Full Year 2013 Mechel OAO Earnings Conference Call (US GAAP)

May 15, 2014 AM EDT
MTLR.MZ - Mechel PAO
Full Year 2013 Mechel OAO Earnings Conference Call (US GAAP)
May 15, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  Vladislav Zlenko
      Mechel OAO - Director, IR
   *  Oleg Korzhov
      Mechel OAO - CEO
   *  Stanislav Ploschenko
      Mechel OAO - CFO

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Conference Call Participants
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   *  Dan Yakub
      UBS - Analyst
   *  Sergey Donskoy
      Societe Generale - Analyst
   * Dmitriy Kolomytsyn
      Morgan Stanley - Analyst
   *  Barry Ehrlich
      Citigroup - Analyst
   *  Neri Tollardo
      Morgan Stanley - Analyst
   *  Irina Trygub
      Raiffeisen Bank - Analyst
   *  George Buzhenitsa
      Deutsche Bank - Analyst
   *  Alexander Levinskiy
      Sherbank - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Mechel 2013 full-year financial results conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today. I will now turn the conference over to Mr. Vladislav Zlenko. Please go ahead sir.

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

 With us from management today are Mr. Oleg Korzhov, Mechel's CEO and Mr. Stanislav Ploschenko, Mechel's CFO. 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 do not intend to update these statements. We refer you to the documents Mechel files from time to time with the US Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

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

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

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 Oleg Korzhov,  Mechel OAO - CEO   [3]
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 (interpreted) Ladies and gentlemen, good afternoon and good morning. Welcome to the 2013 full-year performance conference call. The past year proved to be quite challenging for mining companies and steelmakers, particularly for those whose financial performance to a great extent depends on the price of metallurgical coal.

 Suffice it to say that in 2013 the average coking coal price dropped by 33% year on year. Prices for long steel products did not fair much better with, for example, average rebar prices going down by 11% year on year.

 Throughout the year we invested significant efforts into adapting the Company's business model to the new realities by divesting several assets that did not meet the group development strategy. Due to weak prices and market volatility, those assets were cash flow negative or were cumbersome for the group from the opportunity cost standpoint. The divestments were successful, however, the downside associated with the divestment of loss making assets was a significant non-cash write-off.

 As a whole, in 2013 the Company's consolidated revenue was some $8.6 billion with EBITDA at $735 million and net loss of some $3 billion where $2.5 billion is the amount of the aforementioned write-offs and the ForEx difference.

 During the year, our top priority was reduction of the group debt burden. We managed to make a significant progress in the deleveraging strategy. As a result, thanks to divestments and shutting in or mothballing loss making facilities, we have an up to date business structure that makes it possible to maximize operational cash flows in an environment characterized by a lingering weakness of our product market.

 Given the existing debt burden, we drastically revised our investment program, cutting back investments almost by half compared to the previous year. Among other things, completion of the investment cycle of our major investment projects was also helpful.

 This year our investment program will be down to the bare minimum, largely investments to maintain our existing capacity and an insignificant amount of carried over payment under recently launched projects financed by loans.

 The curtailed investment program will make it possible to free additional funds to increase our financial soundness. At the same time, it does not in any way impact the Company's key strategic project, development of the Elga Coal complex. This project is going full steam ahead as planned with project financing provided by Vnesheconombank.

 It should be noted that starting this year we are already getting returns from projects implemented over the past few years such as the rolling mill at the Chelyabinsk Metallurgical Plant or upgrading train shipment facilities at Port of Posiet, up to 7 million tons a year.

 In particular, the project implemented at the Chelyabinsk Metallurgical Plant made it possible to almost fully abandon selling low profit billets and significantly broadened the range of shaped rolls for construction, thus consolidating our leadership position in the Russian long roll segment.

 In the near future, we will send a batch of rails produced at the mill to the Russian Railroad Company for certification. Whilst we have all the required approvals, our rail supplies to the Russian Railroad Company will be 400,000 tons per annum.

 Since the beginning of the year, record volumes of coal have been put through Posiet, which facilitates a gradual expansion of our [tests] with metallurgical coal consumers in the Asian and Pacific region. We were particularly successful with Chinese steelmakers, who generally avoid long-term contracts, preferring spot deals.

 Last year we managed to sign a number of one-year contracts with such major global steelmakers as Baosteel and [Shaft] Steel. Earlier this year, we consolidated our success by signing another one-year contract with Baosteel, increasing our supplies to this customer by 25%. As a whole, suffice it to say that last year our supplies to China amounted to some 7.5% of this total metallurgical coal import to China.

 Despite our successful expansion into the C-trade coal markets in Asia, the present environment for mining companies continues to be complicated. Coking coal prices have long been at the seven-year minimum. This in its turn leads to major under investment in the industry and will ultimately lead to a drop in supply to the coking coal market and a subsequent price recovery.

 Given the above, our efforts focused on improvement of production efficiency, cost control, optimization of our product range, and diversifying our client base and markets are more important than ever. I am confident that as we go ahead implementing our deleveraging strategy, our efforts will be a valued driver to increase the Company's shareholder value.

