Metinvest announces financial results for the first six months of 2015

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 unaudited IFRS interim condensed consolidated financial statements for the six months ended 30 June 2015.

Summary - financial results	1H 2015	1H 2014	Change, y-o-y
			US$m	%
Income statement highlights
Revenues	3 650	6 023	-2 373	-39%
Adjusted EBITDA1	620	1 666	-1 046	-63%
Margin	17%	28%		-11 pp
Net profit	-166	653	-819	-125%
Margin	-5%	11%		-16 pp
Cash flow highlights
Net cash from operations	351	766	-415	-54%
Net cash used in investing activities	-94	-280	186	-66%
incl. purchase of PPE and intangible assets	-113	-279	166	-59%
Net cash used in financing activities	-209	-710	501	-71%
incl. dividends	0	-253	253	N/A
Summary - financial results	30.06.2015	31.12.2014	Change, YTD
			US$m	%
Total debt	3 070	3 232	-162	-5%
Cash	151	114	37	32%
Key ratios
Total debt/EBITDA2	1,9	1,2		0,7x
Net debt3/EBITDA2	1,8	1,2		0,6x
EBITDA/Interest expense	6,3	11,4		-5,1x
Total debt/Equity	0,5	0,5

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).  EBITDA for the last 12 months

3). Net debt is calculated as the sum of long-term and short-term loans and borrowings and seller notes less cash and cash equivalents.

4). 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 2015	1H 2014	Change, y-o-y
			000 t	%
Crude steel	3 875	5 725	-1 850	-32%
Azovstal	1 688	2 040	-352	-17%
Ilyich Steel	1 362	2 209	-847	-38%
Yenakiieve Steel	825	1 476	-651	-44%
Iron ore concentrate	15 806	18 011	-2 205	-12%
Northern GOK	6 317	7 075	-758	-11%
Ingulets GOK	6 366	7 707	-1 341	-17%
Central GOK	3 123	3 229	-106	-3%
Coking coal concentrate	1 638	2 362	-724	-31%
Krasnodon Coal	121	1 175	-1 054	-90%
United Coal	1 517	1 187	330	28%

 

OPERATIONAL HIGHLIGHTS

• In 1H 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 installed a new state-of-the-art gas cleaning system as part of the modernisation of blast furnace no. 4. The new equipment is expected to cut dust emissions by 20%.
• Metinvest opened a new retail warehouse for steel products in Dnipropetrovsk and representative sales offices in Spain and Poland.
• The Group launched 10 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 renegotiated to move repayment of the remaining US$90 million of seller notes from 2015 to 2016.
• In February, Metinvest obtained a waiver from the 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 June, as part of a consent solicitation process, Metinvest extended the maturity of its 2015 guaranteed notes from 20 May 2015 to 31 January 2016 in exchange for redeeming 25% of the nominal in July 2015. In addition, holders of 2015, 2017 and 2018 notes agreed to waive certain existing and related future event of defaults until 31 January 2016, allowing time for restructuring negotiations.
• Global debt restructuring discussions are ongoing.

CORPORATE STRUCTURE

• As of 30 June 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 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 receipt of respective governmental approvals if such will be necessary), and in such manner that the ultimate interest of SCM in the Company shall be 75% minus 1 share, and the ultimate interest of SMART in the Company shall be 25% plus 1 share.

EVENTS AFTER THE REPORTING PERIOD

• In July, as part of the abovementioned consent solicitation process, US$28.4 million of the 2015 guaranteed notes were repaid to noteholders.
• In August, Metinvest completed the final drawdown under the ECA facility for the construction of a pulverised coal injection (PCI) unit at Yenakiieve Steel.
• In August, disruptions to Metinvest’s operations in Ukraine continued amid the conflict in the east of the country. Avdiivka Coke was hit several times by intensive artillery shelling.

 

Commenting on the results, Yuriy Ryzhenkov, Chief Executive Officer of Metinvest, said: “As expected, the challenges facing our business remained considerable in the first half of 2015. We continued to experience significant disruptions due to the conflict in Eastern Ukraine, where many of our assets are based, while the collapse of global raw material and steel prices continue to impact our margins.

In general, all of our facilities located in or nearby the conflict zone saw material year-on-year production declines due to direct damage in some instances, as well as disruptions to raw material supplies, transport infrastructure and power and water utilities.

