H1 & 9M 2013 Mechel OAO Earnings (US GAAP) Conference Call

Dec 23, 2013 AM EST
MTLR.MZ - Mechel PAO
H1 & 9M 2013 Mechel OAO Earnings (US GAAP) Conference Call
Dec 23, 2013 / 02:00PM GMT 

==============================
Corporate Participants
==============================
   *  Alexey Lukashov
      Mechel OAO - Deputy Director, IR
   *  Evgeny Mikhel
      Mechel OAO - CEO
   *  Stanislav Ploschenko
      Mechel OAO - CFO
   *  Oleg Korzhov
      Mechel OAO - SVP, Economics & Management

==============================
Conference Call Participants
==============================
   *  Neri Tollardo
      Morgan Stanley - Analyst
   *  Boris Krasnojenov
      Renaissance Capital - Analyst
   *  Maria Radchenko
      BCS Financial Group - Analyst
   *  Sergey Donskoy
      Societe Generale - Analyst
   *  George Buzhenitsa
      Deutsche Bank - Analyst

==============================
Presentation
------------------------------
Operator   [1]
------------------------------
 Welcome to the Mechel reports first half and nine months 2013 financial results. (Operator Instructions).

 I'll now hand you over to your host, Alexey Lukashov, to begin. Please go ahead sir.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [2]
------------------------------
 Thank you and good day, everyone. I would like to welcome you to Mechel's conference call to discuss our first half and nine months 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 provision 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 do not intend to update this statement. 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. A reconciliation 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 www.mechel.com.

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

------------------------------
 Evgeny Mikhel,  Mechel OAO - CEO   [3]
------------------------------
 (interpreted) Good afternoon and good morning, ladies and gentlemen. We are glad to welcome you to the conference call to present the Company's financial results for nine months of 2013.

 First of all, we should note that throughout the year mining and steel companies had to operate in fairly difficult conditions in the key markets. Prices were steadily going down throughout the entire period.

 It is enough to say that the average coking coal prices in this year's third quarter were lower than the first quarter prices by 26%. For iron ore concentrate prices, the decrease was 15%, while for long rolls, which are our steel division's key product, the decrease was 5%.

 Despite the price pressure, thanks to our constant efforts aimed at optimizing costs and increasing production efficiency, in the second and third quarters, we managed to retain our EBITDA at the level of the first quarter, which was most favorable price-wise.

 Our success at disposal of assets that do not fit the Group's development strategy, and the majority of which are loss-making in the current market situation, played no small part in it.

 We may currently state that most of our work on restructuring the Group's business in accordance with the revised development strategy has been completed. For example, we have recently closed deals or signed agreements on the disposal of our Bulgarian power plant, steel facilities in Romania and Ukraine, ferrochrome assets in Russia and Kazakhstan.

 The moth-balling project for Southern Urals nickel plant is in its final stage. This business restructuring led to an improvement in our cash flow, which was an important result. At the same time, the downside of this process were one-off paper write-offs as the sale price of loss-making assets in weak market conditions is much less than their book value.

 On the whole, as a result of nine months of 2013, Mechel's consolidated revenue was approximately $6.7 billion. EBITDA amounted to $608 million. Net loss was approximately $2.2 billion where $2 billion is the amount of losses due to the aforementioned non-cash write-offs and ForEx effect.

 Considering the protracted price corrections on our key markets and respective fall of profit, as well as Mechel's existing debt burden, we pay particular attention to our relations with lenders.

 Based on the high probability of the lack of tangible positive dynamics in the raw materials markets next year, we managed to get lender banks agree to covenant holidays until the end of 2014, as well as more comfortable levels of tested financial ratios in the following periods.

 Our success in the talks with lenders was largely due to the acknowledgement of a major progress that we made in implementing our revised strategy of deleveraging through business restructuring and disposal of assets.

 After the divestment of assets that put pressure on the Company's shareholder value, and having completed the cycle of large-scale investments into projects that are strategically important for Mechel's future development or, as was the case of Elga, having ensured the uninterrupted external funding, we can confidently say that Mechel has returned to a stable business model. This business model is based on our Company's indisputable competitive advantages and enables us to generate stable cash flows even during a protracted slump in raw materials market.

 Starting next year, investment will be minimized, which will enable us to free up additional cash to improve the Company's financial sustainability.

 This year, we gained tangible success in implementing our investment program, having completed one of the key projects of recent years, construction of a universal rolling mill. The mill's launch will enable us to significantly improve our product range, giving us access to new and highly profitable markets.

