H1 2012 Mechel OAO Earnings Conference Call (IFRS)

Oct 02, 2012 AM EDT
MTLR.MZ - Mechel PAO
H1 2012 Mechel OAO Earnings Conference Call (IFRS)
Oct 02, 2012 / 02:00PM GMT 

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Corporate Participants
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   *  Vladislav Zlenko
      Mechel OAO - Director - IR
   *  Yevgeny Mikhel
      Mechel OAO - CEO
   *  Stanislav Ploschenko
      Mechel OAO - CFO
   *  Oleg Korzhov
      Mechel OAO - SVP Economics and Management

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Conference Call Participants
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   *  Sergey Donskoy
      Societe Generale - Analyst
   *  Anton Rumanse
      Sberbank - Analyst
   *  Boris Krasnojenov
      Renaissance Capital - Analyst
   *  Dan Yakub
      Citigroup - Analyst
   *  Stan Gojanking
      Merrill Lynch - Analyst
   *  George Buzhenitsa
      Deutsche Bank - Analyst
   *  Alexander Trazanov
      Sovlink LLC - Analyst
   *  Dmitry Smolin
      Credit Suisse - Analyst
   *  Serge Lioutyi
      Deutsche Bank - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Mechel Reports 1H 2012 financial results call. My name is [Fay], and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. (Operator Instructions).

 I will now hand you over to your host to begin today's conference. Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [2]
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 Thank you and good day, everyone. I would like to welcome you to Mechel's conference call to discuss our first half 2012 financial results which were reported today. With us from management today are Mr. Yevgeny Mikhel, Mechel's CEO, Mr. Stanislav Ploschenko, Mechel's CFO and Mr. Oleg Korzhov, Mechel's Senior Vice President for Economics and Management.

 After management has made their formal remarks we will take your questions to the presentation team. Please note that during this call management will make forward-looking statements, some of which may have been made in the press release. Some of the information on the conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

 Wish to caution you that these statements are only predictions and that actual events or results may differ materially. We don't intend to update these statements. We refer you to the documents Mechel files from time to time with the US Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

 In addition, we will be using non-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable US GAAP financial measures are contained in the earnings press release, which is available on our website at mechel.com.

 At this point, I would like to turn the call over to Mechel's CEO. Mr. Mikhel, please go ahead.

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 Yevgeny Mikhel,  Mechel OAO - CEO   [3]
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 (interpreted) Good day and good morning, ladies and gentlemen. Welcome to the conference call where we will discuss company's performance in the first six months of 2012.

 We must admit that on the whole the first half of the year was rather challenging as regards price dynamics in the Company's key markets. During that time we saw prices adjusting in the Mechel target export channels, in the Asia-Pacific on mining products and in the Eurozone on steel products.

 Still in the second quarter the Company took measures to control costs, optimize production and improve sales policy, which resulted in the growth of revenue. And despite a noticeable price drop we managed to minimize the shrinking of EBITDA.

 At the same time a prolonged weakness of the Eurozone countries and absence of positive expectations of their recovery in the foreseeable future against the background of prices on steel products in the European markets falling quarter-on-quarter called for a revaluation of some of our investments in accordance with the GAAP rules.

 This led to one-time write offs at Mechel steel assets in the Eastern European steel division, Bulgarian Rousse power plants and Urals Nickel combined works. In this connection the Group recognized losses due to impairment of long-lived assets and goodwill of about $471 million at the end of the second quarter.

 Net income over the reporting period was also negatively affected by a provision set aside for partial impairment of loan to Estar companies for $202 million as a result of depreciation of fair value of Estar's company stock used as security for the loan due to the reduction in sales volume and market prices.

 Therefore the biggest factors contributing to the financial performance in the first half of 2012 were non-recurrent accounting write offs, including ForEx losses due to rubles devaluation to the dollar in the reporting period. In summary, Mechel's consolidated revenue amounted to about $6 billion. EBITDA was $849 million and net loss $605 million.

 As you know, for the most part of the second and the third quarters the Company's management was focused on the detailed analysis of the existing structure of Mechel's assets and its conformity to the fundamental criteria of the reverse strategy. I should note that at the recent meeting of the board of directors in accordance with the approved strategy, the assets where they were write offs were found to be subject to a divestment.

 Apart from the sold assets the resolutions of the board of directors provide for a sale of a number of other entities of the Group that do not meet the interests of Mechel's shareholders in terms of investment opportunity costs and asset management. All in all, acting as instructed by the board in May this year we made an important practical step towards reducing the level of debt as it is a significant constraint on the Group's development.

 In view of the above decisions Mechel's business model will be centered around the Company's key assets with undeniable competitive advantages that make the greatest contributions of the Group's consolidated operation performance. Already in midterm prioritization of mining and full cycle steel metallurgy with an emphasis on production of long steel and high added-value products will enable us to raise the Company's value as well as improve operational cash flow and reduce debt.

 The basis of the reviewed strategy is the need to focus the investment program on the implementation of the most promising projects with a maximum return on capital employed. In the course of the year we have made significant progress with such projects. In particular a seasonal washing plant constructed during the year was launched only yesterday at the Elga deposits, one of the key sites for the development of the Company's mining segments.

 Until the end of the year we plan to complete construction of the power lines to supply Elga with electricity by connecting the deposits with the [pre leased] transformer station. With the new washing capacity and power supply to Elga we have a fully featured production facility with all required infrastructure. This dramatically improves the project's economics and enables industrial scale production of coal at the deposit already next year.

 Work is underway as was scheduled to upgrade and widen Port Posiet to safeguard sales of Mechel's coal products to the export markets of Asia-Pacific. This November we plan to commission the first stage of this investment project to bring the ports' throughput capacity to 7 million tons a year.

 Construction of a universal rolling mill is nearing its completion. Presently equipment has been mounted and start of work is conducted. Until the end of the year we plan to complete construction and assembly and in the first quarter we will conduct startup and coal testing. And we will begin production.

 Over the year we have advanced substantially in the execution of our investment program along all strategically important projects in that strengthening the Company's leadership in mining and steel. Despite persistent signs of a crisis in the global economy and an uncertain environment in the key sales markets which affects our company's financial results, we have every confidence in the chosen strategy and we will spare no efforts to ensure its success.

 To this end we rely on the support of our shareholders and the board of directors. We are convinced that actions taken by management to implement the strategy will achieve stable development of the Group in the short run and provide a basis for its dynamic progress in years to come.

 And now I pass the floor to Stanislav Ploschenko who will cover financial results of all of our business segments. Thank you.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [4]
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 Good morning and good evening, ladies and gentlemen. We will begin the review with the mining segment as usual.

 As you likely realize the difficult operating environment which we have been experiencing over the last several quarters continued into the second quarter of this year. On a net CA basis coke and coal and coke prices were down by 9% and 10% respectively with the fall in coke prices in line with the decrease in the price of feedstock, both our own and purchase from third parties.

 Prices for our other main selling groups fared relatively better quarter-on-quarter, increasing by 1% for anthracite and PCI, 4% for thermal coal and 3% for iron ore. Overall revenue in our mining segment was down 6% to $881 million in Q2. The decreased revenue was in turn largely driven by a 14% decrease in sales of coking coal.

 The lower quarter-on-quarter coking coal revenue was roughly half due to a negative volume variance and half to an 8% decrease in realized pricing. Most of the volume shortfall was experienced at our US operations. The North Atlantic seaborne market continues to be severely impacted by decrease in the European steel plant utilization.

 The anthracite and PCI market at the same time has held up better than coking coal market. In addition to the slight increase in average FCA prices just noted, volumes were up 11% due to continued relative strength in Asian markets.

 An 80,000 ton quarter-on-quarter increase in PCI sales there more than offset a slight softening of demand in Europe. With respect to steam coal sales were down by 10% with slight quarter-on-quarter increase in FCA pricing offset by 10% decrease in volumes. The uptick in realized prices was due to an increase in the percent of thermal coal sold in the export market where prices are generally higher.

