Half Year 2014 Mechel OAO Earnings Call

Oct 14, 2014 AM EDT
MTLR.MZ - Mechel PAO
Half Year 2014 Mechel OAO Earnings Call
Oct 14, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  Alexey Lukashov
      Mechel OAO - Deputy Director, IR
   *  Oleg Korzhov
      Mechel OAO - CEO
   *  Andrey Slivchenko
      Mechel OAO - CFO

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Conference Call Participants
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   *  Oleg Petropavlovskiy
      BCS Capital - Analyst
   *  Neri Tollardo
      Morgan Stanley - Analyst
   *  Irina Trygub
      Raiffeisen Bank - Analyst
   *  Alexaner Shihev
      Sofgen - Analyst
   *  Sergey Donskoy
      Societe Generale - Analyst

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Presentation
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Operator   [1]
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 Good day and welcome to the Mechel reports first-half 2014 financial results conference call. Today's conference is being recorded.

 At this time I would like to turn the conference over to Mr. Alexey Lukashov, Deputy Director of Investor Relations. Please go ahead, sir.

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 Alexey Lukashov,  Mechel OAO - Deputy 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 six-month 2014 results which were reported today.

 With us from management today are Mr. Oleg Korzhov, Mechel's CEO and Mr. Andrey Slivchenko, Mechel's CFO. After management has made their formal remarks we will take your questions to the presentation team.

 Please note that during the 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 United States Securities and Exchange Commission, which contains 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 discussions 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 www.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) Good morning and good afternoon dear ladies and gentlemen. We are very happy to welcome you at this conference call covering the first-half results of the operations of the Company.

 At the start of my part of the presentation I would like to say a few words about the situation which produces the greatest effect upon the current status and the future destiny of the Company. The Company is currently going through a large-scale restructuring of our debt obligations and in the beginning, at the end of last year and the beginning of this year, we saw that despite the meta analytical outlooks for coking coal prices, which was at least $150, the situation in the market was unfolding in a not very favorable way. And so understanding that the changing financials would affect our ability to service our debt back in spring we started our negotiations to buy the current loan sales to ensure these stable operations of the Company as well as our ability to service our debt.

 Despite the fact that the prices for our coal products went down the Company continued to service its loan obligations and that led to a considerable decline of our working capital which started producing a negative effect over our operations. Despite our efforts we were not able to achieve agreements with our lenders which led to reclassification of our long-term debts into a short one.

 And currently we have suggested to our financial lenders various options to restructure our debt which even under the current conditions would enable the Company to service its debt and ensure the repayment. And so with this regard we continue active negotiations with the bank hoping to achieve agreements very soon.

 And now I would like to go over to the results of our first half year. The consolidated revenue was $3.4 billion, which is 26% lower than the similar indicator last year. The EBITDA was $250 million, having shown a decline by 38%.

 Within the current period the decline of prices for main products was particularly effective, which was the steel coals. And the main reasons behind the decline of revenue was the divestment from a number of assets from the group as well as a strong reduction of resale from the third-party producers. But at the same time one should note the effectiveness of sales in the Company grew and the gross revenue grew from 30% to 34%.

 Over the operation results in the mining segment we received an effect from the termination of the operations of the Mechel Bluestone, which was our US assets because of an unfavorable market environment that we currently see in the input segment. The EBITDA indicator was affected by the low input prices which reach the minimum level during the past seven years. It is balanced between the supply and demand in the global steel input market affected itself when the sale of the steel products was even more effective than the sale of the coke in concentrate.

 Because of the worsening environment of the global iron ore market we purposefully redirected the volumes of the iron ore concentrate previously supplied to China to the Chelyabinsk plant for the internal consumption purposes which became another factor of the decline of revenue from the sale to the third parties which you can see in our ports but supported the efficiency of our operations and improved the profit margin of the steel segment. And I should note that the effect from the one-off accounting factors which weren't reflected in the report based upon the H1 results, the Company demonstrated operational profit.

