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 audited IFRS consolidated financial statements for the 12 months ended 31 December 2015.

Summary - financial results FY2015 FY2014 Change, y-o-y
US$m %
Income statement highlights        
  Revenues 6,832 10,565 -3,732 -35%
  Adjusted EBITDA1 513 2,702 -2,189 -81%
    Margin 8% 26%   -18 pp
 Adjusted EBITDA1 excl. impairment of trade and other receivables2 804 2,762 -1,957 -71%
 Net profit -1,003 159 -1,161 -732%
   Margin -15% 2%   -16 pp
Cash flow highlights        
Net cash from operations 625 1,489 -864 -58%
Net cash used in investing activities -237 -559 322 -58%
incl. purchase of PPE and intangible assets -275 -549 274 -50%
Net cash used in financing activities -309 -1,542 1,233 -80%
incl. dividends 0 -388 388 -100%
         
Summary - financial results 31.12.2015 31.12.2014 Change, YTD
US$m %
Total debt 2,946 3,232 -286 -9%
Cash 180 114 66 58%

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), sponsorship and other charity payments, the share of results of associates and other expenses that the management considers non-core, plus the share of EBITDA of joint ventures. We will refer to adjusted EBITDA as EBITDA throughout this release

2) Following further delays in payments from some key customers beyond the originally expected dates and certain operational and financial issues for them, the Group recognised a related impairment of US$255 million in 2015. The overall impairment of trade and other receivables was US$292 million in 2015 and US$60 million in 2014.

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 FY2015 FY2014 Change, y-o-y
000 t %
Crude steel 7,669 9,205 -1,536 -17%
  Azovstal 3,206 3,599 -393 -11%
  Ilyich Steel 2,645 3,544 -899 -25%
  Yenakiieve Steel 1,818 2,062 -244 -12%
Iron ore concentrate 32,208 34,888 -2,680 -8%
  Northern GOK 13,152 13,420 -268 -2%
  Ingulets GOK 12,903 15,056 -2,153 -14%
  Central GOK 6,154 6,412 -258 -4%
Coking coal concentrate 3,285 4,098 -813 -20%
  Krasnodon Coal 346 1,522 -1,176 -77%
  United Coal 2,940 2,577 363 14%

  

OPERATIONAL HIGHLIGHTS

  • In 2015, disruptions to the Group’s operations continued due to the ongoing conflict in Eastern Ukraine. Metinvest suspended production at Yenakiieve Steel and its Makiivka branch from 7 February to 16 March amid interruptions to raw material and electricity supplies due to the conflict. Other plants in the Donbas region have experienced periodic delays due to damage to railway, pipeline and power infrastructure and blockages of raw material supplies.
  • Azovstal completed the major overhaul of blast furnace no. 4 in September 2015
  • Yenakiieve Steel resumed construction of pulverised coal injection (PCI) facilities and launched the technology at blast furnace no. 5 in February 2016
  • Ilyich Steel replaced the filters of sintering machines nos. 1-3 as part of its sinter plant reconstruction
  • Metinvest opened a new retail warehouse for steel products in Dnipropetrovsk and representative sales offices in Spain and Poland
  • The Group launched 21 new products, mainly rebar, plates and coils for the construction, machine-building and oil transportation industries
  • Metinvest established Metinvest-PromService, which will specialise in maintaining and repairing equipment at metallurgical assets of Metinvest and third parties

DEBT MANAGEMENT

  • In January, the Group extended the maturity of the outstanding seller notes from 2015 to 2016
  • In February, Metinvest obtained a waiver from pre-export finance (PXF) lenders, deferring payment of 75% of the February principal instalment by one month
  • After not obtaining another waiver to partly defer the March and April principal instalments from 100% of its PXF lenders and due to very tight liquidity, Metinvest had to stop repayments under its PXF facilities and decided to launch global debt restructuring discussions with both its PXF lenders and noteholders
  • In August, Metinvest completed the final drawdown under the ECA facility for the construction of PCI facilities at Yenakiieve Steel
  • In December, Metinvest signed a standstill agreement with certain PXF lenders, providing a forbearance on the signatories taking enforcement action or initiating insolvency proceedings until 29 January 2016
  • In June, as part of consent solicitation transactions, Metinvest extended the maturity of its 2015 guaranteed notes from 20 May 2015 to 31 January 2016. In addition, holders of 2015, 2017 and 2018 notes agreed to waive certain events of default until 31 January 2016, allowing time for restructuring negotiations.