 Coke sales increased by 23% on the back of a 34% increase in volumes, offsetting the lower FCA pricing. In nominal terms the volume increase was 75,000 tons, two thirds of which was our own production and one-third the trading of third party. Iron ore sales were up overall by 3%. The 3% increase in export pricing and an increase of export volumes from 63% to 85% of the overall sales mix at the expense of the sales to the steel segment more than offset a 2% volume decrease. Naturally that was the main reason for a 7% quarter-on-quarter fall in intersegment sales to $207 million.

 As we have noted before, the difficult operating environment heightens the importance of controlling cash costs. We feel like we can report a reasonable success in that regard. At Bluestone we were able to bring cash costs per ton down to $88, a decrease of $12 quarter-on-quarter. The decrease there was generally along all cost items with the common denominator being the temporary closure of high cost mines as we have previously disclosed, plus a sales pickup in the second quarter.

 At Southern Kuzbass and caution of iron ore mine cash costs held relatively steady quarter-on-quarter at $42 and $45 per ton respectively. In both cases a slight decrease in exchange rate was offset by somewhat higher maintenance expenses. At Yakutugol we managed to bring cash costs down $4 per ton to $32 due to a switchback from winter fuel, exchange rate and increased output.

 A lower cash costs have almost compensated for growth in sales of PCI and coke, resulting in only marginal 3% increase in cost of sales. The combination of lower sales and almost flat cost of sales resulted in a 14% quarter-on-quarter fall in the gross profit to $516 million, or 47% of the revenue versus 52% in the previous quarter.

 Sales and distribution expenses decreased over the quarter by $35 million or about 14% in spite of an increase in the ratio of export to domestic sales. This decrease was driven by several factors, the most significant of which were a relative decrease of export sales to Ukraine versus sales to China and Southeast Asia, which have a shorter delivery basis, and an increase in the percentage of coke sold on an FCA basis.

 All of the above factors plus an additional $19 million provision for accounts receivable contributed to a 16% decrease in quarterly EBITDA to $302 million. Net interest expense changed insignificantly. At the same time profit tax expense decreased by $78 million or 81%.

 The decrease in profit tax was disproportionately large relative to the change of -- on the mining segment overall performance due to the fact that the Russian tax code requires that FX gain and losses even if unrealized be included in the tax base.

 The weakening of the ruble against the United States dollar during Q2 resulted in a $300 million FX effect. Largely due to that fact the segment finished the quarter with a net loss of $30 million.

 The beginning of the new construction season was marked with sales growth in almost all products, groups in the steel segment. The sales of the billets and wire rod grew quarter-on-quarter in physical volumes by 53% and 33% respectively as rebar and wire sales grew by 15% and 14%.

 Negative dynamics were demonstrated only by flat products, down 17% quarter-on-quarter and engineering steel down 6% due to continued suppressed demand in Europe, their main sales market. The seasonal market and uplift in Russia also led to an increase in third-party sales volumes which grew by 9% quarter-on-quarter, including the increase in resale volumes of Estar products by 15%.

 These sales dynamics coupled with virtually flat sales prices led to a 15% quarterly growth in the revenue from third parties to almost $1.9 billion. Intersegment sales on the other hand decreased by 16% due to seasoned driven lower purchases by the power segment.

 It is worth noting that if the first half of 2012 is compared to the similar period of 2011 we can witness a significant change in the product mix. Sales of semi-finished steel such as billet and wire rod fell in physical terms by 19% and 50% respectively, while sales of processed steel such as rebar, carbon flat steel and engineering steel grew by 14%, 13% and 7% respectively.

 That change is largely attributable to a ramp up of production on new processing facilities. The biggest contributor was Estar where the new modernized rolling mill was working at its full capacity in the first half of the year, whereas last year when it was still undergoing modernization, Estar was exporting billets for the new smelting and casting facilities commissioned earlier.

 As revenue grew the cost of sales on the contrary fell by 11%, which is explained by two factors. The decrease in billet and the rebar production cash costs, which you can see on the slide number seven, reflects decrease in the price of coke, iron ore feed and scrap we have been witnessing in the last months.

 At the same time significant production cuts implemented by the management in order to slash costs of inefficient manufacturing and reduce stock also resulted in a visible impact on the P&L. First of all these productions cuts took place [Lithuania], Ukrainian and Romanian businesses whereas certain production adjustments were also implemented at our Russian facilities, which have proven to be more competitive cost wise.

 The combination of growing top line and falling costs resulted in a 32% jump in the gross income and gross margin, which improved to $327 million or 17% of the revenue.

 Selling and distribution expenses grew by 7% to reflect higher sales, but is a lower rate than the latter, which resulted in their share of revenue falling from 10% in Q1 to 9% in the reported period. The segment posted $14 million bad debt provision expenses in Q2, which reflects growing sales against increased market volatility and is largely attributable to our European receivables.

 As I mentioned before, we implemented significant cuts Lithuania, non-Russian facilities to keep production costs under control. In some cases it leads to idling entire workshops with headcount reduction or either leaves. We view these implementations to have a medium to long-term character unless the market situation improves significantly. These cutbacks also concern the businesses which we identified as nonstrategic and consider to divest.

 As we do not expect to reverse these production cuts in the foreseeable future, we are required to impair these assets accordingly on to US GAAP. The operating expenses posted $316 million of this impairment in the reported period, $94 million of goodwill and $222 million of long-lived assets.

 All of these related only to our East European assets. On top of these expenses we also recognize the loss from partial provision for the loan issued to Estar of $202 million following the decrease of the fair value of the pledged assets. The main reason for that are negative trends in macroeconomic conditions which affect the performance of the Estar companies whose shares are pledged to secure the loan.

 The positive dynamics in the gross income which outpaced growth in SD&A expenses resulted in doubling of the segment's EBITDA quarter-on-quarter to $91 million, which is unaffected by one-off impairment charges and provision for Estar loan. The EBITDA margin also improved to about 5% of the revenue.

 Net interest expenses increased by 10% reflect in growing interest rates. Income tax expense of $31 million posted in Q1 reversed into a gain of $32 million in Q2. This is largely attributable to the fact that Q1 saw a bigger rundown on stock at lower prices, resulting in a release of unrealized margin leading to an additional income tax expense of $23 million, which was not the case in Q2.

 Another $21 million of the decrease came from Chelyabinsk Metallurgical Plant as a result of an adjustment of property, plant and equipment tax base, as well as an increase in a deferred tax asset due to tax loss carried forward. In addition, Romanian companies deferred tax liabilities decreased by about $15 million following the fixed assets impairment charges.

 The revaluation of dollar versus ruble in Q2 resulted in $116 million of FX loss for the segment versus a $92 million gain in Q1. All these factors combined into a $137 million net loss before the impairment of goodwill, and long-lived assets and provision for Estar loan, and $625 million loss with it.

 The financial performance of the ferroalloys segment was driven by different dynamics in the main products, as the demand in Asia remained robust and prices notched up, we undertook a significant reduction of chrome stock, increasing our third-party sales by 43% tonnage wise quarter-on-quarter, due mainly to China and Japan.

 As a result of that the share of the Asian markets in the ferroalloys segment revenue increased from 4% in Q1 2012 to 18% in Q2 as you can see on slide number 10. Sales of ferrosilicon and nickel decreased by 7% and 12% in physical volumes respectively as prices went down 6% and 10% on FCA basis. The reduction in ferrosilicon sales however were not affected by the price dynamics as the production actually grew on the back of the launch of the modernized furnace in March 2012. And at these price levels the sales remain comfortably profitable.

 This reduction was only due to a late title transfer on CAF sales, resulting in higher carry over tonnages in Q3. Nevertheless, lower sales in nickel and ferrosilicon were not enough to compensate for a jump in chrome sales, which drove revenue from third parties 6% up quarter-on-quarter to $132 million. The decrease in third-party sales of ferrosilicon were more than compensated by growth in intersegment sales, overall sales growing by 2% tonnage wise.