 And I would like to draw your attention then. In many ways, the half-year results came from a week first quarter where the negative environment in the raw materials market came from the constructions in steel and in the second quarter because of the grim steel segment and against the improving environment, the results also improved and the profitability was better than the previous period last year.

 And I would like to say a few words about our strategic and investments project that we previously referred to and continue talking about. With the commissioning into operation of the seasonal benification plant at the Elga core production we resumed production of the coke and coal concentrate, which was reflected in the first half of 2014.

 By the end of September Elga produced more than 740,000 tonnes. The benefication plant produced more than 250,000 tonnes of coke and concentrate and we shipped almost 0.5 million tonnes of product to consumers. In the immediate future the seasonal plant is going to be transferred to the year-round operation, which would enable us to increase production and continue benefication on an annual basis.

 In the course of the whole year we have been gradually increasing production at the rail production line which was launched last year and by autumn more than 700,000 tonnes of this new products have already been shipped. In August the first shipment of P65 rails, which were produced there, were independently assessed in the laboratory environment showing very good results, which compliant with the best international practices.

 Currently our rails have installed an experimental rail circle for the purpose of being certified after which we will be able to start shipping these rails to a Russian railroad company. Already this year Chelyabinsk Plant shipped its rails to a number of Russian companies to be installed on several technological rail connections for testing purposes.

 I intentionally made reference to these two developments because the basic line of arguments that we are mentioning when we talk to our lenders is the fact that the Company has the points of growth necessary. And these two projects that we are working on are the kinds of points of growth that we are very much helpful for.

 And whatever we do as part of the implementation of these two projects shows that as of right now they already making contributions both into the operational and financial results of the Company. And as these two projects reach their objectives these contributions will become stronger.

 (technical difficulty)

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Operator   [4]
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 Ladies and gentlemen, please stand by as we are experiencing a momentary interruption in today's conference. Thank you for your patience and please continue to hold.

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 Andrey Slivchenko,  Mechel OAO - CFO   [5]
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 Ladies and gentlemen, thank you for your time and lasting interest towards the Company. I would like to welcome you on this call, which is particularly special for me as this is my first call in my capacity of the Chief Financial Officer for Mechel.

 I will take you through the most important issues related to the financials we are releasing today. As you all know the Company is undergoing quite a turbulent period in its history.

 The coal prices keep decreasing, resulting in 26% drop in revenues year-on-year basis pressing EBITDA further down. Simultaneously the financial indebtedness of the Company being pretty constant over recent time in relation to the EBITDA has turned to be above comfortable level.

 Nevertheless, consolidated EBITDA for the first half of 2014 exceeded $250 million, although a decline of 38% from the last year quarter-on-quarter basis it has doubled. EBITDA margin for the period was down to 7.3% but up to almost 10% in the second quarter, well above 2013 levels.

 The downward trend continued from the last year. It had slowed down by the end of the first half of 2014. Mining revenues were down by 23% primarily due to the decrease in Mechel sales volumes and internalized supplies of iron ore into the group companies increasing into segment sales and a further decline in the products prices gross all the segments, which we believe to be at the minimum level now.

 Hot coke and coal benchmark price slumped from $154 per tonne in the fourth quarter of 2013 to $120 per tonne in the second quarter of 2014 pushing mining segments EBITDA by 39%. Steel revenues were down by 29%, a result of the group disposing of its Romanian business but also it cut down in sales of third-party products in the end of 2013 and a further curtailing of Mechel Service Global operations in Europe.

 Metal and Steel segment's EBITDA decrease was 41%. Due to the halting of Southern Urals Nickel Plant and disposal of [Crow Massive], the ferroalloy segment had been excluded from the Company's accounts. The division's management company was liquidated and Bratsk Ferroalloy Plant was merged into the steel division.

 For further reporting and analysis there are only three segments left: mining, steel and power. Power sales were down by 8%. The overall group's consolidated gross margin, as was mentioned for the six months of 2014, increased from 30.4% to 33.75% as compared to six months of 2013.