 We have also made major headway in implementing our other strategic project, development of the Elga coking coal deposit. In particular, after creating all requisite primary infrastructure and launching production, we made an agreement with Vnesheconombank on further financing Elga's development through a project funding to be provided by the Bank totaling $2.5 billion without recourse to Mechel Group.

 This agreement will not only enable us to speed up the development of the deposit, but it will also bring the project to a positive free cash flow before repayment of Vnesheconombank credit lines.

 Vnesheconombank project financing contemplates completion of the Elga Coal Complex first-stage development and reaching the annual production of 11.7 million tonnes of coal. Considering the deposit's proximity to far-reaching ports and most promising markets, it will enable us to take maximum advantage of coal prices' recovery which can happen due to global under-investment in the industry.

 As a whole, despite the protracted stagnation in our key markets, mining and steel making remain fundamentally attractive. Large-scale investment made by Mechel in the recent years enabled us to secure our position in the most promising geographic and product segments.

 Growing demand for metallurgical coal from Asian Pacific countries, as well as growing demand for long rolls from large-scale infrastructure and construction projects creates favorable conditions for increasing Mechel's shareholder value, which is our absolute priority.

 And now I'd like to hand over to our Chief Financial Officer, Stanislav Ploschenko, who will further elaborate on the financial performance of all our business segments. Thank you.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [4]
------------------------------
 Good morning, and good evening, ladies and gentlemen.

 Our mining segment demonstrated the relative robustness over the reviewed period. In the second quarter, sales to third parties declined by 10% on a 5% drop in the average coking coal price and a 12% reduction in iron ore price.

 While the sales volumes of coking coal edged slightly up, the sales of iron ore concentrate and other metallurgical coal dropped by 9% and 16% respectively as some of the export sales were en route, having been posted to the Q3 results, leading to a 32% rise in other metallurgical coal sales, and a 16% rise in iron ore sales in the last quarter, offsetting a continuing downward trend in prices, and a 6% drop in coking coal sales in the third quarter.

 The steam coal held up better price-wise in the reviewed period; a seasonal drop in Q2 being fully offset by an increased stock build up by the utilities in Q3. The combination of these factors resulted in almost unchanged top line for the segment in the third quarter at $695 million.

 While the sales were affected by the negative trend in the realized price, the seasonal reduction in the cash costs, depreciation of ruble versus American dollar, and continuing cost optimization, resulted in a 13% drop in cost of sales in Q2, and a further 6% reduction in Q3, pushing the gross margin from 42% in the first quarter to 46% in the third one.

 The most significant cash cost reduction, 19%, took place at Korshunov mining plant due to increase of sales volumes reaching its maximum in Q3, and a shift to insourcing of certain services.

 Sales and distribution expenses decreased by 10% to $234 million over Q2 and Q3 due to a decline in coal export sales at Mechel Carbon. On a relative basis, S&G expenses remained flat at 34% of the revenue.

 Other operational and G&A expenses remained virtually flat. The positive dynamics of the gross profit, and the reduction in operating expenses, resulted in a steady EBITDA growth through the reported period, up 3% to $128 million in the second quarter, and a further 16% in the third one to $148 million, improving the margin from 14% in Q1 to 18% in Q3.

 The FX losses over the two quarters compounded to $49 million. Both Q2 and Q3 posted a deferred tax benefit resulting from the tax savings incurred by the consolidated tax payer regime with the majority of that benefit, $28 million, posted to the second quarter.

 Additional net interest expense increased by $60 million in Q3, being flat in the previous quarter, due to a temporary cessation of capital expenditures at Elga, which stops capitalization of the interest expense. The work at Elga was recently resumed, as we have secured project financing from VEB.

 Despite increase in interest expenses, the net loss decreased from $108 million in the first quarter, to only $15 million in the third one.

 The steel segment results were influenced by the seasonal factors on the one hand. On the other, they reflected the improved economics resulting from the disposal of the remaining assets in Q1, and signing of the binding offer for the Donetsk plant, following which we account for it as discontinued operations.

 The price trend was largely negative over the reported period with prices for rebar dropping 2% in Q2, and another 2% in Q3. The prices for other products follow the trend. At the same time, the rebar sales volumes grew by 16% in Q2, as the construction season was in full swing. The rebar sales in Q3 remained flat.

 The sales of wire rod grew by 10% in Q2, and a further 15% in Q3 in physical volumes. The volumes of billet sales, on the other hand, fell by 40% in Q2, and another 56% in Q3, due to a rundown of the stock accumulated previously and cessation of trading operation with Estar mills.