 Now let me hand over to Stanislav Ploschenko, the Senior Vice President for Finance, who will present our financial results across all 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. Our financial analysis will as always begin with the mining segment. The fourth quarter saw the average realized price from third party sales keep relatively well around the levels of Q3 or even higher in case of iron ore, up 7%; 9% for anthracite and PCI; and 8% for thermal coal.

 The volumes of sales however were lower than in the previous period, affected by generally slowing processing on the railroad and in the ports due to whether facts are recurring every winter. That led to a 4% decrease in sales volumes of coking coal, whereas steam coal volumes dropped by 8%, largely at the expense of the domestic sales. The same factors stood behind the 15% drop in other metallurgical coal sales.

 The third party sales volumes of iron ore concentrate were down by 42% only due to the fact that we redirected some of the export and domestic volumes to supply our steel segment due to better relative pricing versus third party contracts. That is mirrored in the 35% quarter on quarter growth in the intersegment revenue.

 The decrease in third party sales could not be entirely compensated by higher sales prices, which resulted in the revenue from third parties drift 10% lower than in Q3 to post $626 million.

 Higher intersegment sales almost restored the top line to the third quarter levels, short only $30 million. The cash cost experienced the usual seasonal inflation as a result of higher energy costs and usage of wintertime fuel. It was more pronounced at Yakutugol where cash costs were up from $32 a ton in Q3 to $37 a ton in the fourth quarter. And Korshunov Mining Plant with an $8 increase, whereas cash costs at Southern Kuzbass were only $1 up to $35 a ton.

 The higher cash costs were compensated to a certain extent by the $15 million positive difference in inventory write-down as compared to the third quarter, due to the fact that in Q4 was relatively clean of write-downs to net realizable value.

 That's going to help the cross income hold up at $350 million, only 6% below the third quarter as a result, with a gross margin only slightly down to 45% of the top line versus 46% in Q3.

 The selling and distribution expenses changed insignificantly. The beginning of utilization of Elga's infrastructure incurred an $11 million increase in land and property tax at Yakutugol, driving the non-profit tax expenditure up 49% quarter on quarter to $10 million.

 Bad debt expense grew to $8 million, largely as a result of a change in receivable turnover period.

 Administrative expenses grew 49% to $87 million, the biggest item in this increase being the write-off of fixed assets at Yakutugol and Southern Kuzbass, resulting from the annual fixed assets appraisal.

 Other items behind the growth of administrative expenses were higher audit and advisory costs related to preparation of project finance at Elga, the sale of Bluestone and transfer of some of the audit fees from the third quarter to the fourth one due to later half-year reporting last year. As a result, the operating expenses increased 19% quarter on quarter to $370 million.

 All these dynamics, especially the growth in operating expenses, led to a 44% drop in EBITDA, which posted only $83 million in Q4 with EBITDA and margin dropping to 11% from 18% in Q3.

 The profit tax expense grew by $42 million quarter on quarter, predominantly due to write-off of the third tax asset at [Moscow] Coke and Mechel Coke in the amount of $45 million recorded on tax loss over the previous periods, which increased our deferred tax expense.

 Ethics gain of $9 million in Q4 was much lower than the $45 million one in the previous period and variable dollar exchange rate demonstrated less dynamics in the reported period. These factors combined in the bottom line of the mining segment, dropping to $131 million in the fourth quarter as compared to just $15 million loss in Q3.

 For the year 2013, the revenue from third parties dropped by 18% to $2.784 billion as a result of the combination of lower prices, especially for metallurgical coal, and lower sales volumes of thermal coal and iron ore concentrate, the last one nevertheless, being fully compensated by shipments to the steel segment.

 The EBITDA halved to $482 million or 15% of the top line, versus 25% in 2012.

 The net income of $357 million of 2012 reversed into a net loss of $364 million as a result of lower EBITDA, FX loss and provisions for profit tax liability.

 The prices in the steel segment demonstrated a mixed trend with the average rebar sales price down by 2%, driven by a low sales season. Wire rod price down by 8%, whereas wire price was up 2%.

 The physical volumes of sales continued to fall for the second consecutive quarter as a result of the termination of the partnership with Estar mills and hence the end to resale of Estar goods coming to our top line in the previous years.

 In numbers, that shows up in the 20% quarter on quarter fall in rebar sales, 56% fall in billet and 27% fall in flat product sales. That resulted in a 16% quarter on quarter decrease in the revenue from third parties to $1.029 billion. The intersegment sales grew by 44% to $73 million, which is explained by the increase of blast furnace gas supplies from Chelyabinsk mill to the power segment in winter months.

 The cost of sales fell by 9%, which is less than the reduction in the revenue and is largely explained by the growth in iron ore price and the growth in gas tariffs in Q4. That resulted in a 5% growth in cash costs for rebar and consequently, a 37% quarter on quarter decrease in the gross profit of the segment to $134 million.

 The selling and distribution expenses decreased by 13% to $104 million due to the previously mentioned fall in sales, as well as the reduction in the headcount at our European arm of Mechel Service Global, due to slimming down of its operations.

