44 million excluding interest with receivable should be extended by another nine months, during which and taken comfort from our knowledge of the ongoing asset sale negotiations. We believe that most of the Estar assets could be monetized and the loan repaid.

$187 million of this loan should be converted into the following assets. Firstly, 100% capital of Rostov Electrometallurgical works, with the capacity of 730,000 tons of liquid steel and 530,000 tons of long steel including rebar situated in the town of Rostov in South of Russia. This is Estar’s most modern plant at which the production began in 2008, and Estar’s biggest operating income contributor accountable for most of Estar’s operating profit in Q2.

Apart from the fact that Rostov plan covers the construction markets over south of Russia fully, it is also 100% secured with scrap unlike the rest of our operations, which is due to the scrap collectors consolidated by the name of Lomprom also acquired by the group from Estar.

The last asset that we look to consolidate is Estar steel production distribution network in Eastern and Central Europe COGNA with 20 warehouses and 37,000 tons distribution – a month’s selling capacity. We strongly believe that COGNA is going to be an excellent contributor to Mechel Service Global European distribution network enhancing our positioned supplier to the Europe market which is living through a prolonged demand in supply volatility, but is essential for maintaining higher rate of alternative sales for our steel segment.

There is another synergy that we may extract from these acquisitions taken the reference to the board’s decision to consider the European part of MSG for sale, a veteran section takes place. We believe that with the contribution of COGNA, MSG will fetch a high value through the affect of scale who is a current value of our own distribution.

The above mentioned assets account for $187 million of Estar loan, leaving the $555 million to be extended for another nine months after the provision posted to the accounts in Q2 as we discussed above.

We will be closely watching over the sales process of the other Estar assets. In the meantime, and for avoidance of doubt, we do not intend to consolidate any more of them. We expect the consolidation of these assets, the assets that I mentioned above, will have a neutral affect on our indebtedness ratios.

COGNA will be consolidated immediately amongst other contribute to MSG Europe divestment process, while the Rostov plant and Lomprom likely to be consolidated in the beginning of 2013.

To conclude ladies and gentlemen, the results of the second quarter demonstrated two things. First of all, the benefits of a vertically integrated model become clear as the volatility increases. The reported period is another proof to it as our performance of the steel division compensated at least partially for decreased profitability in the other divisions.

Secondly, the strategy which the management began to implement in the fourth quarter 2011 proved to be sustainable and bring in results. We continue to improve cash generation and pay down debt. At the same time, measures undertaken to couple of loss making capacities improved profitability of the steel and ferroalloy segment. Now, having defined the list of assets for divestment and having the unanimous board approve for it, we are going to take this measure one step further which I hope will bring about the dramatic change to our group’s profitability and investment attractiveness.

With that have been said, I would like to thank you ladies and gentlemen for your attention. And the team is ready to take your questions.

Unidentified Company Representative

Thank you. We will now take questions. We’d ask that participants please state their name and company before asking their question and allow some time after for translation. When questions are answered in Russian they will be followed by translation, so you may ask your question in Russian also and we will translate. Thank you. Please go ahead.

Question-and-Answer Session

Thank you. (Operator Instructions). Okay. And our first question comes from the line of Sergey from Soc Gen. Please go ahead.

Sergey Donskoy – Société Générale

Hello, good evening everyone, Sergey Donskoy, Soc Gen. Thank you for the presentation. I have four short questions. First, could you please confirm that consolidation of Rostov plan into other perimeter of the group or will not entail an increase in the net debt? Second, could you provide an update on your coal production plan for 2012 by division if possible specifying separately the volume of the coke and coal?

Thirdly, could you provide an update on your 2012 CapEx and if possible some outlook for 2013? And lastly it would help if you could provide some indication of the realized prices metallurgical call in Q3, for Yakutugol and Bluestone by market and if that is possible some outlook for Q4? Thank you.

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer the first question.

Stanislav Ploschenko

The consolidation of Rostov plant, we’ll add an insignificant amount of debt to the group but in terms of relative indebtedness that we expect that the effect will be neutral as the ratio of net debt to the operating income of Rostov today is well below the one of the group.

Unidentified Company Representative

Next question will be answered by Oleg Korzhov.

Oleg Korzhov

(Interpreted). As for 2012, we believe the coal production will amount to around 29 million to 29.5 million tons. And focused specifically about our various units, usually Kuzbass we believe will deliver 14.5 million tons we expect to get 10.5 million tons from Yakutugol together with Energo and another 4.4 million to 4.5 million tons from Bluestone.

