Metinvest published trading update for the first nine 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 published a trading update for the nine months ended 30 September 2015.

The information in this press release has been prepared based on preliminary financial results. Intragroup transactions have been eliminated in consolidation. This announcement does not contain sufficient information to constitute a full set of financial statements. The following preliminary results may differ from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The numbers in this press release have not been audited or reviewed.

Metinvest B.V. publishes consolidated financial statements prepared in accordance with IFRS for the six months ending 30 June and for the year ending 31 December.

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.

FINANCIAL HIGHLIGHTS

(US$ million)	9M 2015	9M 2014	Change
Revenues	5,397	8,461	-36%
Adjusted EBITDA [1]	813	2,210	-63%
margin	15%	26%	-11 pp
CAPEX [2]	191	412	-53%
(US$ million)	30 Sep 2015	31 Dec 2014	Change
Total debt	2,966	3,232	-8%
Cash	198	114	74%
Net debt [3]	2,768	3,118	-11%
Total debt to EBITDA [4]	2.3x	1.2x	1.1x
Net debt to EBITDA [4]	2.1x	1.2x	1.0x

Revenues

In 9M 2015, Metinvest’s consolidated revenues decreased by 36% y-o-y. This was primarily due to a fall in sales of flat (US$1,171 million), long (US$528 million), iron ore (US$707 million), semi-finished steel (US$419 million), tubular (US$92 million), and coke and chemical (US$66 million) products. The Metallurgical division accounted for 79% of external sales (78% in 9M 2014) and the Mining division for 21% (22% in 9M 2014).

Revenues in Ukraine totalled US$1,204 million in 9M 2015, down 41% y-o-y. Sales of the Mining and Metallurgical divisions on the domestic market decreased by 54% and 32% y-o-y respectively. Demand slumped due to the conflict in Eastern Ukraine and overall economic slowdown, exacerbated by lower selling prices, as raw material and steel product prices continued to decline, reaching new lows for the last several years.

The share of international sales increased to 78% in 9M 2015, up 2 percentage points (pp) y-o-y. The proportion of sales to Europe rose by 6 pp y-o-y to 33%, driven by greater sales volumes of square billets, flat products and pellets. The share of sales to Southeast Asia fell by 3 pp y-o-y to 12% due to lower prices of iron ore products, as well as lower sales of flat products and slabs. The proportion of sales to other regions did not change significantly y-o-y.

Revenues by market	9M15		9M14		Change, y-o-y
	US$m	% of revenues	US$m	% of revenues	US$m	%	pp of revenues
Total revenues	5 397	100%	8 461	100%	-3 065	-36%	0
Ukraine	1 204	22%	2 038	24%	-834	-41%	-2
Europe	1 804	33%	2 348	28%	-544	-23%	6
MENA	1 041	19%	1 587	19%	-546	-34%	1
CIS (ex Ukraine)	460	9%	819	10%	-359	-44%	-1
incl. Russia	347	6%	586	7%	-239	-41%	0
Southeast Asia	646	12%	1 288	15%	-642	-50%	-3
North America	191	4%	286	3%	-95	-33%	0
Other regions	51	1%	96	1%	-46	-48%	0

Metallurgical division

Revenues in the Metallurgical division come from sales of steel and coke products and services. In 9M 2015, the division’s top line fell by 36% y-o-y to US$4,256 million, of which steel sales accounted for 89%. The drop was attributable to lower prices of steel products, as well as lower volumes of slabs, billets, flat, long and tubular products, partly offset by higher volumes of pig iron.

Metallurgical division Sales by market	9M15			9M14			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	4 256	100%	9 867	6 628	100%	11 920	-2 372	-2 053	-36%	-17%
Ukraine	844	20%	2 082	1 249	19%	2 563	-405	-481	-32%	-19%
Europe	1 668	39%	3 611	2 192	33%	3 689	-524	-78	-24%	-2%
MENA	1 011	24%	2 511	1 587	24%	2 941	-575	-430	-36%	-15%
CIS (ex Ukraine)	460	11%	910	818	12%	1 222	-358	-312	-44%	-25%
incl. Russia	347	8%	733	586	9%	945	-239	-212	-41%	-22%
Southeast Asia	116	3%	264	494	7%	880	-378	-616	-77%	-70%
North America	106	2%	367	199	3%	474	-93	-107	-47%	-23%
Other regions	51	1%	122	89	1%	151	-38	-29	-43%	-19%

