Q1 2013 Mechel OAO Earnings Conference Call

Jun 18, 2013 AM EDT
MTLR.MZ - Mechel PAO
Q1 2013 Mechel OAO Earnings Conference Call
Jun 18, 2013 / 02:00PM GMT 

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

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Conference Call Participants
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   *  Sergey Donskoy
      Societe Generale - Analyst
   *  Richard Russell
      VTB Capital - Analyst

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Presentation
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Operator   [1]
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 Good afternoon, ladies and gentlemen. Welcome to Mechel Q1 Financial Results Conference call. My name is [Kate] 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'll have the opportunity to ask questions. (Operator Instructions)

 I'll now hand it over to your host to begin.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [2]
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 Thank you and good day, everyone. I would like welcome to you to Mechel's Conference Call to discuss our first quarter 2013 results which were reported today.

 With us from management today are Mr. Evgeny 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 this 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.

 We 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 in our website at www.mechel.com.

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

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 Evgeny Mikhel,  Mechel OAO - CEO   [3]
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 (interpreted) Good afternoon, ladies and gentlemen. We are glad to welcome you at the conference call on the Company's results for first quarter 2013.

 This year we managed to significantly boost our slumping sales which have had their impact on our financial results in last year's fourth quarter particularly those of Mechel's mining division. Today we also see the effect of measures aimed at maximizing profit in the steel and ferroalloy divisions.

 For example, disposal or halting of several loss making steel enterprises enabled us to finish this quarter with a positive EBITDA in all of the groups divisions.

 As a whole, in the first quarter we saw mixed to dynamics on our key markets. Prices on our steel products were fairly stable considering seasonal sectors and at the same time, demand for raw materials for steelmaking such as coking coal and iron ore was in some ways restored.

 So stepping up our export sales allowed us to significantly improve Mechel's financial results quarter on quarter in first quarter 2013, Mechel's consolidated revenue what was a some $2.5 billion, EBITDA was at $210 million and net loss went down to $321 million.

 Since this year's beginning, we made a great deal of effort in structuring the group's business in accordance with the renewed it development strategy. After the disposal of loss making, Romanian enterprises we managed to make significant headway in negotiations to sell Mechel's chrome assets in Russia and Kazakstan as well as [Dinesk] electrometallurgical plant in several of Mechel's service global European-based assets.

 We have also decided to shut down the loss making southern euros nickel plant. These measures will help the group to attract major funds creating conditions for deleveraging as well as free up managerial resources that we will be able to focus on those directions of that are most important for the Company's gradual development.

 We have also achieved a serious results in implementing one of our priority investment projects construction of the universal rolling mill at Chelyabinsk metallurgical plant.

 After successful hot testing of the mill in early May, when its first product, [25ASH1-type bar], who was produced and shipped off to our customers we have very recently also succeeded at rolling the 100-meter are 65 rails.

 Before the year's end, we plan to master and pass inspection of all kinds of products that due to be produced at the mill including all types and sizes of rail products with equipment suppliers.

 Besides active efforts on optimizing production and aligning our product range with the market, this year we took measures to optimize sales policies. For example, as demand for metallurgical cores on the Asian markets researched, we managed to significantly increase our core sales to Japan, South Korea, and China.

 As a whole, the volume of coking coal export sales went up by 21% quarter on quarter which also helped improve the groups of financial results.

 Considering the drawn out corrections at export markets for metallurgical coals, we pay special attention to making long-term contracts with our key customers.

 This year, we have signed such contracts with the world's leading steelmakers, POSCO (inaudible) Baosteel, and (inaudible) steel. These contracts provide for annual supplies of between 500,000 to 1,000,000 tons of metallurgical coal and enable us not only to ensure full load for our mining enterprises but also consolidate Mechel's status is one of the world's largest exporters of metallurgical coal.

 Mechel's competitive advantages of such as a diversity of metallurgical coal grades, high mining production efficiency, close proximity to key markets, and our own logistics give us the opportunity to continue increasing our supplies to Asia-Pacific where the steelmaking industry is expected to demonstrate the best development in the near future.

 Despite fairly competent macroeconomics, global steel production and consumption of raw materials for steelmaking are growing and we plan to continue focusing on improving our production efficiency diversifying our markets and expanding our client base thus increasing Mechel's shareholder value.

 And now, let me hand the microphone over to our chief financial officer, Stanislav Ploschenko, who will review our financial results in all of our business segments in more detail.