In terms of your third question, regarding our CapEx, according to the budgets, the investment cost – we budgeted for $1,100,000,000 out of which we believe that $200 million would be spent on maintenance projects and $900 million on investment projects. Since June until here, we have continued with construction at our major strategically important sites. We believe that this, amounts – the amount that we actually spent on investments will be close to the budgeted figures. And we continued with our works at Elga and Universal Rolling Mill and the push yard reconstruction. So, again, we expect that the overall CapEx investment for this year will be around $1.1 billion.

Sergey Donskoy – Société Générale

I apologize, before turning to the fourth question, speaking about production I also asked if possible to provide guidance for coke and coal output for this year within those subsidiaries?

(Foreign Language)

Oleg Korzhov

(Interpreted). We believe the coke and coal concentrates in 2012 for the company will amount to roughly 11 million to 11.5 million tons. And speaking about the breakdown by various entities of the company, usually Kuzbass we expect to deliver 4.3 million to 4.4 million tons, Yakutugol 5.5 million to 5.6 million tons and Bluestone around 1.8 million.

To answer your question about the sales prices in the third quarter, at Bluestone we are producing two types of coal, high volatility and low volatility coals. As to high volatility coals, the average selling price were $120 to $150 basis with the transportation component to the board of $55. As to low volatility coal, the average prices were between $145 to $205 per ton, at the start of the quarter they were around $200 to $205 and towards the end of the quarter, they went down to around $145. The transportation component from the sites to the put together with both loading unloading average cost was $55.

Now from Yakutugol, the coals are going to Ukraine, China and Southeast Asia, sorry, Ukraine, Japan and Southeast Asia, China and Korean. K9 coals in third quarter once Ukraine at the GGU price of $210, with the logistics component of $60, K9 coals went to China on the CC basis at $140 to $160 per ton, with a logistic component of $55, K9 went to Southeast Asia at average prices of $202 to $209 for B – the transportation component was $42 together with both loading and unloading.

Sergey Donskoy – Société Générale

Thank you very much. Just one last question. How do you think these prices will or may change into the fourth quarter? Thank you.

(Foreign Language)

Sergey Donskoy – Société Générale

Thank you.

Yevgeny Mikhel

(Interpreted). Given the current market environment, we expect that the high volatility coals from Bluestone will be priced around $120 to $130 we expect that they’re moving back about $10. As for low volatility coals, which you expect, that they will gain another $10 to $15 to their current prices.

As for K9 coals, we’ve got contracted volumes for the fourth quarter to the Southeast Asia. And we expect the prices to be around $145, $155 FOB. China, China is slightly a bit more challenging because with China, we’re working on the basis of sports contracts, sports market which you expect that there the prices will win back another $10 to $15. Right now, the prices in this corridor are somewhat low.

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Anton from Burbank. Please go ahead.

Anton Rumanse – Burbank

Hello gentlemen, thank you for the presentation. It’s Anton Rumanse from Burbank. You have a very successful track record of decreasing the US steel stocks at Mechel Service Global. In the first half of the year, I just wanted to find out if there is a possibility of fair increase of the stock? And overall do expect any further decrease of your working capital in the second half of this year? Thank you.

(Foreign Language)

Unidentified Company Representative

Oleg Korzhov will answer the question.

Anton Rumanse – Burbank

Okay, thank you.

Oleg Korzhov

(Interpreted). Indeed, the management of Mechel Service Coal Board did a lot of work to optimize the inventory. At the start of the year we had 1,370,000 tons of products in stock. And over the first six months of the year, we managed to reduce that volume by about 30% and bring it to around 970,000 tons roughly 1 million tons.

Because of a lot of efforts that went into this process at Mechel trading, and also at the enterprises of the facilities of the group, we managed to return quite a substantial amount of money into the working capital. Mechel Service Global will probably not be able to reduce too much of the stock until the end of this year. They will focus on optimizing the assortment, the types of products that will store right now in the inventory.

Right now, energy is tasked with reducing the stock of the most expensive and so moving products, mainly high quality rolled products. Maybe we will be able to cut down another 150,000 tons at best until the end of the year, which will mean that we will be able to inject into our working capital by the end of the year and now the $200 million to $250 million.

Anton Rumanse – Burbank

Could I ask one more full off question. Could you please provide a breakdown about of the steel stocks at Mechel Service Russia and Mechel Service International which you want to sell? Thank you.

(Foreign Language)

Yevgeny Mikhel

(Interpreted). Over which period of time, at the start of the year, right now?