 The sales of billets from Chelyabinsk was also affected by the launch of the universal mill, which finally closed the gap between the [rolled] and rolled steel production,

 As a result, the third-party sales grew by 1% to $1,359 million in Q2, and dropped by 10% to $1,225 million in Q3, as the prices continued to retrench and sales of billet continued to fall.

 The cost of sales followed the volume's dynamics with a 2% growth in Q2, and a 10% reduction in Q3, although the cash costs of rebar at Chelyabinsk decreased by 5% over the reported period following the trend in raw materials' prices.

 The gross margin went down from 18% in Q1 to 16% in Q2, and then recovered to 17% in the third quarter. The sales and distribution expenses fell by 17% in Q2, and then by a further 9% in Q3, as export sales fell due to disposal of European assets and reduction of stock at our trading operations, leading to an increased share of domestic sales.

 Administrative expenses were reduced by 5% in Q3 in comparison with Q1.

 As we stopped commercial relationship with Estar mills completely and initiated the legal procedures, in order to recover as much as we can of our receivables, we had to make the full provision of [$653] million on them in the reported period.

 The EBITDA of the steel segment dropped by 3% to $64 million in Q2, and then further 23% down to $49 million in Q3 on the downward trend in prices and a reduction of trade volumes. The EBITDA margin stood at 3.8% in the third quarter as compared to 4.4% in Q1, which is not a bad result taking into account the negative price dynamics we have witnessed this year.

 The reported period also posted $176 million loss from discontinued operations over Donetsk plant and $15 million loss on sales of Invicta, a small mill in UK, reflecting the difference between the sale and book value of the assets.

 The profit tax expenses of $22 million posted to Q1 turned into an income of $53 million in the second quarter and were around zero in the third quarter, as a result of inclusion of some of the profit-making steel mills into the consolidated tax-payer group, offsetting their taxable income against loss of other Group members.

 The ruble depreciation resulted in $22 million FX loss for the second period.

 The bottom line, heavily affected by the provisions and write off on disposal of assets in Q2, have received to $94 million negative in Q3.

 The results of the ferroalloy segment after recognition of the ferrochrome and ferronickel businesses as discontinued operations, due to signing a sales agreement with respect to the former and conservation of the letter, largely represent the results of the ferrosilicon business.

 The revenue from third parties remained virtually unchanged, and $20 million of growth in sales volumes due to larger output after partial modernization, offset a slightly downward pace of the selling prices. The cash costs of ferrosilicon production fell 14% over the accounting period largely due to reduction of the stock with higher production cost, and a reduction of expenses for electricity and heating.

 The gross margin improved to 20%. The operating expenses were relatively stable. The EBITDA improved to $3 million or 15% of the revenue. The FX effect and profit tax expenses are insignificant.

 The net result of Q2 was affected by an $881 million write-off of the book value of the ferrochrome assets leveling up with the sale price. That was the only item bringing the segment into the red in Q2 on otherwise a zero net result.

 The bottom line recovered to $3 million profit in Q3.

 So the performance of the power segment was not out of the ordinary. After the end of the heating season, the revenue from third parties fell 26% in Q2 and 12% in Q3 to $149 million. The gross margin reduced from 31% in Q1 to 20% in Q3 as lower sales brought up the share of fixed cost in the total.

 The sales and distribution expenses fluctuated, in line with the revenue, albeit with a lower amplitude, bringing the segment's EBITDA down to just $3 million in Q2, and a negative $4 million in Q3. The net result fell to $21 million in Q2 and remained at that level through the third quarter.

 On the consolidated basis the Q2 revenue was 5% down quarter on quarter, and then further down 7% to $2,089 million, entirely as a result of subdued pricing and seasonal factors.

 The gross margin remained almost unchanged over the same period at 31% as lower cash costs and efficiency improvements offset lower prices.

 Operating expenses, including provisions made for Estar receivables, fell 12% in Q3 as compared to Q1, largely driven by lower sales in the steel and power segments, and controlling share of domestic sales in the steel segment.

 Despite lower sales we managed to maintain EBITDA almost on the same level as it notched down 4% to $202 million in Q2, and another 3% to $196 million in Q3. As the EBITDA dynamics were less pronounced as that of the topline, the EBITDA margin grew slightly from 8.9% in Q1 to 9.4% in Q3.

 The net interest expense decreased by 3% in Q1 versus -- in Q2, excuse me, versus Q1, to $162 million, but increased to $211 million in Q3 as we reclassified the capitalized interest on financing of Elga due to a halt in the construction works. As mentioned above, the works resumed in the fourth quarter as we began to receive financing from VEB.