Yenakiieve Steel had to suspend its operations in February and March. Ilyich Steel and Azovstal were further affected by damage to a key gas pipeline in June. Khartsyzk Pipe has been idle since June due to limited supplies of coating materials for pipes and shipments of finished goods. In August, after the reporting period, Avdiivka Coke’s power supply was interrupted once again by heavy shelling. Our employees worked with experts from the power company DTEK to repair damaged high-voltage lines.

Overall output of crude steel fell by 32% year-on-year to 3.9 million tonnes, iron ore concentrate by 12% to 15.8 million tonnes, and coking coal concentrate by 31% to 1.6 million tonnes.

In many cases, our plants are the key employers and economic anchors in the local communities where we operate. Metinvest takes its role as a corporate citizen of Ukraine very seriously, and equally takes responsibility for these communities. We have reacted to the economic and political uncertainty promptly and effectively, particularly the conflict in Eastern Ukraine, through increased financial support in cooperation with the Rinat Akhmetov Humanitarian Centre and personal commitment by thousands of our employees.

Alongside the conflict and the heightened country risk that has effectively closed international capital markets to Ukrainian companies, including Metinvest, prices on global markets are affecting our business results. Raw material prices remain depressed due to persisting oversupply worldwide and the pursuit of a ‘volume over price’ strategy by the largest global producers of iron ore. The benchmark iron ore price[1] decreased by 46% year-on-year in the first half of 2015, reaching a spot market historic low of US$45/tonne in July.

While prices for steel products remained more resilient than raw material prices, they also continued to decline. This was primarily due to increased international competition from Chinese steel exporters, as steel demand in China proved lower than expected due to slowing domestic economic growth. The average benchmark price for hot-rolled coil[2] decreased by 27% year-on-year in the first half of 2015.

The combination of lower production volumes at our assets, logistical bottlenecks to ship raw materials to and finished goods from Eastern Ukraine, and sharply lower product prices continued to have a significant impact on financial results, hitting revenues and profitability. Compared with the same period last year, revenues dropped by 39% to US$3,650 million, EBITDA by 63% to US$620 million and the EBITDA margin by 11 percentage points to 17%. We recorded a net loss of US$166 million.

We sought to reduce the negative impact on our sales by increasing sales volumes of raw materials, mainly to Europe and China. We also adjusted the geography of our steel product sales to compensate for weak demand in the Ukrainian market by redirecting volumes to Europe, increasing the share of sales in Europe by 9 percentage points year-on-year to 41% of total sales. Our robust global sales network remains vital for supporting our business. We continue to prioritise a client-oriented approach and are launching new products and services.

Despite the operational issues, we continued to implement our long-term Technological Strategy, demonstrating our confidence in the long-term future of our business and country. Given the tight liquidity situation and conflict in the region, we have focused our investments on high-priority maintenance projects, which accounted for 80% of total CAPEX projects during the reporting period, as well as expansion projects capable of delivering a rapid return on investments. Some projects remain delayed or frozen. As a result, we reduced capital expenditure by 57% year-on-year to US$117 million in the first half of 2015.

Major CAPEX projects in the Metallurgical division include the major overhaul of blast furnace no. 4 at Azovstal, completed in September, and the replacement of turbine air blower no. 3. We further advanced the project to build a PCI unit at Yenakiieve Steel. In addition, we made progress on another continuing major project, the refurbishment of the sinter plant at Ilyich Steel, which is expected to significantly reduce our environmental footprint.

In the Mining division, we continued to install a crusher and conveyor system at Northern GOK. We are also building a crusher and conveyor system at Ingulets GOK on one line.

The current outlook remains deeply uncertain due to the sustained political and economic instability and security situation in Ukraine, as well as the volatility of global prices for raw materials and steel.

Against this backdrop, the successful outcome of the debt restructuring process launched with our creditors in early 2015 is critical to the survival of the Group. We remain committed to transparent and open dialogue with our creditors, and I would like to thank them for their continued loyalty and confidence in Metinvest.

We also acknowledge the tremendous ongoing efforts of our employees, management and partners, and would like to thank them for addressing all issues promptly and finding appropriate solutions in difficult situations.”

Commenting on the results, Aleksey Kutepov, Chief Financial Officer of Metinvest, said: “The year-on-year results in the first half of 2015 clearly reflect the continued impact of the conflict in Eastern Ukraine, exacerbated by falling global prices for our products. The negative effect of lower sales volumes on EBITDA totalled US$1,222 million, while the decline in prices reduced it by US$1,151 million.

