OREANDA-NEWS. November 9, 2012. Metinvest B.V., a parent company of the international vertically integrated steel and mining group of companies (jointly referred to as “Metinvest”), today announced its unaudited consolidated financial results for the first six months of 2012 ended 30 June 2012.

FINANCIAL HIGHLIGHTS

Consolidated revenues down 4% year-on-year to USD 6,743 million

Adjusted EBITDA1 down 47% year-on-year to USD 1,085 million with a margin of 16%

Operating profit down 61% year-on-year to USD 630 million

Net Profit down 71% year-on-year to USD 334 million

Total loans and borrowings of USD 3,9522 million as at 30 June 2012, comprising USD 2,777 million of long-term and USD 1,175 million of short-term borrowings

Seller’s Notes of USD 275 million as at 30 June 2012

Capital expenditure of USD 3883 million

Cash and cash equivalents of USD 713 million as at 30 June 2012

OPERATIONAL HIGHLIGHTS

Crude steel production down 8% year-on-year to 6,747 thousand tonnes

Coking coal (mined) up 11% year-on-year to 6,114 thousand tonnes

Iron ore concentrate production up 2% year-on-year to 18,217 thousand tonnes

Opening of a Metal Service Centre in Vinnytsia (Central Ukraine)

FINANCIAL MANAGEMENT HIGHLIGHTS

Secured a USD 325 million 3-year pre-export finance facility arranged by Deutsche Bank AG

Igor Syry, Chief Executive Officer of Metinvest, commented: “In the first six months of 2012, steel demand and selling prices were affected by the volatile economic situation. As the industry was not immune to this trend, our financial numbers experienced a decline year-on-year. Revenues for the reporting period amounted to USD 6,743 million, operating profit reached USD 630 million, and net profit totalled USD 334 million. At the same time, our operating results were driven by an increase in output of key raw materials. While our crude steel production reached 6,747 thousand tonnes, declining 8% year-on-year, production of iron ore concentrate amounted to 18,217 thousand tonnes, representing 2% growth year-on-year, and production of coking coal amounted to 6,114 thousand tonnes, growing by 11% year-on-year due to an increase in coking coal output at our operations in the US.

In line with our strategic goal of boosting the Group’s steel production capacity and increasing the production of high value-added products, after the end of the reporting period, jointly with a group of investors, we consolidated a more than 50% interest in Zaporizhia Iron and Steel Works4, one of Ukraine’s major steel producers.

In the first half of 2012, we approved and proceeded with our revised long-term Technological Strategy for 2012-2022 that includes strategic as well as maintenance and overhaul projects and an environmental programme. Within the strategy’s framework, we plan to close open-hearth furnaces. We also envisage casting 100% steel using continuous casting machines, and upgrading Metinvest’s steel rolling facilities in order to increase capacities. These measures will secure Metinvest’s position in our target markets of long and flat products. The strategy provides for a flexible project schedule based on our Group’s needs and availability of funding. We will give priority to initiatives with the shortest payback period, and will finance subsequent projects partially from the return generated by completed projects. In the short term, we are planning to focus on the implementation of measures that will ensure higher quality of products, provide for cost reduction and enhance our operational efficiency.

Due to unfavourable market conditions, we revised down our capital expenditure for the first half of 2012 to USD 388 million. With this adjusted CAPEX budget, we continued to implement technological upgrades across the business. During the reporting period, we focused on a number of ongoing projects. At Ilyich Steel, we completed the major overhaul of Blast furnace No. 2, launched a new turbine air blower at Blast furnace No.3, and finished the construction of the pulverised coal injection (“PCI”) unit. The PCI unit will enable us to significantly reduce the use of natural gas and coke in the blast furnace shops. In addition, we undertook cold and hot testing of an accelerated cooling system at Azovstal’s plate milI and further increased capacity at United Coal’s Affinity mining complex. In the second half of 2012, we started the construction of a PCI unit at Yenakiieve Steel and will carry out hot testing of the PCI unit at Ilyich Steel in the 4th quarter of 2012.