 Thank you.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [4]
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 Good morning and good evening, ladies and gentlemen. Despite the fact that the difficult market conditions for the global mining industry continues during the first quarter, the relative the stabilization of the pricing environment helped our mining segment to achieve much better results than in Q4.

 Overall mining revenue was up 14%. Coking coal sales contributed 58% of the balance it with a 19% volume increase and 3% price increase with high shipments of volumes to China and South Korea.

 PCI and Anthracite revenue added an additional $33 million to the overall increase with a 3% decrease in pricing more than offset by 26% volume increase.

 The principal geographies for the additional shipments were Brazil and Asian markets. On an FCA basis, PCI and anthracite pricing was off by 9% to $63 a ton.

 Thermal coal sales were up 6% in fiscal volumes however a three dollar correction in average sales price left the revenues from third parties virtually unchanged.

 Iron ore sales also contributed to the overall revenue improvement as the average of sales price recovered from the troughs seen in Q4 reaching $92 per ton on an FCA basis versus just $59 in the compared period.

 In this price dynamics partially offset by lower export volumes of which was due to the massive nonrecurring stock selloff in Q4 still resulted in the 17% revenue growth.

 Coke sales were off by 16% with a lower domestic volumes being partially offset by increased exports, albeit (inaudible) price that was lower quarter on quarter by nearly 20%.

 Intersegment sales were down by 4% principally due to lower shipments to Chelyabinsk Steel Mill, cost of sales were nearly flat at $527 million, an increase of less than 1%.

 Cash costs at our mining operations experienced a seasonal increase driven by the more expensive winter fuel costs and drying as well as high share of coking coal in the production mix.

 Another factor that adds to an increase in cash coffin Q1 every year is a payment of personnel social taxes which are frontloaded toward the beginning of the year.

 The cash cost of iron ore concentrate was also inflated as fixed cost rose due to lower sales volumes. These (inaudible) were largely offset by significant decrease in cost at our US operations on the back of substantially higher volumes as mining operations were partially resumed.

 The results on the cross income was a hefty 28% growth quarter on quarter with a gross margin improvement by almost 6 percent points to 42% of the revenue.

 Sales and distribution expenses to quarter on quarter by 24% increasing from 26% to 29% of the segment revenue.

 That was mostly due to expansion of coking coal and met coal sales in Q1 predominantly to China which is done on an CNF basis.

 Other operational and G&A expenses were down by 15% mainly due to the absence of a number of one-off charges book to during Q4.

 All of the above led it to an EBITDA for the quarter of the $124 million, a dramatic almost four-time increase over the previous period.

 The net result however posted a $104 million loss which with income tax and interest expenses mostly unchanged was all due to the FX loss of the $69 million in Q1. This is nearly the same amount but with a positive sign in the previous period.

 For the still segment, the first quarter was traditionally marked by a seasonal slowdown partially counted by continuing carryover effects from a shutdown or disposal of ineffective businesses.

 While price environment was generally stable, the volumes were slightly down Rebar by 9% and wire by 5% due to deconsolidation of remaining mills in February following their disposal.

 Billet was down by 9% due to suspension of DMZ activities in Q4 as well as a decrease in resale operations of billet from [Esta Mills]. That led to quarter on quarter reduction of revenue from third parties by 8% to $1.43 billion in the reported period.

 Intersegment sales were only slightly down by 4% at $69 million due to seasonal factors.

 All of the cash costs trends were flat quarter on quarter. The cost of sales are comfortably down by 10% all thanks to the reduction of the share of less sufficient business in the sales which resulted in the cross income edged 3% up to $252 million, and improvement of 17% of the revenue versus 15% in Q4.

 The selling and distribution expenses were 7% up quarter on quarter largely due to the sale down of the stock of billet with higher railway tariffs from Chelyabinsk to the seaport as opposed to the previous sales of billet from Esta plants closer situated closer to the FOB basis.

 Provisions of doubtful accounts posted an increase by $5.5 million largely due to deterioration in payment discipline in Ukraine and Romania

 At 28% growth in administrative expenses, it's largely attributed to the events of previous periods and are nonrecurring.

 In Q4, certain previously capitalized bank charges were reclassified from administrative to interest expenses on the P&L due to loan prepayment with a one-time decrease in the administrative expenses.

 At the same time, depreciation at DMZ was reclassified from cost of sales to operating expenses following suspension of his activities since December 2012.