CORPORATE STRUCTURE

  • As of 31 December 2015, Metinvest B.V. is owned 71.24% by SCM Cyprus and 23.76% by companies of the Smart Group. The remaining 5% interest in the Company in the form of Class C shares has been acquired from the previous owners of Ilyich Group for the benefit of SCM and Smart. It is the intention of SCM and Smart to dispose of the said 5% interest in due course (after the receipt of respective governmental approvals, if such will be necessary), and in such a manner that the ultimate interest of SCM in Metinvest B.V. shall be 75% minus 1 share, and the ultimate interest of Smart in Metinvest B.V. shall be 25% plus 1 share, thus SCM remaining as the controlling shareholder.

EVENTS AFTER THE REPORTING PERIOD

  • In January 2016, the Group sold its investment in Black Iron (Cyprus) Limited for US$6 million
  • To ensure a stable platform for the continued debt restructuring negotiations, on 29 January 2016 the High Court of Justice of England and Wales sanctioned a scheme of arrangement involving a moratorium over enforcement action by noteholders in respect of certain defaults under the notes until 27 May 2016 (unless terminated earlier) and on 1 April 2016 the standstill with certain PXF Lenders was extended until 27 May 2016 (unless terminated earlier)
  • Non-binding heads of terms for the restructuring of the notes and PXF facilities has been agreed.
  • As of April 2016, global market prices for steel and iron ore products had partly recovered compared with levels in late 2015 and early 2016.

Commenting on the results, Yuriy Ryzhenkov, Chief Executive Officer of Metinvest, said: “As expected, 2015 was another deeply challenging year for our business. We continued to face a difficult geopolitical and economic situation in Ukraine. At the same time, conditions on the global steel and raw material markets, where prices were their lowest in more than a decade, remain a major source of pressure.

In 2015, we were able to overcome the vast majority of the considerable operational issues in Eastern Ukraine and enter 2016 with production restored at the majority of our key facilities, a tribute to the hard work and bravery of our employees on the ground. In 2016, the affected regions have remained unstable, although we are prepared for any eventuality.

Our operational and financial results reflected the conditions at home and abroad. The Group’s crude steel production fell by 17% y-o-y to 7,669 million tonnes in 2015, iron ore concentrate output by 8% y-o-y to 32,208 million tonnes, and coking coal concentrate production by 20% y-o-y to 3,285 million tonnes. Compared with 2014, the Group’s revenues declined by 35% to US$6,832 million and EBITDA by 81% to US$513 million.

Despite the considerable headwinds, Metinvest continued to move forward proactively in 2015. How we approached and overcame the challenges underscores the strength of our management team, business model and strategy. There were several managerial changes in our team. Following a reorganisation of the Strategy department, Ruslan Rudnitsky, Chief Strategy Officer, left the Group in November 2015. In March 2016, Aleksey Kutepov stepped down as Chief Financial Officer and Yuliya Dankova replaces him in the interim. Also in March, Mykola Ishchenko stepped down as Director of the Mining division and Aleksandr Pogozhev, Director of the Metallurgical division, takes his place in the interim, while Sergiy Detyuk was appointed as Chief Information Officer. On behalf of the Group, I would like to thank Ruslan, Aleksey and Mykola for their contributions and commitment over the years and welcome Yuliya and Sergiy to the team. Both have extensive industry expertise and established track records of success in their fields, making them an excellent fit with the management team.

In view of the short to medium-term situation in the Ukrainian market, we adjusted our sales geography in 2015, while maintaining our position in key strategic markets. The proportion of overall sales to Europe rose by 5 pp y-o-y, while that of Southeast Asia fell by the same amount.

