OREANDA-NEWS. Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), today announced its unauditedIFRS interim condensed consolidated financial statements for the six months ended 30 June 2016.

Summary - financial results 1H 2016 1H 2015 Change, y-o-y
US$m %
Income statement highlights        
Revenues 2,880 3,650 -770 -21%
Adjusted EBITDA1 580 623 -43 -7%
Margin 20% 17%   3 pp
Net profit 90 -166 256 -154%
Margin 3% -5%   8 pp
Cash flow highlights        
Net cash from operations 163 354 -191 -54%
Net cash used in investing activities -109 -94 -15 16%
incl. purchase of PPE and intangible assets -130 -113 -17 15%
Net cash used in financing activities -50 -212 162 -76%
         
Summary - financial results 30.06.2016 31.12.2015 Change, YTD
US$m %
Total debt 2,981 2,946 35 1%
Cash and cash equivalents2 183 180 3 2%

Notes:

1). Adjusted EBITDA is calculated as earnings before income tax, finance income and costs, depreciation and amortisation, impairment and devaluation of property, plant and equipment, foreign exchange gains and losses (starting from 1 January 2015), the share of results of associates and other expenses that the management considers non-core, plus the share ofEBITDA of joint ventures. We will refer to adjusted EBITDA as EBITDA throughout this release.

2). Cash and cash equivalents do not include blocked cash for cash collateral under issued letters of credit and include cash blocked for foreign currency purchases and cash collateral for issued bank guarantees.

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

 

Summary - production results 1H 2016 1H 2015 Change, y-o-y
000 t %
Crude steel 4,187 3,875 312 8%
Azovstal 1,809 1,688 121 7%
Ilyich Steel 1,427 1,362 65 5%
Yenakiieve Steel 951 825 126 15%
Iron ore concentrate 15,811 15,806 5 0%
Northern GOK 6,269 6,317 -48 -1%
Ingulets GOK 6,901 6,366 535 8%
Central GOK 2,641 3,123 -482 -15%
Coking coal concentrate 1,580 1,638 -58 -4%
Krasnodon Coal 323 121 202 168%
United Coal 1,257 1,517 -260 -17%

 

OPERATIONAL HIGHLIGHTS

  • In 1H 2016, disruptions to the Group’s operations continued due to the ongoing conflict in Eastern Ukraine. Logistical constraints remain one of the biggest challenges:
  • In April, Metinvest resumed raw material shipments to Ilyich Steel and Azovstal via seaports, as the low throughput capacity on the Kamysh-Zarya – Volnovakha railway link, the only one connecting Mariupol to the rest of Ukraine, became insufficient to cope with increased production needs.
  • Since the end of May, the Nikitovka – Mayorskaya railway line, which has handled around 25% of all volumes transported to and from the conflict zone, had been blocked due to intensified shelling. This caused a shortage of raw materials at Metinvest’s production facilities and caused output to decline.
  • In June, railway operations were temporarily suspended in the uncontrolled territory, as Donetsk Railways banned freight transportation. As a result, Yenakiieve Steel had to scale back production and stop shipping goods.
  • In January, the Group sold its stake in Black Iron (Cyprus) Limited for US$6 million.
  • In January, steel product prices hit multi-year lows, although as of October, they had partly recovered compared with levels in late 2015 and early 2016.
  • Yenakiieve Steel started pulverised coal injection at blast furnace no. 5 in February and blast furnace no. 3 in April.
  • Ilyich Steel completed the major overhaul of blast furnace no. 4 in May.
  • The Group launched 10 new products, mainly hot-rolled and cold-rolled coils (for construction, agricultural machine-building and pipe production), hot-dip galvanised coils, rebar and weather-proof plates.

 

DEBT MANAGEMENT

  • To ensure a stable platform for negotiating the restructuring of its debt, the Group obtained a moratorium on enforcement actions by noteholders and signed a standstill agreement with PXF lenders, both with effect to 27 May 2016.
  • On 24 May 2016, Metinvest agreed with its creditors non-binding heads of terms for restructuring the notes and PXF facilities (the Heads of Terms). Among other terms, this includes an extension of Metinvest’s debt maturities until the end of 2021, including a grace period on the scheduled amortisation of principal until the end of 2018.
  • To document and implement a consensual restructuring based on the Heads of Terms, Metinvest extended the moratorium under the notes and signed a second standstill extension agreement with its PXF lenders, both with effect to November 2016.