 The growth in SG&A expenses was the biggest factor behind the reduction of EBITDA to $57 million in Q1 or 4% of the revenue.

 The net income was also affected by a loss from disposal of remaining assets of $96 million that mainly consists of other comprehensive income accumulated on that asset and goodwill of the remaining plans since the time of their acquisition.

 The nature of this income comes from the difference between the measurements currency which is Romanian leu and reporting currency which is the US dollar.

 At this income can be recognized in the profit and loss account only in the period when the assets are disposed of. The mills were sold in the first quarter as you know.

 There were no goodwill or long-lived assets impairment in the reported period as well as and no additional related party provisions that resulted in reduction of the net loss by 78% to $205 million thereof $12 million of FX loss due to ruble depreciation versus the American currency.

 The ferroalloy segment continued with its turnaround in Q1 following the shutdown of the nickel plant in 2012 and adjustment of operations at Tikhvin Ferro chrome plant. The FCI price of chrome and chrome concentrate improved by 6% and 9% respectively in the reported period which led us to the relaunch of the third furnace (inaudible) towards the end of the quarter.

 That however was too late to have any effect in the reported period. The volumes of chrome sales were down by 41% quarter on quarter after massive stock clear up in Q4. At the same time, the sales volumes of chrome were 37% up as price and cost environment was more favorable to concentrate sales rather than ferrochrome.

 The average price for ferrosilicon was flat as third-party sales volumes were up 3% quarter on quarter. There were non-equal sales in Q1 is the plants remained idle and stock cleared out.

 That along with the reduction of chrome sales resulted in the 21% quarter on quarter downward dynamics in the revenue from third parties to $54 million.

 Intersegment revenue was down only 6% on the back of lower chrome sales. At the gross income however improved dramatically to $5 million due to the improvement in the efficiency.

 Cash cost of ferrosilicon demonstrated moderate growth of 6% goes by the increase in electricity tariffs. Chrome cash costs was a stable and chrome concentrate cash costs grew up by 12% to do to increase of electricity tariffs and it changed geological conditions.

 SG&A expenses were three times down in the reported period due to the absence of the one off provisions for the layoff of personnel at the nickel plant posted in the fourth quarter. There was no bad debt provision recorded in the Q1 either.

 That all resulted in the EBITDA turned positive for the first time since the third quarter of 2011 even overtaking the still segment in terms of the EBITDA margin.

 The net loss of decreased almost fivefold 10 $19 million also held by $6 million FX again.

 For the power segment, the first quarter was expectedly the strongest. Both the revenue from third parties and intersegment sales were up 3% quarter on quarter driven primarily by Southern Kuzbass Power station which increased its electricity sales volumes by 21% and capacity sales volumes by 40% while the tariffs grew 6% and 28% respectively.

 The cost of sales edged up only 1% resulting in 10% growth in the gross income pushing the gross margin up to 28% of the revenues.

 SG&A expenses are were stable at the level of $80 million. Of this EBITDA improved by 55% to $24 million or almost 7% of the revenue, the best result in the reported period after the mining segment.

 The net result of the fourth quarter was negatively affected by the loss on discontinued operations related to the sale of Toplofikatsia Rousse. There was no such item recorded in Q1 which helped to drive the net results back into the black with $7 million result.

 On the consolidated basis, the revenue was only slightly down by 2% to $2.481 billion as the revenue reduction in the steel and ferroalloy segments were almost compensated by the growth in the mining and power segments top line.

 However, due to efficiency improvements, disposal, and shutdown of loss making assets as well as stabilization of the price environment in the mining segment, the gross income went up 15% to $738 million of% of the revenue versus only 25% in Q4.

 EBITDA shot up by an impressive 72% to $210 million almost all thanks to the mining and the ferroalloy segments slightly aided by the power one which is more than enough to compensate for the lower still segments results.

 The EBITDA margin improved from 5% in Q4 12 most 9% in the reported period. The net interest expenses remained mostly unchanged as a net debt was kept under control.

 The depreciated ruble for the periods resulted in $75 million FX loss versus an $83 million gain in the previous quarter, the income tax expense changed only by $7 million which can be regarded as insignificant.

 The improvements in profitability as well as absence of goodwill and long-lived assets impairment in Q1 resulted in a dramatic reduction of that loss from over $1.1 billion in Q4 to $320 million in the reported period.