Metallurgical division Sales by product	9M15		9M14		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	692	2 091	1 111	2 329	-419	-237	-38%	-28%	-10%
Pig iron	293	1 039	368	907	-75	132	-20%	-35%	15%
Slabs	213	564	408	774	-196	-210	-48%	-21%	-27%
Square billets	186	488	335	648	-149	-160	-44%	-20%	-25%
Finished products	3 083	6 404	4 873	7 913	-1 790	-1 509	-37%	-18%	-19%
Flat products	2 490	5 228	3 661	6 063	-1 171	-836	-32%	-18%	-14%
incl. Zaporizhstal	896	2 077	1 209	2 150	-313	-73	-26%	-23%	-3%
Long products	530	1 111	1 058	1 693	-528	-583	-50%	-16%	-34%
Tubular products	63	65	155	156	-92	-90	-59%	-1%	-58%
Coke and chemical products	288	1 372	353	1 679	-66	-306	-19%	0%	-18%
Coke products	227	1 138	209	1 278	18	-140	8%	19%	-11%
Chemical products	61	234	144	401	-84	-167	-58%	-16%	-42%
Other products and services	194	N/A	290	N/A	-96	N/A	-33%	N/A	N/A
Total sales	4 256	9 867	6 628	11 920	-2 372	-2 053	-36%	-19%	-17%

Pig iron

In 9M 2015, sales of pig iron decreased by 20% y-o-y to US$293 million; a lower average selling price caused a drop of 35 pp, partly compensated by higher sales volumes (15 pp). Despite the 7% y-o-y decline in production, sales volumes of pig iron rose by 132 thousand tonnes y-o-y to 1,039 thousand tonnes in 9M 2015, due to re-sales of 185 thousand tonnes of Zaporizhstal’s pig iron. Given unfavourable market prices in the US, sales volumes were redirected to other higher-margin markets, such as Ukraine, the Middle East and North Africa (MENA) and other regions. One new market for the Group was Mexico, where margins were also more attractive than in the US.

Slabs 

In 9M 2015, sales of slabs slumped by 48% y-o-y to US$213 million, driven by a decrease in sales volumes (27 pp) and a lower average selling price (21 pp). Sales volumes of slabs declined by 210 thousand tonnes y-o-y to 564 thousand tonnes in 9M 2015 due to lower overall production. This resulted in lower sales volumes to Europe and Southeast Asia, reducing their shares in total sales y-o-y by 1 pp to 57% and 20 pp to 4% respectively. Meanwhile, sales volumes to MENA (mainly Turkey) rose by 91 thousand tonnes y-o-y, increasing the region’s share by 21 pp y-o-y to 38% of total sales. In 9M 2015, the decline in the average selling price followed the benchmark for slabs FOB Black Sea, which dropped by 29% y-o-y. In particular, in 3Q 2015, the benchmark slab price dropped m-o-m by 4% in July, 6% in August and another 5% in September, which corresponds to an 11% q-o-q decrease. In October, the benchmark price declined further by 4% m-o-m.

Square billets

 In 9M 2015, sales of square billets slumped by 44% y-o-y to US$186 million, of which 25 pp was attributable to a fall in sales volumes and 20 pp to a drop in the average selling price. Sales volumes of square billets declined by 160 thousand tonnes y-o-y to 488 thousand tonnes in 9M 2015. This was mainly due to lower production volumes 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 accounted for 71% of total sales (81% in 9M 2014). In particular, Turkey accounted for 59% of total sales volumes to the region. Meanwhile, Europe’s share increased by 19 pp y-o-y to 27% of total sales due to higher sales volumes. In 9M 2015, the average selling price followed the dynamics of billet FOB Black Sea quotations, which fell by 26% y-o-y. Notably, in 3Q 2015, the benchmark square billet price declined m-o-m for three months in a row – by 9% in July, 3% in August and 8% in September – which corresponds to a 15% q-o-q decrease. In October, the benchmark price declined further by 8% m-o-m.

Flat products

In 9M 2015, sales of flat products decreased by 32% y-o-y to US$2,490 million, driven by a decline in sales volumes (14 pp) and a lower average selling price (18 pp). Sales volumes of flat products fell by 836 thousand tonnes y-o-y to 5,228 thousand tonnes due to a 16% decline in flat product output at Metinvest’s operations and a drop of 73 thousand tonnes in re-sales of Zaporizhstal’s flat products. Zaporizhstal’s share in total sales volumes of flat products increased by 5 pp y-o-y to 40%. Sales volumes decreased to all regions, except Europe, where they increased by 306 thousand tonnes y-o-y, as new customers were won through the back-to-back sales system and additional services provided. In addition, sales volumes to Poland, Romania, Spain and Portugal rose following the opening of new sales offices in the countries. In 9M 2015, the average selling price was largely in line with the benchmark quotations for HRC FOB Black Sea, which fell by 21% y-o-y. In particular, in 3Q 2015, the benchmark HRC price declined m-o-m for three months in a row – by 4% in July, 5% in August and 6% in September – and 11% q-o-q. In October, the benchmark price dropped further by 5% m-o-m.