Anton Rumanse – Burbank

No, no, no, current, just if you say that you’ve got 1 million tons of current stock piles actually what part of the stock piles actually is lying in Russia and what is attributable to your international warehouses?

Yevgeny Mikhel

(Interpreted). Okay. If you want the figures, I can provide you with the figures. As of today, right now, Mechel Service Global has 950,000 tons of products in stock, out of which 390,000 allocated to Russia and the rest which is 950,000 minus 390,000, within the international domain of the Mechel Service Global namely Europe, Kazakhstan, Turkey, UK and other locations.

Anton Rumanse – Burbank

Great, thank you.

Unidentified Company Representative

Next question please.

Operator

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

Boris Krasnojenov – Renaissance Capital

Good evening gentlemen, Boris Krasnojenov of Ren Cap. Three questions from my side. First question, if you can just – if the company generates net loss for full year 2012, do they preps gain voting rights or you need two competitive years of net loss for preps to gain voting rights?

The second question is, you mentioned that they are close to commissioning of revenue, what’s the remaining CapEx on this asset and what can the volumes we can expect in the year 2013 from the US railway revenue? And do you have any orders or something booked by the Russian railways?

And the third question, what volumes of coke and coal and thermal coal and dissolvable volumes you expect from Elga next year? And what CapEx you plan for Elga project for next year? And just one small addition, I understood you’re going to take from Estar Group of assets, Rostov, also you mentioned to other COGNA and MSG, what was the first asset you mentioned? Thank you.

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer the first and the last question.

Stanislav Ploschenko

According to the charter, the preps are entitled 20% of the net income if the dividend, if the dividend is paid in lesser amount or if not paid at all. The preferred shares can get the voting right. But in the absence of the income, if any dividend is paid, then the preferred shares don’t get the voting rights. That’s the answer to the first question.

The second question, we look into consolidate three companies belonging currently to Estar is Rostov, the Electrometallurgical Plant, COGNA, the distribution network and Lomprom, these are company securing 100% of Rostov Metallurgical Plant’s scrap needs.

(Foreign Language)

Unidentified Company Representative

Oleg Korzhov will answer the remaining questions.

Oleg Korzhov

(Interpreted). To answer your question about the Universal Rolling Mill, the total financing allocated for this project was $850 million out of which $350 million have been already invested at the start of this year. The investment program for 2012 is $250 million to $300 million, it means that in 2013, we will have to inject the revenue, the residual amount into this project of $200 million to $250 million.

As to the volumes of production, we wouldn’t like to give at the moment. In the first quarter we will begin production, we will start mastering of the assortment, where we’ll start loading that capacity. And of course the volume of production will depend on the situation in the market of construction materials.

As to volume of sales, well, again, you have rightfully pointed to the experience of Mechel Service and Sales. Right now Mechel Service is buying similar products from third parties so we are learning there training next phase for us. And we do have an agreement signed with Russian Railways with to date. And under this agreement they are supposed to offset 400,000 tons of rails from us.

Boris Krasnojenov – Renaissance Capital

Thank you very much Korzhov.

Oleg Korzhov

(Interpreted). The one-off production at Elga for 2013, well, we believe that we’ll be able to produce up to 4 million tons of raw mine coal. And the main factor disseminating the rate of production will and is already new washing plants. There it’s drying capacity is 2 million tons a year, so we will need to fully load that capacity for washing our coke and coal.

Right now in the roll mine coal, the ratio between the ordinary coals and the thermal coals are 50-50, it means that we need to produce 4 million tons so that we will be able to fully load our washing capacities. Maybe production plants will be adjusted towards lower series. Again it depends on the actual ratio of ordinary and thermal coals in the production.

As to our CapEx plan, load depends actually on our plans for 2014 production so that right now we would not be able to give you a specific feedback for 2013. But most likely it will be close to the investment that has been already made this year which is around $300 million, $350 million. This question is currently being discussed by the management of the company. And we believe that we will be able to take that decision pretty soon.

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Dan Yakub from Citi. Please go ahead.

Dan Yakub – Citi

Guys, thanks a lot for the presentation. Just a couple of questions from me. The first one relates to the – to your cash and cash equivalents presented on slide 14 where you show the available lines and the cash colons on September 1. If I’m reading the actual press release correctly, you had close to $150 million of cash and equivalents in the end of June and on the September 1, you expect $630 million.

So, I’m just trying to understand where is this extra close to $400 million or even $500 million is coming from given that the working capital release from the Mechel Service Global is expected at much less than that or even maybe half of that for the entire second half. So, I’m just trying to understand where the money is going to come from in those July and August month.