With regard to the markets, Ukraine, Europe, the Middle East and North Africa, and the CIS remained our key regions for steel products. In the first half of 2012, the share of sales to European customers decreased by 13 percentage points to 27% on the backdrop of worsening market conditions, while the share of sales in Ukraine grew by 7 percentage points to 25% due to the number of construction and infrastructure projects in preparation for the 2012 UEFA European Football Championship.

We have also continued to expand our distribution network. To that end, in May, we opened a Metal Service Centre in Vinnytsia in Central Ukraine to better address the needs of our end clients in the region. In August 2012, our wholesale and retail channel Metinvest Eurasia acquired an 85.21% stake in CJSC ‘Belgorodmetallosnab’ as part of our strategic view to expand our distribution network in target regions of Russia. The acquired assets service customers in Central and Northwestern Federal Districts of the country.

Overall, we anticipate that the rest of 2012 will continue to remain challenging for our business and the sector as a whole. Therefore, we will focus our efforts on improving cost-efficiency and profitability across the business, which should allow us to maintain our stable financial position in the volatile market environment.”

Sergiy Novikov, Chief Financial Officer of Metinvest, commented: “Positive trends in the steel markets changed at the end of 2011, leading to a fall in prices. Whilst the price of iron ore products remained relatively stable throughout the first six months of the year, the downward trend in steel prices continued during the reporting period.

The deterioration in the global steel markets resulted in squeezing margins on steel and iron ore products which affected our profitability. Our EBITDA amounted to USD 1,085 million for the first six months of the year, and we reported an EBITDA margin of 16%. At the same time, our cash and cash equivalents stayed largely unchanged at the level of USD 713 million as at 30 June 2012.

Despite the slowdown in steel markets, we were able to secure a USD 325 million 3-year pre-export finance facility in May of this year, reaffirming the banking sector’s positive view of our Company and its development strategy.

Metinvest sees potential challenges ahead as a result of the persistent slowdown in the growth of global economies which affects steel consumption and puts pressure on pricing. We continue to monitor the situation in global markets and will be adjusting our operational and financial targets in line with the changing conditions.

Starting from January 2012, we have reported on two segments: Metallurgical and Mining in line with our new operational model approved in 2011”.

GROUP FINANCIAL REVIEW (USD million)

1H 2012

1H 2011

% change

Sales (total)

6,743

6,991

-4%

Metallurgical

4,987

5,283

-6%

Mining

2,916

3,213

-9%

Eliminations (intersegment sales)

-1,160

-1,505

-23%

Sales (external)

6,743

6,991

-4%

Metallurgical

4,949

5,240

-6%

Mining

1,794

1,751

+2%

Sales (intersegment)

1,160

1,505

-23%

Metallurgical

38

43

-12%

Mining

1,122

1,462

-23%

EBITDA

1,085

2,045

-47%

Metallurgical

-205

337

-161%

Mining

1,350

1,856

-27%

Eliminations and corp. overheads

-60

-148

-59%

EBITDA margin

16%

29%

-13pp

Metallurgical

-4%

6%

-10pp

Mining

46%

58%

-12pp

Revenue

In the first half of 2012, Metinvest's consolidated revenues amounted to USD 6,743 million, representing a decrease of 4% compared with USD 6,991 million in the first half of last year. The decrease in consolidated revenues was a result of a 6% decline in revenues of the Metallurgical division and a 2% increase in revenues of the Mining division. The Metallurgical division accounted for 73% of external sales (compared with 75% in the first half of 2011), while the Mining division accounted for 27% (compared with 25% in the first half of 2011).

In the Metallurgical division, revenues from sales of semi-finished products decreased by 29% compared to the same period last year. In particular, slab sales decreased by 51% (USD 404 million), of which 44% constituted a decline in sales volumes due to weak demand for slabs and 7% constituted a drop in average slab prices. At the same time, square billet and pig iron sales increased by USD 75 million and USD 31 million respectively, mainly due to increased sales volumes on the backdrop of declining prices.