 Operating loss decreased to minus $16 million for six months of 2014, down from $631 million loss for six months of 2013. If relieved of accruals for doubtful accounts allowances and tax provisions for previous years, adjusted operating income would amount to $16.5 million.

 Net loss for the first six months of 2014 amounted to $648 million, a decrease of almost [17%] compared to the same period last year. Adjusted net loss less non-cash accruals attributable to the previous years would amount to $544 million only.

 As far as cash is concerned, operations brought in $476 million of cash. Significant cash contribution was due to the decrease in the working capital.

 As of the end of the period, trade working capital amounted to $40 million, a 94% decline, or a $631 million decline from the year beginning. For the past 12 months the trade working capital shrinks by $900 million.

 Capital expenditures for the period were quite modest, only $294 million of which $244 million were invested in the mining segment and $30 million was invested in the steel segment. Over the period we had repaid $513 million in bonds and other syndicated and bilateral credit facilities. As of June 30, 2014, net debt amounted to $9 billion including finance lease obligations.

 In the media we have requested all our lenders to revisit repayments schedules, postpone this year repayments until later period. We have entered into large-scale negotiations with banks on restructuring of our financial indebtedness and managed to restructure or reach preliminary agreements on restructuring.

 As such negotiations are yet in progress we have booked all of our debt obligations as short-term, reclassifying $6.4 billion of long-term debt into short-term. The weakened ruble has recently relieved the Company of another portion of debt so currently our debt portfolio amounts to approximately $7.7 billion, or if to account for the financial lease, $8.1 billion.

 And in conclusion and an important note, the Company is switching from US GAAP reporting to IFRS reporting as required by the Russian legislation. For the transfer period of about two years we are to prepare two versions of financials under US GAAP and IFRS.

 This requires quite a lot of our resources. And in the interest of time as well as cost wise we have decided to have no interim auditors review of our consolidated results. Thus these first half of 2014 financials are to be viewed as management reporting only.

 Thank you very much. And we will be glad to take your questions now.

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Questions and Answers
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Operator   [1]
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 Thank you, sir. (Operator Instructions) Oleg Petropavlovskiy, BCS.

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 Oleg Petropavlovskiy,  BCS Capital - Analyst   [2]
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 Good evening, gentlemen. Thank you for your presentation. Three questions from me.

 First of all, they are already connected with themselves so you may answer all of them in one thing. First of all, what are your current scenarios for resolvance of your debt issue with banks? What we heard were only rumors in the newspaper, maybe you can share with us real scenarios here since for the discussion with banks now?

 Second question is what do you think minorities of Mechel may get in all of this scenarios? And the last question, what if banks will take control over Mechel? How do you think -- what will minorities get and who will control Mechel's operating activity? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [3]
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 The question will be answered by Andrey Slivchenko.

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 Andrey Slivchenko,  Mechel OAO - CFO   [4]
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 (interpreted) At this point in time the loan portfolio of the Company is made up of $7.7 billion out of which 166 million is denominated in rubles and 3.5 in both US dollars and euros.

 And so this structure of our loan portfolio has different lenders in it. And so whenever we negotiate with these lenders we do take into account the current stage of affairs as well as potentially what their preferences might be.

 Two-thirds of this portfolio belong to the banks with the government ownership, which is Gazprombank, Sberbank and VTB. Most of these obligations have been restructured to last for another five years and just minor credit lines were remaining for which a preliminary agreement was achieved to postpone the repayment until later periods.

 Being aware of the negative trends currently unfolding in the market as well as the external factors we have contacted specifically these lenders with a request to restructure our depositions to extend them for further -- longer period of time -- and we have found response from their side. The media coverage does demonstrate the situation as it actually is and I am sure that is the information that you are following and this information shows exactly what is going on.

 We have also tried as best as we can to act openly and we were always straightforward in commenting on our situation. However, at this point in time we continue to interact with the above-mentioned banks with respect to the current loan position without yet being able to identify any resolution of the global restructuring.