 Turning to the cash flow analysis, I must acknowledge that the first quarter was expectedly not as strong in cash flow generation is the previous periods. On the one hand, it is explained by the fact that the first quarter of the year is seasonally on the slow side and steel sales. On the other, most of the working capital release had already taken place in 2012 which naturally left less room for further performance at the same high rates.

 Nevertheless, we still managed to reduce inventory by another $155 million in the reported period. Albeit almost offset by increased receivables as we had to extend the terms of payment in the mining segment in order to boost sales in the Asian markets.

 Thus, the cash flow from operations generated only $69 million in the reported period. The investments used of $192 million, $171 million thereof for property, plant, and equipment as we will finalize the modernization of Posiet and most importantly, the last preparations for the launch of the universal rolling mill at Chelyabinsk.

 It is worth noting know that only $105 million thereof was the direct investment, the balance following on capitalized interest on the work in progress.

 However, as a ruble depreciated, the net debt increased only by a negligible 1% to $9.665 billion including financial leasing.

 The structure of debt continue to improve after five-year RUB40 billion loan from VTB that we announced in April we signed $1 billion worth of three to five year facilities with Gazprom bank which will be used to replace the debt maturing in 2013 and 2014.

 As you can see from the slide number 14, we already began to apply our refinancing efforts not only to the current year but to the following years with aim to push the maturities of our debt beyond the 12-month horizon in order to create a solid safe execution for our cash flow during the period of uneasy markets until we complete the restructuring of our business.

 To recap, ladies and gentlemen, despite the traditional low seasons for steel, the first quarter demonstrated a marked improvement in our business as commodity markets stabilized and our efficiency improvement efforts bore fruit in the steel and ferroalloy segments.

 We are committed to continue on that path until we can report the complete turnaround of our business which we expect to take place until year-end.

 Thank you for your attention, ladies and gentlemen, and we will be welcoming your questions now.



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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 allow some time after for translation. When questions are answered in Russian, they will be followed by translation. So you may ask your questions in Russian also and we will translate.

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Operator   [2]
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 (Operator Instructions). You'll be advised when to ask your question.

 Your first question comes from (inaudible) from Morgan Stanley. Please go ahead.

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Unidentified Participant   [3]
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 Hello. Thank you very much for the presentation. My question is regarding the press release that came out a few minutes ago regarding your buyback. I was wondering if you could give us some color on the rationale and why for example this cash was not invested in paying down debt or say the development of [Elka]. Thank you.

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Unidentified Company Representative   [4]
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 (interpreted) Yes, the Board of Directors took the decision to approve buyback of the Company's ordinary shares up to $100 million because the board believes that the current market capitalization might not reflect the fundamentals of the Company and they believe that this action will be in the best interest of the Company shareholders in the current environment.

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Unidentified Company Representative   [5]
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 (Speaking in Russian).

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [6]
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 Next question please.

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Operator   [7]
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 Thank you. Your next question comes Sergey Donskoy from Societe Generale. Please go ahead.

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 Sergey Donskoy,  Societe Generale - Analyst   [8]
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 Hello, everyone. I have for questions if I may. First of all, regarding your CapEx in the first quarter, it amounted to approximately $170 million. I may be wrong, but I think that earlier you provided a guidance for this year which was a something to the tune of $400 million.

 Doesn't mean that we should expect a dramatic decline in your CapEx outlay in the coming quarters or your CapEx budget for the current year has been increase?

 Second question, given that to the results of the steel division that were affected by several one-offs, could you please give me a grand total of what was the total effect of one offs that affected the segment EBITDA?

 Question number three, on your balance sheet, I'm seeing long-term investment in related parties in the amount of $175 million, I think there was no such thing last year. Could you provide some comments what this thing means?

 And lastly, on Bluestone, could you provide us some numbers; what were the sales of coking and thermal coal and Bluestone in Q1? And what was the average selling price? Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [9]
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 Stanislav Ploschenko will answer the first three questions.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [10]
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 As I said, we spent about $105 million in direct investments are during Q1 which fairly corresponds with the CapEx guidance announced earlier. The difference between the direct investment and what you can see on the investment cash flow falls on the capitalized interest on the working progress which is substantial in the Company.

 Usually if the direct investments go down, this indifference tends to increase because the work in progress doesn't change much.