 

EVENTS AFTER THE REPORTING PERIOD

  • In July, Northern GOK commissioned the first facility of the iron ore crushing and conveying system (CCS) at the Pervomaisky open pit mine.
  • In July, the electricity supply at Avdiivka Coke was disrupted after heavy shelling.
  • In September, Metinvest established an Operations directorate based on its Mining and Metallurgical divisions. The main objective of the move is to ensure close cooperation between the Group's mining and metallurgical production assets and centralise the management of all production processes.


Commenting on the results, Yuriy Ryzhenkov, Chief Executive Officer of Metinvest, said:

“In first half of 2016, we continued to face challenges posed by the difficult geopolitical and economic situation in Ukraine and volatility in prices for our key products in the global market.

The picture in Ukraine was mixed during the first half of 2016. In the east of the country, our key challenge remains logistics, as the disruption of railway lines is hampering flows of both raw materials and finished products to and from the area. However, there were cautious indications of economic recovery in Ukraine for the first time since 2013. The real GDP growth rates of 0.1% in the first quarter and 1.4% in the second were modest, but promising.

In the first half of 2016, we managed to navigate a challenging environment and delivered stable volume output. Crude steel production increased by 8% year-on-year to 4,187 thousand tonnes and iron ore concentrate remained flat at 15,811 thousand tonnes.

Low global prices for steel and iron ore products remained a central issue. Steel prices reached multi-year lows in the first quarter. At that point, the outlook was especially gloomy, and no one in the market knew what would happen next: how long prices would remain low or whether they would fall even further. All eyes have been on China, the world’s largest market for steel and iron ore. The introduction of economic stimulus measures and infrastructure investments, coupled with seasonal and other factors, led to a partial recovery in steel and iron ore prices in the second quarter. However, industry players believe that this rally may be short-lived and price uncertainty will be the main challenge in the second half of the year. We are prepared for continued global market volatility.

Lower selling prices on global markets were the key driver of a 21% year-on-year decline in Group revenues to US$2,880 million. At the same time, EBITDA fell by 7% year-on-year to US$580 million, while the EBITDA margin rose by 3 percentage points year-on-year to 20%. We were able to enhance margin by changing our sales geography, which enabled us to lower distribution costs. In addition, falling prices of coal and coke, as well as lower expenditures on natural gas also contributed to margin growth. As a result, we delivered net profit of US$90 million and a net margin of 3%.

We have underinvested this year, amid the constraints of poor liquidity, market uncertainty and the ongoing debt restructuring. Several projects have been delayed, frozen or postponed. Overall capital expenditure totalled US$116 million in the first half of 2016. Nevertheless, we delivered results in the period. Northern GOK commissioned the first facility of the iron ore crushing and conveying system at the Pervomaisky open pit mine. The Group launched PCI injection at both blast furnaces at Yenakiieve Steel and started construction of the PCI unit at blast furnace no. 4 at Azovstal. We also completed a major overhaul of blast furnace no. 4 at Ilyich Steel, and initiated several other projects designed to make our enterprises more environmentally friendly, increase productivity and further reduce costs. Meanwhile, we continued to conduct crucial maintenance to keep our assets operating.

We made major progress in restructuring discussions with our creditors. A moratorium on the notes and a standstill extension under the PXF facilities have been secured until the end of November. This in turn provided the stability needed to finalise the key terms of our debt restructuring, which were agreed with creditors on May 24. We are now negotiating the long-form restructuring documentation to effectively implement the restructuring.

We would like to thank all our creditors, investors, partners, clients and employees for their ongoing support and continued belief in the Metinvest story.”

RESULTS OF OPERATIONS

Results of operations 1H 2016 1H 2015 Change, y-o-y
US$m % of revenues  US$m % of revenues US$m % pp of revenues
Revenues 2,880 100% 3,650 100% -770 -21% 0
Cost of sales -2,240 -78% -3,047 -83% 807 -26% 5
Gross profit 640 22% 603 17% 37 6% 5
Distribution costs -347 -12% -463 -13% 116 -25% 1
General and administrative costs -82 -3% -96 -3% 14 -15% 0
Other operating income -5 0% 47 1% -52 -111% -1
Operating profit 206 7% 91 2% 115 126% 5
Finance income 13 0% 11 0% 2 18% 0
Finance costs -178 -6% -374 -10% 196 -52% 4
Share of results of associates and JV 70 2% 99 3% -29 -29% -1
Profit before income tax 111 4% -173 -5% 284 -164% 9
Income tax -21 -1% 7 0% -28 -400% -1
Net profit 90 3% -166 -5% 256 -154% 8

 

REVENUES

Metinvest’s revenues are generated from sales of its steel, iron ore, coal and coke products and resales of products from third parties. Unless otherwise stated, revenues are reported net of value-added tax and discounts and after eliminating sales within the Group.