At the same time, cost of sales decreased by US$1,272 million year-on-year. In particular, following lower consumption and prices, we saved US$484 million on lower costs of raw materials and US$110 million on lower spending on natural gas. Distribution and general and administrative costs declined by US$145 million year-on-year. In the first quarter of the year, a positive financial effect came from the further devaluation of the hryvnia, which stabilised in the second quarter.

The comparatively faster decline in prices of raw materials has continued to shift margins from the Mining to the Metallurgical division. The Mining division’s EBITDA margin dropped by 39 percentage points year-on-year to 15%, while the EBITDA margin of the Metallurgical division increased by 2 percentage points to 15%.

Total debt was down by US$162 million year-to-date, mainly due to the repayment of PXF facilities in January and February and trade finance during the first half of 2015.

The cash balance stood at US$151 million at the end of the reporting period. We consider this to be inadequate in the ordinary course of our business and continue to review all of our options to restore it given our limited recourse to external funding for the foreseeable future.

At the beginning of the year, Metinvest launched global debt restructuring discussions with PXF lenders and holders of 2015, 2017 and 2018 notes, continuing to service interest and coupon payments under its bank loans and notes.

A coordinating committee of PXF lenders was formed in May 2015 and Metinvest recently agreed a standstill with PXF lenders until the end of January 2016. As part of a consent solicitation process, Metinvest obtained noteholders consent to waive certain events of default under each series of notes until the end of January 2016, as well as to extend maturity of 2015 notes to 31 January 2016. In August, an ad hoc committee of noteholders was formed. Both PXF lenders’ standstill and noteholders’ waivers and maturity extension have created a stable platform for negotiating a deal fair to all parties over the coming months.

As restructuring discussions continue, we fully appreciate creditors’ confidence in us as a strong market player and intend to submit a restructuring proposal to our PXF lenders and noteholders in the near future.”

 

RESULTS OF OPERATIONS

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	1H 2015		1H 2014		Change, y-o-y
	US$m	% of revenues	US$m	% of revenues	US$m	%	pp of revenues
Total revenues	3 650	100%	6 023	100%	-2 373	-39%	0
Ukraine	741	20%	1 455	24%	-714	-49%	-4
Europe	1 256	34%	1 628	27%	-372	-23%	7
MENA	725	20%	1 163	19%	-438	-38%	1
CIS (ex Ukraine)	281	8%	544	9%	-263	-48%	-1
incl. Russia	189	5%	380	6%	-192	-50%	-1
Southeast Asia	527	14%	933	15%	-407	-44%	-1
North America	89	2%	212	4%	-124	-58%	-1
Other regions	32	1%	88	1%	-55	-63%	-1

In 1H 2015, Metinvest's consolidated revenues fell by US$2,373 million y-o-y to US$3,650 million. Revenues from the Metallurgical division declined by US$1,849 million, while those from the Mining division dropped by US$524 million, mainly due to overall lower production of steel products amid the conflict in Eastern Ukraine and a collapse in global prices of steel and iron ore products. The shares of the Metallurgical and Mining divisions in external sales remained unchanged y-o-y, at 78% and 22% respectively.

In 1H 2015, the Group’s revenues in Ukraine almost halved y-o-y to US$741 million. This was mainly due to a drop in sales volumes of steel and iron ore products amid lower demand in major steel consuming sectors (construction, machine-building and pipeline infrastructure) as a result of the conflict in Eastern Ukraine and overall economic slowdown in the country. Steel production in Ukraine decreased by 27% y-o-y to 11.3 million tonnes in 1H 2015 [3], as logistical constraints forced local steelmakers to scale back production, the Ukrainian steel market remained weak, and demand for Ukrainian steel products declined in Russia. In addition, consumption of steel products (excluding pipes) in Ukraine decreased by 36% y-o-y to 1.9 million tonnes³. The main factor was a decline in construction activity, which fell by 28% y-o-y [4]. The pipe and hardware industries reduced production by 42% y-o-y³ and 26% y-o-y³ respectively. Manufacturing output declined by 24% y-o-y⁴. Regarding iron ore products, sales in Ukraine slumped, as a couple of Metinvest’s key customers in the country decreased production dramatically following the escalation of the conflict in 2H 2014. As a result, the share of sales in Ukraine decreased by 4 percentage points (pp) y-o-y to 20% of consolidated revenues.