In addition, we focused on reducing costs through operational efficiency measures and improved our management of working capital. The cost of sales amounted to US$6,087 million, down 26% y-o-y, while distribution costs equalled US$920 million, down 13%, and general and administrative costs US$211 million, down 26%. The main drivers were depreciation of the hryvnia, lower raw material prices and consumption, and less spending on energy, essentially natural gas, due to lower consumption and prices. The latter was offset by a rise in average electricity tariffs, while railway transportation tariffs also increased. Metinvest remains committed to scrutinising expenses throughout the business and streamlining operations where possible.

Despite the liquidity constraints, we continued to pursue our Technological Strategy in 2015. Given the current situation, this involved reducing CAPEX by more than half compared with 2014 and setting clear priorities. We focused on projects offering rapid, tangible returns on investment and those delivering clear environmental benefits.

In 2015, as debt markets effectively remained closed to the majority of Ukrainian companies, we embarked on a necessary debt restructuring process with our creditors. We serviced interest and coupon payments on our bank loans and notes in full in 2015 and have been doing so partly in 2016 in accordance with terms of the Scheme of Arrangement and the PXF facilities Standstill Extension Agreement. At present, we are in restructuring talks that aim to reach a satisfactory settlement for all stakeholders based on the non-binding heads of terms agreed with the ad hoc committee of noteholders and the coordinating committee of the PXF lenders. To document and implement the consensual global restructuring, the Group is seeking to extend a moratorium on enforcement action by noteholders and a standstill with PXF lenders. On this basis, we expect to improve our overall liquidity and plan for the long-term future of our business.

As of April 2016, global prices for steel and iron ore products had partly recovered compared with levels in late 2015 and early 2016. At the same time, market fundamentals remain bearish, as oversupply persists and demand is still weak.

I believe that the true test of an individual or company is not when times are good, but when the challenges are the greatest. We continue to invest in our communities and our employees continue to come forward as volunteers, providing vital humanitarian assistance. Also crucial has been the contribution of both shareholders to the restructuring process. We would like to thank them and all employees, investors, partners and clients for the ongoing support and continued belief in the Metinvest story.”
 

RESULTS OF OPERATIONS

Results of operations FY2015 FY2014 Change, y-o-y
US$m % of revenues  US$m % of revenues US$m % pp of revenues
Revenues 6,832 100% 10,565 100% -3,732 -35% 0
Cost of sales -6,087 -89% -8,240 -78% 2,153 -26% -11
Gross profit 745 11% 2,325 22% -1,579 -68% -11
  Distribution costs -920 -13% -1,063 -10% 143 -13% -3
  General and administrative costs -211 -3% -287 -3% 76 -26% 0
  Other operating income -300 -4% 130 1% -430 -331% -6
Operating profit -686 -10% 1,105 10% -1,790 -162% -20
  Finance income 26 0% 25 0% 1 4% 0
  Finance costs -635 -9% -902 -9% 267 -30% -1
  Share of results of associates and JV 131 2% 142 1% -11 -8% 1
Profit before income tax -1,164 -17% 370 3% -1,533 -415% -21
  Income tax 161 2% -211 -2% 372 -176% 4
Net profit -1,003 -15% 159 2% -1,161 -732% -16

Revenues

Metinvest’s revenues are generated from sales of its steel, iron ore, coal and coke products and re-sales 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 FY2015 FY2014 Change, y-o-y
US$m % of revenues US$m % of revenues US$m % pp of revenues
Total revenues 6,832 100% 10,565 100% -3,732 -35% 0
Ukraine 1,619 24% 2,496 24% -876 -35% 0
Europe 2,255 33% 2,950 28% -695 -24% 5
MENA 1,305 19% 1,872 18% -567 -30% 1
CIS (ex Ukraine) 602 9% 1,074 10% -472 -44% -1
incl. Russia 470 7% 721 7% -251 -35% 0
Southeast Asia 751 11% 1,666 16% -915 -55% -5
North America 229 3% 405 4% -177 -44% 0
Other regions 71 1% 102 1% -31 -30% 0

In 2015, Metinvest's consolidated revenues fell by US$3,732 million y-o-y to US$6,832 million. Revenues from the Metallurgical division declined by US$2,758 million, while those from the Mining division dropped by US$974 million. This was mainly driven by overall lower production of crude steel amid the conflict in Eastern Ukraine, lower output of iron ore concentrate, weak demand in key markets and multi-year low prices of steel and iron ore products. The share of the Metallurgical division in external sales increased by 2 percentage points (pp) y-o-y to 79%, while the share of the Mining division decreased by 2 pp y-o-y to 21%.