Revenues by market 1H 2016 1H 2015 Change, y-o-y
US$m % of revenues US$m % of revenues US$m % pp of revenues
Total revenues 2,880 100% 3,650 100% -770 -21% 0
Ukraine 698 24% 741 20% -43 -6% 4
Europe 1,036 36% 1,256 34% -220 -18% 2
MENA 487 17% 725 20% -238 -33% -3
CIS (ex Ukraine) 226 8% 281 8% -54 -19% 0
incl. Russia 195 7% 189 5% 7 3% 2
Southeast Asia 270 9% 527 14% -257 -49% -5
North America 133 5% 89 2% 44 50% 3
Other regions 29 1% 32 1% -3 -9% 0

 

In 1H 2016, Metinvest's consolidated revenues decreased by 21% y-o-y to US$2,880 million. External revenues dropped by US$549 million in the Metallurgical division and by US$221 million in the Mining division. This was mainly driven by lower selling prices of steel and iron ore products, which hit multi-year lows in 1Q 2016, although they partly recovered in 2Q 2016. In addition, sales volumes of square billets, pipes, coke and pellets dropped due to such factors as weak demand in key markets and unstable operations at Yenakiieve Steel. The Metallurgical division accounted for 80% of external sales (78% in 1H 2015) and the Mining division for 20% (22% in 1H 2015).

In 1H 2016, revenues in Ukraine dropped by 6% y-o-y to US$698 million, or 24% of consolidated revenues. The decline was mainly attributable to lower sales prices of key products, as well as lower volumes of coking coal concentrate. This was partly compensated by higher sales volumes of flat, long and iron ore products amid greater local demand, as the Ukrainian economy started to recover. Real GDP increased for the first time since the end of 2013: by 0.1% y-o-y in 1Q 2016 and 1.4% y-o-y in 2Q 2016 [1]. Apparent consumption of steel products (excluding pipes) in Ukraine rose by 37% y-o-y to 2.4 million tonnes [2] in 1H 2016, driven mainly by inventory replenishment.  Real demand recovery in key steel-consuming industries was more modest: construction activity rose by 9.1% y-o-y1, while the machine-building industry increased by 1.7% y-o-y1. Regarding iron ore products, sales in Ukraine rose, as a couple of Metinvest’s key customers in the country managed to restore operations and increased consumption, despite the ongoing conflict.

International sales decreased by 25% y-o-y to US$2,182 million in 1H 2016, mainly due to lower sales prices. As a result, the share of international sales dropped by 4 percentage points (pp) y-o-y to 76% in 1H 2016. The share of sales to Southeast Asia decreased by 5 pp y-o-y to 9% due to lower selling prices and volumes of flat products and pellets, as well as lower prices of iron ore concentrate. The share of sales to MENA fell by 3 pp y-o-y to 17%, due to decreased selling prices of key products and lower sales volumes of pig iron, billets and pellets. While sales to Europe and the CIS (ex Ukraine) declined in absolute terms, their share did not: that of Europe rose by 2 pp y-o-y to 36% due to higher sales volumes of square billets, long products and pellets; while that of the CIS (ex Ukraine) remained unchanged y-o-y at 8%, driven mainly by higher sales of flat products to Russia. The share of North America increased by 3 pp y-o-y to 5%, mainly due to higher sales of pig iron.
 

Metallurgical division

The Metallurgical division generates revenues from sales of pig iron, steel and coke products and services. In 1H 2016, its revenues decreased by 19% y-o-y to US$2,290 million. This was attributable to lower sales of flat, (US$366 million), semi-finished (US$144 million), tubular (US$62 million) and coke (US$58 million) products. Meanwhile, sales of long products and other products and services increased by US$65 million and US$15 million respectively.

Metallurgical division
Sales by market		 1H 2016 1H 2015 Change,
y-o-y		 Change,
y-o-y %
US$m % of revenues 000 t US$m % of revenues 000 t US$m 000 t US$m 000 t
Total sales 2,290 100% 6,176 2,839 100% 6,085 -549 91 -19% 1%
Ukraine 484 21% 1,153 512 18% 1,062 -28 91 -6% 9%
Europe 957 42% 2,475 1,168 41% 2,480 -211 -5 -18% 0%
MENA 487 21% 1,525 704 25% 1,632 -218 -107 -31% -7%
CIS (ex Ukraine) 226 10% 508 281 10% 491 -54 17 -19% 3%
incl. Russia 195 9% 430 189 7% 362 7 68 3% 19%
Southeast Asia 28 1% 102 111 4% 251 -83 -149 -75% -59%
North America 79 3% 330 31 1% 98 48 232 153% 238%
Other regions 29 1% 83 32 1% 72 -3 11 -9% 16%