The share of international sales increased by 4 pp y-o-y to 80% in 1H 2015. Europe’s share rose by 7 pp y-o-y to 34%, as sales volumes of flat products, pig iron and iron ore products increased to the region. The proportion of sales to other regions did not change significantly y-o-y.

Metallurgical division

The Metallurgical division generates revenues from sales of pig iron, steel and coke products and services. In 1H 2015, its revenues decreased by US$1,849 million y-o-y to US$2,839 million. This was attributable to lower sales of all steel products: flat (US$768 million), long (US$455 million), semi-finished (US$437 million), and tubular (US$55 million) products. In addition, sales of coke and chemical products decreased by US$72 million.

Metallurgical division Sales by market	1H 2015			1H 2014			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	2 839	100%	6 307	4 688	100%	8 546	-1 849	-2 239	-39%	-26%
Ukraine	512	18%	1 230	850	18%	1 807	-338	-576	-40%	-32%
Europe	1 168	41%	2 487	1 519	32%	2 536	-351	-48	-23%	-2%
MENA	704	25%	1 668	1 163	25%	2 180	-458	-512	-39%	-23%
CIS (ex Ukraine)	281	10%	499	544	12%	821	-263	-322	-48%	-39%
incl. Russia	189	7%	370	380	8%	630	-192	-260	-50%	-41%
Southeast Asia	111	4%	252	375	8%	684	-264	-432	-70%	-63%
North America	31	1%	98	157	3%	381	-126	-284	-80%	-74%
Other regions	32	1%	72	80	2%	136	-47	-64	-59%	-47%

Metallurgical division Sales by product	1H 2015		1H 2014		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	446	1 260	883	1 845	-437	-585	-50%	-18%	-32%
Pig iron	170	569	290	714	-119	-145	-41%	-21%	-20%
Slabs	144	363	299	564	-155	-202	-52%	-16%	-36%
Square billets	131	328	294	567	-163	-238	-55%	-13%	-42%
Finished products	2 094	4 227	3 371	5 483	-1 278	-1 256	-38%	-15%	-23%
Flat products	1 730	3 550	2 498	4 162	-768	-612	-31%	-16%	-15%
incl. Zaporizhstal	623	1 389	816	1 455	-193	-65	-24%	-19%	-4%
Long products	301	612	756	1 203	-455	-591	-60%	-11%	-49%
Tubular products	63	65	118	117	-55	-53	-47%	-2%	-45%
Coke and chemical products	183	820	255	1 217	-72	-398	-28%	5%	-33%
Coke products	145	676	144	918	1	-242	1%	27%	-26%
Chemical products	38	144	111	300	-73	-156	-65%	-14%	-52%
Other products and services	116	N/A	178	N/A	-62	N/A	-35%	N/A	N/A
Total sales	2 839	6 307	4 688	8 546	-1 849	-2 239	-39%	-13%	-26%

Pig iron 

In 1H 2015, sales of pig iron decreased by 41% y-o-y to US$170 million, of which 21 pp was attributable to a lower average selling price and 20 pp to a slump in sales volumes. Given the unfavourable market prices and a 39% decline in pig iron production, sales volumes fell by 20% y-o-y to 569 thousand tonnes in 1H 2015. This includes re-sales of 125 thousand tonnes of Zaporizhstal’s pig iron. Since market prices were low in the US in 1H 2015, sales volumes were redirected to other higher-margin markets in Europe, the Middle East and North Africa (MENA) and other regions. One new market for the Group was Mexico, where prices were higher than in the US.

Slabs 

In 1H 2015, sales of slabs slumped by 52% y-o-y to US$144 million, driven by a decrease in sales volumes (36 pp) and a lower average selling price (16 pp). Sales volumes of slabs fell by 202 thousand tonnes y-o-y to 363 thousand tonnes due to lower overall production. This resulted in lower sales volumes to Europe and Southeast Asia. Meanwhile, sales volumes to MENA (mainly Turkey) rose by 44 thousand tonnes, increasing the region’s share by 19 pp y-o-y to 36% of total slab sales. The decline in the average selling price followed the benchmark for slabs FOB Black Sea, which dropped by 36% y-o-y.

Square billets

In 1H 2015, sales of square billets decreased by 55% y-o-y to US$131 million, of which 42 pp was attributable to a decrease in sales volumes and 13 pp to a drop in the average selling price. Sales volumes of square billets decreased by 238 thousand tonnes y-o-y to 328 thousand tonnes, mainly due to lower production amid the escalation in the conflict in 2H 2014 and the halt in production at Yenakiieve Steel from 7 February to 16 March 2015. MENA remained the most important market, accounting for 77% of total sales: in particular, Turkey accounted for 50% of total sales volumes of square billets. The average selling price followed the dynamics of billet FOB Black Sea quotations, which dropped by 25% y-o-y.