 The FX effect for two periods resulted in a $71 million loss. The income tax expense of $80 -- of $48 million in Q1 turned into a gain of $71 million in Q2, and another $8 million in Q3 as a result of the application of the consolidated tax payer regime for the Group.

 The net loss from discontinued operations posted $1,056 million in Q2, resulting, with other items, in $1,799 million net loss. The bottom line for the third quarter posted only $127 million loss.

 Overall for the first nine months of 2013 the Group's revenue stood at $6,692 million, down 19% year on year. The EBITDA fell by 24% to the same period last year to $608 million. The net loss totaled $2,247 million, largely affected by impairment of goodwill and assets due to divestment and closure of loss-making assets, and creation of the full provision on operations with Estar, due to a start of bankruptcy procedures at its plants.

 Now let us turn to the cash flow analysis. Here we can see that our efforts to optimize the working capital and improve the cash flow through disposal of loss-making assets paid back, allowing us to generate $244 million of operating cash flow in Q2 and Q3.

 $231 million thereof came only from working capital management and $273 million just from inventory management, but the stock decreased by 16% to $1,481 million in the second and third quarters, largely in the steel segment where we focused most of our asset optimization efforts.

 The investments stood at $199 million in Q2, almost the same expenditure as in Q1, but then sharply drop to just below $100 million in Q3 as we temporarily stopped work at Elga and investment into the Universal Mill and modernization of Port Posiet were drawing to an end.

 The capability to generate cash has helped us despite downward price trends during the reported period to maintain the net debt at a stable level. In fact, it even fell by 2% to under $9.5 billion as of the end of Q3 as compared to Q1, but that was largely influenced by the exchange rate.

 The reported period was also marked with major achievements on the front of debt restructuring, which has considerably alleviated the pressure on the balance sheet in 2013 and 2014. We have agreed refinancing with Gazprombank and Sberbank, shifting the repayments to these two beyond 2014. We have achieved an extension of the grace period on the international syndicated loan by one year, equally extending the maturity.

 We have received similar refinancing from other Russian banks, all of the above totaling around $1.5 billion repayments, shifted into 2015 and beyond.

 As you can see on slide 14 of the presentation, this process is not over yet as we have around $2 billion of repayments due next year. We are going to continue our refinancing exercise in 2014, which will be assisted by four factors we did not have the luxury of this year.

 Firstly, the sale -- with the sale of our ferrochrome business we expect to receive enough funds in the next few weeks to honor the public debt falling due in 2014. This will also reduce our debt portfolio by around $0.5 billion.

 Secondly, in 2014 we are planning to complete the restructuring of the Group, selling non-strategic assets, which will bring us additional cash to reduce debt and renegotiate the maturity schedule.

 Thirdly, we have agreed covenant holidays with our creditors, which will alleviate negotiations next year, taking the focus off potential waivers.

 And last but not the least, the completion of our investment program and [fictional], and off-balance sheet project financing for Elga will take the pressure off our cash flows next year, allowing us to use all the cash beyond maintenance CapEx for debt repayment.

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



==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 (Operator Instructions).

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [2]
------------------------------
 Thank you. We will now take questions. We would ask the 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.

------------------------------
Operator   [3]
------------------------------
 Neri Tollardo, Morgan Stanley.

------------------------------
 Neri Tollardo,  Morgan Stanley - Analyst   [4]
------------------------------
 Got a couple of questions. First I will start off, if you could share with us the long-term plan or the strategic initiatives that Mechel shared with its creditors to effectively convince them to delay the maturity and give the covenant breaks that you've mentioned?

 And, as a consequence, is the sale of a stake in Mechel Mining still on the cards?

 My second question is whether you have negotiated any interest expense changes with the banks, either breaks or even increases to compensate for the longer maturity of your debt?

 Third question, back in June you announced $100 million buyback, if you could give us an update on that?

 And then if you could guide us for CapEx in 2013 and 2014, and production guidance for both mining and steel division for the remaining of this year and 2014? Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [5]
------------------------------
 The first question will be answered by Stanislav Ploschenko.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [6]
------------------------------
 The milestones of long-term plan, that we shared with our creditors, were that next year the Group will complete the restructuring of its assets, selling off the remainder of the non-strategic assets, which will bring around $1 billion of cash. And that includes a divestment of a minority stake in Elga.