 We have been able to achieve a solution in as far as our leasing portfolio obligations are concerned. One of the biggest ones was the restructuring exercise we undertook with VTB Leasing, which ended in us signing the respective agreement and we did our first payments as part of those restructuring of those leasing obligations for 15 years.

 We have similarly been quite successful in achieving an agreement with Gazprombank with respect to the factoring as well as the documentary transactions and particularly the banking guarantees, which helps us to make payments in favor of our commercial counterparties. And that takes place in the environment of very strong decline in our working capital position.

 Similarly with Gazprombank, we have achieved and reached an interim agreement to carry forward our outstanding payments with regard to the principle loan until next year. And as far as Sberbank is concerned, practically all of the payments are due in future periods and so as far as all of the government banks are concerned we continue negotiating the possibility of reducing the interest payments although there hasn't yet been any tangible agreement reached on this particular letter.

 As far as the rest of our lenders are concerned, as you may know, we have bought quite a sizable share of our loan portfolio in syndicated -- loans from the international banks and a preliterate agreement has been reached and an understanding about these loans in terms of their repayment to be restructured and postponed. And so currently we are negotiating with these banks about the structure of such a refinancing.

 A similar situation is what we are having with respect to the loans were received from the export agencies. We have reached agreements and also signed respective understandings and agreements with certain banks in terms of the bilateral arrangement to delay the repayment.

 And the Company is also continuing to service its public debt, which is the bonds. We never allowed any default position with respect to these kinds of obligations that we have.

 The fundamental idea that we are trying to achieve in our loan portfolio exercise is to meet the interests of the diverse group of stakeholders including the banks and the shareholders including the controlling shareholders as well as the minorities and the Company itself in an attempt to reconcile our capabilities with its obligations. In answering your second question, i.e. what the minorities might get out of the restructuring, we want to express a certainty that minorities won't suffer and they would get at the end of the day the company with the restructured debt with the capacity to services long term. And according to the financial model which we have shared out with all of our lenders, this is possible and feasible against the reduction of the interest payment, the maturity timeframe extended and a certain group of assets that is divested from so as to achieve a comfortable level of debt-to-EBITDA in about three- to five-year timeframe.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [5]
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 Next question please.

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Operator   [6]
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 Neri Tollardo, Morgan Stanley.

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 Neri Tollardo,  Morgan Stanley - Analyst   [7]
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 Thank you gentlemen for the conference call. Thank you for describing what Mechel is bringing to the table with the banks but would you be able to share what the banks themselves and especially the state banks are proposing in terms of restructuring of your debt?

 And the second question is a bit more specific about your trade working capital, which was reduced by 96% in the first half. What has been the dynamics of this working capital in the third quarter and how much more room do you have to optimize it? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [8]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [9]
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 (interpreted) Well again I should refer to the information occurring with this particular issue being continuously made public. The proposals that the banks came with to the Company was an additional stock issue worth $3 billion and the possible conversion of the 75% of this issue into the shares of the Company.

 And respectively, this particular proposition we didn't accept it because as I said we do see the possibility for the Company to persevere through this situation. We see that the Company is capable with a midterm perspective to service its debt if the debt is restructured. So that was why we have reviewed these ideas but because of a number of considerations we have declined it and so respectfully we came back with a counter proposition which our CFO has described before me.

 As far as the trade working capital is concerned indeed in the first half of this year the Company managed to engage its trade working capital into the production processes, which in the first place was related to the fact that we have devised a program which we previously announced, meaning a divestiture from the steel assets in Europe and we were quite active in the first half of the year in trying to actively reduce our stocks in Europe. As far as our current and the future possibility to reduce the working capital is concerned I don't see any tangible injections that could be made into the Company because of that but nevertheless at this point in time we are prudently reviewing all of the possibilities which could assist the Company in terms of the operational cash flow.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [10]
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 Next question please.

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Operator   [11]
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 Irina Trygub, Raiffeisen Bank.