Second, I’m just trying to understand the Estar reorganization so to speak. You’re going to keep Rostov, keep COGNA and Lomprom that supplies scrap through Rostovsky. What about the rest of the assets, can you describe what will happen to these assets, are you going to bankrupt them or are you going to try and sell them?

And finally, another question on divestments, you identified some of the non-core assets like power – do you consider ferroalloy a non-core asset as well or not? And in the power segment, we were seeing basically – on balance as a zero or negative EBITDA generation from the power segment. Can you describe whether these assets are actually cash generating or cash consuming, the power segment because I understand that if EBITDA is close to zero, probably with the exception of the first quarter?

And is there also capital expenditure commitment on the – in the power segment and whether the Estar and the power segments actually generate or consume cash and whether you will be able to divest an asset which is generating zero EBITDA and potentially negative cash – adjusted for CapEx? Thank you.

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will begin answering.

Stanislav Ploschenko

Yes, indeed the cash position as of Sept 1, increased quite substantially as we drew some of the available credit lines and kept cash in our accounts including for the dividend payout which took place in August.

The question number two on Estar, as I said previously, no we do not want to consolidate any other Estar assets, we’re not interested. And currently the divestment process is underway profound by the onus of Estar which we’re watching very closely. And we expect that by the time the extension of the loan to Estar matures these divestments will be over.

Unidentified Company Representative

The remaining questions will be answered by Yevgeny Mikhel.

Yevgeny Mikhel

(Interpreted). I mean, could you please allow some time for translation. As regards to the ferroalloys and ferroalloy segment and the power assets, you know that the company now has a new approved strategy. Ferroalloy is no longer considered to be a priority. And those assets will be subject to sale on the basis of markets.

As to our power generation assets, except for the Rousse Power Plant in Bulgaria, all other assets we consider to be auxiliary for our production. And we need them to ensure the power security of our company.

There is one more asset, Kuzbass that we will divest because this is an independent business that the market might be interested in. While, for us it is no longer a priority. And as to our potential CapEx into those assets, we will invest only as much as is needed to maintain the operational production at those enterprises and not more, so this will be maintenance CapEx.

Unidentified Company Representative

Next question please.

Dan Yakub – Citi

Just a quick follow-up question. There was also, a little bit of press coverage of your plants to potentially divest between 20% and 25% of Mechel Mining’s division. I’m not sure if you can at least provide us with comment or just understanding of – if any of these speculations in the press are actually true and whether you will actually be able to invite a strategic partner for Mechel Mining’s division and Mechel Mining efforts to develop assets? Thank you.

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will comment.

Stanislav Ploschenko

Yes, they both has approved to – a possible divestment of up to 25% in Mechel mining. And I would like to drive everybody’s attention to make it clear in view of the speculation in the press. We are considering 25% at most. And any deal could be anywhere between zero and 25%, depending on other conditions of this transaction.

Currently it’s too early to say anything about this process. We are potentially interested in attracting a strategic partner that would help us to develop Mechel Mining because Mechel Mining has one of the largest coke and coal reserves globally. And clearly there is the – the sky is the limit if we talk about a possible development of this reserve base and the opportunities it might offer to our group. And in the next several months, we will be considering different possibilities with regard to this divestment.

(Foreign Language)

Dan Yakub – Citi

Thank you.

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Stan Goff from Merrill Lynch. Please go ahead.

Stan Goff – Merrill Lynch

Yes, this is Stan Goff from Merrill Lynch. I have three questions if I may. The first one is a follow-up on Estar. You mentioned that Rostov plant has insignificant debt. But could you provide a more precise estimate of total Estar’s debt, to further thought is you’re going to consolidate at the end of this year, beginning next year.

My second question is about debt repayment in the second quarter. Probably I missed your explanation sorry about that. But you reduced your net debt by about $0.5 billion in the second quarter and the same time your freakish flow was around zero. So, what was the source of the debt reduction in the second quarter? And my last question is about your plans for debt repayments by the end of this year? Thank you.

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer.

Stanislav Ploschenko

As far as Estar’s debt is concerned, we can say the exact figure representing the debt on the consolidated entities once we do all necessary US GAAP procedures on them. Because according to GAAP treatment, that can be – can vary. But we do not expect that the consolidated debt will exceed $200 million. That’s for all the three entities that we consolidate. And most of that will be on the Rostov plant which we’re going to consolidate not before January next year.

The explanation of significant debt reduction in Q2 comes from the ruble depreciation during the period basically that is a reflection of depreciation of the ruble denominated part of our debt on our balance sheet.