 We have put the divestment of Mechel Mining off the table, since we have much more attractive offers for a minority stake in Elga. And all that money will be used to reduce the debt portfolio, but we don't have any fixed commitments or timelines for that.

 Even barring these divestments, the Group is confident of generating enough cash to service the current debt -- the interest on the current debt without its reduction. Therefore, the main point of a negotiation with our creditors was to postpone debt repayments beyond 2014.

 We did not renegotiate the interest rates, they remained at the same level, and we did not negotiate any holiday or postponement of interest payment. Although some of our agreements with creditors, even before the negotiations started, included certain capitalization of interest, but that did not have anything to do with the negotiations we undertook with our creditors in the last couple of months.

 As far as the buyback that we announced in June is concerned, we have postponed it indefinitely.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [7]
------------------------------
 The next question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [8]
------------------------------
 (interpreted). In 2014 the cost that the Company has planned amount to the maintenance cost that will be about $110 million/$150 million. And we plan to spend a similar amount to complete our key investment projects that were launched earlier.

 I'm talking about completion of the funding of the universal mill and the Posiet port. The bulk of work has been completed, but the accounts payable that has accrued as a result of the construction will be repaid in 2014. We have to note that as far as these two projects are concerned, we have sources of funding as borrowed funds and we made that decision earlier.

 As to 2014, so far the estimates are rough and we believe that the maintenance costs will be about $150 million/[$300] million. As to investment projects, the Company is not planning to launch any new projects or reanimate any old projects. But, at the same time, I'd like to note that Elga, as our key investment project, is financed on the basis of project finances and it is not incorporated in the numbers quoted above.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [9]
------------------------------
 The next question will also be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [10]
------------------------------
 (interpreted). So I will answer the question regarding our production plans for next year and expected production guidelines for 2014. I'll start with our key segment, which is mining.

 This year the production will be about 27.5 million tonnes. Next year we have planned production at 30.5 million tonnes and the incremental production is mostly thanks to the ramp up from the Elga deposit.

 As far as the Company's [Urals nickel]. South Kuzbass will be flat in 2014, as in 2014 about 15 million tonnes of production you could (inaudible) and (inaudible), as the key asset, will produce about 10 million tonnes, which is comparable to 2013. The Company is running at almost full capacity, that's why we plan it to be able to produce the same amount next year.

 Elga, this year production is about 150,000/300,000 tonnes. For next year we have planned [2.2] million] of production.

 And our US asset will produce about 3.5 million tonnes this year. And next year we plan a flat production of about 2.5 million/3 million tonnes.

 Speaking about the caution of milling plant -- mining plant, this is also a pretty stable company, and it is running at fully capacity. And this year will sell about 4.3 million tonnes of concentrate. For next year we have planned 4.5 million tonnes.

 And as to the steel segment, the situation is approximately the same. Next year we do not plan any deviations from 2013 in terms of pig iron production; it will be flat in an amount of about 3.8 million tonnes/3.9 million tonnes.

 And in terms of steel production the situation is analogous; the production is about 4.5 million/4.6 million tonnes this year, and planned for next year.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [11]
------------------------------
 Next question please.

------------------------------
Operator   [12]
------------------------------
 Boris Krasnojenov, Renaissance Capital.

------------------------------
 Boris Krasnojenov,  Renaissance Capital - Analyst   [13]
------------------------------
 Two questions on my side. First question about SG&A in your nine month accounts; our understanding was that you've been in process of separating the non-core and quite dilutive loss-making efforts like Romanian steel assets. Also, according to your press release you are selling some warehouses in Europe.

 How will we see that the SG&A if we look at quarter-on-quarter basis comparison -- sorry, year-on-year basis if we take SG&A in the second quarter versus the second quarter of the previous year? Or for nine months they're even slightly up. Why we don't see any reduction in terms of SG&A on year-on-year basis and nine month accounts?

 And relative to revenue, they still look really high compared to industry averages. So that's the first question.

 And the second question, according to your maturity profile in the presentation, you've got $429 million of bond expiration with put options in 2014.

 Do I understand correctly; that all these bonds, first of all, it's ruble-denominated bonds and these bonds with the put option they're due to redemption in February this year, because on Bloomberg, which is maybe some kind of misunderstanding, Bloomberg reports some kind of -- four tranches of ruble-denominated bonds of total amount of around RUB20 billion, maybe just misunderstanding?

 But do you have any other bonds with put option that expire in -- let's say, in the first or second quarter?

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [14]
------------------------------
 Both questions will be answered by Stanislav Ploschenko.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [15]
------------------------------
 Concerning SG&A expenses, as a matter of fact they are more or less stable, and we're even showing a downward pace if we take away bad debt provisions, which incur a high fluctuation.