 At the same time intersegment nickel sales were also down by 8% as economics of nickel production remained to be loss making. And its production was hot. The intergroup revenue thus decreased by 20% quarter-on-quarter to $22 million. It is notable that even despite the reduction, nickel production in Q2, the sales of nickel in the first half of 2012 were 26% higher tonnage wise than in the same period of 2011, which was due to the increase of third-party sales at the expense of intra-group sales.

 The continuing growth of chrome production resulted in almost double sales of that product in the first six months of 2012 than during the same period a year ago. Only volumes of ferrosilicon sales were down by 34% in the compared period due to the furnace refurbishment ended in March 2012.

 The cash costs of production demonstrated downward dynamics, partly due to ruble depreciation, partly due to a reduction in prices for input materials, in particular coke, which saw costs of nickel production reduced almost by $1,700 a ton to $19,700. Cash cost of ferrosilicon was also impacted by growing production due to a full ramp up of the modernized furnace and went down to $845 a ton.

 The cast cost of chrome concentrate production fell by 13% to $149 a ton due to increase in production volumes. Only the cash costs of ferrochrome production slightly grew as the purchase price of concentrate moved higher. These above factors all combined resulted in virtually flat costs of sales quarter-on-quarter, which along with growth of sales led to 14% decrease in the gross loss to less than $14 million.

 The operating expenses in the ferroalloys segment changed insignificantly, reflecting slightly higher sales of ferrochrome and higher export sales of nickel. The continuing negative price dynamics of nickel led to an increasing loss on its production, even despite falling coke prices. As we do not see a reason for significant improvement in this market we have cut nickel production by more than a half in Q3 and recently idled the plant for at least one month in order to use the market downturn to execute all necessary maintenance.

 Since we expect that even when the production is restarted the plant will work at significantly subdued capacity, we took an impairment of one point -- $101 million for the fair value of this asset, of which $7 million of goodwill and $94 million of long-lived assets. That impairment was fully reflected in the operating expenses.

 This did not affect the segment's negative EBITDA, which improved by 2% to $7.4 million loss. The FX gain of $23 million almost mirrored the FX loss in the previous period and it was due to a revaluation of intercompany loans extended in appreciating currencies such as dollar and tenge, and loans attracted in depreciating ruble. The income tax turned from $7 million gained in Q1 to a $3 million expense in Q2, mainly due to the recognition of the valuation allowance for deferred tax assets from tax losses carried forward at the nickel plant following to the market downturn and idling the plant as described above.

 The net loss before long-lived assets and goodwill impairment decreased by 57%, quarter-on-quarter to $24 million, after the impairment charges the segment finished the reported period with a $107 million net loss.

 The performance of the power segment was none of the unordinary. The revenue from third parties declined by 28% to $175 million as heating season ended. Intersegments revenue also decreased by 17% to $113 million. Consequently, the gross income fell by 39% to $62 million or 22% of the revenue compared to 27% in Q1.

 Selling and distribution expenses decreased accordingly by 24% to $56 million. Bad debt provision of $3.5 million was created as receivables grew on the slower market.

 At the call dedicated to the release of full-year accounts for 2011 we announced that we have earmarked our power station in Bulgaria, Toplofikatsia Rousse for sale. Accordingly, we cut any investment in the power plant, which is now operating only for heat generation as economics based on thermal power feeds continue to be negative.

 We do not see any improvement in the highly regulated European environment of power generation, which would make this investment profitable for us, and therefore decided to take a partial impairment of the goodwill on this acquisition, totaling $54 million, which was posted to the operating expenses. The resulting EBITDA stage is marginally positive at $0.6 million.

 The $6 million income tax expense posted in Q1 reversed to a $2.7 million gain in Q2 as the taxable income of Mechel [and Algo] decreased. The FX effect was negligible as always. As a result of lower sales in a low season, the bottom line posted a $6.2 million loss before impairment of goodwill versus an $11 million income in Q2 -- in Q1.

 On the consolidated level the positive dynamics of the steel and to a lesser extent ferroalloy segment compensated a decrease in revenue of the mining and power segments, resulting in a 5% quarter-on-quarter growth in the revenue to $3.86 billion in Q2. The gross income was down 8% quarter-on-quarter as adherent to the lower profitability in the outperforming steel segment relative to mining diluted the overall profitability while the margins in the mining segment were also decreasing.

 The gross margin reduced to 29% from 33% in Q1. The SD&A expenses increased insignificantly as lower selling and distribution expenses were set off by slightly higher administration expenses and allowance for doubtful accounts. The EBITDA decreased accordingly by 17% to $385 million or 12% of the revenue. Net interest expenses remained almost flat at $146 million.

 The FX loss of $292 million can be compared to $171 million gain posted in Q1. Income tax expense of $103 million for the first quarter was replaced by a $36 million gain in the second one due to the effects explained in the discussion of the mining and steel segments.

 Net loss before asset impairment and provision for receivables due from related parties posted $177 million. Goodwill and long-lived assets impairment together with the provision for receivables due from related parties before the income tax and share of non-controlling interest effect contributed another $694 million to the bottom line.

 If we compare half year the periods of 2012 and 2011, the revenue decreased by 6% to $6.36 billion, the gross margin down from 34% to 31%. Operating expenses grew by 5%, largely due to selling and distribution expenses and provision for doubtful accounts as general and administrative expenses fell by 2%.

 Consolidated EBITDA fell by 28% to $849 million or 14% of the revenue versus 18% in the compared period. Net interest expenses remained almost unchanged at $288 million. $121 million FX loss can be compared to $164 million gain in the first half of 2011. Income tax expense fell by 72% as profitability decreased.

 The result in net income before asset impairment and provisions for receivables due from related parties posted $41 million in the first six months of 2012 versus $501 million in the similar period of 2011. The goodwill and fixed asset impairment and provision for receivables due from related parties before the income tax and share of non-controlling interest effect reduced the bottom line by another $694 million, resulting in a net loss of $653 million for the reported six months period.

 Now let's turn to the discussion of the cash flow and balance sheet. The production adjustments, changes in sales and inventory management undertaken by the management since the last quarter 2011 continued to deliver results in the second and the third quarters.

 The operating cash flow before changes to the working capital improved to $270 million over the previous quarter as sales in the steel segment grew. The working capital release nevertheless was lower in Q2 than in the first three months as cash was reinvested in growing sales, taking advantage of the high season in construction.

 Inventory and third party receivables to run down released $329 million. At the same time $252 million were reinvested in stock and receivables due from Estar. This decision was taken consciously as growing market in construction steel offered a great opportunity to take advantage of higher demand in prices at the time when cost of raw materials was falling.

 We managed to utilize this opportunity through our exclusive commercial agreements with Estar, also taking comfort from the security over its assets by increasing sales of its products. That nevertheless required an investment into working capital in order to boost production, which was subdued in Q1.

 The financial results of the steel segment discussed above proved that that was a timely decision. Looking beyond the reported period as the construction season is drawing to an end and steel markets are slowing down as sales volumes decrease, we began to divest our exposure to Estar towards the end of the Q3, returning to our previous net receivables position.

 Overall cash flow from operations brought $304 million to the business in Q2. Cash flow from investments required $303 million, almost all of it for new property plant and equipment. For the first six months our operations generated $649 million, $579 million thereof were used for investments. The rest applied towards the debt reduction.

 On the balance sheet side the net debt improved significantly from $9.2 billion as of the end of the first quarter to $8.7 billion ending the reporting period. Most of this reduction is attributable to ruble depreciation. However, at least part of that reduction came from the excess of the cash flow from operations of investments that the Company generated in the first half of 2012, demonstrating that company is capable of not servicing its debt, but reducing it even at a time of high market volatility.

 As reported in the results of Q1, the Company had negotiated around $1.7 billion of new long-term facilities from Russian banks which would be used to replace the short-term debt. That exercise has been taking place throughout the second to the third and into the fourth quarter as part of the short-term debt was refinanced outright and part of it is being replaced as it falls due, each case depending on the terms of the financing.