As for the third question, as you can see on the slide number 14, we have plenty of cash and cash equivalents and un-drawn credit lines to repay the debt that holds due until the end of this year. But at the same time we are currently negotiating up to $1.5 billion worth of new long-term money and refinancing of the existing debt which I hope will be consummated by the end of November.

(Foreign Language)

Unidentified Company Representative

Next question please.

Stan Goff – Merrill Lynch

Yeah. Thank you. Just one follow-up, can we expect significant increase or reversal increase in your net debt in case of like ruble appreciation?

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer this question.

Stanislav Ploschenko

Yes. If the ruble appreciates the ruble denominated part of the debt will go higher. So, net debt will increase. But in the existing covenants we have eliminated this affect. And the compliance with the covenants is calculated excluding the effects of FX and the picture for your reference is on the page number 14 as well.

(Foreign Language)

Stan Goff – Merrill Lynch

Yeah, it’s clear. Thank you.

Unidentified Company Representative

Next question please.

Operator

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

George Buzhenitsa – Deutsche Bank

Good evening gentlemen. Thank you for the conference call. I have a couple of questions. First, just correct me if I’m wrong, but I believe you had a plan to construct, to build a second washing plant, a seasonal washing plant and Elga deposit. So, my question is, if I’m correct in my memory, so is the plant still in place or you’ve amended that?

And the second question would be with respect to your provision for amounts you from related parties. So, my question is, how did you calculate that? And is there a reason that the provision will increase going forward especially given the situation with the net debt of Estar?

And the third question would be, do you have any other covenants about net debt to EBITDA or EBIT to interest expense, covenants which would relate to the value of your assets on the balance sheet or equity on the balance sheet? Thank you.

(Foreign Language)

Unidentified Company Representative

Oleg Korzhov will answer the first question.

Oleg Korzhov

(Interpreted). To answer your question about the washing capacities of Elga, for us this is one of the greatest priorities in the development of the whole segment. Elga is a washing project, it’s not ecstatic. And we are constantly searching for possibilities of optimizing the financial – the financing of such projects because we are operating under limited resources and we need to ensure quick return on our investments.

Additionally, these projects provided for two seasonal washing plants, one of them has been constructed as you know this year. And the second one was supposed to have been constructed this year. But we analyzed the current situation and we adjusted our plans somewhat.

Current plant is a seasonal washing plant. And we want it to extend its functioning through the year. And for this we insulated the alternative building of the other factory of this plant, which gave us another two months of its functioning during the year. We would like to see this washing plant become year around washing plant eventually and to this aim. We want to also provide heating to the conveyer galleries.

And right now our engineers are looking into the smelter. And if we will be able to do this, then its current capacity will increase from 2 million to 3 million tons a year. Besides there are two more units that are missing today from the site, from that particular washing plant, mainly it is a special drying unit, a dryer which will allow us to produce coke and concentrate with the necessary moisture content which in itself enable us to do the loading of the products in winter time.

And the second unit is called a floatation unit, and it allows you to introduce more fine fractions into production, thus including the total volume of output. We have not fully disregarded the project for construction of the full fledged washing plant for 9 million tons. Instead of constructing this in one go, we decided to break it into stages. And there will be two stages to this full-fledged washing plant of 4.5 million tons each.

We will start with the first stage and with the construction of those two missing units, the dryer and the floatation units. And hopefully from next year, we will be able to washing during the whole 12 months. And we will have this first phase of big washing plant for 4.5 million tons and those additional units. We believe that this sequencing then will allow us to maximize the use of available equipment and to minimize the spent resources while generating maximum cash flow through sale of products.

And this strategy has indeed quite recently has been discussed for the last couple of months. So, hopefully we will be able to see it comes to fruition and we’ll see the actual results of this strategy next year.

Unidentified Company Representative

Stanislav Ploschenko will answer the remaining questions.

Stanislav Ploschenko

Okay. US GAAP tries certain procedure that tests the investments including loans given, in our case it’s just our loan. And this is a test for the fair value of these investments and (inaudible) based on the model of discounted cash flow from this investment. So, in this situation the test or test for impairment of SR loan is not very much different from the test for impairment of any of the goodwill fixed assets that we perform on our assets, which is meant to say that since we’re talking about a discounted cash flow model, if there is a serious market deterioration, which would entail further deterioration of the market’s projections and assumptions. Then yes, there might be other impairment to the fair value of our investment. And that would concern or could concern if that happens both Estar loan and our own assets.