In 2015, Metinvest’s revenues in Ukraine dropped by 35% y-o-y to US$1,619 million. This was mainly due to lower sales of finished steel and iron ore products amid weak demand in major steel consuming sectors and lower selling prices, which followed benchmark dynamics. Demand slumped due to the conflict in the eastern regions of the country and significant economic contraction. Consumption of steel products (excluding pipes) in Ukraine decreased by 28% y-o-y to 4.0 million tonnes. In particular, construction activity fell by 12% y-o-y, the hardware sector contracted by 19% y-o-y1 and the machine-building industry declined by 14% y-o-y2. Regarding iron ore products, sales in Ukraine slumped, as a couple of Metinvest’s key customers in the country scaled back production dramatically following the escalation of the conflict in 2H 2014. Meanwhile, the share of Ukraine in the Group’s consolidated revenues remained unchanged y-o-y at 24%.

International sales decreased by 35% y-o-y to US$5,213 million in 2015. While sales to all regions fell, the breakdown of sales by region changed compared with 2014. The proportion of sales to Europe rose by 5 pp y-o-y to 33% of consolidated revenues in 2015, due to higher sales volumes of pig iron, square billets, flat products and pellets. The share of sales to Southeast Asia fell by 5 pp y-o-y to 11% due to decreased selling prices of key products and lower sales volumes of flat products, slabs and pellets.

Metallurgical division

The Metallurgical division generates revenues from sales of pig iron, steel and coke products and services. In 2015, its revenues decreased by 34% y-o-y to US$5,407 million. This was attributable to lower sales of all steel products: flat (down US$1,467 million), long (down US$506 million), semi-finished (down US$443 million), and tubular (down US$174 million) products. In addition, sales of coke and chemical products decreased by US$59 million.

Metallurgical division
Sales by market		 FY2015 FY2014 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 5,407 100% 13,268 8,165 100% 14,764 -2,758 -1,496 -34% -10%
Ukraine 1,151 21% 2,983 1,578 19% 3,254 -427 -270 -27% -8%
Europe 2,090 39% 4,793 2,751 34% 4,648 -661 145 -24% 3%
MENA 1,266 23% 3,372 1,872 23% 3,476 -607 -104 -32% -3%
CIS (ex Ukraine) 602 11% 1,267 1,073 13% 1,628 -471 -361 -44% -22%
incl. Russia 470 9% 1,042 721 9% 1,202 -251 -160 -35% -13%
Southeast Asia 116 2% 265 516 6% 922 -400 -657 -77% -71%
North America 111 2% 379 281 3% 677 -170 -298 -61% -44%
Other regions 71 1% 209 94 1% 159 -23 50 -25% 31%
Metallurgical division
Sales by product		 FY2015 FY2014 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 880 2,880 1,324 2,826 -443 54 -33% -35% 2%
Pig iron 379 1,467 490 1,226 -111 241 -23% -42% 20%
incl. Zaporizhstal 84 332 40 100 45 232 113% -120% 233%
Slabs 274 782 483 916 -209 -135 -43% -29% -15%
Square billets 228 631 351 684 -123 -53 -35% -27% -8%
Finished products 3,857 8,354 6,004 9,788 -2,146 -1,434 -36% -21% -15%
Flat products 3,084 6,726 4,550 7,583 -1,467 -857 -32% -21% -11%
incl. Zaporizhstal 1,098 2,659 1,557 2,794 -459 -135 -29% -25% -5%
Long products 710 1,562 1,216 1,965 -506 -403 -42% -21% -20%
Tubular products 63 66 237 240 -174 -174 -73% -1% -73%
Coke and chemical products 404 2,035 463 2,151 -59 -116 -13% -7% -5%
Coke products 318 1,693 290 1,664 27 29 9% 8% 2%
Chemical products 86 342 172 486 -86 -145 -50% -20% -30%
Other products and services 265 N/A 376 N/A -110 N/A -29% N/A N/A
Total sales 5,407 13,268 8,165 14,764 -2,758 -1,496 -34% -24% -10%