 The fact that as of the end of the reported period, the Company stayed well within the renegotiated covenants, helps us to enjoy good credit with our banks. Besides the cushion of cash and undrawn credit facilities of $1.5 billion as of September the 1st provides a solid security for debt repayments falling due in the next six months, nevertheless we continue to work on our target to reduce the short-term debt to a run rate of below $1 billion for the consecutive 12 months, which we believe is essential for better visibility into our cash flow and investments planning in the current market conditions.

 For that purpose we are currently negotiating another $1 billion worth of new long-term money and $500 million worth of refinancing of the existing loans. We expect that negotiations will be concluded within the next two months.

 Separately, I would like to comment on the loan extended to Estar in the first quarter of 2012 which expired on September the 30th. As we disclosed one week ago, the board of directors had been presented the management's plan of restructuring the assets of the Group based on a thorough analysis of each asset according to its place and contribution to the Group strategy.

 The plan was unanimously approved by the board. All the Estar assets were also subject to this analysis in the course of the due diligence according to the same criteria. At the same time we realized that and the maturity of this loan was drawing closer the other negotiations of Estar owners on the asset disposal were underway no definite deal could be concluded at this time.

 As a result, the management recommended that the loan in the amount of $44 million, excluding interest receivable, should be extended by another nine months during which and taking comfort from our knowledge of the ongoing asset sale negotiations. We believe that most of the Estar assets could be monetized and the loan repaid.

 $187 million of this loan should be converted into the following assets, firstly 100% capital of Rostov Electrometallurgical Works with a capacity of 730,000 tons of liquid steel and 530,000 tons of long steel including rebar situation in the town of Rostov in the south of Russia. This is Estar's most modern plant at which the production began in 2008, and Estar's biggest operating income contributor accountable for most of Estar's operating profit in the Q2.

 Apart from the fact that Rostov plant covers the construction markets of the south of Russia fully, it is also 100% secured with scrap, unlike the rest of our operations, which is due to the scrap collectors consolidated by the name of Lomprom, also acquired by the group from Estar.

 The last assets that we took -- that we look to consolidate is Estar steel product distribution network in Eastern and Central Europe, [Cogna], with 20 warehouses and 37,000 tons amount selling capacity. We strongly believe that Cogna is going to be an excellent [distribution] to Mechel service global European distribution network, enhancing our position as supplier to the European market, which is living through a prolonged demand in supply volatility, but is essential for maintaining a high rate of alternative sales for our steel segment.

 There is another synergy that we may extract from this acquisition, taking reference to the board's decision to consider the European part of MSG for sale. If that transaction takes place we believe that with the contribution of Cogna, MSG will fetch a higher value through the effect of scale with the current value of our own distribution.

 The above mentioned assets account for $187 million of Estar loan, leaving $555 million to be extended for another nine months after the provision posted to the accounts in Q2 as we discussed above. We will be closely watching over the sales process of the other Estar assets in the meantime and for avoidance of debt we do not intend to consolidate any more of them.

 We expect the consolidation of these assets, the assets that I mentioned above, will have a neutral effect on our indebtedness ratios. Cogna will be consolidated immediately amongst others to contribute to MSG Europe divestment process, while the Rostov plant and Lomproms likely to be consolidated in the beginning of 2013.

 To conclude, ladies and gentlemen, the results of the second quarter demonstrated two things, first of all the benefits of a vertically integrated model become clear when the volatility increases. The reported period is another proof to it. It's outperformance of the steel division compensated at least partially for the increased profitability in the other divisions.

 Secondly, the strategy which the management began to implement in the fourth quarter of 2011 proved to be sustainable and bring in results. We continue to improve cash generation and pay down debt. At the same time measures undertaken to cut loss making capacities improved profitability of the steel and ferroalloys segment.

 Now having defined the list of assets for divestment and having the unanimous board approve for it, we are going to take these measures one step further, which I hope will bring about a dramatic change to our Group's profitability and investment attractiveness.

 That having been said, I would like to thank you, ladies and gentlemen, for your attention. And the team is ready to take your questions.



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Questions and Answers
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 Vladislav Zlenko,  Mechel OAO - Director - IR   [1]
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 Thank you. We will now take questions. We'd ask that participants please state their name and company before asking their question and also some time after for translation. When questions are answered in Russian they will be followed by translation, so you may ask your question in Russian also and we will translate. Thank you. Please go ahead.

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Operator   [2]
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 Thank you. (Operator Instructions). Okay. And our first question comes from the line of Sergey from Soc Gen. Please go ahead.

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 Sergey Donskoy,  Societe Generale - Analyst   [3]
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 Hello. Good evening, everyone, Sergey Donskoy, Soc Gen. Thank you for the presentation. I have four short questions.

 First, could you please confirm that consolidation of Rostov plant into the perimeter of the Group will not entail an increase in the net debt? Second, could you provide an update on your coal production plan for 2012 by division, if possible specifying separately the volume of the coke and coal?

 Thirdly, could you provide an update on your 2012 CapEx, and if possible some outlook for 2013? And lastly, it would help if you could provide some indication of the realized prices, metallurgical, coal in Q3 for Yakutugol and Bluestone by market, and if that is possible some outlook for Q4. Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [4]
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 Stanislav Ploschenko will answer the first question.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [5]
------------------------------
 The consolidation of Rostov plant will add an insignificant amount of debt to the group, but in terms of relative indebtedness we expect that the effect will be neutral as the ratio of net debt to the operating income of Rostov today is well below the one of the Group.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [6]
------------------------------
 The next question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [7]
------------------------------
 (interpreted) As for 2012 we believe that the coal production will amount to around 29 million to 29.5 million tons, and focused specifically by our -- focused specifically about our various units usually in Kuzbass we believe we'll deliver 14.5 million tons. We expect to get 10.5 million tons from Yakutugol together with Elga and another 4.4 million, 4.5 million tons from Bluestone.

 To answer your third question regarding our CapEx, according to the budget, the investment cost of the budget it was $1.1 billion, out of which we believe that $200 million will be spent on maintenance projects and $900 million on investment projects. Since during the year we continued with construction at our major, strategically important sites, we believe that this amount -- the amount that we actually spent on investments will be close to the budgeted figures, and we continued with our works at Elga, and universal rolling mill and the [Porshel] reconstruction. So again we expect that the overall CapEx investment for this year will be around $1.1 billion.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [8]
------------------------------
 I apologize. Before you turn to the fourth question, speaking about production I also asked if possible to provide guidance for coke and coal output for this year within those subsidiaries.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [9]
------------------------------
 (interpreted) We believe that coke and coal concentrate -- coking concentrate in 2012 for the Company will amount to roughly 11 million, 11.5 million tons. And speaking about the breakdown by various entities of the Company usually in Kuzbass we expect to deliver 4.3 million, 4.4 million tons Yakutugol 5.5 million, 5.6 million and Bluestone around 1.8 million.

 To answer your question about the sale prices in the third quarter, at Bluestone we are producing two types of coal, high volatility and low volatility coals. As to high volatility coals the average selling prices were $120 to $150 FOB basis with the transportation component to the port of $55. As to low volatility coals, then there the FOB prices were between $145, $205 per ton. At the start of the quarter they were around $200, $205. And towards the end of the quarter they went down to around $145. And the transportation component from the site to the port together with the loading, unloading at the port was $55.

 Now Yakutugol they coals are going to Ukraine, China and Southeast Asia -- sorry, Ukraine, Japan and Southeast, China and Korea, K-9 coals in the third quarter went to Ukraine at the DDU price of $210 with a logistics component of $60. K-9 coals went to China on the CC basis at $140, $160 per ton with a logistic component of $55. K-9 went to Southeast Asia at average prices of $202, $209 FOB. To Posiet's and the transportation component was $42 together with the port loading, unloading.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [10]
------------------------------
 Thank you very much, just one last question. And how do you think these prices will or may change into the fourth quarter? Thank you. Thank you.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [11]
------------------------------
 (interpreted) Given the current market environment we expect that high volatility coals from Bluestone will be priced around $120, $130. We expect that they will win back about $10. As to low volatility coals we do expect that they will gain another $10 to $15 to their current prices.