The third question, the short answer is yes. We have a number of other covenants we have been discussed in the most significant ones. But since you mentioned one particular concerning equities and the answer is yes, we have the minimum equity requirement according to our loan agreements of $4 billion.

(Foreign Language)

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Alexander from (inaudible). Please go ahead.

Unidentified Analyst

Good evening. I have three questions. The first, what is the target year ton on the realization from non-core assets? The second question is about the total debt of mining division and still about contract price per ton of SIMCO and long-term contracts with Rostov system of East? Thank you.

(Foreign Language)

Unidentified Company Representative

Yevgeny Mikhel will answer the first question.

Yevgeny Mikhel

(Interpreted). To answer your first question, there is no fixed timeline for the sale of the assets. Our priority is an efficient divestment so that we can minimize or better exclude any write-offs. Every decision will be taken on the basis of thorough analysis of the market and market trends. The company wouldn’t want to lose the potential incremental value of these assets through hasty divestments view.

If we see that in the short run, potentially the value of these businesses might increase, then we will be ready to bargain. And we’re already doing this. We have already identified the agents and we have already established data rooms. And we already know for most of these assets, the current demand in the market, and actually it sounds – the demand is better than we expected. So, for us, efficiency is a priority.

Unidentified Company Representative

Next question will be answered by Oleg Korzhov.

Oleg Korzhov

(Interpreted). Now to answer your third question I believe, it is, we do have a signed strategic agreement with Energy systems with Turkey. But that agreement prescribes the volumes not the prices of deliveries. The prices are market prices on thermal coal and we have already started shipping to Turkey and the prices as we are using now in our current deliveries those from, for Neryungri coals. Right now the price is as seen, Neryungri, 50 rubles and 100 rubles per ton.

Unidentified Company Representative

The remaining questions will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

As of the end of the second quarter, the net debt of Mechel Mining stood at the level of $3.6 billion.

(Foreign Language)

Unidentified Analyst

Thank you.

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Dmitry Smolin from Credit Suisse. Please go ahead.

Dmitry Smolin – Credit Suisse

Yes, good evening gentlemen. I have a question, two questions on non-core asset sale. The first one is, how much do you plan or you may raise from the sale of these assets maybe share some internal estimates for this? And the second is given that some of those assets basically divested. What might be an effect on EBITDA from the sale of – from the sale?

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer the second question.

Stanislav Ploschenko

As far as the EBITDA of the assets to be divested is concerned, all in all they generated about $100 million of negative EBITDA in the first half, so taking into the account the deteriorating markets in this condition. So, we expect the divestment to bring from $200 million to $300 million of EBITDA.

Dmitry Smolin – Credit Suisse

Thank you.

(Foreign Language)

Unidentified Company Representative

And the first question will be answered by Yevgeny Mikhel.

Yevgeny Mikhel

(Interpreted). And as regards of the plant’s or target amount to be obtained through the sale of non-core assets, at this point we would love to refrain from giving any estimates or assessments. Right now, the negotiations are already underway. And quite actively for some of these assets, we expect to close some deals till the end of the year. So, we do not want to influence the outcome of those deals by giving – by voicing any estimates at this point.

Unidentified Company Representative

Next question please.

Operator

Thank you. And we have a follow-up question from the line of Sergey from Soc Gen. Please go ahead.

Sergey Donskoy – Société Générale

Yes, hello, three very small questions from me. First, now that you are planning to consolidate Rostov plant at the beginning of the next year. Could you provide us some idea of the company’s financial performance in the first half of the year, EBITDA wouldn’t be ideal?

Second, regarding the power line that is expected to be connected to Elga by end of the year. Do you think this capacity will be enough to power the 9 million ton plant or you will have to further expand this capacity to ensure stable power supply to the 9 million ton washing facility?

And lastly, just one small question regarding Bluestone, you mentioned that you plan to mine around 4.5 million tons of raw coal at Bluestone and sell only about 1.8 million tons of coke and concentrate. Now from my knowledge about the asset, I conclude that this probably means you’re going to stock pile some of the coal before or without converting it into concentrate, is it correct? Thank you.

(Foreign Language)

Unidentified Company Representative

First question will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

Given the exact financial figures for Rostov for the first half of the year would be not representative because in the first half of the year, the main Rolling Mill which was recently launched and ramped up to full capacity was not operating at its full capacity. That’s one thing.

Secondly, Rostov has not been accounted for the current two years GAAP. So, I can only give you a guidance of the operating income under Russian accounting standards, which is – each running currently – it’s about from 70 million rubles to 80 million rubles a month.