 Apart from that I'm not sure what you take for the comparison basis, because after the sale of the assets, of certain assets, and accounting for a number of the assets as discontinued operations, we recalculated the P&L according to the discontinued operations accounting.

 So if you compare SG&A expenses this year using a recently published account, and the P&L from the last year where these companies were still consolidated in the Group, it is not correct to compare these two.

 As far as the question about the bond is concerned, indeed, we have four tranches about -- or exactly RUB20 billion, where the put options expire, RUB5 billion in January and RUB15 billion in February. But part of those bonds were bought from the market, or delivered to the Company at the time when the new coupon was set during the last put option expiration. Therefore, the balance still outstanding in the market is exactly what you can see in the presentation.

------------------------------
 Boris Krasnojenov,  Renaissance Capital - Analyst   [16]
------------------------------
 Thank you very much.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [17]
------------------------------
 Next question please.

------------------------------
Operator   [18]
------------------------------
 Maria Radchenko, BCS Financial Group.

------------------------------
 Maria Radchenko,  BCS Financial Group - Analyst   [19]
------------------------------
 (interpreted) The first question relates to bank loans that are due next year. If we look at your presentation, then the amount shown there is $1.3 billion. But today you have announced that you would -- you have agreed with Sberbank, the rescheduling of your repayment 'til 2015, for an amount of $25 billion. Is $1.3 billion included into that deferral or not?

------------------------------
Unidentified Company Representative   [20]
------------------------------
 (interpreted) The answer was yes.

------------------------------
 Maria Radchenko,  BCS Financial Group - Analyst   [21]
------------------------------
 (interpreted) Sorry, I need to check, $1.3 billion to be repaid. The reason is referenced in the present -- no, it's in the presentation, which reads that you mean [VEB] and Gazprombank financing. Does $1.3 billion include the Sberbank debt of RUB25 billion?

------------------------------
Unidentified Company Representative   [22]
------------------------------
 (interpreted) It does not.

------------------------------
 Maria Radchenko,  BCS Financial Group - Analyst   [23]
------------------------------
 (interpreted) Now it's clear.

 My question is about the bond offer. You have announced a disposal of assets for $425 million, and do you expect receipt from divestment, which can be used to repay your public debt? Did you mean this very amount?

------------------------------
Unidentified Company Representative   [24]
------------------------------
 (interpreted) Yes.

------------------------------
 Maria Radchenko,  BCS Financial Group - Analyst   [25]
------------------------------
 (Spoken in Russian).

------------------------------
Unidentified Company Representative   [26]
------------------------------
 (interpreted) We do not have any public debt, except for the bond debt.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [27]
------------------------------
 Next question please.

------------------------------
Operator   [28]
------------------------------
 Sergey Donskoy, Societe Generale.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [29]
------------------------------
 I first have a few follow-ups. First on CapEx, I'm sorry if this issue was covered during the presentation, could you explain the decline in third quarter CapEx, which dropped by about $100 million, from the level of second quarter? And what can we expect it in the fourth quarter of the year?

 My second question also CapEx, could you give us an idea what was the amount of capitalized interest in Q2 and in Q3 of the year?

 Thirdly, on production, we know that steel -- crude steel production at Chelyabinsk plant declined significantly in the second half of the year, from approximately 400,000 tonnes a month, at the beginning of this year, to slightly more than 300,000 tonnes, in October and November. What was the reason for such a decline? And yes, what's your outlook for the next year?

 And finally, you have already mentioned that no changes to interest rates followed from your negotiations with banks. Could you just give us an approximate amount of quarterly interest payments, according to your current loan agreements? Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [30]
------------------------------
 The question regarding capitalized percent will be answered by -- interest will be answered by Stanislav Ploschenko.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [31]
------------------------------
 The capitalized interest in Q2 stood at the level of $72 million, in Q3, that fell to $20 million, because as I mentioned before, we halted production or construction at Elga. So about $60 million of capitalized interest roughly, went -- was taken off the CapEx, and added to interest payments.

 As far as the interest payment projection for 2014 is concerned, if we take into account the cash interest payment, which consists of what you will see in the P&L and the capitalized interest, that's going to be roughly $800 million next year. Although in the P&L you will see less, because the balance will be capitalized interest, which is difficult to predict as of now.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [32]
------------------------------
 The next question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [33]
------------------------------
 (interpreted) In terms of steel production at the Chelyabinsk plant, the main reason for the reduction in Q2, the volumes in Q2 were about 1.2 million; in Q3, the volume was a bit more than 1 million tonnes. The main reason is associated with the plant itself.