Revenues from sales of finished products decreased by 7% year-on-year to USD 3,667 million mainly due to a 15% (USD 404 million) decrease in revenues from sales of flat products, of which 9% was attributable to falling prices and 6% to a decrease in sales volumes. Unlike flat products, revenues from long, tubular and railway products increased year-on-year by 6%, 2% and 67% respectively. The rise in revenues from long and tubular products was supported by an increase in sales volumes in light of falling prices. Sales of railway products grew by 67%, of which 49% represented an increase in sales volumes and 18% - an increase in price. The primary reason for a significant rise in sales volumes was the growing demand for railway products from some CIS countries (Uzbekistan, Kazakhstan) and Georgia. Sales of other steel products and of coke products also rose by USD 233 million and USD 49 million respectively. The increase in sales of other steel products was mainly a result of increased volumes of steel products for resale (up by 489 thousand tonnes) during the reporting period.

Europe, Ukraine, the CIS, and the Middle East and North Africa remained the primary markets for the Group’s steel products, accounting for 27%, 25%, 21% and 16% of revenue respectively. While the share of sales to European customers decreased by 13 percentage points to 27% on the backdrop of worsening market conditions, the share of sales in Ukraine grew by 7 percentage points to 25% due to the number of construction and infrastructure projects in preparation for the 2012 UEFA European Football Championship. At the same time the share of sales to the Middle East & North Africa region increased by 6 percentage points primarily due to an increase in demand for long products.

Despite a 9% rise in sales volumes, revenues from sales of iron ore products decreased marginally year-on-year by 2% to USD 1,331 million due to a drop in price in the first half of 2012. In particular, sales volumes of pellets increased by 830 thousand tonnes (+29%) as a result of sales redistribution to external customers due to a reduction in internal consumption of pellets. Although sales volumes of iron ore concentrate remained almost stable year-on-year, a considerable decline in prices of 17% resulted in 16% lower sales revenues in the first half of 2012.

In the first half of 2012, revenues from sales of coal products increased year-on-year by 18% to USD 463 million. While higher prices of coking coal concentrate (+20%) drove sales growth in the segment, sales volumes of steam coal concentrate declined by 379 thousand tonnes due to lower production levels at the operations in the US.

In the first half of 2012, the primary markets for the Group’s mining products remained unchanged compared to the first half of last year. The Ukrainian and Southeast Asian markets accounted for 53% and 23% of segment sales, adding 901 thousand tonnes and 514 thousand tonnes of mining products year-on-year respectively. The sales share to Europe’s market marginally decreased due to a slowdown in steel production at European steel assets, and comprised 13% of segment sales in the first half of 2012. Although the share of coal concentrate sales to North America remained stable, representing 8% of segment sales revenues, sales volumes of coal products decreased by 464 thousand tonnes primarily due to lower production of steam coal concentrate at United Coal’s mines.

Cost of sales

In the first half of 2012, cost of sales amounted to USD 5,258 million, 14% higher than USD 4,618 million in the first half of 2011. At the same time, cost of sales as a share of consolidated revenues increased from 66% in the first half of 2011 to 78% in the first half of 2012. The increase in the cost of sales was primarily due to an increase in the electricity tariffs by approximately 20% and natural gas by 44% at the Group’s Ukrainian assets. High volumes of goods for resale also contributed to the increase in the cost of sales.

Distribution, general and administrative expenses

Distribution costs consisted largely of transportation costs, salaries paid to sales and distribution employees, commissions and cost of materials. These costs rose by 27% to USD 589 million, compared to USD 464 million in the first half of 2011, mainly due to an almost 50% year-on-year increase in railway tariffs in Ukraine.

General and administrative expenses consist largely of salaries paid to administrative employees; consultancy providers, auditors, legal and banking services expenses; insurance costs and lease payments. General and administrative expenses remained unchanged year-on-year and amounted to USD 195 million, representing 3% of consolidated revenues.