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 Irina Trygub,  Raiffeisen Bank - Analyst   [12]
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 Yes, hello. This is Irina Trygub from Raiffeisen Bank. Thank you so much for the presentation.

 I would like to return to the question related to the operational cash flow potential growth. Can you please tell us your productions plans at Elga coal deposit for the next year or two? And also please can you specify at which coal price you would be able to restart sales of coal to China because how much you plan to increase the sales to Chelyabinsk Metallurgical Plant of coal.

 So I don't see basically the potential to increase the volumes of coal sales due to redirection of sales to Chelyabinsk. Then the second question to which other potential directions you are planning to sell coal to which countries?

 And the next question relates to the potential rollover of repayment of debt for the next year to Gazprombank. Can you specify please the amount of this debt which you would plan to roll over?

 And the last question is what are your current covenant agreements with the banks and by how much you are planning to reduce and improve your net debt-to-EBITDA next year or two? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [13]
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 The second question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [14]
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 (interpreted) So currently we are planning to produce from Elga about 1.2 million to 1.3 million tonnes of coal. And as far as our plans for next year are concerned, a lot will depend here upon the extent to which the benefication plant will work during the winter season.

 Like I stated in the opening presentation that we are currently finishing winterizing this benefication plant and so depending upon how we will go through the winter our next-year volumes of output will depend upon it. So far we plan that with the launching of the benefication plant, our output volumes will be in between 3 million to 3.5 million tonnes.

 And as far as our supplies of coal to Chelyabinsk is concerned and I have been prompted by my colleagues that you were talking specifically about the Elga coal, which are the destinations that we are going to go for with our coal I would like to mention that right now against the volumes that we are planning to produce principally speaking the Company is able to meet its own needs in the coke and concentrate. So objective number one when producing coal from the Elga deposit is to power our own needs in order not to spend the working capital to acquire the types of coal that we traditionally have been buying from third parties.

 As far as the potential sales of this kind of coal for exports is concerned, like we stated previously, right now we are actively negotiating and we are in an active dialogue with our potential consumers. These are exactly the same consumers that we've been working with during so many years and we are discussing the possibility of supplying them with our coal. And with a number of major companies we have already reached certain agreements and we have shipped them with test shipments of our coals which have proven themselves from the possible best site.

 And so the supplies next year would follow the rationale from Elga that we will take the maximum volumes for our own selves, then the balance we will ship for exports so as to demonstrate the advantage of our products. But as I stated first and foremost we will be trying to cover our own needs during next year.

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 Andrey Slivchenko,  Mechel OAO - CFO   [15]
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 (interpreted) And as far as the question about Gazprombank is concerned, we are talking about $170 million, which is the loan that we are supposed to carry forward into the future period. And as far as the covenants are concerned and specifically the debt-to-EBITDA ratio, while it is quite clear that we see the current situation as the result of the price declines as well as the external sectors and on our part we were saying that we shall continue selling certain assets that we are currently having, which would enable the Company to reduce its debt burden and bring the debt-to-EBITDA ratio to a lower and more comfortable level. However, without any dramatic changes, which may take place in the external environment, or in sales it is hardly likely that considering the current operations we would be in a position to tangibly alter the debt-to-EBITDA that we are currently seeing right now.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [16]
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 Next question please.

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Operator   [17]
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 Neri Tollardo, Morgan Stanley.

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 Neri Tollardo,  Morgan Stanley - Analyst   [18]
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 Yes, just a follow-up question on my previous one. So you said the banks proposed a $3 billion equity issue and then I wasn't sure if you said that 75% of the debt would be converted into equity, or if that $3 billion would become a 75% stake in the Company and the debt would remain unchanged, so if you could clarify that?

 And then the second question is about also media rumors that you are considering the sale of the Elga Railway, so if you could comment on that as well. Thank you.