 As a result of the initiations of bankruptcy procedures at Estar plants in the fourth quarter, we increased the bad debt provision on Estar receivables by another $70 million.

 On the other hand, we reversed $14 million of the bad debt provisions on other accounts made in the previous periods, due to repayment of the receivables from third parties.

 The administrative expenses were down by 36% largely due to a reverse of a $14 million environmental provision at Beloretsk Plant traded in Q3 and canceled in Q4 due to settlement agreement with the environmental authority.

 As a result, this segment's EBITDA decreased by 28% to $35 million in Q4, or 3% of the revenue versus 4% in the previous quarter. The depreciating ruble added a $17 million FX loss. It is worth mentioning that the segment posted a $16 million quarter on quarter increase in other income, which came from a repayment of part of the previously provisioned receivables from Romanian mills disposed of in Q1.

 The income tax expense increased by $43 million quarter on quarter, mainly due to write-off of a deferred tax asset at Izhstal in the amount of $37 million recorded on tax loss over the previous periods.

 (Inaudible) across income high interest expense, the negative FX effect and an increase in profit tax liability resulted in $206 million net loss for the segment in Q4 versus $94 million loss in the third quarter.

 If we compare the full-year results of 2013 versus 2012, the steel segment's revenue decreased by 22% to $5.2 billion due to lower prices and a more pronounced fall in volumes of goods sold due to the termination of the commercial relationship with Estar.

 The EBITDA decreased by 44% to $210 million or 4% of the revenue as compared to 5.7% a year ago. At the same time, despite the negative FX effect of $49 million in 2013 versus a positive $46 million in 2012, the net loss was reduced by 24% to $1.294 billion, due to the fact that most of the bad debt provisions' related part of receivables had already been made in 2012.

 After the successful sale of the ferrochrome business in December 2013, the ferroalloys segments is only represented by the ferrosilicon business in Bratsk. If we compare Q4 to Q3, the prior dynamics were insignificant. The volume of sales went down by 6% to $19 million due to furnace repairs.

 The intersegment revenue decreased by the same rate. The cash cost was 5% up, mostly due to the growth in electricity utilization in the winter period. The resulting gross income was 13% down to $5 million; the operating expenses grew by 89% to $8 million, largely due to a write-off of withholding tax asset on intercompany loans and advisory fees, both related to the operations done for the purpose of the execution of the sale of the ferrochrome business.

 The resulting EBITDA was almost zero in Q4. The FX loss was $6 million in the reported period versus less than $1 million in Q3. The resulting net loss of $283 million versus $3 million net income in the third quarter was largely the result of the balance adjustment for the discontinued operations of the ferrochrome business.

 For the full year of 2013, this segment increased its third party revenue by 19% to $82 million, thanks to the 28% growth in ferrosilicon sales volumes.

 The EBITDA grew by 76% to $8 million or 7% of the revenue versus only 4% in 2012.

 The net loss of $1.171 billion in 2013 versus only $213 million in the previous year was only due to the balance sheet adjustment for the sale of the ferrochrome business, in particular the impairment of long lead assets.

 The fourth quarter was traditionally high season for the power segment, which saw its top line grow 31% to $324 million. $209 million thereof was contributed by third party sales, whereas sales to other segments also grew by 17% to $115 million.

 That resulted in a 7% rise in the gross income and $11 million of EBITDA for the quarter, which can be compared to $4 million negative result in the previous period.

 The SD&A expenses grew by 31% quarter on quarter, partly due to the growth in selling and distribution expenses proportionately to the growth in the turnover.

 The rest was contributed by the $28 million impairment on Kuzbass power distribution company's goodwill and a $14 million bad debt provision predominantly on the receivables from Estar loans, which underwent insolvency procedures. These one-off entries resulted in an increase in the net loss of the segment to $54 million in Q4 as compared to the $20 million loss in the previous quarter.

 Overall for the year 2013, the power segment's revenue remained almost unchanged at $1.190 billion, as intergroup sales contributed $436 million and third party sales recorded $755 million flat year on year.

 The EBITDA went down by 20% to $33 million, largely due to bad debt provisions on Estar receivables. The net loss decreased by 40% to $96 million, which was largely due to the absence of the negative result of discontinued operations of Toplofikatsia Rousse recorded back in 2012.

 On the consolidated basis, the Q4 revenue was 10% down to $1.885 billion as the downward trend in the mining and steel segments was only partially compensated by seasonally better results of the power segment. Whereas the contribution of the ferroalloy segment was negligible.

 The EBITDA dropped by 38% to $122 million, largely driven by falling margin in the mining segment. The net loss of $681 million was a combination of negative $14 million FX effect, versus $54 million gain in Q3. Provisions for profit tax liability and adjustments for discontinued operations resulting from asset disposal.

 Similar segmental dynamics stood behind the 19% decrease in the consolidated revenue for the full year versus the previous period. As steel and mining revenue was on the downward path and the power segment demonstrating as stable result, only the ferroalloy segment managed to push its top line by 19%, which however could not change the big picture.