 

Metallurgical division
Sales by product		 1H 2016 1H 2015 Change, y-o-y Change, y-o-y %
US$m 000 t US$m 000 t US$m 000 t US$m due to price due to volume
Semi-finished products 302 1,197 446 1,260 -144 -63 -32% -27% -5%
Pig iron 144 639 170 569 -26 70 -15% -28% 12%
incl. Zaporizhstal 15 74 40 125 -25 -50 -62% -22% -40%
Slabs 96 343 144 363 -48 -20 -33% -28% -6%
Square billets 62 215 131 328 -70 -113 -53% -19% -34%
Finished products 1,731 4,413 2,094 4,227 -363 186 -17% -22% 4%
Flat products 1,364 3,507 1,730 3,550 -366 -43 -21% -20% -1%
incl. Zaporizhstal 454 1,372 623 1,389 -169 -17 -27% -26% -1%
Long products 367 905 301 612 65 293 22% -26% 48%
Tubular products 0 1 63 65 -62 -64 -99% 0% -99%
Coke 78 566 136 598 -58 -32 -43% -37% -5%
Other products and services 179 N/A 164 N/A 15 N/A 9% N/A N/A
Total sales 2,290 6,176 2,839 6,085 -549 91 -19% -21% 1%

 

Pig iron
In 1H 2016, sales of pig iron decreased by 15% y-o-y to US$144 million, caused by a slump in the average selling price (-28 pp), which was partly compensated by higher sales volumes (+12 pp). Volumes increased by 70 thousand tonnes y-o-y to 639 thousand tonnes due to higher overall production, while resales of Zaporizhstal’s pig iron dropped by 50 thousand tonnes y-o-y to 74 thousand tonnes. Sales volumes to Southeast Asia increased by 24 thousand tonnes y-o-y, due to shipments to a new client in Bangladesh. Sales volumes to North America increased by 221 thousand tonnes y-o-y, due to a new long-term contract with one of customers in the US. To fulfil its obligations under this contract, Metinvest redirected volumes from other markets: 73 thousand tonnes from Europe and 69 thousand tonnes from MENA.

Slabs 
In 1H 2016, sales of slabs decreased by 33% y-o-y to US$96 million, driven by a drop in the average selling price (-28 pp) and a decrease in sales volumes (-6 pp). Volumes fell by 20 thousand tonnes y-o-y to 343 thousand tonnes, due to lower sales to Europe, Southeast Asia and other regions. Meanwhile, sales to MENA (mainly Turkey) increased by 14 thousand tonnes y-o-y, driven by higher sales to a key client. The decline in the average selling price followed the benchmark for slabs FOB Black Sea, which dropped by 6% y-o-y.

Square billets
In 1H 2016, sales of square billets decreased by 53% y-o-y to US$62 million, of which 34 pp was attributable to a fall in sales volumes and 19 pp to a drop in the average selling price. Volumes declined by 113 thousand tonnes y-o-y to 215 thousand tonnes, mainly due to an increase in long product output. As such, sales to MENA decreased by 143 thousand tonnes y-o-y. Meanwhile, sales to Europe increased by 19 thousand tonnes y-o-y. Sales to other regions increased by 20 thousand tonnes y-o-y due to a one-off sale at a higher price in 1Q 2016. The average selling price followed the dynamics of billet FOB Black Sea quotations, which dropped by 15% y-o-y.

Flat products
In 1H 2016, sales of flat products decreased by 21% y-o-y to US$1,364 million, mainly due to a lower average selling price. Volumes remained almost unchanged y-o-y at 3,507 thousand tonnes. Zaporizhstal’s share in total sales volumes of flat products remained flat y-o-y at 39%. Sales to Ukraine increased by 43 thousand tonnes y-o-y amid higher sales of galvanised and polymer-coated sheets on the local market in 1Q 2016. Sales to the CIS (ex Ukraine) rose by 82 thousand tonnes y-o-y, driven mainly by higher sales to Russia in 1H 2016 amid lower sales in the corresponding period of 2015, when that market was less attractive than others. Sales to MENA increased by 67 thousand tonnes y-o-y, due to higher sales of galvanised flat products to the Middle East and ongoing sales in Algeria and Egypt. Sales to Europe decreased by 99 thousand tonnes y-o-y due to weaker demand. Sales to Southeast Asia dropped by 152 thousand tonnes y-o-y, amid strong competition from Chinese producers, a lower effective average selling price, anti-dumping duties imposed by the Pakistan government and the redirection of volumes to other markets. The average selling price followed the dynamics of HRC FOB Black Sea quotations, which dropped by 8% y-o-y.