Pig iron

In 2015, sales of pig iron decreased by 23% y-o-y to US$379 million. This was driven by a substantially lower average selling price (-42 pp), which was partly compensated by an increase in sales volumes (+20 pp). Sales volumes of pig iron rose by 241 thousand tonnes to 1,467 thousand tonnes mainly due to re-sales of 332 thousand tonnes of Zaporizhstal’s pig iron as a result of surplus hot metal available after the major overhaul of blast furnace no. 4, completed in 2H 2014. Given the unfavourable market prices in the US, sales volumes were redirected to the other higher-margin markets of Ukraine, Europe, the Middle East and North Africa (MENA) and other regions (such as Mexico).

Slabs

In 2015, sales of slabs slumped by 43% y-o-y to US$274 million, of which 29 pp was attributable to a drop in the average selling price and 15 pp to lower sales volumes. Sales volumes of slabs decreased by 135 thousand tonnes y-o-y to 782 thousand tonnes due to lower overall production volumes in the first half of the year and a lack of orders in the second half. This resulted in lower sales volumes to Europe and Southeast Asia. Meanwhile, sales volumes to the MENA region(mainly Turkey) increased by 177 thousand tonnes y-o-y due to a rise in sales to a key client. The decline in the average selling price followed the benchmark for slabs (FOB Black Sea), which dropped by 39% y-o-y.

Square billets

In 2015, sales of square billets decreased by 35% y-o-y to US$228 million, driven by a drop in the average selling price (-27 pp) and a decrease in sales volumes (-8 pp). Sales volumes of square billets decreased by 53 thousand tonnes y-o-y to 631 thousand tonnes, mainly due to lower production volumes at Yenakiieve Steel amid the halt of production from 7 February to 16 March 2015, as well as limited supplies of raw materials and natural gas during the year. MENA remained the most important market, accounting for 73% of total sales of billets: in particular, Turkey accounted for 41% of total sales volumes to the region. The average selling price followed the dynamics of billet FOB Black Sea quotations, which dropped by 32% y-o-y.

Flat products

 In 2015, sales of flat products decreased by 32% y-o-y to US$3,084 million, of which 21 pp was attributable to a lower average selling price and 11 pp to lower sales volumes. The flat product sales volumes decreased by 857 thousand tonnes y-o-y to 6,726 thousand tonnes, driven mainly by a 13% decline in the output of flat products at Metinvest’s operations in 2015. Zaporizhstal’s share in total sales volumes of flat products increased by 3 pp y-o-y to 40% in 2015. As such, sales volumes to all regions fell except Europe. Sales volumes in Ukraine dropped by 198 thousand tonnes y-o-y as a result of weak demand in key steel consuming industries due to the conflict in Eastern Ukraine and the overall economic slowdown in the country. Shipments to the Commonwealth of Independent States (CIS) dropped by 51 thousand tonnes y-o-y, driven by lower sales to Russia. Sales volumes in MENA and Southeast Asia decreased by 445 thousand tonnes and 452 thousand tonnes y-o-y respectively amid lower overall production and stronger competition from Chinese producers. In contrast, sales volumes to Europe increased by 334 thousand tonnes y-o-y due to customer capture through the back-to-back sales system and additional services provided. Moreover, sales volumes to Romania, Poland, Spain and Portugal rose following the opening of new sales offices in the countries. As a result, Europe accounted for 51% of total sales in 2015, compared with 42% in 2014. The average selling price was largely in line with the benchmark quotations for HRC FOB Black Sea, which were down 35% y-o-y.

Long products

In 2015, sales of long products decreased by 42% y-o-y to US$710 million, of which 20 pp was attributable to a decline in sales volumes and 21 pp to a lower average selling price. Sales volumes of long products decreased by 403 thousand tonnes y-o-y to 1,562 thousand tonnes. This was caused by lower production due to the conflict in the Donetsk and Luhansk regions, problems with dispatching finished goods from the conflict region and difficulties in supplying square billets from Yenakiieve Steel to Promet Steel in Bulgaria for further re-rolling. As such, sales to key markets fell.
 