 Answering the second question, there were really only two items which you can call a one-off effect in the EBITDA or the difference between the EBITDA for the first quarter and the fourth one. There was a reduction of about $6.5 million in the administrative expenses and Q4 due to the fact that the capitalized interest on certain loan was expense against the P&L due to the loan repayment which wasn't the case in Q1.

 And another factor was -- is reflected in the provision for bad debt in the amount of $6 million in Q1 which wasn't present in Q4.

 As far as your third question is concerned, these long-term investments reflect our investment in a stock share in the port [Wagner] for which we have obtained the title but we haven't paid because the terms of our arrangements with the minorities was that the payment would be deferred. The Company has the put option to sell this stock just like we did with the shares in [Vania] that the Company acquired in January of this year.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [11]
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 And Oleg Korzhov will answer the question about Bluestone.

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 Oleg Korzhov,  Mechel OAO - SVP - Economics & Management   [12]
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 (interpreted) The volume of the production and sales of from Bluestone that were not terribly big because as you know, it was not from the start of the year that we were operating the asset test so the production of the coking concentrate was at the level of 700,000 during the first quarter in Thermo coal at about 200,000.

 As far as the sales prices are concerned from Bluestone, these are exports in the domestic market that it works for in Q1 that the sales price for the high-volume call was at the level of $125 at FOB and the sales price for the low volume coal was at about the level of $140, $150. If anybody is interested in FCA, this is minus 15. So the volumes and contracts and the prices have been fixed and so the sales price for the hot rolled coal were $95 on FCA and the low volume 130.

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 Sergey Donskoy,  Societe Generale - Analyst   [13]
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 May I ask just two follow-ups if I may? First regarding CapEx, do I understand correctly had that bearing in mind this capitalized interest which went to increased CapEx the total actual cash paid to banks was significantly higher than $173 million net on your income statement and something closer to $240 million.

 And the second question on Bluestone, could you just roughly maybe you give us some idea of what is the breakdown between domestic and export sales for coking coal? Thank you.

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Unidentified Company Representative   [14]
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 (Speaking in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [15]
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 First question will be answered by Stanislav Ploschenko.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [16]
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 As a matter of fact, it is difficult to answer this question in a simple way because we are talking about US GAAP measurements which reflected the interest paid by the Company in the P&L are so the interest you see on the P&L is the interest the Company pays on bank loans.

 The interest, the capitalized interest which you can see in the investment cash flow is usually calculated in simplistic terms of by taking the CapEx and progress on CapEx and process and multiplying by the average interest rate but if you are interested in what the Company pays from its income to the banks, that's the item you can find in the P&L.

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Unidentified Company Representative   [17]
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 (Speaking in Russian)

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Unidentified Company Representative   [18]
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 (interpreted) And as far as the Thermo coals from Bluestone, 100% into the domestic market, coking concentrate about 30% to 70% whereby 30% goes into domestic market and about 70% is being exported.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [19]
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 Next question please.

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Operator   [20]
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 Thank you. Your next question comes from [Victor] from VTB Capital. Please go ahead.

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 Richard Russell,  VTB Capital - Analyst   [21]
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 Yes, hi. This is [Richard Russell] from VTB capital. Thank you for your presentation.

 I have several questions. Could you please comment on current status of potential 25% stake sale in Elga project? And as well, do you have any specific comments on divestments from non-core assets particularly on (inaudible) plant? And one more question.

 Given recent information on Mechel applying for Elga development planned amendments toward (inaudible), could you please provide information on some '13 Elga production plans? Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [22]
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 The first question will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [23]
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 We are continuing to investigate for an opportunity to attract a strategic investor in Elga.

 However, we are not pressing forward with it at the time being because we are going through an alternative road namely the attraction of the project financing from VTB which is currently being discussed and is in this stage of due diligence by the (inaudible) bank and we have high expectations about finally getting this project finance done.

 If we are successful in that, then we will be more relaxed in terms of -- or more demanding as to the terms of potential transaction for a minority stake in Elga.

 And the remaining part of the question will be answered by Evgeny Mikhel.

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 Evgeny Mikhel,  Mechel OAO - CEO   [24]
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 (Speaking in Russian)

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 Richard Russell,  VTB Capital - Analyst   [25]
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 Thank you.

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Unidentified Company Representative   [26]
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 (interpreted) As you might know, the Southern Urals Nickel was in its operations was put on hold by the end of last year and so currently, there is a procedure underway for the reduction of the headcount and against the current price environment, we do not envision and need potential future relaunching of this particular operation in the mode that it operated in before the crisis came.