Long products

In 9M 2015, sales of long products slumped by 50% y-o-y to US$530 million, of which 34 pp was attributable to a decline in sales volumes and 16 pp to a lower average selling price. Sales volumes of long products decreased by 583 thousand tonnes y-o-y to 1,111 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 for further re-rolling. As such, sales to all key regions fell.

Tubular products

In 9M 2015, sales of tubular products slumped by US$92 million y-o-y to US$63 million, driven mainly by a 58% decline in sales volumes. Sales volumes of tubular products dropped by 90 thousand tonnes y-o-y to 65 thousand tonnes due to a slump in production and lack of orders. In addition, Khartsyzk Pipe has been idle since June 2015.
 

Coke and chemical products

In 9M 2015, sales of coke and chemical products decreased by US$66 million y-o-y to US$288 million amid an 18% decline in sales volumes. Sales volumes of coke and chemical products decreased by 306 thousand tonnes y-o-y to 1,372 thousand tonnes. This was primarily 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

Revenues in the Mining division come from sales of iron ore, coal and other products and services. In 9M 2015, the division’s top line dropped by 38% y-o-y to US$1,140 million, mainly because of a slump in prices of iron ore products.

Mining division Sales by market	9M15			9M14			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	1 140	100%	16 570	1 834	100%	17 027	-693	-457	-38%	-3%
Ukraine	360	32%	5 170	788	43%	7 671	-428	-2 502	-54%	-33%
Europe	135	12%	2 187	156	9%	1 619	-21	568	-13%	35%
MENA	30	3%	372	0	0%	0	30	372	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	530	46%	7 870	794	43%	6 846	-264	1 024	-33%	15%
North America	85	7%	970	87	5%	806	-2	165	-2%	20%
Other regions	0	0%	0	7	0%	84	-7	-84	N/A	N/A

Mining division Sales by product	9M15		9M14		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	914	15 230	1 621	15 662	-707	-433	-44%	-41%	-3%
Merchant iron ore concentrate	489	9 515	860	9 456	-371	60	-43%	-44%	1%
Pellets	424	5 714	761	6 207	-336	-492	-44%	-36%	-8%
Coking coal concentrate	132	1 340	126	1 365	6	-24	5%	7%	-2%
Other products and services	95	N/A	87	N/A	8	N/A	9%	N/A	N/A
Total sales	1 140	16 570	1 834	17 027	-693	-457	-38%	-35%	-3%

Iron ore concentrate

In 9M 2015, sales of merchant iron ore concentrate slumped by 43% y-o-y to US$489 million; a lower average selling price caused a decrease of 44 pp, partly compensated by greater sales volumes (1 pp). Sales volumes of merchant iron ore concentrate increased by 60 thousand tonnes y-o-y to 9,515 thousand tonnes. Sales from stock amounted to 180 thousand tonnes during the reporting period. Sales volumes in Ukraine and Europe fell by 1,061 thousand tonnes and 62 thousand tonnes y-o-y respectively. As such, volumes were redirected to Southeast Asia. Average selling prices in all regions followed the dynamics of the benchmark, Platts 62% Fe iron ore fines CFR China, which dropped from US$104/tonne in 9M 2014 to US$59/tonne in 9M 2015 (down 44% y-o-y). Notably, in 3Q 2015, the benchmark iron ore price dropped by 6% q-o-q, while in October it decreased further by 7% m-o-m. On 4 December 2015, the benchmark price for iron ore was US$39/tonne, the lowest level over the last ten years.

 

Pellets

In 9M 2015, sales of pellets slumped by 44% y-o-y to US$424 million, driven by a lower average selling price (36 pp) and a decrease in sales volumes (8 pp). Volumes fell by 492 thousand tonnes y-o-y to 5,714 thousand tonnes due to a decline in pellet output and destocking in 9M 2014. Sales volumes in Ukraine decreased by 1,335 thousand tonnes y-o-y due to lower consumption by key Ukrainian customers amid the conflict. Sales of pellets in Southeast Asia declined by 160 thousand tonnes y-o-y. As such, volumes were partly redirected from Ukraine and Southeast Asia to other markets: 630 thousand tonnes to Europe and 372 thousand tonnes to MENA. Average selling prices to all regions were largely in line with the Platts benchmark, which fell by 44% y-o-y.

Coking coal concentrate

In 9M 2015, sales of coking coal increased by 5% y-o-y to US$132 million: an increase of 7 pp was attributable to a higher average selling price, partly offset by lower sales volumes (2 pp). Sales volumes declined by 24 thousand tonnes y-o-y to 1,340 thousand tonnes, primarily due to the redirection of United Coal’s volumes from sales to third parties for internal consumption amid logistical disruptions in supplies from Krasnodon Coal due to the conflict in Eastern Ukraine. The average selling price increased by 7% 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 15% y-o-y, in line with the dynamics of the benchmark for hard coking coal FOB Australia, which dropped by 20% y-o-y.