Tubular products

In 2015, sales of tubular products decreased by 73% y-o-y to US$63 million. This was due to the same percentage decline in sales volumes, which dropped by 174 thousand tonnes y-o-y to 66 thousand tonnes due to a lack of orders.

Coke and chemical products

In 2015, sales of coke and chemical products decreased by 13% y-o-y to US$404 million, driven by lower sales volumes (-5 pp) and a decrease in the average selling price (-7 pp). Sales volumes of coke and chemical products decreased by 116 thousand tonnes y-o-y to 2,035 thousand tonnes due to a slump in coke output amid raw material supply constraints and unstable operations at Avdiivka Coke and Donetsk Coke from July 2014.

Mining division

The Mining division generates revenues from sales of iron ore, coal and other products and services. In 2015, its revenues decreased by 41% y-o-y to US$1,425 million, mainly because of a slump in prices of iron ore products, as well as lower sales volumes.

Mining division
Sales by market		 FY2015 FY2014 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 1,425 100% 22,016 2,400 100% 23,746 -974 -1,730 -41% -7%
Ukraine 468 33% 7,315 918 38% 9,366 -450 -2,052 -49% -22%
Europe 165 12% 2,790 199 8% 2,217 -34 573 -17% 26%
MENA 39 3% 498 0 0% 0 39 498 N/A N/A
CIS (ex Ukraine) 0 0% 0 1 0% 1 -1 -1 N/A N/A
incl. Russia 0 0% 0 0 0% 0 0 0 N/A N/A
Southeast Asia 635 45% 10,034 1,150 48% 10,908 -515 -874 -45% -8%
North America 118 8% 1,379 124 5% 1,170 -7 209 -5% 18%
Other regions 0 0% 0 7 0% 84 -7 -84 N/A N/A

 

Mining division
Sales by product		 FY2015 FY2014 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 1,139 20,083 2,128 21,961 -989 -1,877 -46% -38% -9%
Merchant iron ore concentrate 639 13,159 1,156 13,571 -517 -412 -45% -42% -3%
Pellets 500 6,925 972 8,390 -472 -1,465 -49% -31% -17%
Coking coal concentrate 179 1,933 172 1,786 7 147 4% -4% 8%
Other products and services 107 N/A 101 N/A 6 N/A 6% N/A N/A
Total sales 1,425 22,016 2,400 23,746 -974 -1,730 -41% -33% -7%

Iron ore concentrate

In 2015, sales of merchant iron ore concentrate declined by 45% y-o-y to US$639 million, of which 42 pp was attributable to a drop in the average selling price and 3 pp to a decrease in sales volumes. Volumes declined by 412 thousand tonnes y-o-y to 13,159 thousand tonnes. Sales volumes in Ukraine and Europe fell by 1,062 thousand tonnes and 142 thousand tonnes y-o-y respectively. As such, volumes were redirected to Southeast Asia, where they increased by 792 thousand tonnes y-o-y. The average selling price followed the dynamics of the benchmark 62% Fe iron ore CFR China, which dropped from US$97/tonne in 2014 to US$56/tonne in 2015 (down by 43% y-o-y).

Pellets

In 2015, sales of pellets decreased by 49% y-o-y to US$500 million, driven by a fall in the average selling price (-31 pp) and a drop in sales volumes (-17 pp). Volumes decreased by 1,465 thousand tonnes y-o-y to 6,925 thousand tonnes due to a 16% decline in pellet output in 2015 and destocking in 2014. Sales volumes in Ukraine decreased by 977 thousand tonnes y-o-y amid lower consumption by key Ukrainian customers due to the conflict. Sales of pellets in Southeast Asia decreased by 1,666 thousand tonnes y-o-y due to lower production. As such, volumes were partly redirected from Southeast Asia and Ukraine to other markets: 681 thousand tonnes to Europe and 498 thousand tonnes to MENA. Sales to MENA, mainly Turkey, were resumed after a break of over one year. The average selling price dropped in line with the benchmark 62% Fe iron ore CFR China, which fell by 43% y-o-y.