 So currently there is a vision visiting this location which considered different ways of how this operation can be disposed of.

 We can consider and look into the possibility of divesting from a 100% of this property in favor of interested parties and there are parties alike that that are considering the possibility, but at the same time, we do not rule out any other possible venues of how we can -- what we can do with it in the future looking into the various technology upgrades and quite possibly we may dispose of it as a non-core assets in terms of its possible applications into non-core operations in the future.

 But in any case, the final decision is going to be made as the result of the current considerations and the financial calculations. As far as the amendments are concerned into the Elga license, respective amendments into the current license agreement have been submitted according to which the timeframe and timing for the license is going to be changed have been signed between the respective governmental authorities and (inaudible) on June 18 this year, which is today.

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 Richard Russell,  VTB Capital - Analyst   [27]
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 And one follow-up question if I may. Could you specify your production volumes expected for 2013 at Elga? Thank you.

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

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 Oleg Korzhov,  Mechel OAO - SVP - Economics & Management   [29]
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 (interpreted) So as has been previously mentioned, as of today, we have the opportunity to produce out of this facility of up to 2.5 million tons of coal a year. And just to speak about 2013 is a bit difficult. There are two reasons behind it. Firstly, as we've previously stated, there are two ways of the way we can dispose of the product first in a thermal application in coking concentrate.

 As far as the thermal cores are concerned, we are watching it and not because it is economically not viable and as of today we have entered into five contracts with companies which burn coal.

 These are the far Eastern generating companies plants that were supposed to supply 90,000 tons for a trial burning and so respectively, after we passed through this test and the coal passes through this test and we receive the respective review, that would enable us to participate in the tendering for the supplies for the thermal coals for the heating season of 2013/2014.

 And so respectively in terms of how much we produce thermal coal would depend upon the extent to which all of our coals will pass through these procedures and will be deemed to be compliant with the subsequent thermal application.

 As far as the coking concentrate is concerned, as we've stated, it will all depend upon the way the seasonal workshop unit is going to work because we've intended to launch it by the end of this month and because of a number of technical considerations and reasons, we are currently running it through some fine-tuning and so in June we are finishing this fine-tuning and then are planning to launch it in August.

 So the amount of cold that we are going to produce is going to depend upon the way that this unit operates and so we've been this subsequent periods, we will see how good it is in terms of the productivity and the quality of coal. So in terms of any specific targets, we are not yet setting them up because we are working in the current situation in terms of the sales that we are envisioning based upon what kind of production will be able to envisage based on what we are currently doing.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [30]
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 Next question please.

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Operator   [31]
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 Thank you. The next question comes from (inaudible). Please go ahead

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Unidentified Participant   [32]
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 Good evening. (Inaudible). I have a few questions. First, taking into account huge debts of the Company, do you see a possible conflict between creditors and companies for Mechel is unable to pay the interest for the debt?

 The second about your buyback program from the viewpoint of credit as an initiation of buyback will be considered as first in term of [block], do you see any other reasons from the moment to initiate this buyback terrific market positions? Thank you.

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Unidentified Company Representative   [33]
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 (Spoken in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [34]
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 Stanislav Ploschenko will answer.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [35]
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 I'll begin with the second question. No, we don't see any other fundamental reasons. We believe that the market is right for such a program and it's not our management's beliefs. It's the belief of the independent Board of Directors.

 Answering the first question, we do not see any possible conflict with the creditors of because the Company has been able to pay its interest and settle its debt successfully even in the first quarter of this year where the cash flows are usually subdued. So we don't see any ground for the worries that we would be able to service our debt.

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Unidentified Company Representative   [36]
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 (Spoken in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [37]
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 Next question please.

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Operator   [38]
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 Thank you. Your next question comes from the line of [Boris], Renaissance capital. Please go ahead.

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Unidentified Participant   [39]
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 Good evening, gentlemen. This is Boris (inaudible), Renaissance capital. Several small questions first on the buyback program; just a follow-up. If this program got any time constraints, is it a one year program or it's not in constraint?

 Second, what's the source of money for this buyback program? Is your cash flow or any other sources?

 Also, it looks like $100 million roughly enough to buy 25% of free flow to the Company. So in case you buy back any shares, ADRs do you plan to cancel the shares?

 And also, if you are buying any shares, ADRs do you plan to update the market on the size of buyback on a weekly, quarterly, or monthly basis?