Other operating expenses

Other operating expenses consisted primarily of bad debt expenses, foreign exchange gains less losses, sponsorship and other charity payments, and maintenance of social infrastructure.

These expenses saw a decrease of 28% to USD 71 million, compared with USD 98 million in the first half of 2011.

EBITDA

Metinvest’s consolidated adjusted EBITDA amounted to USD 1,085 million in the first half of 2012, representing a decrease of 47% compared to USD 2,045 million in the first half of 2011, with the EBITDA margin contracting from 29% to 16% year-on-year due to a deterioration on the global steel markets which resulted in squeezing margins on steel products. The Mining division generated a 46% margin, while the Metallurgical division generated a negative margin of 4% in the first half of 2012.

Finance income

Metinvest's finance income represents interest and other income. Finance income amounted to USD 37 million or 0.5% of consolidated revenues in the first half of 2012.

Finance costs

Metinvest's finance costs include foreign exchange losses attributable to financial activities, interest expenses on bank borrowings and debt securities, seller’s notes expenses and other finance costs. These costs marginally decreased by 2% to USD 175 million in the first half of 2012 from USD 178 million in the corresponding period of last year.

The share of finance costs in consolidated revenues remained unchanged year-on-year at 3%.

Income tax expense

In the first half of 2012, Metinvest’s income tax expenditure decreased year-on-year by 56% to USD 149 million due to a 67% decrease in profit before tax in 1H 2012. However, the effective tax rate increased by 8 percentage points to 31% as a result of increased losses carried forward at the rate of 16% by metallurgical plants.

Net profit

Metinvest delivered a bottom line of USD 334 million in the first half of 2012, representing a year-on-year decrease of 71%. This resulted in a net margin of 5%.

Consolidated cash flow

Cash generated from operations decreased by 44% to USD 914 million in the first half of 2012 against USD 1,641 million in the corresponding period of 2011. Net cash from operating activities amounted to USD 360 million in the reporting period against USD 1,150 million in the first half of 2011, representing a decrease of 69%.

Net cash used in investing activities decreased by 10% to USD 440 million, against USD 491 million in the first half of 2011. This result was primarily attributable to a decrease in capital expenditures by USD 164 million and a prepayment issued for the interest in Industrial Group in the amount of USD 212 million in 1H 2012.

Liquidity and capital resources

The Company seeks to maintain an optimal capital structure in order to reduce the cost of financing, thereby ensuring its long-term stability and ability to deliver returns to shareholders.

Metinvest’s cash balance stood at USD 713 million as at 30 June 2012, compared with USD 724 million as at 30 June 2011. Proceeds5 from the bank loans and bonds issued decreased by 55% to USD 410 million during the reporting period, compared to USD 912 million in the first six months of 2011. The Company drew down a USD 85 million revolver loan arranged by ING bank in April and secured a USD 325 million 3-year PXF facility arranged by Deutsche Bank AG. Repayments of bank loans, bonds and seller’s notes totalled USD 250 million against USD 489 million in the first half of 2011.

Net debt (loans, borrowings and seller’s notes less cash and cash equivalents) stood at USD 3,514 million as at 30 June 2012 compared to USD 3,189 million as at 31 December 2011.

Metinvest’s credit is rated by two international ratings agencies, Fitch (‘B’) and Moody’s (‘B2’), and its ratings are currently capped by Ukraine’s sovereign rating.

Capital expenditure

Metinvest’s capital expenditure6 decreased by 31% from USD 559 million in the first half of 2011 to USD 388 million in the first six months of 2012. The Metallurgical division accounted for 35% of total capital expenditure, while the Mining division accounted for 65%.

In the first half of 2012, the Company carried out a number of projects as part of its Technological Strategy:

During the reporting period, the Company finished a major overhaul of Blast furnace No. 2 and completed the installation of the pulverised coal injection (PCI) unit at Ilyich Steel. Also, a new turbine air blower has been blasting steam into Blast furnace No. 3 since May 2012, leading to a reduction in production costs.