Long products
In 1H 2016, sales of long products increased by 22% y-o-y to US$367 million. This was caused by a hike in sales volumes (+48 pp), partly offset by a lower average selling price (-26 pp). Volumes rose by 293 thousand tonnes y-o-y to 905 thousand tonnes, driven by a recovery in demand and higher overall production. As such, sales to all regions increased, except the CIS (ex Ukraine). The negative price trend on all markets for long products was due to lower scrap and billet quotations.

Tubular products
In 1H 2016, sales of tubular products decreased by 99% y-o-y to US$0.5 million, as Khartsyzk Pipe has been idle since June 2015 amid a lack of orders.

Coke
In 1H 2016, sales of coke dropped by 43% y-o-y to US$78 million, driven by lower sales volumes (-5 pp) and a decrease in the average selling price (-37 pp). Sales volumes of coke declined by 32 thousand tonnes y-o-y to 566 thousand tonnes, primarily due to lower sales to a key client in Ukraine.

Mining division

The Mining division generates revenues from sales of iron ore, coal and other products and services. In 1H 2016, its revenues decreased by 27% y-o-y to US$590 million, mainly because of a slump in prices of iron ore products and coking coal concentrate, as well as lower sales volumes of pellets, partly offset by higher sales volumes of iron ore concentrate.

Mining division
Sales by market		 1H 2016 1H 2015 Change, y-o-y Change, y-o-y %
US$m % of revenues 000 t US$m % of revenues 000 t US$m 000 t US$m 000 t
Total sales 590 100% 10,931 811 100% 11,478 -221 -547 -27% -5%
Ukraine 214 36% 4,249 229 28% 3,066 -15 1,183 -6% 39%
Europe 79 13% 1,429 88 11% 1,355 -9 74 -11% 5%
MENA 1 0% 14 21 3% 253 -20 -239 -96% -94%
CIS (ex Ukraine) 0 0% 0 0 0% 0 0 0 N/A N/A
incl. Russia 0 0% 0 0 0% 0 0 0 N/A N/A
Southeast Asia 242 41% 4,541 416 51% 6,146 -174 -1,604 -42% -26%
North America 54 9% 698 57 7% 659 -3 39 -6% 6%
Other regions 0 0% 0 0 0% 0 0 0 N/A N/A
Mining division
Sales by product		 1H 2016 1H 2015 Change, y-o-y Change, y-o-y %
US$m 000 t US$m 000 t US$m 000 t US$m due to price due to volume
Iron ore products 475 10,058 656 10,618 -181 -560 -28% -22% -5%
Merchant iron ore concentrate 301 7,227 339 6,466 -37 761 -11% -23% 12%
Pellets 174 2,831 317 4,152 -143 -1,321 -45% -13% -32%
Coking coal concentrate 71 873 90 860 -19 13 -21% -22% 2%
Other products and services 44 N/A 65 N/A -21 N/A -32% N/A N/A
Total sales 590 10,931 811 11,478 -221 -547 -27% -22% -5%

Iron ore concentrate
In 1H 2016, sales of iron ore concentrate decreased by 11% y-o-y to US$301 million, caused by a lower average selling price (-23 pp), which was partly compensated by greater sales volumes (+12 pp). Volumes increased by 761 thousand tonnes y-o-y to 7,227 thousand tonnes in 1H 2016, due to destocking and higher production. Sales to Ukraine increased by 267 thousand tonnes y-o-y amid higher sales to a key client. Sales to Southeast Asia increased by 719 thousand tonnes y-o-y, while sales to Europe decreased by 224 thousand tonnes y-o-y amid weak demand in 1Q 2016. The average selling price followed the benchmark 62% Fe iron ore CFR China, which declined to an average of US$52/tonne in 1H 2016, from an average of US$60/tonne in the corresponding period of 2015 (down 14% y-o-y).

Pellets
In 1H 2016, sales of pellets decreased by 45% y-o-y to US$174 million, of which 32 pp was attributable to lower sales volumes and 13 pp to a lower average selling price. Volumes decreased by 1,321 thousand tonnes y-o-y to 2,831 thousand tonnes in 1H 2016, due to lower production coupled with a drop in premiums on certain markets. As such, sales to Southeast Asia and MENA decreased by 2,323 thousand tonnes and 239 thousand tonnes y-o-y respectively. At the same time, sales to Ukraine increased by 942 thousand tonnes y-o-y due to higher consumption by a key client. Sales to Europe rose by 298 thousand tonnes y-o-y amid higher demand. The average selling price followed the benchmark 62% Fe iron ore CFR China, which dropped by 14% y-o-y.