 In Q3, there was a planned turnaround of one of the blast furnaces and, simultaneously, with this turnaround we replaced one of the converters at the Chelyabinsk plant. And, therefore, this reduction in the throughput was planned and was done as planned.

 Basically, we did have options to offset the decline in the converter steel production at the expense of the electric steel shop. But it was more expensive and we decided not to do that. And that's why the total throughput reduced in Q3 compared to Q2.

 Speaking about next year's plans, as I said, we plan to be flat against 2013 in an amount of about [4.5 thousand/4.6 thousand] tonnes of steel.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [34]
------------------------------
 Thank you, if I may two small follow ups on Elga. First of all, is it correct that the financing of the project was resumed in the fourth quarter? And what amount of CapEx went or is going to be spent on Elga this year? And what is your plan for 2014?

 And secondly, out of the 2 million tonnes of mine output in 2014, how much do you think will be coking coal? Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [35]
------------------------------
 The question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [36]
------------------------------
 (interpreted) In Q4, we did resume the Elga construction project. And, as of today, as we speak, the preparation is in progress and we have already started excavation to complete construction of such facilities as the railroad and bridges.

 This year, we plan to finance the Elga project in an amount of $50 million to be provided by VEB Bank, Vnesheconombank. At the same time, we have to note that this is the Q4 amount.

 The question was about the 2013 amount spend. This amount will be about $80 million/$85 million without taking into account $50 million in Q4, because throughout the first three quarters, we partially financed this project using our own resources. So that we have $80 million/$85 million thanks to our own resources and about $50 million as the amount to be provided by VEB.

 Next year, we plan to finance the project using Vnesheconombank resources. The amount that was negotiated with and agreed with VEB is about $780 million. Originally, we planned this amount to be $830 million, but we have a bridge loan of $50 million. In Q4, therefore, the remainder will be about $780 million.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [37]
------------------------------
 The second part of the question will also be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [38]
------------------------------
 (interpreted) As I said, the Elga production next year will be about 2.2 million tonnes. And given that the coking coal is planned to be used for coking concentrate production, the total shipment will be [1.3 thousand] million including concentrate of 500,000/600,000 tonnes.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [39]
------------------------------
 Next question please.

------------------------------
Operator   [40]
------------------------------
 George Buzhenitsa, Deutsche Bank.

------------------------------
 George Buzhenitsa,  Deutsche Bank - Analyst   [41]
------------------------------
 I have a couple of questions. First question is on ferroalloy assets; can you remind us, is there a binding bid with your Turkish partner on those assets? And if so, is there a break-up fee in case the buyer decides not to proceed with the acquisition of those assets?

 The second question is on DEMZ, your Ukrainian asset. I can see from the cash flow statement that you continue paying for that asset, despite the fact that, if I remember correctly, you have agreed with the former owner of DEMZ, Mr. Varshavsky, that the plant will be transferred to him. My question is, is that deal still alive? What is the status of that deal?

 The third question is on your borrowings. Do you have any limits on any additional borrowings to be raised next year?

 And the fourth question is on VEB project financing. As far as I understand, you have received the first tranche of project financing and you expect to receive the second tranche, which is a bigger amount as far as I understand; something between $700 million and $800 million. Do you need any additional approvals from VEB to get that money?

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [42]
------------------------------
 The first question will be answered by Evgeny Mikhel.

------------------------------
 Evgeny Mikhel,  Mechel OAO - CEO   [43]
------------------------------
 (interpreted) Speaking about the deal with our Turkish partners, we expect to close it by the end of this year. And, actually, the contract does have a clause where a break-up fee is provided in case of refusal to close the deal.

 Speaking about the Donetsk Plant, as we previously announced, we have a signed agreement with Vadim Varshavsky and this agreement is in the process of being implemented.

------------------------------
Unidentified Company Representative   [44]
------------------------------
 (interpreted) Could you please clarify your question about the borrowings? I didn't hear it completely.

------------------------------
 George Buzhenitsa,  Deutsche Bank - Analyst   [45]
------------------------------
 (interpreted) Yes, of course. The question is do you have any restrictions in terms of raising additional borrowings next year?

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [46]
------------------------------
 We do not have -- well, we do have a limit on the maximum borrowing installed by our creditors, and this is slightly more than $10 billion of debt.

 As far as VEB is concerned, I need to clarify the arrangement so that it's understood by everyone, because I feel that there is still some confusion about our arrangement.