 The EBITDA for the year halved to $730 million following a similar trend in the mining result, while steel and power EBITDA dynamics were less pronounced and again, the ferroalloy segment challenging the overall picture with an EBITDA increase.

 The net loss increased by 76% to $2.9 billion on asset disposal write-offs, FX loss and provisions for bad debt.

 Turning to the cash flow analysis, we can see that the potential of the working capital divestment reached its combination in Q4, injecting $108 million into group operations, which helped to keep cash flow from operations positive at $10 million in Q4, despite the low season, characterized usually with annual reinvestment into working capital.

 Inventory reduction only brought $100 million, as management of accounts payable and receivable contributed another $134 million.

 Settlements with related parties required another $108 million as we drew our relationship with Estar to the end, initiating bankruptcy procedures with respect to most of them.

 An increase in unrecognized income tax benefits of $28 million in Q4 was a result of the intercompany loans increase, which resulted in additional amounts of interest expense deductions for income tax purposes.

 Cash flow from investment contributed for the first time since 2004 to the group's cash position $306 million, despite PP investment of $130 million. That was entirely due to the cash flow from divestments, predominantly the ferrochrome business and Toplofikatsia Rousse.

 Overall, the cash flow from operations and investment brought $316 million to the business in Q4, used entirely for debt reduction in Q4 and Q1 of 2014, which you can witness by the growth of the cash and cash equivalents item to $269 million on the balance sheet as of the end of the reporting periods.

 Overall for the year 2013, the operations generated $324 million of cash, which was a challenge in the atmosphere of falling commodity prices and worsening payment terms. $180 million thereof were used in investment activities leaving the balance for the debt management.

 The debt situation improved significantly in Q4 and to the reporting date. In the end of December 2013, we received the consideration in the amount of $425 million for our ferrochrome business, with another $15 million following in Q1 2014 for the working capital adjustment. All used entirely for debt reduction.

 The working capital management in Q1, most importantly the continuing rundown on stock at our European steel distribution operations, generated extra cash, which allowed us to reduce debt further to $8.67 million as of May 14th.

 Simultaneously, we have undertaken steps to reduce the debt due in 2014 from $2 billion as of December 2013 to $800 million as of May 14, 2014, this year, by repaying the debt coming due as well as agreeing the terms with our second largest creditor, VTB, on refinancing the repayments of 2014 over a four-year term.

 We have already signed agreements totaling $260 million of the rescheduling the short-term debt to the reporting date, with another $275 million worth of rescheduling to follow in the next few weeks.

 Having said that, ladies and gentlemen, I would like to thank you for your attention and welcome you to open the Q&A session.

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [5]
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 Thank you. We will now take questions. We'd ask that participants please say 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 a translation, so you may ask your question in Russian also and we will translate. Please go ahead.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Dan Yakub, UBS.

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 Dan Yakub,  UBS - Analyst   [2]
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 I really have just one kind of overall broad question. It looks like the EBITDA is not really covering the -- either interest expense or if annualizing the fourth quarter, it's probably not even covering sort of the CapEx levels that the Company looks like cutting CapEx to absolute minimum cannot reduce any further. So my question really is what will happen going forward? Will the Company be growing debt if the situation doesn't change? Or the Company will potentially try and renegotiate interest rates with the banks, maybe reduce interest payments? Just trying to understand how to -- kind of how to match the cash that the Company is earning with sort of the mandatory payments that the Company has to do on a regular basis.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [3]
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 (interpreted) Let me answer your question. There will be a translation. So interest related to our loan portfolio are financed from the operating cash flow rather than EBITDA. And the operating cash flow, as you may have seen, has been positive over the recent reporting periods.

 In addition to the above, we do indeed see some further opportunities for reduction of our investment spend. And as you could and may have seen up till today, we have managed to significantly reduce our loan portfolio and we keep reducing the amount of loans and that undoubtedly affects interest payments downward. Besides, we are in the process of negotiations with our lenders, so that the interest rates, if not the reduced in absolute terms, then we negotiate rescheduling or restructuring of interest payments in such a way so that there is a lower interest payment burden during those years when the EBITDA is low.

 And at the same time, a certain percentage is capitalized with -- or certain interest is capitalized to be paid at the maturity date. And that relieves the burden on us and a bigger portion of interest payments is deferred till a later period, which we expect to be more positive from the market environment perspective.

 We believe that this year we will have enough operating cash flows and EBITDA to service our interest payments.

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Operator   [4]
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 Sergey Donskoy, Societe Generale.

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 Sergey Donskoy,  Societe Generale - Analyst   [5]
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 I have several questions. First of all, could you please comment maybe in more detail? In the fourth quarter, gross profit of the mining segment declined by $25 million, EBITDA dropped by $65 million, which means about $50 million difference. You mentioned during your presentation a number of extraordinary factors that affected performance in the fourth quarter, but could you just summarize those which contributed to this particular discrepancy? What was this $50 million difference? What were the main contributors?