Flat products

In 1H 2015, sales of flat products decreased by 31% y-o-y to US$1,730 million, of which 16 pp was attributable to a lower average selling price and 15 pp to a drop in sales volumes. The Group’s sales volumes decreased by 612 thousand tonnes y-o-y to 3,550 thousand tonnes, due to a 22% decline in flat product output at Metinvest’s operations and a drop in re-sales of Zaporizhstal’s flat products of 65 thousand tonnes. Sales from stock amounted to 66 thousand tonnes. Zaporizhstal’s share in total sales volumes of flat products increased by 4 pp y-o-y to 39%. Sales volumes to all regions decreased, except Europe. Sales volumes in Europe increased by 269 thousand tonnes y-o-y as a result of customer capture through the back-to-back sales system and additional services provided. As a result, Europe accounted for 53% of total sales in 1H 2015, compared with 41% in 1H 2014. The average selling price was largely in line with the benchmark quotations for HRC FOB Black Sea, which were down 27% y-o-y.

Long products

In 1H 2015, sales of long products decreased by 60% y-o-y to US$301 million, of which 49 pp was attributable to a decline in sales volumes and 11 pp to a lower average selling price. Sales volumes of long products decreased by 591 thousand tonnes y-o-y to 612 thousand tonnes. This was caused by lower overall production due to the conflict in Eastern Ukraine, problems with dispatching finished goods from the conflict zone and difficulties in supplying square billets from Yenakiieve Steel to Promet Steel in Bulgaria. As such, sales to all regions fell.

Tubular products

In 1H 2015, sales of tubular products decreased by 47% y-o-y to US$63 million, driven mainly by a 45% decline in sales volumes. Volumes of tubular products fell by 53 thousand tonnes y-o-y to 65 thousand tonnes due to a slump in production and lack of orders.

Coke and chemical products

In 1H 2015, sales of coke and chemical products decreased by US$72 million y-o-y to US$183 million, primarily driven by lower volumes (33 pp), which were partly compensated by a higher average selling price (5 pp). Sales volumes of coke and chemical products decreased by 398 thousand tonnes y-o-y to 820 thousand tonnes, mainly due to a slump in coke output following raw material supply constraints and limited 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 1H 2015, its revenues decreased by US$524 million y-o-y to US$811 million, mainly because of a slump in prices of iron ore products.

Mining division Sales by market	1H 2015			1H 2014			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	811	100%	11 478	1 335	100%	11 702	-524	-224	-39%	-2%
Ukraine	229	28%	3 066	605	45%	5 577	-376	-2 511	-62%	-45%
Europe	88	11%	1 355	109	8%	1 036	-21	319	-19%	31%
MENA	21	3%	253	0	0%	0	21	253	N/A	N/A
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	416	51%	6 146	558	42%	4 508	-142	1 638	-26%	36%
North America	57	7%	659	55	4%	498	2	161	4%	32%
Other regions	0	0%	0	8	1%	84	-8	-84	N/A	N/A

Mining division Sales by product	1H 2015		1H 2014		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	656	10 618	1 184	10 742	-528	-125	-45%	-43%	-1%
Merchant iron ore concentrate	339	6 466	616	6 339	-277	127	-45%	-47%	2%
Pellets	317	4 152	568	4 403	-251	-251	-44%	-38%	-6%
Coking coal concentrate	90	860	91	960	-1	-100	-1%	9%	-10%
Other products and services	65	N/A	60	N/A	5	N/A	8%	N/A	N/A
Total sales	811	11 478	1 335	11 702	-524	-224	-39%	-37%	-2%

Iron ore concentrate

In 1H 2015, sales of merchant iron ore concentrate declined by 45% y-o-y to US$339 million, of which 47 pp was attributable to lower average selling price, partly compensated by greater sales volumes (2 pp). Despite a 12% y-o-y decrease in overall iron ore concentrate production, merchant iron ore concentrate sales volumes increased by 127 thousand tonnes y-o-y to 6,466 thousand tonnes due to destocking of 276 thousand tonnes during the reporting period. Sales of iron ore concentrate in Ukraine fell by 65% y-o-y, driven by a 52% decline in the average selling price and a 28% drop in volumes. As such, volumes were redirected from Ukraine to Europe and Southeast Asia. Despite a 6% increase in sales volumes in Europe, revenues from the region fell by 42% y-o-y due to a 45% decline in prices. The Group redirected 900 thousand tonnes from Ukraine to Southeast Asia in the reporting period. Average selling prices in all regions followed the dynamics of the benchmark, Platts 62% Fe iron ore fines CFR China, which dropped from US$112/tonne in 1H 2014 to US$60/tonne in 1H 2015.