 As to K-9 coals we've got contracted volumes for the fourth quarter to the Southeast Asia. And we expect the prices to be around $145, $155 FOB. China is slightly a bit more challenging because with China we're working on the basis of spots contracts at the spot market, but we do expect that there the prices will win back another $10 to $15. Right now the prices in this corridor are somewhat low.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [12]
------------------------------
 Next question please.

------------------------------
Operator   [13]
------------------------------
 Thank you. Our next question comes from the line of Anton from Sberbank. Please go ahead.

------------------------------
 Anton Rumanse,  Sberbank - Analyst   [14]
------------------------------
 Hello, gentlemen. Thank you for the presentation. It's Anton Rumanse from Sberbank. You have a very successful track record of decrease in the US steel stocks at Mechel Service Global. In the first half of the year, I just wanted to find out if there is a possibility of further increase of this stock. And overall do you expect any further decrease of your working capital in the second half of this year? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [15]
------------------------------
 Oleg Korzhov will answer the question.

------------------------------
 Anton Rumanse,  Sberbank - Analyst   [16]
------------------------------
 Okay. Thank you.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [17]
------------------------------
 (interpreted) Indeed the management of Mechel Service Global did a lot of work to optimize the inventory. At the start of the year we had 1.270 million tons of products in stock and over the first six months of the year we managed to reduce that volume by about 30% and bring it to around 970,000 tons, roughly 1 million tons.

 Because of a lot of efforts that went into this process at Mechel Trading, and also at the enterprises of the facilities of the group we managed to return quite a substantial amount of money into the working capital. Mechel Service Global will probably not be able to reduce too much the stock until the end of this year. They will focus on optimizing the assortment, the types of products that we store right now in the inventory.

 Right now MSG is tasked with reducing the stock of the most expensive and slow moving products, mainly high quality rolled products. Maybe we will be able to cut down another 150,000 tons at best until the end of the year, which will mean that we will be able to inject into our working capital by the end of the year another $200 million, $250 million.

------------------------------
 Anton Rumanse,  Sberbank - Analyst   [18]
------------------------------
 Could I ask one more for a last question? Could you please provide a breakdown about -- of the steel stocks at Mechel Service, Russia and Mechel Service International which you want to sell? Thank you.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [19]
------------------------------
 (interpreted) Over which period of time, at the start of the year, right now?

------------------------------
 Anton Rumanse,  Sberbank - Analyst   [20]
------------------------------
 No, no, no, the current -- just if you say that you've got 1 million of tons of current stockpiles, actually what part of the stockpiles actually is lying in Russia and what is attributable to your international warehouses?

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [21]
------------------------------
 (interpreted) Okay. If you want the figures I can provide you with the figures. As of today, right now Mechel Service Global have 950,000 tons of products in stock, out of which 390,000 are allocated in Russia. And the rest, which is 950,000 minus 390,000 within the international domain of the Mechel Service Global, mainly Europe, Kazakhstan, Turkey, UK and other locations.

------------------------------
 Anton Rumanse,  Sberbank - Analyst   [22]
------------------------------
 All right. Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [23]
------------------------------
 Next question please.

------------------------------
Operator   [24]
------------------------------
 Thank you. And our next question comes from the line of Boris from Renaissance Capital. Please go ahead.

------------------------------
 Boris Krasnojenov,  Renaissance Capital - Analyst   [25]
------------------------------
 Yes. Good evening, gentlemen, Boris Krasnojenov of Ren Cap. I have three questions from my side. First question, [you mentioned] -- if the Company generates net loss for full year 2012, the pref -- do the prefs gain voting rights? Or you need two consecutive years of net loss for prefs to gain voting rights?

 The third question -- the second question is you mentioned that they are close to commissioning of revenue. What's the remaining CapEx on this asset? And what kind of volumes that we may expect on the year 2013 from the new universal rail mill? And do you have any orders or something booked by the Russian railways?

 And the third question, what volumes of coking coal and thermal coal you -- maybe sellable volumes you expect from Elga next year? And what CapEx you plan for Elga project for next year?

 And just one small addition, I understand you are going to take from the Estar group [of essence], Rostovsky. Also you mentioned two other Cogna and I just need what was the first effort you mentioned? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [26]
------------------------------
 And Stanislav, Stanislav Ploschenko will answer the first and the last question.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [27]
------------------------------
 According to the charter the prefs are entitled 20% of the net income if the dividend -- if the dividend is paid in lesser amount or if not paid at all. The preferred shares can get a voting right, but in the absence of the income, if any dividend is paid then the preferred shares don't get a voting right. That's an answer to the first question.

 The second question we are looking to consolidate three companies belonging currently to Estar, is Rostov, the electrometallurgical plant, Cogna, the distribution network and Lomprom. This the company securing 100% of Rostov metallurgical plant's scrap needs.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [28]
------------------------------
 Oleg Korzhov will answer the remaining questions.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [29]
------------------------------
 (interpreted) To answer your question about the universal rolling mill, the total financing allocated for this project is -- was $850 million, out of which $350 million have been already invested at the start of this year. The investment program for 2012 is $250 million, $300 million. It means that in 2013 we will have to inject the revenue -- the residual amount into this project of $200 million, $250 million.

 As the volumes of production we wouldn't like to guess at the moment. In the first quarter we will begin production. We will start mastering the assortment. We will start loading that capacity. And of course the volume of production will depend on the situation in the market of construction materials.

 As to volume of sales, well again you have rightfully pointed to the experience of major service and sales. Right now major service is buying similar products from third parties and we are learning that. It's a training exercise for us and we do have an agreement signed with Russian Railways, with RZhD OAO. And under this agreement they are supposed to off take 400,000 tons of rails from us.

------------------------------
 Boris Krasnojenov,  Renaissance Capital - Analyst   [30]
------------------------------
 Thank you very much. That's it.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [31]
------------------------------
 (interpreted) The one-off production at Elga for 2013, well we believe that we will be able to produce up to 4 million tons of rolled mined coal. And the main factor determining the rate of production will and is already a new washing plant. That -- it's drying capacity is 2 million tons a year. So we will need to fully load that capacity for washing on coking coal.

 Right now in the rolled mine coal the ratio between the ordinary coals and the thermal coals are 50/50. It means that we'll need to produce 4 million tons so that we will be able to fully load our washing capacities. Maybe production plans will be adjusted towards lower figures. Again it depends on the actual ratio of ordinary and thermal coals in the production.

 As to our CapEx plan, it all depends actually on our plans for 2014 production so that right now we would not be able to give you a specific figure for 2013, but most likely it will be close to the investment that has been already made this year, which is around $300 million, $350 million. This question is currently being discussed by the management of the Company and we believe that we will be able to take that decision pretty soon.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [32]
------------------------------
 Next question please.

------------------------------
Operator   [33]
------------------------------
 Thank you. Our next question comes from the line of Dan Yakub from Citi. Please go ahead.

------------------------------
 Dan Yakub,  Citigroup - Analyst   [34]
------------------------------
 Guys, thanks lots for the presentation, just a couple of questions from me. The first one relates to the -- to your cash and cash equivalent figures presented on slide 14 where you did show the available lines and the cash equivalents on September 1st. If I'm reading the actual press release correctly, you had close to $150 million of cash equivalents in -- at the end of June.

 And on the 1st of September you expect $630 million, so just trying to understand where is this extra close to $400 million, or even $500 million is coming from, given that the working capital release from the Mechel Service Global is expected at much less than that, or even maybe half of that for the entire second half, so just trying to understand where the money is going to come from? And in those July and August months.

 Second, I'm just trying to understand the Estar reorganization, so to speak. You're going to keep Rostovsky, Cogna, Lomprom. That's asset wise scrapped Rostovsky. What about the rest of the assets? And can you describe what will happen to these assets? Are you going to bankrupt them or are you going to try and sell them?

 And finally another question on divestments, you identified some of the non-core assets like power -- do you consider ferroalloys a non-core asset as well or not? And in the power segment we've seen basically on balance either zero or negative EBITDA generation from the power segment. Can you describe whether these assets are actually cash generative or cash consuming the power segment?