(Foreign Language)

Unidentified Company Representative

Next questions will be answered by Oleg Korzhov.

Oleg Korzhov

(Interpreted). Regarding the power lines and the power capacity to Elga, we are currently constructing the power line to 2020 to Elga, and that capacity will be sufficient not only to sustain the 9 million ton washing plant but also to sustain the whole ground infrastructure at its design capacity, which mean mainly production of up to 25 million tons of coal and washing of all that volume of coal.

And you are right in saying that at Bluestone we intend to produce 4.5 million tons of coal, rolled mine coal in 2012. We do not sell raw coal from that facility, we sell washed coal and other 4.5 million tons of rolled mine coal, we can get 2.3 million tons of finished product, out of which 1.8 million tons is coke and concentrate and approximately 0.5 million is thermal coal. So, everything that we will produce at Bluestone this year, we intend to sell.

Unidentified Company Representative

Next question please.

Operator

Thank you. We have a follow-up question from the like of Dan Yakub from Citi. Please go ahead.

Dan Yakub – Citi

Thank you guys. I mean, at the very beginning of the call, you gave guidance for CapEx. Maybe you can just reiterate Capital Expenditure level for the second half of the year and maybe a figure for 2013? And in addition to the question of the previous speaker, on Rostov plant, is there any maintenance CapEx or CapEx pertaining to Rostov plant that is not let’s say captured in the operating income. Is there any CapEx that was recorded – let’s say at a steady state, once the ramp up of the early mentioned was completed? Thank you.

(Foreign Language)

Unidentified Company Representative

Oleg Korzhov will answer the questions.

Oleg Korzhov

(Interpreted). To answer your first question, as I’ve already explained the version for 2012 provided for full CapEx of $1,116,000,000. The actual figures of capital expenditures for the first six months of the year are $530 million and it means that until the end of the year, we will have to employ another $500 million to $600 million since we intend to fully exercise or execute to that investment program.

And we are not ready right now to give you any 2013 CapEx, guidance. We are still considering this matter inside the company. But if you follow the logic of this year and if you look at our strategy, then it means that next year there will be around $200 million to $250 million of maintenance CapEx, this is the expenditure that we do every year. And we do not plan to have any new investment projects next year, we plan only to complete the ones we already have, mainly the (inaudible) which will require another $40 million to $50 million.

Elga will require another $300 million to $350 million and we are currently looking into different financial options there and the project of the Universal Rolling Mill, another $200 million to $250 million.

And as to the Rostov CapEx, our technical experts have started that facility very thoroughly. And we know that Rostov is one of the youngest plans of this kind. So, in the country and we do not believe that it will be necessary for us to inject heavily into that plant in the near future. There will be some CapEx spend on regular upgrades and maintenance. But anyways, those figures will be lower than the annual amortization of the plant.

Unidentified Company Representative

Next question please.

Operator

Thank you. We have a follow-up question from the line of Anton Rumanse from Burbank. Please go ahead.

Anton Rumanse – Burbank

Hello again gentlemen. I just have small – several small follow-up questions on Estar, Steel trader, COGNA. Could you please repeat how much warehouses this company is currently operating? Maybe you could provide us with some ballpark figures of how much does this company sell in millions of tons per year or in thousands of tons? And I also want to find out actually if there are any significant steel stocks in this warehouse change and what are they? Thank you.

(Foreign Language)

Unidentified Company Representative

The questions will be answered by Stanislav Ploschenko.

Stanislav Ploschenko

COGNA has 20 warehouses, and selling capacity is around 35,000 to 37,000 tons a month. And the current stock at COGNA warehouses is, around 80,000 tons of steel products.

(Foreign Language)

Anton Rumanse – Burbank

Understood. Thank you very much.

Unidentified Company Representative

Next question please.

Operator

Thank you. Our next question comes from the line of Maria from BCS Financial. Please go ahead.

Maria – BCS Financial

Good evening. Thank you very much for taking my questions. I’ve got several very quick questions concerning your debt position. First question regarding your leverage ratios calculation for the purpose of the covenants, do you include applications under financial lease into the amount of net debt when calculating net debt to EBITDA ratio?

And the second question, could you please provide the outstanding amount of your syndicated loans? And last one, if it’s possible, could you please disclose what, is your average interest rate on short-term of loans? Thank you.

Unidentified Company Representative

Sorry, could you please repeat the first question.

Maria – BCS Financial

It is concerning the leverage ratio calculation for the purposes of the covenants under the syndicated loan. I wonder if the company includes obligations under financial lease into the amount of net-debt.