 Second, if I'm not mistaken in my calculations, there was a $6 million outlay in the fourth quarter to acquire non-consolidated interest in subsidiaries. Could you please remind us what was it about? What was the reason, the purpose? And maybe who were the parties that benefited?

 Third question, could you please give me the amount of capitalized interest in the 2013? And also the total interest paid? And if possible, same numbers for the fourth quarter.

 And lastly, a question on your universal mill. Could you provide us a number, what was the production in the 2013? And what is the production planned for 2014 separately, rails and sections, if possible?

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [6]
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 The first three questions will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [7]
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 (interpreted) Speaking about the EBITDA trend in Q4 in the mining sector. So basically if we look at the EBITDA from Q3 to Q4, the EBITDA profile from Q3 to Q4, the biggest impact was caused by the gross profit reduction by about $40 million. We also need to add the increase in operating and G&A, general and administrative expenditures, of $4 million plus a $6 million increase in commercial expenditures, other taxes of $9.5 million impairment of goodwill in the segment of $5.5 million. And the increase in the bad debt provision of $8 million.

 At the same time, there was also a positive effect related to other non-operating expenditures of about $10 million. All this taken into account explains the difference between the Q3 and Q4 EBITDA.

 Regarding your question about the buyout of minority stakes for an amount of about $46 million in Q4, we consolidated the shareholding in the [Korshunov] mining company that we had. We had about 85% prior to the consolidation. Given that last year our group entered the consolidated taxpayer group, one of the conditions presented was a direct ownership of more than 90% of the subsidiaries. So that the Korshunov mining plant is to make sure that the Korshunov key plant was included, we had to consolidate our stake up to 90%.

 And $46 million was the amount that we paid to have a more than 90% shareholding interest in the Korshunov mining company. I can tell you that after the consolidation of Korshunov, the positive effect that is derived from that Company alone in terms of profit tax is about RUB100 million per month. So thus these investments will be repaid in less than a year and a half.

 Answering your third question. In Q4, interest payments that you see in the P&L amounted to $196 million and $66 million was the amount of interest capitalized, as you can see in the investment cash flow. And if we take 2013, then according to your P&L it was $742 million and $331 million of capitalized interest.

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [8]
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 Next question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [9]
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 (interpreted) Last year in terms of the total output of rails from the universal mill, it was about 5.5 million tons. This was not an over impressive output, but our objective was not to maximize the production. Our principle objective was to learn how to manufacture channel bars and beams, so it was by trial and error. And it was our first attempt to see how well we would be able to succeed.

 This year's plans for today are as follows. We are planning that later this month, early next month we will make sure that we have the required batch of rails to send the rails to the Russian Railroad Company for certification. Judging by prior experience, due to required activities to be performed, certification of rails, usually it takes from six to eight months.

 So it is quite a challenge to forecast the throughput this year because everything will depend on two factors; the success of the certification process and consequently our capability to produce the required volume of rails. But we'll keep exercising verbatim, so we'll keep learning this year, pending the completion of the rail certification.

 Over the first four months of this year we manufactured about 10,000 tons and we produced 5.5 thousand tons of rails in April. And we plan that given the uncertainties associated with 2014 we will produce a rail product from 20,000 tons to 50,000 tons, depending on when we'll be able to complete the certification process.

 And as to the Russian Railroad Company, we have an agreement with them that once the rails are fully certified, they will off take all our volumes.

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Operator   [10]
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 Dmitriy Kolomytsyn, Morgan Stanley.

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Dmitriy Kolomytsyn Morgan Stanley - Analyst   [11]
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 (interpreted) I'd like to ask a question firstly about Elga. I'd like to know whether you are able to tell us about your plans for this year and next year or maybe for the few coming years in terms of production and with a breakdown into steam, coal and coking coal concentrate.

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [12]
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 Oleg Korzhov will answer the question.

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 Oleg Korzhov,  Mechel OAO - CEO   [13]
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 (interpreted) This year we have planned to produce 2.2 million tons of coal from the Elga field. We proceeded from the assumption that we would be able to complete upgrading our seasonal [washing] plant that would end -- it would run year around, starting in October. We launched it in the second half of April this year.

 In terms of the breakdown, steam coal versus coking coal, this has been mentioned and the current breakdown is 50-50; 50% is the share of steam coal and 50% is coking coal. And therefore we plan that we'll be able to produce about 1.3 million tons of product. And the breakdown will be approximately the same in terms of product for energy products and coking products.

 Speaking about the future periods, for next year we have planned to produce 3.7 million tons. Again, we proceed from the assumption that the washing plant would run all around the year. And basically we'll keep our production flat at 3.7 million tons until and through the end of 2016, until we have built and completed construction of our principle washing plant.

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Operator   [14]
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 Barry Ehrlich, Citigroup.

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 Barry Ehrlich,  Citigroup - Analyst   [15]
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 These are forward-looking questions to give us some idea of how the business is developing this year, if I may. How did EBITDA margins develop in the first quarter? And what was total CapEx and CapEx on Elga related projects in the first quarter?