 Because I understand that if EBITDA is close to zero, probably with the exception of the first quarter. And is there also capital expenditure commitments on the -- in the power segment, and whether the assets in the power segments actually generate or consume cash? And whether you will be able to divest an asset which is generating zero EBITDA and potentially negative cash adjusted for CapEx? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [35]
------------------------------
 Stanislav Ploschenko will begin answering.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [36]
------------------------------
 Yes indeed. The cash position as of September the 1st increased quite substantially as we drew on some of the available credit lines and kept cash in our accounts, including for the dividend payout which took place in August.

 The question number two on Estar, as I said previously, no, we do not want to consolidate any other Estar assets. We're not interested. And currently the divestment process is underway, performed by the owners of Estar, which we are watching very closely. And we expect that by the time the expansion of the loan to Estar matures this divestment will be over.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [37]
------------------------------
 The remaining question will be answered by Yevgeny Mikhel.

------------------------------
 Dan Yakub,  Citigroup - Analyst   [38]
------------------------------
 Just one follow-up question. Oh I'm sorry.

------------------------------
Unidentified Speaker   [39]
------------------------------
 Could you please allow some time for translation?

------------------------------
 Yevgeny Mikhel,  Mechel OAO - CEO   [40]
------------------------------
 (interpreted) As regards to the ferroalloys, and ferroalloy segment and the power assets, you know that the Company now has a new approved strategy. Ferroalloy is no longer considered to be a priority and those assets will be subject to sail on the basis of market.

 As to our power generation assets, except for the Rousse power plant in Bulgaria all other assets we consider to be auxiliary for our production. And we need them to ensure the power security of our Company.

 There is one more asset, Kuzbass (inaudible) that we will divest because this is an independent business that the market might be interested in, while for us it is no longer a priority.

 And as to our potential CapEx into those assets, we will invest only as much as is needed to maintain the operational production at those enterprises, and not more. So this will be maintenance CapEx.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [41]
------------------------------
 Next question please.

------------------------------
 Dan Yakub,  Citigroup - Analyst   [42]
------------------------------
 I just -- a quick follow-up question. There was also a little bit of the press coverage of your plans to potentially divest between 20% and 25% of Mechel Mining, Mechel Mining division. I'm not sure if you can at least provide with comment or just understanding of -- if any of these speculations in the press are actually true, and whether you will actually be able to invite a strategic partner for Mechel Mining's division and Mechel Mining efforts to develop assets. Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [43]
------------------------------
 Stanislav Ploschenko will comment.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [44]
------------------------------
 Yes. The board has approved a possible divestment of up to 25% in Mechel Mining. And I would like to draw everybody's attention to make it clear in the view of the speculation in the press we are considering 25% at most. And any deal could be anywhere between zero and 25%, depending on other conditions of this transaction.

 Currently it's too early to say anything about this process. We are potentially interested in attracting a strategic partner oh that would help us to develop Mechel Mining because Mechel Mining has one of the largest coke and coal reserves globally. And clearly there is the sky is the limit if we talk about a possible development of this reserve base and the opportunities it might offer to our Group. And in the next several months we will be considering different possibilities with regard to this divestment.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [45]
------------------------------
 Next question please.

------------------------------
Operator   [46]
------------------------------
 Thank you. Our next question comes from the line of [Stan Goofer], Merrill Lynch. Please go ahead.

------------------------------
 Stan Gojanking,  Merrill Lynch - Analyst   [47]
------------------------------
 Yes, hello. This is [Stan Gojanking] from Merrill Lynch. I have three questions if I may. The first one is a follow-up on Estar. You mentioned that Rostov plant has a insignificant debt, but could you provide a more precise estimate of total Estar's debt to third parties you are going to consolidate at the end of this year, beginning next year?

 My second question is about debt repayment in the second quarter. Probably I missed your explanation, sorry about that, but you reduced your net debt by about $0.5 billion in the second quarter. At the same time your free cash flow was around zero. So what was the source of that debt reduction in the second quarter? And my last question is about your plans for debt repayment by the end of this year? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [48]
------------------------------
 Stanislav Ploschenko will answer.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [49]
------------------------------
 As far as Estar's debt is concerned, we can't say the exact figure of representing the debt on the consolidated entities once we do all necessary US GAAP procedures on them because according to GAAP treatment, debt can be -- can vary. But we do not expect that the consolidated debt will exceed $200 million. That's for all the three entities that we consolidate and most of that will be on the Rostov plant which we are going to consolidate not before January next year.

 The explanation of a significant debt reduction in Q2 comes from ruble depreciation during that period. Basically that is a reflection of depreciation of the ruble denominated part of our debt on our balance sheet.

 As for the third question, as you can see on the slide number 14 we have plenty of cash, cash equivalents and undrawn credit lines to repay the debt that falls due till the end of this year, but at the same time we are currently negotiating up to $1.5 billion worth of new long-term money and a refinancing of the existing debt which I hope will be consummated by the end of November.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [50]
------------------------------
 Next question.

------------------------------
 Stan Gojanking,  Merrill Lynch - Analyst   [51]
------------------------------
 Yes thank you, just one follow-up. Can we expect a significant increase -- a reversal increase in your net debt in case of like ruble appreciation?

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [52]
------------------------------
 Stanislav Ploschenko will answer this question.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [53]
------------------------------
 Yes. If the ruble appreciates the ruble denominated part of the debt will go higher. So net debt will increase, but in the existing covenants we have eliminated this effect. And the compliance with accountants is calculated excluding the fact FX. And the picture for your reference is on the page number 14 as well.

------------------------------
 Stan Gojanking,  Merrill Lynch - Analyst   [54]
------------------------------
 Okay. It's clear. Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [55]
------------------------------
 Next question please.

------------------------------
Operator   [56]
------------------------------
 Thank you. Our next question comes from the line of George from Deutsche Bank. Please go ahead.

------------------------------
 George Buzhenitsa,  Deutsche Bank - Analyst   [57]
------------------------------
 Good evening, gentlemen. Thank you for the conference call. I have a couple of questions. First, just correct me if I'm wrong, but I believe you had a plan to construct -- to build a second washing plant, a seasonal washing plant and [held] the deposit. So my question is if I'm correct in my memory, so is the plan still in place or you've amended that?

 And the second question now would be with respect to your provision for amounts due from related parties. And my question is how did you calculate that? And is there a risk that that provision will increase going forward, especially given the situation with the and that of Estar?

 And third question would be do you have any other covenants but net debt to EBITDA or EBIT to interest expense, covenants which would relate to the value of your assets on the balance sheet or equity on the balance sheet? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [58]
------------------------------
 Oleg Korzhov will answer the first question.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [59]
------------------------------
 (interpreted) To answer your question about the washing capacities of Elga you know that for us this is one of the greatest priorities in the development of the whole segment. Elga is a large-scale project. It is not static. And we are constantly searching for possibilities of optimizing the financial -- the financing of such projects because we are operating under limited resources and we need to ensure a quick return on our investment.

 Additionally, this project provided for two seasonal washing plants. One of them has been constructed as you know this year. And the second one was supposed to have been constructed this year, but we analyzed the current situation and we adjusted our plans downwards.

 Our current plan is a seasonal washing plant and we wanted to extend its functioning through the year. And for this we insulated the outer building of the factory, of this plant, which gave us another two months of its functioning during the year. We would like to see this washing plant become a year round washing plant eventually. And to this aim we want to also provide heating to the conveyor galleries. And right now our engineers are looking into this matter and if we will be able to do this then its current capacity will increase from 2 million to 2 million tons a year.

 Besides the two more units that I'm missing today from the site, from that particular washing plant, mainly it is a special drying unit, a dryer which will allow us to produce coke in concentrate with the necessary moisture content, which in its term will enable us to do the loading of the products in wintertime. And the second unit is called a floatation unit. And it allows you to introduce more fine fractions into production, thus increasing the total volume of output.

 We have not fully disregarded the project for construction of the full-fledged washing plant for 9 million tons. Instead of constructing this in one go we decided to break it into stages and there will be two stages to it in a full-fledged washing plant of 4.5 million tons each. We will start with the first stage and with the construction of those two missing units, the dryer and the flotation units.