(Foreign Language)

Unidentified Company Representative

Excuse me is the question about the average interest rate on short term?

Maria – BCS Financial

Yes, on short term loans.

Unidentified Company Representative

Stanislav Ploschenko will answer the questions.

Stanislav Ploschenko

Yes, the financial covenants include the financial lease, so the leases includes for the purpose of calculation of financial covenants. The syndicated loan outstanding amounts as of – today it’s slightly less than $1.3 billion. And the average interest rate on the Russian on the ruble denominated short term debt is from 7% to 10% depending on the instrument.

Maria – BCS Financial

Thank you very much.

(Foreign Language)

Unidentified Company Representative

Next question please.

Operator

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

Serge Lioutyi – Deutsche Bank

Hi, apologies, this is actually Serge Lioutyi from Deutsche Bank. Gentlemen, thank you very much having the call. I joined in a bit late. And I just wanted to ask some details on your PXF which are related to the previous question. Actually, I saw some news come out today that you’ve been approaching lenders in order to offer an extension on your 2013 loan? Could you please elaborate on this one please? And the rationale as well, same as you have I think un-drawn committed lines of 1.5 billion, and how those negotiations are progressing please?

(Foreign Language)

Unidentified Company Representative

Stanislav Ploschenko will answer.

Stanislav Ploschenko

The availability of $1.5 billion worth of cash, cash equivalents and un-drawn credit lines in the current volatile market conditions is not an excuse for reasonable corporate – not to do it best beyond that to optimize this debt portfolio and to decrease the short-term debt to the minimum. And as I said previously, our target which we’re trying, which we aim at in the course of our negotiations with all the banks, Russian and the International currently is to decrease the short-term portion of debt below $1 billion for the next 12 months.

Precisely, following that logic we indeed approached the International Syndicate with a request to grant a 12-month grace period on the existing syndicated facility without changing its term structure, its final maturity. And we expect that we will reach an agreement within the next two months. We have been working pretty closely with all the banks and the syndicate and we have an understanding that this request has been taken positively by most of our lenders.

We expect that the banks will react positively to that because we will use some of the existing un-drawn facilities to repay some of these syndicated facilities in return for giving this 12-month grace period.

Serge Lioutyi – Deutsche Bank

Sorry, if there any translators or can I ask a follow-up question?

Unidentified Company Representative

If you could please allow sometime for translation.

(Foreign Language)

Serge Lioutyi – Deutsche Bank

That’s fantastic, that’s good for short tender. One other follow-up question, the PX is a dual tranche facility if I’m not mistaken. So, it’s a three-year and a five-year. Are similar negotiations happening for a great sphere to the five-year tranche of the loan as well or is it just the three-year tranche, if you’ll have to disclose that please?

(Foreign Language)

Stanislav Ploschenko

At this point, I would like to refrain from any further discussion of the process with the international syndicate because we are a little bit too early in the process. So I wouldn’t like to devour the details which might not be affective at the end of the process.

Serge Lioutyi – Deutsche Bank

That is all from me. Thank you very much for your time. Thank you.

(Foreign Language)

Unidentified Company Representative

Next question please.

Operator

Okay. And our final question is a follow-up question from the line of Sergey from Soc Gen, please go ahead.

Sergey Donskoy – Société Générale

Thank you. I promised to ask no more questions today. Just one, you mentioned that you estimate your maintenance CapEx at $200 million to $250 million per annum. Meanwhile, your depreciation charge annualized currently runs at approximately $450 million. I think that to most of our analyst this would be the – well, the best possible available indication of the actual maintenance CapEx requirements long-term. Do you think that your current depreciation charge overstates your actual maintenance requirements or they may increase going forward? Thank you.

(Foreign Language)

Unidentified Company Representative

Oleg Korzhov will answer.

(Foreign Language)

Sergey Donskoy – Société Générale

Lovely. Thank you.

Oleg Korzhov

(Interpreted). Well, the answer is maybe but in recent years the company has been commissioned a lot of new facilities especially in the fuel segment. And of course depreciation is growing since again, we have a lot of new assets – all the new facilities on our balance sheet. And as these assets age, fixed assets specifically maybe the depreciation charge and the maintenance CapEx will converge. But at this point we believe that where we are is optimal for the company.

Unidentified Company Representative

Next question please.

Operator

Okay. Just to confirm that we have no further questions coming through in today’s call.

Unidentified Company Representative

Ladies and gentlemen, thank you for taking the time to join Mechel first half 2012 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. Goodbye.

Operator

Thank you for joining today’s call. You may now replace your handset.

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