Coking coal concentrate

In 2015, sales of coking coal increased by 4% y-o-y to US$179 million. This was caused by an 8% rise in sales volumes, partly offset by a lower average selling price. Sales volumes increased by 147 thousand tonnes y-o-y to 1,933 thousand tonnes due to higher sales in North America. The average selling price in Ukraine rose by 37% y-o-y following an increase in the share of more expensive coal in sales to this country. At the same time, the average quarterly contract price for hard coking coal in North America fell by 17% y-o-y, in line with the benchmark for hard coking coal FOB Australia, which dropped by 19% y-o-y.

 Cost of sales

Metinvest’s cost of sales consists primarily of the cost of raw materials; the cost of energy materials, including gas and electricity; payroll and related expenses for employees; amortisation and depreciation; repair and maintenance expenses; outsourcing; taxes; and other costs.

In 2015, Metinvest’s cost of sales declined by 26% y-o-y to US$6,087 million. This was primarily attributable to (i) favourable movements in the USD/UAH exchange rate, which accounted for US$1,410 million or 65% of the total decrease in the cost of sales, (ii) a reduction in the cost of raw materials (excluding changes in work in progress and finished goods) of US$454 million due to a decrease in consumption volumes (effect of US$185 million) and lower prices (effect of US$268 million), (iii) lower energy consumption (effect of US$286 million) and lower gas prices (savings of US$96 million), (iv) a drop in the cost of goods and services for resale of US$411 million, mainly goods from Zaporizhstal. These factors were partly offset by: (a) a rise in electricity tariffs (effect of US$168 million), (b) an increase in depreciation and amortisation of US$123 million as a result of a revaluation of property, plant and equipment (PPE), (c) a rise in services and other costs of US$104 million, mainly due to the high inflation in Ukraine, and (d) an increase in impairment charges of US$61 million, attributable mainly to United Coal.

As a percentage of consolidated revenues, the cost of sales increased by 11 pp y-o-y to 89% in 2015.

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 2015, distribution costs decreased by 13% y-o-y to US$920 million. The decline was primarily attributable to the positive effect of changes in the local currency exchange rate, which mainly impacted transportation costs, wages and salaries, as well as other distribution costs (US$203 million). In addition, freight costs dropped by US$79 million due to lower freight tariffs amid decreased crude oil prices. These factors were partly offset by a 30% increase in railway tariffs since 31 January 2015 (effect of US$34 million) and higher other transportation costs (effect of US$58 million).

As a share of consolidated revenues, distribution costs increased by 3 pp y-o-y to 13% in 2015. 

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 2015, general and administrative costs decreased by 26% y-o-y to US$211 million, driven by favourable movements in the USD/UAH exchange rate, which mainly impacted wages and salaries, as well as service fees (US$92 million), a decrease in depreciation and amortisation costs of US$10 million and lower rent expenses for the head office (US$3 million).

As a share of consolidated revenues, general and administrative costs remained unchanged y-o-y at 3% in 2015.

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 trade and other receivables, gains or losses on disposals of property, plant and equipment, and gains or losses on sales of inventory.

In 2015, other operating expenses amounted to US$300 million, compared with US$130 million of other operating income in 2014. This was mainly driven by an increase in impairment of trade and other receivables of US$252 million, primarily due to the recognition of US$255 million of impairment of trade receivables of some key customers in the Mining division following further delays in payments beyond the originally expected dates and certain operational and financial issues for them. In addition, operating foreign exchange gains decreased by US$267 million y-o-y, as receivables denominated in hard currency declined while such payables remained unchanged. These factors were partly compensated by a decrease in impairment of goodwill of US$28 million y-o-y to US$74 million in 2015, all of which is attributable to United Coal, and a positive forex effect on other items of US$54 million.

As a share of consolidated revenues, other operating expenses amounted to negative 4% in 2015, compared with positive 1% in 2014.

Operating profit

In 2015, the operating loss amounted to US$686 million, compared with an operating profit of US$1,105 million a year earlier. This primarily reflected a reduction in revenues of US$3,732 million y-o-y and an increase in other operating losses of US$430 million, partly compensated by a drop in the cost of sales of US$2,153 million and distribution, general and administrative costs of US$219 million y-o-y. In 2015, the operating margin was negative and amounted to 10%, compared with a positive operating margin of 10% in 2014.