Coking coal concentrate
In 1H 2016, sales of coking coal concentrate decreased by 21% y-o-y to US$71 million, driven mainly by a lower average selling price. Volumes increased by 13 thousand tonnes y-o-y to 873 thousand tonnes in 1H 2016 due to higher sales to North America. The average selling price in Ukraine declined by 32% y-o-y following a decrease in the share of more expensive coal in sales in that market. At the same time, the average quarterly contract price for hard coking coal in North America fell by 15% y-o-y, largely in line with the benchmark for hard coking coal FOB Australia, which dropped by 27% y-o-y.

 

COST OF SALES

Metinvest’s cost of sales consists primarily of the cost of raw materials; the cost of energy materials; payroll and related expenses for employees at its production facilities; depreciation and amortisation; impairment of property, plant and equipment; repair and maintenance expenses; outsourcing; taxes; and other costs.

In 1H 2016, cost of sales decreased by 26% y-o-y to US$2,240 million. This was primarily attributable to (i) favourable movements in the USD/UAH exchange rate, which accounted for US$219 million or 27% of the total decrease in the cost of sales; (ii) a drop in the cost of goods and services for resale of US$281 million, mainly goods from Zaporizhstal; (iii) no impairment charges accrued in 1H 2016, compared with US$165 million in the corresponding period of 2015; (iv) a decrease in the cost of raw materials (excluding changes in work in progress and finished goods) of US$66 million amid lower prices of coal, scrap, iron ore and coke (US$163 million), partly offset by a rise in their consumption (US$97 million); (v) a drop in the cost of energy of US$80 million amid lower consumption of natural gas and fuel (US$46 million) and lower gas prices (US$51 million), partly offset by a rise in electricity tariffs in UAH (US$17 million); and (vi) a decline in services and other costs of US$51 million, mainly due to the reversal of a provision for inventory impairment of US$43 million created at the end of 2015 as a result of sales price growth.

As a percentage of consolidated revenues, the cost of sales dropped by 5 pp y-o-y to 78% in 1H 2016.
 

DISTRIBUTION COSTS

Distribution costs consist largely of transportation costs, salaries paid to sales and distribution employees, and commissions paid by Metinvest’s European subsidiaries to third-party sales agents and trade offices for their services and costs of materials.

In 1H 2016, distribution costs decreased by 25% y-o-y to US$347 million. The decline was primarily attributable to lower freight costs (US$110 million) due to lower sea shipment volumes amid a change in sales structure and lower freight tariffs stemming from decreased crude oil prices. In addition, the positive effect of changes in the USD/UAH exchange rate, which mainly impacted railway costs, wages and salaries, as well as other distribution costs, contributed US$30 million in savings. These factors were partly offset by an increase in railway costs of US$34 million amid higher transportation volumes and following an upward indexation in tariffs of 15% on 30 April 2016.

As a share of consolidated revenues, distribution costs decreased by 1 pp y-o-y to 12% in 1H 2016.
 

GENERAL AND ADMINISTRATIVE COSTS

General and administrative costs consist largely of salaries paid to administrative employees; consultancy fees; audit, legal and banking services expenses; insurance costs; and lease payments.

In 1H 2016, general and administrative expenses decreased by 15% y-o-y to US$82 million, driven by favourable movements in the USD/UAH exchange rate, which mainly impacted wages and salaries, service fees and other expenses.

As a share of consolidated revenues, general and administrative costs remained flat y-o-y at 3% in 1H 2016.
 

OTHER OPERATING INCOME / EXPENSES

Other operating income and expenses consist primarily of sponsorship and other charity expenses, foreign exchange gains less losses, maintenance of social infrastructure, impairment of goodwill and trade and other accounts receivable, and gains or losses on disposals of property, plant and equipment.

In 1H 2016, other operating expenses amounted to US$5 million, compared with US$47 million of other operating income in the corresponding period of 2015. This was mainly attributable to a decrease of US$100 million in net foreign exchange gains, principally due lower gains from a revaluation of trade receivables and trade payables. At the same time, there was no impairment of goodwill accrued in 1H 2016, compared with US$39 million charged in the same period of 2015.

As a share of consolidated revenues, other operating income amounted to 0% in 1H 2016, compared with 1% in the same period of 2015.

OPERATING PROFIT

In 1H 2016, operating profit increased by 126% y-o-y to US$206 million, while the operating margin increased by 5 pp y-o-y to 7%. This primarily reflected a drop in cost of sales, distribution, general and administrative costs, partly offset by a reduction in consolidated revenues and other operating income.