Cold and hot testing of an accelerated cooling system at Azovstal’s plate mill was finished. The accelerated cooling system has allowed the Company to reduce the costs of the current product range. The improved technology will enable Metinvest to produce strip of X80 grade and above in the future.

United Coal’s Affinity mining complex has continued to increase its capacity in the first half of 2012. Three new sections have been launched and, at present, Affinity operates at 70% capacity.

The construction of a PCI plant began at Yenakiieve Steel in July 2012. In addition, hot testing of Ilyich Steel’s PCI plant will take place in the 4th quarter of 2012.

Significant events after the end of the Reporting Period

In July 2012, Metinvest B.V. fully repaid a 5-year USD 1.5 billion Global Refinance Facility which was arranged by a syndicate of 16 banks in July 2007

In July 2012, Metinvest B.V. exercised an option to acquire the remaining 50% interest in the Industrial Group’s mining and steel business and, jointly with a group of investors, became owner of a 50.0032% stake in Zaporizhia Iron and Steel Works (Metinvest owns 49.0032%, and the group of investors owns 1%)

In August 2012, Metinvest Eurasia LLC, the wholesale and retail sales channel of Metinvest Group in the Russian Federation, acquired an 85.2% stake in CJSC ‘Belgorodmetallosnab’, a warehouse complex and steel product trans-shipping centre in Belgorod (Russia)

In September 2012, Metinvest B.V. secured a ˆ25 million ten-year buyer credit facility covered by Euler Hermes Deutschland AG, the German export credit insurance agency, to finance the construction of a pulverised coal injection unit at Yenakiieve Steel

APPENDIX 1
SALES BY PRODUCTS7

USD million

000 t

METALLURGICAL DIVISION

1H 2012

1H 2011

% change

1H 2012

1H 2011

% change

Semi-finished products

734

1,032

-29%

1,292

1,616

-20%

Pig iron

108

77

40%

236

150

57%

Slabs

390

794

-51%

671

1,209

-44%

Square billets

236

161

47%

385

257

50%

Finished products

3,667

3,942

-7%

4,888

4,901

0%

Flat products

2,211

2,615

-15%

3,132

3,319

-6%

Long products

918

864

6%

1,275

1,164

10%

Tubular products

373

364

2%

322

311

4%

Railway products

165

99

67%

159

107

49%

Other steel products & services

375

142

164%

571

82

596%

Coke products

173

124

40%

187

84

123%

TOTAL

4,949

5,240

-6%

6,938

6,683

4%

MINING DIVISION

1H 2012

1H 2011

% change

1H 2012

1H 2011

% change

Iron ore

1,331

1,357

-2%

13,047

11,946

9%

Iron ore concentrate

735

878

-16%

6,409

6,360

1%

Pellets

550

433

27%

3,734

2,904

29%

Other products & services

46

46

0%

2,904

2,682

8%

Coal

463

394

18%

2,414

2,475

-2%

Coking coal concentrate

253

205

23%

1,183

1,151

3%

Steam coal concentrate

36

54

-33%

352

731

-52%

Other products & services

174

135

29%

879

593

48%

TOTAL

1,794

1,751

2%

15,461

14,421

7%

APPENDIX 2
SALES BY PRODUCTS

(in USD million)