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Unidentified Company Representative   [19]
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 (interpreted) As far as the state bank's proposal is concerned, they suggested that the $3 billion of debt are to be converted into the new equity issue, which on the basis of would constitute 75% of the Company's equity pool.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [20]
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 The next question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [21]
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 (interpreted) As far as the Elga Railroad is concerned, at this point in time we are considering different options in relationship to this asset of the Company. And amongst other possibilities we are also thinking about selling it because we are very well aware that this kind of asset will look totally different without this infrastructure component in it. So we are currently reviewing different options and we haven't yet arrived at any final decision.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [22]
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 Next question please.

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Operator   [23]
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 (Operator Instructions) [Alexander Shihev, Sofgen]

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 Alexaner Shihev,  Sofgen - Analyst   [24]
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 Yes, hello. Thank you for the call. I've got a few questions.

 Firstly on your capital expenditures, could you specify how much you spent on Elga in the first half and remind us your full-year CapEx budget with segment breakdown, if possible and Elga in particular. Next, from cash flow statement we can see that you have acquired a noncontrolling interest and subsidiary in the amount of $35.8 million, could you please shed some light on that?

 And finally a couple of questions on Elga. In the press release you have provided nine-months production figures, could you give us quarterly breakdown of those figures, please?

 And lastly, can you specify what product you were selling there, what was the percentage of steam coal and coke and coal concentrate? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [25]
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 Our first question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [26]
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 (interpreted) So in as far as the capital investments are concerned for 2014, originally we had in our plans that we would spend four investments, approximately $930 million/$940 million, out of which $720 million we plan to fund into the Elga project. At the same time all of the money that we were planning to spend for Elga we plan to have it as a borrowed capital through the project finance arrangements through the VEB Bank and I would later comment on it additionally.

 So as far as the rest of the Company operations are concerned we plan to spend approximately $200 million to $220 million. Now segment wise it would look approximately in the following way. The steel division approximately $110 million, Mechel Mining about $90 million, transportation segment $30 million and the power division approximately $6.

 So that is as far as our plans for 2014 are concerned. But based on actual we are slightly below that in terms of the capital spending, which is explained partially by the fact that we are continuously reviewing our capital spending program in an effort to optimize all of the costs that we incur related to these activities.

 So primarily all of the figures of our spending are the costs that we incur to maintain our capacities. And all the way down to the payments for the executed projects as well as to bring down our payables.

 So in terms of funding of our Elga project as you might know, the implementation of this project is taking place under the project finance regiment with the VEB Bank that previously we received EUR150 million for the purposes of capital spending into this particular project. But at the same time we were supposed to enact a certain number of delaying covenants after which the remaining balance of the loan was to be made available.

 And I shall remind you that the overall loan was for $2.5 billion. And approximately I should say that all of the money that we are spending on Elga this year were done through the bridge loans that we received last year. So out of this amount of money this year was spent approximately the two-thirds.

 No further funding for the Elga project was to be done out of the second credit line, which didn't take place because of the reason that I mentioned previously. And so as of right now we are trying to resolve the station with the railroad, looking for ways to divest from this infrastructure facility. And so respectively map a transfer of the railroad itself was one of the delaying covenants.

 And so considering the fact that the situation with the railroad hasn't yet been resolved it means that we were not in a position to claim the second part of the credit line. So we are currently working only with the money which we had from the bridge loan. And so we are now waiting for the results of the negotiations which we are currently having about this railroad in order to understand the way we shall proceed with this project.

 Now as far as the shipments from Elga are concerned, on a quarterly basis in Q1 we shipped approximately 85,000 tonnes and all of the coals that we sold in Q1 were power coals. During the second quarter the volume of shipments was at 100,000 tonnes with approximately 50% of it were coke and concentrate. In Q2 we have commissioned into operations a seasonal benefication unit which started producing coke and concentrate.

 At the same time we are planning that in the third quarter we will considerably increase the shipment volumes. We are already doing it.

 And so the overall shipments during the third quarter would be 300,000 tonnes out of which 50% will be coke and concentrate. And further on we are confident that the amounts of shipment before the end of the year, on a monthly basis, will be about 150,000, 200,000 out of which again I shall reiterate, 50% will be coke and concentrate.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [27]
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 The next question will be answered by Andrey Slivchenko.