EBITDA

In 1H 2016, EBITDA dropped by 7% y-o-y to US$580 million. The contribution from the Metallurgical division declined by US$20 million. In addition, corporate overheads and eliminations increased by US$60 million. This was partly compensated by an increase in the contribution of the Mining division of US$37 million.

EBITDA by division 1H 2016 1H 2015 Change, y-o-y
US$m % of division revenues US$m % of division revenues US$m pp of division revenues
Metallurgical division 401 17% 421 15% -20 2
- incl. JV 69   101   -32  
Mining division 255 26% 218 15% 37 11
- incl. JV 41   37   4  
Corporate o/hs and eliminations -76   -16   -60  
Total EBITDA 580 20% 623 17% -43 3

In 1H 2016, the y-o-y reduction in consolidated EBITDA was primarily attributable to a decrease in selling prices (US$737 million) and sales volumes of the Mining division (US$81 million). In addition, the JVs’ positive contribution to EBITDA declined by US$28 million, mainly due to a decrease in the share of Zaporizhstal’s EBITDA of US$32 million. These factors were partly compensated by:

  • an increase in sales volumes of the Metallurgical division of US$48 million;
  • a positive effect from the hryvnia devaluation of US$218 million;
  • a decline in other costs of US$286 million, mainly due to a drop in cost of goods and services for resale;
  • a drop in logistics costs of US$106 million, mainly due to lower freight costs (US$110 million) and lower other expenses (US$30 million), partly offset by higher railway costs (US$34 million);
  • lower spending on energy due to lower consumption of natural gas and fuel (US$46 million) and lower prices of natural gas (US$51 million), partly offset by increased electricity tariffs (US$17 million);
  • a decrease in the cost of raw materials due to lower market prices of coal, scrap, iron ore and coke (US$163 million), partly offset by higher consumption (US$97 million).

In 1H 2016, the consolidated EBITDA margin increased by 3 pp y-o-y to 20%. The Metallurgical division’s EBITDA margin rose by 2 pp y-o-y to 17%, while the Mining division’s increased by 11 pp y-o-y to 26%.

 

FINANCE INCOME          

Finance income comprises interest income on bank deposits and loans issued, imputed interest on other financial instruments and other finance income.

In 1H 2016, Metinvest’s finance income increased by 18% y-o-y to US$13 million. As a percentage of consolidated revenues, finance income remained flat y-o-y at 0% in the reporting period.
 

FINANCE COSTS

Finance costs include interest expenses on bank borrowings and debt securities, finance foreign exchange net losses, interest cost on retirement benefit obligations and other finance costs.

In 1H 2016, finance costs decreased by 52% y-o-y to US$178 million, primarily due to lower foreign exchange losses from financing activity, which arose on intragroup loans and dividends.

As a percentage of consolidated revenues, financial costs decreased by 4 pp y-o-y to 6% in 1H 2016.

SHARE OF RESULT OF ASSOCIATES AND JOINT VENTURE

In 1H 2016, the share of net income from associates and joint ventures decreased by 29% y-o-y to US$70 million, largely as a result of a decrease in net income at Southern GOK and Zaporizhstal of US$14 million and US$16 million respectively amid lower selling prices.
 

INCOME TAX EXPENSE

In accordance with the Tax Code of Ukraine, the current income tax rate in the country is 18%. Metinvest’s overall income tax rate derives from the rates applicable to profits in the jurisdictions where it operates (Ukraine, the US and countries in Europe).

In 1H 2016, the income tax expense amounted to US$21 million, compared with a positive amount of US$7 million in the corresponding period of 2015. This was principally driven by a decrease in deferred tax credit of US$15 million y-o-y, mainly due to decreased tax liabilities at Ingulets GOK and Avdiivka Coke. Meanwhile, current tax increased by US$12 million y-o-y, as Northern GOK and Metinvest International reported higher profit before income tax during the reporting period.

NET PROFIT

In 1H 2016, net profit totalled to US$90 million, compared with a net loss of US$166 million in the corresponding period of 2015. This was principally due to a drop in cost of sales, finance costs, distribution, general and administrative costs totalling US$1,133 million. These factors were partly offset by lower revenues (US$770 million), share of results of associates and JVs (US$29 million) and other operating income (US$52 million), as well as a higher income tax charge (US$28 million).