Pellets

In 1H 2015, sales of pellets fell by 44% y-o-y to US$317 million, of which 38 pp was attributable to a lower average selling price and 6 pp to a decrease in sales volumes. Volumes declined by 251 thousand tonnes y-o-y to 4,152 thousand tonnes due an overall decline in concentrate output and an accumulation of 149 thousand tonnes of stock in 1H 2015 compared with destocking in 1H 2014. Sales in Ukraine decreased by 1,381 thousand tonnes y-o-y due to lower consumption by key Ukrainian customers as a result of the conflict. Volumes were partly redirected to other markets. Sales to Europe and Southeast Asia increased by 267 and 611 thousand tonnes y-o-y respectively. In addition, Metinvest resumed sales to MENA (mainly Turkey), which totalled 253 thousand tonnes. Average selling prices in all regions were largely in line with the Platts benchmark, which decreased by 46% y-o-y.

Coking coal concentrate

In 1H 2015, sales of coking coal remained almost unchanged y-o-y at US$90 million. A 10% y-o-y decline in sales volumes was compensated by a higher average selling price. Sales volumes declined by 100 thousand tonnes y-o-y to 860 thousand tonnes, primarily due to the redirection of United Coal’s volumes from sales to third parties to internal consumption amid logistical disruptions in supplies from Krasnodon Coal due to the conflict in Eastern Ukraine. The average selling price rose by 10% y-o-y due to a greater share of high-quality coal in sales in Ukraine. At the same time, the average quarterly contract price for hard coking coal in North America fell by 16% y-o-y, replicating the change in the benchmark quotation for hard coking coal FOB Australia.

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 1H 2015, Metinvest’s cost of sales declined by 29% y-o-y to US$3,047 million. The drop was primarily attributable to (i) favourable movements in the USD/UAH exchange rate, which accounted for US$940 million, or 74% of the total decrease; (ii) a reduction in the cost of raw materials of US$484 million, mainly because of lower consumption and prices; (iii) lower energy consumption (effect of US$195 million) and lower gas prices (savings of US$40 million); (iv) a drop in the cost of goods and services for resale of US$45 million, mainly flat products from Zaporizhstal; (v) a decrease in transportation costs of US$23 million due to lower sales volumes. These factors were partly offset by: (a) an impairment of US$165 million mainly of PPE and coal reserves of United Coal due to decreased coking coal prices; (b) a rise in electricity tariffs (effect of US$107 million); (c) an increase in depreciation and amortisation of US$80 million following a revaluation of PPE; (d) a rise in the cost of services and other expenses of US$62 million.

As a share of consolidated revenues, the cost of sales increased to 83% in 1H 2015, from 72% a year earlier.

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 2015, distribution costs decreased by US$93 million y-o-y to US$463 million. The 17% y-o-y decline was primarily attributable to the positive effect from changes in the local currency exchange rate, which mainly impacted railway expenses, wages and salaries, as well as other selling expenses (US$107 million). Lower freights costs contributed US$8 million to savings, principally due to a 15% decrease in freight tariffs. These factors were partly offset by a 30% increase in railway tariffs since 31 January 2015 (US$23 million).

As a share of consolidated revenues, distribution costs increased to 13% in 1H 2015, from 9% a year earlier.

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 2015, general and administrative costs fell by US$52 million y-o-y to US$99 million, mainly due to the hryvnia devaluation.

As a share of consolidated revenues, general and administrative costs remained unchanged y-o-y and accounted for 3% in 1H 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, gains or losses on disposals of property, plant and equipment, and gains or losses on sales of inventory.

In 1H 2015, other operating income dropped by US$159 million y-o-y to US$47 million. The decline was mainly attributable to lower operating forex gains (US$103 million in 1H 2015, compared with US$223 million in 1H 2014), which were principally due to lower gains from a revaluation of trade receivables and payables at the reporting date. In addition, following an impairment assessment of United Coal’s assets as of 30 June 2015 amid lower coking coal prices, impairment of goodwill totalled US$39 million.