EBITDA

Metinvest’s consolidated EBITDA slumped by 63% y-o-y to US$813 million in 9M 2015. The contributions from the Mining and Metallurgical divisions declined by US$1,075 million and US$393 million respectively, partly compensated by a fall in corporate overheads and eliminations of US$71 million. The decline in consolidated EBITDA was primarily attributable to a decrease in sales of US$3,065 million y-o-y, due to lower sales volumes (US$1,812 million) and a collapse in selling prices (US$1,252 million). Other key drivers, which mainly had a positive effect on EBITDA, were:

• the positive effect of the hryvnia devaluation (US$886 million);
• a decrease in the cost of raw materials due to lower consumption (US$270 million) and market prices of coal, scrap, iron ore and coke (US$154 million);
• a decline in other costs, mainly due to a drop of US$180 million in the cost of goods and services for resale (primarily goods from Zaporizhstal);
• lower spending on energy due to lower consumption (US$191 million) and lower prices of natural gas (US$72 million), which were partly offset by increased electricity tariffs (US$127 million);
• a rise in the positive contribution to EBITDA of US$30 million from the JVs, due to an increase in EBITDA of US$11 million at Zaporizhstal and US$19 million at Southern GOK[5].

The EBITDA margin shrank by 11 pp y-o-y to 15% in 9M 2015. The Mining division’s EBITDA margin slumped by 31 pp y-o-y to 15% and the Metallurgical division’s by 2 pp y-o-y to 12%.

Monthly analysis of EBITDA in 3Q 2015 shows that EBITDA for September slumped to US$27 million, from US$86 million in July and US$79 million in August, mainly due to a m-o-m decrease in prices, as well as weak demand affecting sales volumes. In October, the downward trend continued, as the steel and iron ore price environment deteriorated further. As a result, EBITDA for October totalled US$2 million.
 

Debt management

At the beginning of the year, Metinvest launched global debt restructuring discussions with pre-export finance (PXF) lenders and holders of 2015, 2017 and 2018 notes.

On 1 December 2015, Metinvest signed a standstill agreement with certain of PXF lenders providing a standstill until the end of January 2016. As part of a consent solicitation process in May-June 2015, the Group 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 the maturity of the 2015 notes to 31 January 2016. The PXF lenders’ standstill and noteholders’ waivers and maturity extension have created a stable platform for negotiating a restructuring deal over the coming months.

Metinvest submitted a restructuring proposal to a coordinating committee of PXF lenders and the advisers to an ad hoc committee of noteholders at the end of November 2015. Restructuring discussions are ongoing.

At the end of 9M 2015, total debt was down by US$266 million year-to-date to US$2,966 million, while the outstanding amount of trade finance had declined by US$182 million year-to-date to US$234 million. At the end of October 2015, trade finance lines decreased further to US$201 million.

The Group’s cash position at the end of the reporting period was US$198 million. At the end of October 2015, the cash balance stood at US$150 million. Such a cash balance is considered to be inadequate in the ordinary course of business, given the limited recourse to external funding for the foreseeable future, depressed selling prices, and the highly uncertain outlook for the steel and iron ore markets.

Capital expenditure

Capital expenditure decreased by 53% y-o-y to US$191 million[6] in 9M 2015. Due to the tight liquidity situation, the focus has shifted to top-priority maintenance projects, as well as expansion projects that offer a fast payback. In 9M 2015, spending on maintenance projects dropped by US$166 million y-o-y to 68% of capital expenditure (72% in 9M 2014), while spending on expansion projects declined by US$55 million y-o-y to 32% (28% in 9M 2014). The Mining division accounted for 52% of capital expenditure (51% in 9M 2014) and the Metallurgical division for 44% (42% in 9M 2014).

Metallurgical division

Metinvest continued to implement numerous projects in the Metallurgical division: the major overhaul of blast furnace no. 4 at Azovstal (completed in September 2015); the replacement of turbine air blower no. 3 at Azovstal (commissioning works are being performed); the reconstruction of the sinter plant at Ilyich Steel (the filters of sintering machines nos. 1 and 2 were replaced); and the construction of the PCI facilities at Yenakiieve Steel (setup to start PCI injection into blast furnace no. 5). The construction of the PCI unit at Azovstal was halted due to limited funding. Construction of the infrastructure for a new air separation unit at Yenakiieve Steel was frozen due to an operational emergency.

Mining division

Major investment projects in the Mining division included the construction of a deep-quarry crusher and conveyor system at Northern GOK and Ingulets GOK (Vostochny conveyor line only), as well as the replacement of gas cleaning units on the Lurgi 552-B pelletising machine at Northern GOK. Construction of the Zapadny conveyor line at Ingulets GOK and the rebuilding of the Lurgi 278-B pelletising machine at Northern GOK were suspended in 2015 due to limited funding and the need to update design documentation.