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 Andrey Slivchenko,  Mechel OAO - CFO   [28]
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 (interpreted) This is about the acquisition of the noncontrolling share of stock in a subsidiary, which is the $35 million, which was mentioned in our cash flow report. Back in 2013 the Company acquired the minority shares in the Korshunovski Plant and so the settlements took place in the Q1 2014. And so that is the transaction that you are referring to.

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 Neri Tollardo,  Morgan Stanley - Analyst   [29]
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 Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [30]
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 Next question please.

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Operator   [31]
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 Sergey Donskoy, SG Bank.

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 Sergey Donskoy,  Societe Generale - Analyst   [32]
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 Yes, hello, it is Sergey Donskoy from Gen. Thank you.

 I have a couple of follow-ups on Elga. First of all, speaking of the coal realization from the mine, what was the realized prices in the first half of the year, or in the third quarter? And how they compared with realized prices at Yakutugol and Southern Kuzbass, that is number one.

 And number two, if I understand correctly you meant to say that you spent roughly two-thirds of the $150 million bridge loan provided to you by VEB last year, which means that total expenditures on Elga in the first half amounted approximately $100 million. But in such case the expenditures on other mining assets according to your results would amount to more than $140 million, substantially above the budget. Could you clarify this, please? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [33]
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 The answer will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [34]
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 (interpreted) Like it was stated in the first quarter we sold the power coals and the price for those coals was approximately RUB1,300 for the industrial product, which was RUB1,300 of CFA. As far as the coking concentrate was concerned, we didn't sell it in Q1 and then we gradually started selling it and the price for this particular coking concentrate is comparable with the prices that Yakutugol has.

 And back to the question about the expenditures on Elga. I didn't really get the question because there may have been a certain misunderstanding. Let me requote again.

 In H1 our actual cost, our actual expenditures, capital expenditures, were about $160 million. Because in the answer that I gave I was speaking about the full year and because the question was about the fall 2014 and you are currently asking about H1.

 So H1 about $150 million you asked of capital expenditures out of which approximately $103 million was for Elga while the remaining balance, which was approximately $58 million, $60 million we spent as capital investments dedicating it to our divisions. And if you might need that I could give you the itemization.

 And additionally, you can see in the disclosure report there is a 293 figure, which is about $100 million is the capitalized interest, which is accrued by the accounts. But physically this is not the kind of money that was spent on the Elga Mine construction.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [35]
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 Next question, please.

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Operator   [36]
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 We have no further questions at present. So at this stage I will just hand the call back to the speakers for any additional or concluding remarks. Thank you.

 Excuse me. We do have one more question, if you would like to take it? It is a follow-up question from Sergey Donskoy of SG Bank.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [37]
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 Okay, we will take it.

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 Sergey Donskoy,  Societe Generale - Analyst   [38]
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 Yes, thank you. Just one small follow-up.

 Also on Elga, in your disclosure you provide cash production costs for all key mining units. What was, however, the cash cost at Elga in the first half or towards the end of the first half when you reached already substantial volumes either at the mine or at the juncture of the spot crack with the track railway? Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [39]
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 The question will be answered by Oleg Korzhov.

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 Oleg Korzhov,  Mechel OAO - CEO   [40]
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 (interpreted) Again we do understand that whenever we talk about costs in the project like this we are talking about a very sizable amount of expenditures and about sizable production and shipments. So speaking about the cash cost on this project, I can quote them but this is not something that we are expecting. So the cash cost in H1 amounts to approximately $60 in production and benefication.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [41]
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 Next question please.

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Operator   [42]
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 We have no further questions today. So at this time I would like to hand the call back to the speakers for any additional or concluding remarks. Thank you.

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 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [43]
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 Ladies and gentlemen, thank you for taking the time to join Mechel's first-half 2014 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.

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Operator   [44]
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 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.




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