As a share of consolidated revenues, other operating income decreased by 2 pp y-o-y to 1% in 1H 2015.

Operating profit

In 1H 2015, operating profit fell by US$1,115 million y-o-y to US$88 million, amounting to 2% of the corresponding margin, down 18 pp y-o-y. The drop in operating profit primarily reflected the declines in revenues of US$2,373 million and other operating income of US$159 million y-o-y. It was partly compensated by the drop in the cost of sales of US$1,272 y-o-y and distribution, general and administrative costs of US$145 million y-o-y.

EBITDA 

In 1H 2015, EBITDA dropped by US$1,046 million y-o-y to US$620 million. The contributions from the Mining and Metallurgical divisions declined by US$903 million and US$208 million respectively, partly offset by a fall in corporate overheads and eliminations of US$65 million.

EBITDA by division	6M15		6M14		Change, y-o-y
	US$m	% of division revenues	US$m	% of division revenues	US$m	pp of division revenues
Metallurgical division	421	15%	629	13%	-208	2
Mining division	218	15%	1 121	54%	-903	-39
Corporate o/hs and eliminations	-19		-84		65
Total EBITDA	620	17%	1 666	28%	-1 046	-11

In 1H 2015, the y-o-y reduction in consolidated EBITDA was primarily attributable to the decrease in sales of US$2,373 million y-o-y, which was mainly due to lower sales volumes of steel, coke and chemical products (US$1,222 million), amid a slump in sale prices for steel and iron ore products (US$1,151 million). Other key drivers of EBITDA, which mainly offset the drop in sales, were:

• a positive effect from the hryvnia devaluation of US$660 million
• a decrease in the cost of raw materials due to lower consumption (US$361 million) and lower market prices of coking coal, scrap and iron ore (US$123 million)
• lower spending on natural gas due to lower consumption (US$70 million) and prices (US$40 million)
• lower electricity consumption (US$71 million), offset by increased tariffs (US$107 million)
• a positive contribution of the JVs to EBITDA of US$81 million, due to an increase in EBITDA at Zaporizhstal JV of US$44 million and the inclusion of the EBITDA of Southern GOK of US$37 million (the asset did not contribute in 1H 2014).

Metinvest’s consolidated EBITDA margin decreased by 11 pp y-o-y to 17% in 1H 2015. The EBITDA margin of the Mining division dropped by 39 pp y-o-y to 15%, while Metallurgical division’s EBITDA margin increased by 2 pp y-o-y to 15%.

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 1H 2015, finance income totalled US$11 million, compared with US$12 million in 1H 2014. As a percentage of consolidated revenues, finance income increased to 0.3% in 1H 2015, up from 0.2% a year earlier.

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 1H 2015, finance costs decreased by US$46 million y-o-y to US$371 million. This was primarily driven by a foreign exchange loss from financing activities, which was attributable to intra-Group loans denominated in US dollars and fell by US$21 million y-o-y to US$239 million. In addition, interest expenses on loans, bonds and seller notes declined by US$20 million y-o-y due to debt repayment. As a percentage of consolidated revenues, financial costs increased by 3 pp y-o-y to 10% in 1H 2015.

Share of result of associates and joint venture

In 1H 2015, the share of net income from associates and joint ventures increased by US$76 million y-o-y to US$99 million. This was largely due to increased net income at Zaporizhstal (US$37 million) and the inclusion of the net income of Southern GOK (US$44 million), which did not contribute in 1H 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 1H 2015, the income tax expense decreased by US$175 million y-o-y to a positive amount of US$7 million. The decline was principally driven by a drop in current tax of US$139 million y-o-y to US$23 million due to lower production and profitability, as well as foreign exchange differences. In addition, deferred tax assets amounted to US$29 million in 1H 2015, as the Group incurred losses in the previous reporting periods, compared with deferred tax liabilities of US$6 million a year earlier.

Net profit

In 1H 2015, the Group reported a net loss of US$166 million, compared with net income of US$653 million in the respective period of 2014. This was principally due to the lower revenues, partly offset by the lower cost of sales, income tax and distribution costs, as well as the higher share of net income from associates and joint ventures. As a result, the net margin amounted to negative 5% in 1H 2015, compared with 11% in 1H 2014.