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [16]
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 Stanislav Ploschenko will answer the first question.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [17]
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 Unfortunately I cannot say much to the first question because we have not reported the first quarter, therefore we cannot comment on any -- or give any forward-looking statements about our financial metrics for the first quarter. I guess you will have to wait until we report sometime late June.

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [18]
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 The remaining part of the question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [19]
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 (interpreted) In Q1 2014 our CapEx without the Elga project, that is CapEx that is financed by the Company from its own resources using its working capital, the total amount was about $27 million, including $9 million allocated as sustained expenditures and $18 million was spent to make payments in connection with completed investment projects where we have accounts payable -- outstanding accounts payable.

 Speaking about the Elga project that is not financed from our working capital, but its financing provided by [Web], then the total CapEx in Q1 was $48 million.

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Operator   [20]
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 Neri Tollardo, Morgan Stanley.

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 Neri Tollardo,  Morgan Stanley - Analyst   [21]
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 A couple of more questions from our side. Considering all the refinancing that you've done and the interest adjustments that the CFO mentioned earlier in terms of grace periods, how do you see your interest expense and interest payments changing year over year in 2014? And if you can give us a bit more detail on your VTB refinancing deal that was on the news today.

 And the second question is on the Chelyabinsk Metallurgical Plant. We know that the deal fell through, I think it was December of last year. Is there any update on the sale of that asset? And are there any other non-core assets that you are planning to sell?

 And on that front, do you have a timeline on the sale of an Elga stake? Are you able to give us an update on the negotiations there?

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [22]
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 Stanislav Ploschenko will answer the first one.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [23]
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 (interpreted) In terms of interest costs this year, the negotiation process with our lenders is far from being closed or completed. That's why I'm reluctant to give any specific information to the effect since the situation may change. I'd like to go back to the response that I have already given to a prior question that we expect to be able to generate sufficient EBITDA and operating cash flows to cover our interest spend this year. And in terms of the specific amount of interest spent, in addition to the fact that it may change, I cannot quote the amount since it is a forward-looking statement.

 Speaking about the refinancing with VTB, the refinancing deal with VTB, as I've said before, we have reached an agreement to refinance that portion of repayments that are due and payable in 2014. This is an amount of $0.5 billion. We have signed some of the agreements fixing our arrangement for a total amount of $360 million and we expect to be able to sign the remaining agreement within the next few weeks for an amount of $275 million.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director, IR   [24]
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 The next question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [25]
------------------------------
 Speaking about the development of our asset in Ukraine, the current political situation in the region is quite complicated, but despite that, we are still in the process of structuring the deal. There are some parties who have expressed their interest and we're negotiating with them. It is hard to give you any deadline or time period because the process is underway and ongoing and we hope the outcome would be positive.

 Speaking about other non-core assets, I'd like to remind you that these are the assets that we have put on the list as companies that we are ready to divest. Companies that do not have a strategic fit that we spoke about before. These are our US mining company, Bluestone, that's mostly coke, that a (inaudible) ferroalloy plant (inaudible), and we keep divesting our metal trading Eastern European assets.

 And the third question regarding the sale of our stake in Elga. Actually we are going along to you parts. The first one is a potential sale of a portion or a share in the business and the sale of the rollout that we have been building recently. So we are in the process of negotiations and trying to reach an agreement. Again, it is hard to give you any idea of the time period. Hopefully we'll be able to get a result by the end of the year.

------------------------------
Operator   [26]
------------------------------
 Irina Trygub, Raiffeisen Bank.

------------------------------
 Irina Trygub,  Raiffeisen Bank - Analyst   [27]
------------------------------
 Just several questions which I would like to ask. The first question is can you possibly say what is the current capacity load at Port Posiet at the moment? And if you are planning to increase the capacity going forward into the year?

 Second question is what does the current covenant requirements with lenders? And does Mechel plan to renegotiate its covenants again in the course of the year?

 And if possible, what is the debt reduction target for the full-year 2014, if any? I'm sure that you plan at least for yourself maybe to reduce that total debt exposure as well.

 And also, I notice that in the fourth quarter the general and sales and administrative expenses are relatively high. Do you plan any reduction in G&A expenses for in the course of the year? And if yes, at the expense of which activities basically Mechel will do this?

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [28]
------------------------------
 the first question will be answered Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - CEO   [29]
------------------------------
 (interpreted) By the end of last year, we completed the first phase of the Port of Posiet upgrading. This spring we completed all startup and commissioning operations and within a pretty short span of time, in two months we managed to reach the design capacity as planned.

 As to any further increase in the throughput capacity this year there will be an increase compared to last year. Last year we put through 4.1 million tons, whereas the target for this year, given that it was not during the first months when we reached the design throughput capacity, but in April. Therefore our target for this year is about 7 million tons. But as I have said, even now the port is running at a throughput capacity higher than the designed one. In April we put through 640,000 tons and basically if we multiply it by 12, it will be about 7.7 million tons.