 We have received 100 -- we have signed a bridge agreement for $150 million with VEB, which will be completely taken out by the main ring-fenced project financing for which a number of condition precedent have to be fulfilled, like the transfer of the license and fixed assets of the project company, the pledge of the 49% of the project company.

 It all takes time and it will take another couple of months in order to bridge the construction -- financing of the construction in Elga. It's $150 million bridge facility was arranged. So we do not need any further approvals to draw on this $150 million.

 But, as far as anything on top of that is concerned, we need to sign the main agreement for which the condition precedents are being fulfilled at this time. And we do not expect that there will be any setback in fulfilling them in due course.

------------------------------
 George Buzhenitsa,  Deutsche Bank - Analyst   [47]
------------------------------
 Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [48]
------------------------------
 Next question please.

------------------------------
Operator   [49]
------------------------------
 Neri Tollardo, Morgan Stanley.

------------------------------
 Neri Tollardo,  Morgan Stanley - Analyst   [50]
------------------------------
 Just two follow-up questions; one regarding the interest payments, I want to just make sure that I understood correctly. You said that you expect $800 million of interest payments, but you're not sure of how much of that will be capitalized and, hence, how much will be in the profit and loss statement. Is that correct?

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [51]
------------------------------
 Yes, that's correct. It's difficult to predict 12 months ahead what part of the interest is going to be capitalized.

------------------------------
 Neri Tollardo,  Morgan Stanley - Analyst   [52]
------------------------------
 Great, thank you. And going back to the iron ore cash cost, which declined 19% quarter on quarter, is that a new sustainable level of cash cost or should we expect it to go back to first-half levels?

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [53]
------------------------------
 Yes, this a sustainable level for the warm season. As you understand, when we draw closer to the winter season in the fourth and the first quarter, the cash cost is usually higher because of extra expenditure on electricity and heating.

------------------------------
 Neri Tollardo,  Morgan Stanley - Analyst   [54]
------------------------------
 Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [55]
------------------------------
 Next question please.

------------------------------
Operator   [56]
------------------------------
 (Operator Instructions). Sergey Donskoy, Societe Generale.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [57]
------------------------------
 Just one small follow-up, could you give us some idea what was the dynamics in average coal prices for Yakutugol and Bluestone in the second and the third quarter? Thank you.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [58]
------------------------------
 The question will be answered by Oleg Korzhov.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [59]
------------------------------
 Many thanks.

------------------------------
 Oleg Korzhov,  Mechel OAO - SVP, Economics & Management   [60]
------------------------------
 (interpreted) Speaking about [Neryungri] coals, Yakutugol. I'm going to quote numbers and people ask different questions, I will show you the shipment basis and the tariff rate.

 So Neryungri coals are sold to two key markets, China, Japan and Korea. So to China, we sell coal at [C] -- the Q2 prices were $145 at the beginning of the quarter, and went down to $127 at the end of the quarter.

 In Q3 the dynamics was the reverse, starting with $125, and up to $142. And the tariff is about $50 shipment to Japan and Korea. So we ship that coal on free on board conditions. And the prices were quarterly. And our contract was for $144 and $152. In Q3 the prices were $125/$126. The total logistics costs amounted to $35/$40.

 Speaking about Bluestone coals, so we have several types of coals, high and low ash coal. So speaking about high ash coal, the export prices amounted to $125/$130. Based on [C4] logistics is about $50. In Q3, the prices were about $115/$120. So I am talking about exporting this type of coal.

 Besides, we also sell this coal on CCA in the US, and the fixed price is fixed for the whole year. And we have annual contracts. And the price was about $95 per tonne on CCA.

 Low volatility Bluestone coal we exported it in Q2 for $150/$157 FOB. And the logistics' costs were $50. In Q3, the prices were also lower than in Q2 and amounted to $131/$135.

 We also sell it domestically and the contractual end volumes are annual, and the basis is CCA. The price in 2013 was about $130.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [61]
------------------------------
 Next question please.

------------------------------
Operator   [62]
------------------------------
 (Operator Instructions). We have no further questions coming through, so I hand you back to your host to wrap up today's call.

------------------------------
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [63]
------------------------------
 Ladies and gentlemen, thank you for taking the time to join Mechel's first half and nine months 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 Investor Relations office.

 Thank you again from all the team here.

------------------------------
Operator   [64]
------------------------------
 Ladies and gentlemen, thank you for joining. You may now disconnect your line.

------------------------------
Editor   [65]
------------------------------
 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.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------