 That's the questions on buyback.

 And also one more question on your P&L about SG&A dynamics we see that the growing general and administrative expenses basically your fixed costs in the first quarter and roughly flat sales and distribution costs.

 SG&A in the first quarter is roughly 26% of revenue so assuming that you have been divesting non-core loss making assets like (inaudible), the Romanian steel mills technically we assume that we should see some relief on fixed cost side. Are we going to see that in the second quarter? Do you have any plan how to cut fixed costs basically? Thank you.

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Unidentified Company Representative   [40]
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 (Spoken in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [41]
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 Stanislav Ploschenko will answer.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [42]
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 Unfortunately, we cannot disclose any more details about the buyback plan other than what was in the press release.

 I can only say that we plan to use our own funds to carry out this buyback. As far as the second question is concerned, naturally, SG&A expenses will change with the alterations in the business that may happen due to the asset disposal.

 However, as far as Toplofikatsia Rousse is concerned which you mentioned in your question, it has been 90 consolidated and accounted for as a discontinued operations in December of last year. So you saw that in the results of the full-year 2012.

 Therefore, any business related to Toplofikatsia Rousse is out of our accounts already and you will not see it again. Obviously with the disposal of the Romanian plants, the SG&A expenses related to them will be taken off the P&L in the following period. The same concerns any asset that is going to be disposed of.

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Unidentified Participant   [43]
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 Thank you very much.

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Unidentified Company Representative   [44]
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 (Spoken in Russian)

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

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Operator   [46]
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 Thank you. You have a follow-up question from the line of Sergey from Societe Generale. Please go ahead.

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 Sergey Donskoy,  Societe Generale - Analyst   [47]
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 Thank you. I have two follow-up questions. Firstly, could you please provide some more details of the amended Elga license; what are the new production targets that you have to achieve? What are your production plans for the next year, and longer-term?

 That's question number one. And also, to which extent this may or may not change your CapEx strategy towards this project?

 And my second question, one small follow up on your CapEx program for the year, the given that this capitalized interest is a significant part of the total CapEx that you incur during the period, should we imply that in the following quarters you will incur more or less the same amount? Thank you.

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Unidentified Company Representative   [48]
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 (Spoken in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [49]
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 Oleg Korzhov will answer the first question.

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 Oleg Korzhov,  Mechel OAO - SVP - Economics & Management   [50]
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 (Spoken in Russian)

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Unidentified Company Representative   [51]
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 (interpreted) As far as the license agreement is concerned, basically the items that remained primarily the same; we're only talking about carrying forward the execution of the project and so one different line items in it, (inaudible) is different, but generally speaking, it's going to be carried forward by about two to three years.

 In terms of the production, which was the second question, for 2013, I may only repeat by saying that up to 2.3 million tons is what we can produce but in terms of how much we are going to produce next year will depend upon the kinds of contracts that we will have a for the thermal coals and how the seasoned workshop insulation would work. We will definitely try and do our best to Lotus up in the full entirety of the full capacity as long as it would be profitable to produce.

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 Sergey Donskoy,  Societe Generale - Analyst   [52]
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 Thank you.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [53]
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 The next question will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [54]
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 As a matter of fact, the capitalized interest in depends directly on the construction progress on the balance sheet. Bearing in mind the fact that we have reduced our CapEx program substantially and most of the projects that we financed in the previous years are putting operations this year and namely the universal rolling mill and the certain equipment Port Posiet as soon as you put in operations what you have previously accounted for as construction progress, this is -- it gets requested (inaudible) on the balance sheet and the capitalized interest reduces accordingly.

 Therefore, it would it be fair to say that with the passage of time throughout this year, the construction and progress of will be gradually transferred or put into operations and the capitalized interest will go down.

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 Sergey Donskoy,  Societe Generale - Analyst   [55]
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 Thank you.

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Unidentified Company Representative   [56]
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 (Spoken in Russian)

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [57]
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 Next question please.

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Operator   [58]
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 There are no more questions coming through.

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 Vladislav Zlenko,  Mechel OAO - Director - IR   [59]
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 Okay, thank you. Ladies and gentlemen, thank you for taking the time to join Mechel's First Quarter 2013 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 of the team here. Goodbye.

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Operator   [60]
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 Thank you for joining today's call. You may now replace handsets.

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Editor   [61]
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 Portions of this transcript marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring the Event.




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