 Naturally, given the winter seasons and issues related to the winter season, traffic issues and cold, freezing issues, well in principle we can be bold enough to say that we are already at the design capacity and we'll undoubtedly try to ramp it up and further increase.

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [30]
------------------------------
 The remaining questions will be answered by Stanislav Ploschenko.

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 Stanislav Ploschenko,  Mechel OAO - CFO   [31]
------------------------------
 (interpreted) In Q4 last year, we agreed with our lenders covenant holidays with respect to net debt to EBITDA for 2014. Then this particular indicator will be tested for the first time only after 2014. As to Mechel, this indicator should not exceed 10 to 1 and we expect to be there to meet the covenant and therefore, we do not have any plans to have any near-term negotiations with the lenders to amend the covenants.

 The second indicator is EBITDA to interest costs. It should not be less than one. And we also plan that there should be no problems there as well in terms of meeting this covenant as well.

 And as to G&A, I guess you mean the mining sector. Since in the metallurgical segment this indicator was -- G&A spend was even lower than in Q3. And the changes in the ferroalloy and energy sectors were not material.

 As I mentioned above, the principle reason, the main reason behind the increase in G&A in the mining segment in Q4 is the fact that there was a revaluation of fixed assets and some of the fixed asset value was written off in Yakutugol and Southern Kuzbass. This is something that we do on an annual basis when we revaluate our assets to get net realizable value and besides audit fees and consultancy expenditures.

 Speaking about these cost line items, the audit costs last year were residual from Q3 to Q4 because the half-year review was completed as late as in December. That was quite late because we had been in the process of negotiations with lending banks to restructure our debt before some of the payments for audit services were delayed from Q3 to Q4. Besides, there were some extra costs related to consultancy services in connection with the project financing structuring for Elga.

 And speaking about any subsequent -- any future trends in terms of G&A, we'll keep revaluating our fixed assets every year and a lot will depend on their depreciation and the market conditions. And speaking about the auditors and consultancy services, they will be quite stable. Auditor's fees are stable because we have our accounts audited every year. Consultancy fees will depend on projects in the mining segment that we plan to execute.

 And as to asset divestment, you know that we have quite a broad scope of work for this year.

------------------------------
Operator   [32]
------------------------------
 Sergey Donskoy, Societe Generale.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [33]
------------------------------
 (interpreted) I have a few follow-up questions. Firstly, when you were discussing my -- answering my question regarding your load or the rolling mill capacity load, you did not cover that portion of your production that is related to bar and sheet roll production. As far as I understand, more than half of the capacity of the mill is used to produce bars and shaped products. What are your plans for this year and more long-term wise? Are there any constraints -- restraining factors? If there are such constraints, what are they?

 My second question is related to CapEx. Could you please give us the full CapEx number in accordance with your 2014 budget, including the Elga CapEx? And if I understand it correctly, last year you spent about $6 million in connection with payments for the purchase of the (inaudible) Plant. Do you plan to make any payments of the kind this year? And what is the total outstanding amount that is due and payable, all in all?

 And the third question, do you have any plans to restart production at Bluestone? If my understanding is correct, it was completely shut in last year. If yes, and under what conditions?

 And last but not least, taking Q4 and Q1, what were the coking coal prices at Yakutugol?

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 Vladislav Zlenko,  Mechel OAO - Director, IR   [34]
------------------------------
 Oleg Korzhov answer.

------------------------------
 Oleg Korzhov,  Mechel OAO - CEO   [35]
------------------------------
 (interpreted) Well, let me try to answer the question. It takes up more time to read out the questions. Speaking about the bars and channel bars, let me give you an answer in accordance with the same procedures that I used. We produced a bit more than 40,000 tons of bars and channel bars last year over nine months. And this year during the first four months, our throughput is 33.5 thousand tons. And reaching the maximum output in March, we reached it in March. And it is 11.3 thousand tons.

 Of course everything will depend on the market environment as you understand. This is a special purpose of product, but we plan to produce from 122 thousand tons to 150 thousand tons. To date we have capability to produce about 13 types of sheet products. And maximizing output is a constraint by our narrow capabilities to broaden the range of products produced. And this is the issue that we are currently addressing and we hope that by the end of this year we'll be able to get some tangible results in this particular respect.

 Well, this year without the Elga project, we plan to spend $322 million as CapEx, including $240 million as sustained CapEx and about (inaudible) million dollars for investment projects. But I'd like to repeat what has been said that these are not new investment projects, but these are payments for projects that were implemented in 2013.

 As to the Elga project, we plan to spend a bit more than $720 million. This is the Elga CapEx.

 Well, thinking about the prices, Yakutugol prices, I shall say that we have two fitting destinations or markets. The first is the Chinese market. The prices in the Chinese market we sell on the safe bases were about $140 to $145. In Q1 2014, the prices went down and we -- at the beginning of the quarter, the prices were $130 and by the end of the quarter, the prices went down to $110.

 As to the second market, it is Japan and Korea, and we sell our products to them on four bases. In Q4 the prices were $126 and they are almost flat -- they were almost flat in Q1 and were $124.