 And hopefully from next year we will be able to do washing during the whole 12 months, and we will have this first stage of the big washing plant for 4.5 million tons and those two additional units. We believe that this sequencing of events will allow us to maximize the use of available equipment and to minimize the spend resources while generating maximum cash flow through a sale of products. And this strategy has -- it be it quite recently has been discussed for the last couple of months. So hopefully we will be able to see it come to fruition and we'll see the actual results of this strategy next year.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [60]
------------------------------
 Stanislav Ploschenko will answer the remaining questions.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [61]
------------------------------
 Okay. US GAAP has tried a separate procedure that tests the investments, including loans given. In our case it's Estar loan. And this is a test for the fair value of these investments in real terms based on the model of discounted cash flow from this investment.

 So in this situation the test or in test for impairment of Estar loan is not very much different from the test for impairment of any of the good developed fixed assets that we perform on our assets, which is meant to say that since we're talking about a discounted cash flow model, if there is a serious market deterioration which would entail further deterioration of the market's projections and assumptions, then yes there might be another impairment to the fair value of our investments. And that would concern, or could concern if that happens both Estar loan and our own assets.

 The third question, the short answer is yes we have a number of other covenants. We have been discussing the most significant ones, but since you mentioned one particular consent in equity then the answer is yes. We have the minimum equity requirement according to our loan agreements of $4 billion.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [62]
------------------------------
 Next question please.

------------------------------
Operator   [63]
------------------------------
 Thank you. Our next question comes from the line of Alexander from Sovlink. Please go ahead.

------------------------------
 Alexander Trazanov,  Sovlink LLC - Analyst   [64]
------------------------------
 Good day and I have three questions. The first, what is the target period on realization for non-core assets?

 And the second question about the total debt of mining division and with the [sales] about contract price for ton of [steam] coal and long-term contracts with [rolled] energy system of it. Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [65]
------------------------------
 Yevgeny Mikhel will answer the first question.

------------------------------
 Yevgeny Mikhel,  Mechel OAO - CEO   [66]
------------------------------
 (interpreted) To answer your first question there is no fixed fine line for the sale of the assets. Our priority is an efficient divestment so that we can minimize or better exclude any write offs. Every decision will be taken on the basis of our analysis of the market and market trends. The Company wouldn't want to lose the potential incremental value of these assets through a hasty divestment deal.

 If we see that in the short run potentially the value of these businesses might increase, then we will be ready to bargain. And we are already doing this. We have already identified the agents and we have already established data rooms. And we already know for most of these assets the current demand in the market. And actually it turns out that the demand is better than we expected. So for us efficiency is a priority.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [67]
------------------------------
 The next question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [68]
------------------------------
 (interpreted) Now to answer your third question, I believe it is we do have a signed strategic agreement with energy systems, with [TDK], but that agreement prescribes only the volumes, not the prices, deliveries. The prices are market prices on thermal coal and we have already started shipping to TDK. And the prices that we are using now in our current deliveries are those from or -- for [yungree] coals. Right now that price is I've seen yungree RUB1,500 per ton.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [69]
------------------------------
 The remaining question will be answered by Stanislav Ploschenko.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [70]
------------------------------
 As of the end of the second quarter the net debt of Mechel Mining stood at the level of $3.6 billion.

------------------------------
 Alexander Trazanov,  Sovlink LLC - Analyst   [71]
------------------------------
 Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [72]
------------------------------
 Next question please.

------------------------------
Operator   [73]
------------------------------
 Thank you. Our next question comes from the line of Dmitry from Credit Suisse. Please go ahead.

------------------------------
 Dmitry Smolin,  Credit Suisse - Analyst   [74]
------------------------------
 Yes. Good evening, gentlemen. I have a question, two questions on non-core asset sale. The first one is how much do you plan or you may raise from the sale of these assets? Maybe you have some internal estimates for this?

 And the second is you on that some of those efforts are basically loss making. What might be an effect on EBITDA from the sale of -- from their sale?

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [75]
------------------------------
 Stanislav Ploschenko will answer the second question.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [76]
------------------------------
 As far as the EBITDA of the assets to be divested is concerned, all in all they generated about $100 million of negative EBITDA in the first half. So taking into account the deteriorating markets in these conditions we expect the divestment would bring from $200 million to $300 million of EBITDA.

------------------------------
 Dmitry Smolin,  Credit Suisse - Analyst   [77]
------------------------------
 Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [78]
------------------------------
 (spoken in Russian) And the first question will be answered by Yevgeny Mikhel.

------------------------------
 Yevgeny Mikhel,  Mechel OAO - CEO   [79]
------------------------------
 (interpreted) And as regards to our plans or target amounts to be obtained through the sale of non-core assets, at this point we will love to refrain from giving any estimates or assessments. Right now the negotiations are already underway. And quite actually for some of these assets we expect to close some deals until the end of the year. So we do not want to influence the outcome of those deals by giving -- by voicing any estimates at this point.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [80]
------------------------------
 Next question please.

------------------------------
Operator   [81]
------------------------------
 Thank you. And we have a follow-up question from and Sergey from Soc Gen. Please go ahead.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [82]
------------------------------
 Yes hello, three very small questions from me. First, now that you are planning to consolidate Rostov plant at the beginning of next year, could you provide us some idea of the Company's financial performance in the first half of the year? EBITDA would be ideal.

 Second, regarding the power line that is expected to be connected to Elga by end of the year, do you think capacity will be enough to power the 9 million ton plant, or you will have to further expand this capacity to ensure a stable power supply to the 9 million ton washing facility?

 And lastly, just one small question regarding Bluestone, you mentioned that you plan to mine around 4.5 million tons of rolled coal at Bluestone and sell only about 1.8 million tons of coking concentrate. Now from my knowledge about the asset I conclude that this probably means you're going to stockpile some of the coal before or without converting it into concentrate. Is it correct? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [83]
------------------------------
 The first question will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [84]
------------------------------
 Given the exact of financial figures for Rostov for the first half of year would not be not representative because in the first half of the year the main rolling mill, which was recently launched and ramped up to full capacity, was not operating at its full capacity. That's one thing.

 The secondly Rostov is not being accounted for according to US GAAP. So I can only give you guidance of the operating income under Russian accounting standards, which is it's running on currently it's about from RUB70 million to RUB80 million a month.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [85]
------------------------------
 The next questions will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [86]
------------------------------
 (interpreted) Regarding the power lines and the power capacity to Elga we are currently constructing power lines due to and 20 to Elga, and that capacity will be sufficient not only to sustain the 9 million ton washing plant, but also to sustain the whole ground infrastructure at its design capacity, which means the production of up to 25 million tons of coal and washing of all that volume of coal.

 And you are right in saying that at Bluestone we intend to produce 4.5 million tons of coal, rolled mined coals in 2012. You know that we do not sell rolled coal from that facility. We sell washed coal. And out of 4.5 million tons of rolled mined coal you can get 2.3 million tons of finished product, out of which 1.8 million ton is coking concentrate and approximately 0.5 million is thermal coals. So everything that we will produce at Bluestone this year we intend to sell.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [87]
------------------------------
 Next question please.

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Operator   [88]
------------------------------
 Thank you. We have a follow-up question from the line of Dan Yakub from Citi. Please go ahead.

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 Dan Yakub,  Citigroup - Analyst   [89]
------------------------------
 Thank you guys, just maybe at the very beginning of the call you gave guidance for CapEx. Maybe you can just reiterate capital expenditure levels for the second half of the year and maybe have a figure for 2013.

 And in addition to the question of the previous speaker on Rostov plant, is there any maintenance CapEx or CapEx pertaining to Rostov plants that is not let's say captured in the operating income? Is there any CapEx that was recorded let's say at a steady state once the ramp up of the mill you mentioned was completed? Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [90]
------------------------------
 Oleg Korzhov will answer the questions.

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 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [91]
------------------------------
 (interpreted) To answer your first question, as I've already explained the [washed] for 2012 provided for a total CapEx of $1.116 million. The actual figures of capital expenditure for the first six months of the year are $530 million. It means that until the end of the year it will have to employ another $500 million to $600 million since we intend to fully exercise or execute that investment program.