As a result, the net margin amounted to positive 3% in 1H 2016, compared with negative 5% in the same period of 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

NET CASH FROM OPERATING ACTIVITIES

In 1H 2016, Metinvest generated US$163 million of cash from operating activities, compared with US$354 million in the same period of 2015. The principal reason for the decrease was a change in working capital, which had a negative impact on the net cash flow totalling US$253 million in 1H 2016, mainly due to an increase in trade and other accounts receivable of US$237 million amid selling prices growth since the beginning of the year, as well as a rise in recoverable VAT. In comparison, in 1H 2015, the negative change in working capital amounted to US$18 million. In addition, although profit before income tax increased by US$284 million y-o-y to US$111 million, operating cash flows before working capital changes decreased by US$63 million y-o-y to US$420 million due to non-cash adjustments.

These factors were partly compensated by a decrease in income tax paid and interest paid of US$67 million and US$40 million y-o-y respectively. Income tax paid amounted to positive US$45 million in 1H 2016, as US$53 million of corporate income tax prepayment was reimbursed to some Ukrainian subsidiaries of Metinvest B.V. during this period. Moreover, a new tax collection system was introduced in Ukraine on 1 January 2016: tax prepayment requirements were lifted, tax is paid quarterly based on actual financial performance of an entity. Interest paid decreased as starting 2016 Metinvest paid only 30% of accrued interest and capitalised the remaining 70% due to the liquidity crunch and in line with the first and the second moratorium schemes under the notes and the extended standstill agreements in relation with the PXFs.

NET CASH USED IN INVESTING ACTIVITIES

In 1H 2016, Metinvest used US$109 million of cash in investing activities, compared with US$94 million during the same period of 2015. Total cash used to purchase PPE, as well as intangible assets, amounted to US$130 million, up US$17 million y-o-y. Meanwhile, proceeds received from sale of subsidiaries and associates amounted to US$6 million, as the Group sold its stake in Black Iron (Cyprus) Limited.

NET CASH USED IN FINANCING ACTIVITIES

In 1H 2016, net cash used in financing activities dropped by 76% y-o-y to US$50 million. The decline was primarily driven by a decrease in repayments of loans and borrowing. This fell by a total of US$74 million y-o-y to US$8 million in 1H 2016, due to the deterioration of Metinvest’s cash position, in the context of global debt restructuring discussions, as well as in line with the first and the second moratorium schemes under the notes and the standstill agreements under the PXFs. In addition, net repayments of trade finance totalled US$33 million in 1H 2016, as trade finance banks continued to withdraw lines, decrease limits and impose additional drawing restrictions on the Group.

As a result of the abovementioned factors, total debt was up by US$35 million y-t-d to US$2,981 million as of 30 June 2016.

Metinvest’s cash balance stood at US$183 million as of 30 June 2016, compared with US$180 million as of 31 December 2015.

CAPITAL EXPENDITURE

In 1H 2016, Metinvest continued to implement several investment projects in line with its Technological Strategy. Due to the tight liquidity situation and the high volatility of the global steel and iron ore prices, the focus remained on vital maintenance and ecological projects, as well as top-priority expansion projects that offer a fast payback. As such, Metinvest maintained capital expenditure at low level of US$116 million in 1H 2016, flat y-o-y. As a share of total investments, expenditures on expansion projects increased to 36% (20% in 1H 2015), while maintenance projects decreased to 64% (80% in 1H 2015). The Metallurgical division accounted for 53% of capital expenditure (42% in 1H 2015) and Mining for 46% (54% in 1H 2015). Capital expenditures on corporate overheads decreased by 61% y-o-y to US$2 million in 1H 2016.

Metallurgical division

Metinvest made further progress in several projects of the Metallurgical division. Ilyich Steel completed a major overhaul of blast furnace no. 4 in May, while construction and installation works started in early 2016. Construction of the PCI facilities at Yenakiieve Steel is in the final stage: PCI injection into blast furnace no. 5 started in February and into blast furnace no. 3 in April. The equipment of the new turbine air blower no. 3 at Azovstal was launched in April.

Numerous projects were started or resumed. The construction of the PCI unit at blast furnace no. 4 at Azovstal, which was approved as the first stage of the project, was resumed in February 2016 (pre-construction works on site were started in August 2015, but halted soon afterwards due to limited funding) with the PCI injection expected to start in November 2016. Metinvest commenced the reconstruction of the existing dust-trapping facilities of converter no. 2 at Ilyich Steel to comply with environmental requirements. Ilyich Steel launched a large-scale revamp project to build continuous casting machine no. 4 in September, after the reporting date. New equipment will allow for higher productivity, cost reductions, steel product quality improvements and environmental improvements in Mariupol. Ilyich Steel also started an installation of a new winder at the hot strip mill 1700 in September 2016, which will increase weight of commercial hot rolled coils.

Meanwhile, reconstruction of the sinter plant at Ilyich Steel is ongoing: the major overhaul of sintering machine no. 4 has been completed.