 Regarding (multiple speakers), for last year we, as settlement for the acquisition of the asset, we paid $66 million. There will be another payment this year and it will amount to about $85 million. The increase is driven by the deal structure as signed earlier.

------------------------------
 Sergey Donskoy,  Societe Generale - Analyst   [36]
------------------------------
 Is it possible to say how much total remains to be paid, including 2014 and subsequent years?

------------------------------
 Oleg Korzhov,  Mechel OAO - CEO   [37]
------------------------------
 (interpreted) As I have said, in 2014 we'll pay $85 million and within the period from 2015 to 2018, we will pay another $282 million.

 And regarding Bluestone, coal production was suspended later last year. This was related to the fact that production of coal under the pressing environment and given the costs incurred by the Company was not viable or economically efficient. This year the pressing environment has not yet changed and we do not see any point or practicability in restarting the production from this asset.

 If something changes, if the prices move up, we'll reconsider it. As of today, there is no production, but as of the beginning of the year, we had coal inventories -- inventories of coal produced before, therefore this year we are processing and selling the products that were stored earlier this year.

------------------------------
Operator   [38]
------------------------------
 George Buzhenitsa, Deutsche Bank.

------------------------------
 George Buzhenitsa,  Deutsche Bank - Analyst   [39]
------------------------------
 I have a few questions. First, when your equity on the balance sheet, which is not approximately $800 million, I remember you had a covenant, which related to that level of equity. So the question is how the covenant has changed and whether it exists or it has been abandoned altogether.

 Second question is on the second tranche from VTB for Elga financing. Can you please update us? When do you plan to receive it?

 And a third question is on leaseback business. While currently this is a $74 million I think of cash inflow from that business. And I was just wondering what exactly you do there?

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director, IR   [40]
------------------------------
 Stanislav Ploschenko will answer.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [41]
------------------------------
 (interpreted) Well, speaking about the equity covenant, we do have a covenant at the group level which should -- and the equity should be $4 billion at minimum. As of the latest reporting update, equity went down to $800 million, but $4 billion as a covenant is adjusted equity that does not take into account all non-cash write-offs. And if we calculate just to the equity, then as of the recent reporting date, it is $4.5 billion and we do not have any plans to revise or change the covenant at the moment.

 Now regarding the VTB financing. The latest drawdown was in the second half of April. So far this money is sufficient and we are in the process of complying with all conditions precedent to get the second tranche from Vnesheconombank. And hopefully closer to June or the condition's precedent will be met and we'll do the next drawdown.

 Speaking about leaseback, last year as part of our investment program, we purchased mining transport equipment for Southern Kuzbass and Yakutugol, which we leased back, which is quite a standard financial operation to finance CapEx.

------------------------------
Operator   [42]
------------------------------
 Alexander Levinskiy, Sherbank.

------------------------------
 Alexander Levinskiy,  Sherbank - Analyst   [43]
------------------------------
 (interpreted) I have two questions from our part. The first question relates to the bonds. Do you consider any bond redemption, given that they are traded at a big discount as a par value? If so, then what would be the source of funds to finance the buyout?

 And the second question relates to your Russian assets expenditures forecast for 2014 and if possible, could you please show us the cost versus the ruble exchange rate?

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director, IR   [44]
------------------------------
 The first question will be answered by Stanislav Ploschenko.

------------------------------
 Stanislav Ploschenko,  Mechel OAO - CFO   [45]
------------------------------
 (interpreted) We are aware of the fact that our bonds are traded at a pretty big discount. And from time to time we do targeted redemptions, but unfortunately, as you know, the Company is cash strapped. And if it were not the case, there would be no such a discount if we had money to buy out our deeply discounted debts. There would be no discount.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director, IR   [46]
------------------------------
 Next question will be answered by Oleg Korzhov.

------------------------------
 Oleg Korzhov,  Mechel OAO - CEO   [47]
------------------------------
 In terms of Russian coal assets or mining assets costs, when we are during the budgeting process for 2014, we were guided by the following logic. There will be inflation, natural monopolies, tariff rates will grow. We actually assumed in about 5% to 7% tariff growth rate. But thanks to optimization and cost savings, we have planned to offset the inflation thanks to planned cost savings. Therefore, in ruble terms, we do not foresee any major increase in the costs incurred by our coal assets.

 As to the sensitivity of our cost to the ruble exchange rate, all our mining segment costs are ruble denominated. If we convert rubles into dollars, then naturally with ruble depreciation, dollar expenses go down as well.

------------------------------
Operator   [48]
------------------------------
 That is all the questions that we have for today. I will now turn the call over to management for any additional comments or closing remarks.

------------------------------
 Vladislav Zlenko,  Mechel OAO - Director, IR   [49]
------------------------------
 Thank you. Ladies and gentlemen, thank you for taking the time to join Mechel's 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 the team here. Good-bye.

------------------------------
Operator   [50]
------------------------------
 Ladies and gentlemen, that does conclude our conference call for today. Thanks for participating. You may now disconnect your lines.

------------------------------
Editor   [51]
------------------------------
 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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