EBITDA

In 2015, EBITDA dropped by US$2,189 million y-o-y to US$513 million. The contributions from the Mining and Metallurgical divisions declined by US$1,666 million and US$637 million respectively, partly offset by a fall in corporate overheads and eliminations of US$114 million.

EBITDA by division FY2015 FY2014 Change, y-o-y
US$m % of division revenues US$m % of division revenues US$m pp of division revenues
Metallurgical division 486 9% 1,123 14% -637 -5
Mining division 88 3% 1,754 43% -1,666 -40
Corporate o/hs and eliminations -61   -175   114  
Total EBITDA 513 8% 2,702 26% -2,189 -18
Total EBITDA excl. impairment of
trade and other receivables		 804 12% 2,762 26% -1,957 -14

In 2015, the y-o-y reduction in consolidated EBITDA was primarily attributable to a decrease in sales of US$3,732 million y-o-y due to a collapse in selling prices for steel, iron ore and coal products (US$2,455 million) and lower sales volumes of steel, coke and chemical products (US$1,094 million) and iron ore and coal products (US$184 million). Other key drivers of the decline in EBITDA were:

  • an increase of impairment of trade receivables of US$252 million, mainly attributable to some key customers of the Mining division;
  • a drop in the positive contribution to EBITDA of US$88 million from the JVs, due to a decrease in EBITDA of US$29 million at Zaporizhstal and US$59 million at Southern GOK [3].

These factors were partly compensated by:

  • a positive effect of the hryvnia devaluation of US$1,022 million;
  • a decrease in the cost of raw materials due to lower market prices of coal, scrap, iron ore and coke (US$268 million), as well as lower consumption (US$185 million);
  • lower spending on energy due to less consumption (US$286 million) and lower prices of natural gas (US$96 million), which were partly offset by increased electricity tariffs (US$168 million);
  • a decline in other costs of US$193 million, mainly due to a drop in the cost of goods and services for resale.

Metinvest’s consolidated EBITDA margin decreased by 18 pp y-o-y to 8% in 2015. The EBITDA margin of the Mining division dropped by 40 pp y-o-y to 3%, while that of the Metallurgical division declined by 5 pp y-o-y to 9%. 

Finance income          

Finance income comprises interest income on bank deposits and loans issued, imputed interest on other financial instruments, gains from early repayment of assets and other finance income.

In 2015, finance income totalled US$26 million, compared with US$25 million in 2014. 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, losses from the origination of financial assets and other finance costs.

In 2015, finance costs dropped by 30% y-o-y to US$635 million. This decline was mainly attributable to a decrease of US$221 million in foreign exchange losses from financing activity, which arose on intragroup loans and dividends. In addition, interest expense and imputed interest on seller notes were down by US$28 million y-o-y due to a total debt decrease of US$286 million during 2015. Interest expenses on pension obligations declined by US$21 million y-o-y as a result of the hryvnia depreciation.

As a percentage of consolidated revenues, financial costs remained unchanged y-o-y at 9% in 2015. 

Share of result of associates and joint venture

In 2015, the share of net income from associates and joint ventures decreased by 8% y-o-y to US$131 million, largely as a result of a decrease in net income at Southern GOK of US$12 million, although the Group started consolidating its results in 3Q 2014.


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 2015, the income tax expense amounted to a positive US$161 million, compared with a negative US$211 million in 2014. This was principally driven by a drop in current tax of US$170 million to US$28 million in 2015 due to lower production and profitability, as well as foreign exchange differences. In addition, deferred tax assets increased by US$202 million y-o-y to US$189 million in 2015, as the Group incurred losses in the previous reporting periods and final adjustments were made in the end of the year in line with legislation.

Net profit

In 2015, the net loss amounted to US$1,003 million, compared with net income of US$159 million in 2014, principally due to lower revenues, impairment of trade and other receivables, and lower operating foreign exchange gains. These factors were partly offset by lower cost of sales, income tax, distribution, general and administrative costs, and finance costs.

As a result, the net margin amounted to negative 15% in 2015, compared with positive 2% in 2014.