LIQUIDITY AND CAPITAL RESOURCES 

Net cash from operating activities

In 1H 2015, net cash from operating activities decreased by US$415 million y-o-y to US$351 million. The main reason for this was that profit before working capital changes fell by US$905 million y-o-y to US$480 million. This was partly compensated by a lower negative change in working capital (US$18 million), which was primarily attributable to an increase in accounts payable of US$315 million, partly offset by an increase in accounts receivable of US$309 million and inventories by US$24 million. The other factor that compensated the fall in profit before working capital changes was a decrease in income tax paid of US$204 million y-o-y to US$22 million. This was principally due a new tax collection procedure introduced in 1Q 2014, when both the final payment for 4Q 2013 and the advance payment for 1Q 2014 were paid.

Net cash used in investing activities

In 1H 2015, net cash used in investing activities declined by US$186 million y-o-y to US$94 million. This change was primarily attributable to CAPEX projects frozen due to the conflict in Eastern Ukraine and payments deferred to further periods due to funding constraints. Total cash used to purchase property, plant and equipment, as well as intangible assets, fell by US$166 million y-o-y to US$113 million in 1H 2015.

Net cash used in financing activities

In 1H 2015, net cash used in financing activities decreased by US$501 million y-o-y to US$209 million. This was primarily driven by: (i) a reduction in repayments of loans and borrowings of US$308 million y-o-y to US$82 million due to the deterioration in the cash position and in the context of global debt restructuring discussions, (ii) a decrease in net repayments of trade financing of US$366 million y-o-y to US$94 million, (iii) no new proceeds from loans and borrowings, compared with US$445 million received in 1H 2014, (iv) no dividend payments, compared with US$253 million paid in 1H 2014, (v) no repayment of seller notes following the rescheduling agreement negotiated by the Group in January, compared with US$45 million in 2Q 2014, and (vi) higher payments under other financing activities, which include prepayments under consent solicitation agreements of US$33 million.

As of 30 June 2015, total debt was down by 5% (US$162 million) year-to-date to US$3,070 million. This was mainly due to the repayment of US$81 million of PXF facilities in January and February 2015 and a decrease of US$101 million in trade finance lines, partly offset by accrued interest on non-bank borrowings of US$17 million.

Metinvest’s cash balance stood at US$151 million as of 30 June 2015, compared with US$114 million as of 31 December 2014.

Capital expenditure

In 1H 2015, Metinvest continued to implement numerous investment projects in line with its Technological Strategy. Due to the tight liquidity situation and conflict in the region, the focus has shifted to top-priority maintenance projects, as well as expansion projects that offer a fast payback. As such, some projects have been delayed, slowed or frozen. Capital expenditure decreased by 57% y-o-y to US$117 million in 1H 2015[5]. The expenditure on maintenance projects amounted to 80% of total investments (70% in 1H 2014) and on expansion projects to 20% (30% in 1H 2014). The Metallurgical division accounted for 42% of capital expenditure (40% in 1H 2014) and the Mining division for 54% (50% in 1H 2014).

Metallurgical division

Key CAPEX projects in the Metallurgical division included a major overhaul of blast furnace no. 4 at Azovstal. Completion has been delayed until September 2015, mainly due to limited funding, a lack of contractor staff on site and delays in equipment supplies amid the conflict in Eastern Ukraine. The execution of other projects at Azovstal has also been affected by funding constraints in 2015: the construction of a PCI unit (design work and tenders are ongoing) and the replacement of turbine air blower no. 3. The sinter plant reconstruction at Ilyich Steel has been started: the first phase of detailed engineering has been completed and the filters of sintering machine no. 1 have been replaced.

In 1H 2015, work was ongoing to build the infrastructure for a new air separation unit at Yenakiieve Steel, although at a slower pace due to a lack of financing. Metinvest resumed work on the construction of the PCI facility at Yenakiieve Steel in 1Q 2015, following the suspension in 2014. The Group expects to begin PCI injection into blast furnace no. 5 in January 2016.

Mining division

Metinvest made continued progress on installing a crusher and conveyor system (CCS) at Northern GOK. The expected launch of the first facility has been delayed to March 2016 due to funding constraints. The construction of a CCS at Ingulets GOK is ongoing on the Vostochny conveyor line only. The construction of the Zapadny conveyor line at Ingulets GOK and the rebuilding of the Lurgi 278-B pelletising machine at Northern GOK have been suspended for this year due to limited financing. In addition, the replacement of gas cleaning units on the Lurgi 552-B pelletising machine at Northern GOK is ongoing.