 And we are not ready right now to give you any 2013 CapEx guidance. We are still considering this method inside the Company, but if you follow the logic of this year and if you look at our strategy then it means that next year there will be around $200 million, $250 million of maintenance CapEx. This is the expenditure that we do every year. And we do not plan to have any new investment projects next year.

 We plan only to complete the ones that we already have, mainly the Port Posiet, which will require another $40 million to $50 million, Elga will require another $300 million to $350 million and we are currently looking into different financial options there, and the project of the universal rolling mill, another $200 million to $250 million.

 And as to the Rostov CapEx, our technical experts have funded that facility very thoroughly. And we know that Rostov is one of the youngest plants of its kind today in the country. And we do not believe that it will be necessary for us to inject heavily into that plant in the near future. There will be some CapEx spend on in a regular upgrade and maintenance, but anyway those figures will be lower than the annual amortization of the plant.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [92]
------------------------------
 Next question please.

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Operator   [93]
------------------------------
 Thank you. We have a follow-up question from the line of Anton from Sberbank. Please go ahead.

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 Anton Rumanse,  Sberbank - Analyst   [94]
------------------------------
 Hello again, gentlemen. I just small, several small follow-up questions on Estar steel trade Cogna. Could you please repeat how much warehouses this company is currently are operating? Maybe you could provide us with some ballpark figures of how much does this company sell in millions of tons per year, or in thousands of tons.

 And I also want to find out actually if there are any significant steel stocks in this warehouse change, and what are they? Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [95]
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 The questions will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [96]
------------------------------
 Cogna has 20 warehouses, its selling capacity is around 35,000, 37,000 tons a month. And the current stock at Cogna warehouses is around 80,000 tons of steel products.

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 Anton Rumanse,  Sberbank - Analyst   [97]
------------------------------
 I missed it. Thank you very much.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [98]
------------------------------
 Next question please.

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Operator   [99]
------------------------------
 Thank you. Our next question comes from the line of [Maria] from BCS Financial. Please go ahead.

------------------------------
Unidentified Participant   [100]
------------------------------
 Everybody good evening. Thank you very much for taking my questions. I've got several very quick questions concerning your debt position, a first question regarding your leveraged ratio's calculations for the purposes of the covenants. Do you include obligations under financial lease into the amount of net debt when calculating net debt-to-EBITDA ratio?

 And the second question, could you please provide the outstanding amount of your syndicated loans? And the last one, if it's possible could you please disclose what your average interest rate on short-term of loans? Thank you.

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Unidentified Company Representative   [101]
------------------------------
 I'm sorry. Could you please repeat the first question?

------------------------------
Unidentified Participant   [102]
------------------------------
 It is the concerning the leverage ratio calculation for the purposes of the covenants under the syndicated loan. I wonder if the Company includes obligations under financial lease into the amount of net debt.

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Unidentified Company Representative   [103]
------------------------------
 Excuse me. Is the first was about the average interest rate on short-term?

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Unidentified Participant   [104]
------------------------------
 Yes, but on short-term ruble loans.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [105]
------------------------------
 Stanislav Ploschenko will answer the questions.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [106]
------------------------------
 Yes. The financial covenants include the financial lease. So the lease includes for the purpose of calculation financial accounts. The syndicated loan outstanding amount as of today is slightly less than $1.3 billion. And the average interest rates on the Russian -- on the rubles denominated short-term debt is from 7% to 10% for depending on the instrument.

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Unidentified Participant   [107]
------------------------------
 All right. Thank you very much.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [108]
------------------------------
 Next question please.

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Operator   [109]
------------------------------
 Thank you. Our next question comes from the line of [Mark Cliff] from Deutsche Bank. Please go ahead.

------------------------------
 Serge Lioutyi,  Deutsche Bank - Analyst   [110]
------------------------------
 Hi, apologies. It's actually Serge Lioutyi from Deutsche Bank. Gentlemen, thank you very much for having the call. I joined in a bit late and I just wanted to ask some details on your PXF which are related to the previous question. Actually I saw some news come out today that you've been approaching lenders in order to offer an extension on your 2013 loan. Could you please elaborate on this one please, and the rationale as well seeing as you have I think undrawn committed lines of $1.5 billion and how those negotiations are progressing please.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [111]
------------------------------
 Stanislav Ploschenko will answer.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [112]
------------------------------
 The availability of $1.5 billion worth of cash, cash equivalents on undrawn credit lines in the current volatile market conditions is not an excuse for a reasonable corporate not to do its best beyond that to optimize the debt portfolio and to decrease the short-term debt to the minimum. And as I said previously, our target which we are trying to, which we are aiming at in the course of our negotiations with all the banks, the Russian and the international currently is to decrease the short-term portion of debt below $1 billion for the next 12 months.

 Precisely following that logic we indeed approached the international syndicate with a request to grant a 12-month grace period on the existence and to get a facility without changing its term structure, its final maturity.

 And we expect that we will reach an agreement within the next month. We have been working pretty closely with all the banks in the syndicate and we have an understanding that this request has been taken positively by most of our lenders. We expect that the banks would react positive to that because we will use some of the existing undrawn facilities to repay some of this syndicated facility in return for getting this to our fund's grace.

------------------------------
 Serge Lioutyi,  Deutsche Bank - Analyst   [113]
------------------------------
 Sorry. Does that need to be translated or can I ask a follow-up question?

------------------------------
Unidentified Company Representative   [114]
------------------------------
 If you could please allow some time for translation?

------------------------------
 Serge Lioutyi,  Deutsche Bank - Analyst   [115]
------------------------------
 Sure. Thank you.

 That's fantastic. That's good for short-term there. One other follow-up question the PXF is a dual tranche facility if I'm not mistaken. So it's a three-year and a five-year. Are similar negotiations happening for a grace period for the five-year tranche of the loan as well, or is just for the three-year tranche, if you're allowed to disclose that please?

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [116]
------------------------------
 At this point I would like to refrain from any further discussion of the process with the international syndicate because we are a little bit too early in the process. I wouldn't like to divulge the details which might not be effective at the end of the process.

------------------------------
 Serge Lioutyi,  Deutsche Bank - Analyst   [117]
------------------------------
 That is understood. Thank you very much for your time. Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [118]
------------------------------
 Next question please.

------------------------------
Operator   [119]
------------------------------
 Okay. And our final question is a follow-up question from the line of Sergey from Soc Gen. Please go ahead.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [120]
------------------------------
 Oh thank you. And I promise there is no more questions today, just one. You mentioned that you estimate your maintenance CapEx at $200 million to $250 million per annum. Meanwhile your depreciation charge annualized currently runs at approximately $450 million. I think that to most analysts this would be the, well the best possible available indication of the actual maintenance CapEx requirements long term. Do you think that your current depreciation charge overstates your actual maintenance requirements or they may increase going forward? Thank you.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [121]
------------------------------
 Oleg Korzhov will answer.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [122]
------------------------------
 Lovely. Thank you.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP Economics and Management   [123]
------------------------------
 (interpreted) Well the answer is maybe, but in recent years the Company has been commissioning a lot of new facilities, especially in the steel segment. And of course depreciation is growing since again we have a lot of new assets, all the new facilities on our balance sheet. And as these assets age, fixed assets specifically, maybe the depreciation charge and the maintenance CapEx will converge, but at this point we're believe that where they are is optimal for the Company.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [124]
------------------------------
 Next question please.

------------------------------
Operator   [125]
------------------------------
 Okay. Just to confirm that we have no further questions coming through on today's call.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director - IR   [126]
------------------------------
 Ladies and gentlemen, thank you for taking the time to join Mechel First Half 2012 Financial Results Conference Call today. The replay of the call will be available on Mechel's website. If you have any further questions please contact the IR office. Thank you again from all the team here. Goodbye.

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Operator   [127]
------------------------------
 Thank you for joining today's call. You may now replace your handsets.

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Editor   [128]
------------------------------
 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.






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