METALLURGICAL DIVISION

1H 2012

% of total

1H 2011

% of total

pp change

Semi-finished products

734

15%

1,032

20%

-5pp

Pig iron

108

2%

77

1%

1pp

Slabs

390

8%

794

15%

-7pp

Square billets

236

5%

161

3%

2pp

Finished products

3,667

74%

3,942

75%

-1pp

Flat products

2,211

45%

2,615

50%

-5pp

Long products

918

19%

864

16%

3pp

Tubular products

373

8%

364

7%

1pp

Railway products

165

3%

99

2%

1pp

Other steel products & services

375

8%

142

3%

5pp

Coke products

173

3%

124

2%

1pp

TOTAL

4,949

100%

5,240

100%

n/a

MINING DIVISION

1H 2012

% of total

1H 2011

% of total

pp change

Iron ore

1,331

74%

1,357

77%

-3pp

Iron ore concentrate

735

41%

878

50%

-9pp

Pellets

550

31%

433

25%

6pp

Other products & services

46

3%

46

3%

0pp

Coal

463

26%

394

23%

3pp

Coking coal concentrate

253

14%

205

12%

2pp

Steam coal concentrate

36

2%

54

3%

-1pp

Other products & services

174

10%

135

8%

2pp

TOTAL

1,794

100%

1,751

100%

n/a

APPENDIX 3
SALES BY REGION

USD million

000 t

METALLURGICAL DIVISION

1H 2012

1H 2011

% change

1H 2012

1H 2011

% change

Ukraine

1,219

945

29%

1,656

1,057

57%

Europe

1,317

2,093

-37%

1,893

2,761

-31%

Middle East & North Africa

800

518

54%

1,272

795

60%

CIS (except Ukraine)

1,031

981

5%

1,185

1,070

11%

South East Asia

459

630

-27%

729

904

-19%

Other regions

123

73

68%

203

96

111%

TOTAL

4,949

5,240

-6%

6,938

6,683

4%

MINING DIVISION

1H 2012

1H 2011

% change

1H 2012

1H 2011

% change

Ukraine

956

944

1%

9,520

8,619

10%

Europe

239

255

-6%

1,865

1,840

1%

South East Asia

420

366

15%

2,862

2,348

22%

North America

145

162

-10%

892

1,356

-34%

Other regions

34

24

42%

322

258

25%

TOTAL

1,794

1,751

2%

15,461

14,421

7%

(in USD million)

METALLURGICAL DIVISION

1H 2012

% of total

1H 2011

% of total

pp change

Ukraine

1,219

25%

945

18%

7pp

Europe

1,317

27%

2,093

40%

-13pp

Middle East & North Africa

800

16%

518

10%

6pp

CIS (except Ukraine)

1,031

21%

981

19%

2pp

South East Asia

459

9%

630

12%

-3pp

Other regions

123

2%

73

1%

1pp

TOTAL

4,949

100%

5,240

100%

n/a

MINING DIVISION

1H 2012

% of total

1H 2011

% of total

pp change

Ukraine

956

53%

944

54%

-1pp

Europe

239

13%

255

15%

-2pp

South East Asia

420

23%

366

21%

2pp

North America

145

8%

162

9%

-1pp

Other regions

34

2%

24

1%

1pp

TOTAL

1,794

100%

1,751

100%

n/a

1 - Adjusted EBITDA is calculated as profits before income tax, financial income and costs, depreciation and amortization, impairment and devaluation of property, plant and equipment, sponsorship and other charity payments, share of results of associates and other non-core expenses. We will refer to Adjusted EBITDA as EBITDA throughout this release.

2 - Includes bank borrowings, bonds and trade finance.

3 - Includes USD 5 million corporate overheads.

4 - In July 2011, Metinvest jointly with a group of investors acquired a 50% interest in the Industrial Group’s steel and mining business. On 30 July 2012, Metinvest acquired the remaining 50% interest in the Industrial Group’s mining and steel business and jointly with a group of investors became owner of 50.0032% of Zaporizhia Iron and Steel Works shares (Metinvest owns 49.0032%, and the group of investors owns 1%).

5 - Includes bank borrowings, bonds but excludes trade finance facilities.

6 - Includes Corporate overheads

7 - External sales exclude intra-group sales

Flat products include hot rolled quarto plates and hot rolled heavy plates, hot rolled, cold rolled and hot-dip galvanized sheets and coils

Long products include hot rolled sections (light, medium, heavy), rebars, merchant bars and wire rods

Tubular products include LSAW (longitudinal submerged arc welded) large diameter pipes and ERW (electric resistance welded) pipes and seamless pipes

Railway products include light and heavy rails, rail fasteners

Other steel products include volumes of steel products for resale

Coke products include coke, coke breeze, coke nut and chemical products