Full Year 2016 Mechel PAO Earnings Call
Apr 26, 2017 AM EDT
MTLR.MZ - Mechel PAO
Full Year 2016 Mechel PAO Earnings Call
Apr 26, 2017 / 03:00PM GMT
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Corporate Participants
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* Alexey Lukashov
* Boris G. Nikishichev
Mechel PAO - Former Member of Management Board
* Oleg V. Korzhov
Mechel PAO - Chairman of the Management Board, CEO, General Director and Director
* Sergey Viktorovich Rezontov
Mechel PAO - CFO and Member of Management Board
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Conference Call Participants
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* Ksenia Svetlova
* Nikolay Sosnovskiy
* Oleg Petropavlovskiy
BCS Financial Group, Research Division - Metals and Mining Senior Analyst
* Robbie Gautam
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Presentation
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Operator [1]
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Good day. Welcome to the Mechel Reports Fiscal Year 2016 Financial Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Alexey Lukashov. Please go ahead.
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Alexey Lukashov, [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 2016 results, which we reported today. With us from management today are Mr. Oleg Korzhov, Mechel's CEO; and Mr. Sergey Rezontov, 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 United States 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 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-IFRS financial measures, including EBITDA, in our discussions today. Reconciliation of non-IFRS financial measures to the most directly comparable IFRS 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 V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [3]
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(foreign language)
Good afternoon, and good morning, ladies and gentlemen. We are glad to welcome you to the conference call, dedicated to the company's 2016 financial results.
(foreign language)
(technical difficulty)
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Operator [4]
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Ladies and gentlemen, please stand by while we reconnect our speakers.
(technical difficulty)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [5]
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(technical difficulty)
So group has demonstrated improvement of all its financial results. Consolidated revenue is RUB 276 billion, up 9% year-on-year. EBITDA went up by 45% to reach RUB 66.2 billion. The last time we have such a result was in 2011. EBITDA margin reached 24%, a result unmatched since 2007.
Now I'd like to note that this is the first time since 2011 that Mechel has earned net profit of RUB 7.1 billion.
(foreign language)
In 2016, our priority task was to promote our key investment projects wherein the group has invested its own funds and loaned finances over the past few years. We spare no effort in bringing these projects to plan capacity in the shortest possible time to begin earning our deserved profits. For example, last year, Chelyabinsk Metallurgical Plant's universal rolling mill produced 517 tonnes of rail and beams, which is nearly half of its project capacity, with rails accounting for more than 60% of the annual output.
(foreign language)
I think it is no secret to anyone that last year's chief event, which had the most dramatic positive effect on our financial results, was the fourfold growth of coking coal concentrate prices. By the end of the year, prices began to retreat from historical heights, but we do care to take full advantage of the favorable situation. In the fourth quarter, we increased sales of coking coal concentrate to third parties, with export accounting for 90% of this product sales. As a result, the mining division share in the fourth quarter's consolidated EBITDA was nearly 73% and the fourth quarter's EBITDA accounted for 37% of the entire year's EBITDA.
(foreign language)
We paid particular attention to maintenance and repairs of equipment at Elga Coal Complex where, from past 2 years, we have been forced to save costs, investing only when absolutely necessary.
Trade Port Posiet reaching coal shipment capacity of 7 million tonnes was an important event for 2016. Last year, the port shipped nearly 70% of our coal to Asia Pacific. Its 2016 results won the port, the Best Stevedore Company award from Russia's Federal Sea and River transport agency.
(foreign language)
I would like to note that, last year, we have invested a lot of asset into optimizing our steel division expenditures, producing processes and technology work flows. This enabled us to significantly improve its efficiency, distributing the load on our facilities and our trade flow to increase production of high-margin products and cut our costs.
(foreign language)
(technical difficulty)
(foreign language)
Last year, we also received financing for our project at Beloretsk Metallurgical Plant from Russia's industrial development fund, and the project is now steaming ahead. Recently, the industrial development funds expert council approved financing for yet another project of ours, expansion of the product range of Chelyabinsk Metallurgical Plant's universal rolling mill.
(foreign language)
In 2017, development of our key investment projects remains our chief task. That includes primarily the increase of the load of Chelyabinsk Metallurgical Plant's universal rolling mill up to 75% from its project capacity and mastering production of new types of profiles, including those meant for export. We have already mastered production of 2 types of beams and earned European certificates for our entire future beam range, which we plant to export very soon. We will also work on mastering production
(technical difficulty)
(foreign language)
As far as the Elga project, we are currently upgrading its [motor] fleet, aiming to bring Elga in the second half of the year to monthly mining capacity equal to 5 million tonnes a year, which is how much we will be mining at this deposit with current coal processing capacities. Currently, our plan for 2017 is 4.5 million tonnes of run-of-mine coal.
(foreign language)
I want to particularly note that, in December, soon after we have had our conference call with you regarding the 9 months of 2016 results, we have signed a debt restructuring agreement with VTB Bank, which meant that similar agreements signed earlier with Gazprombank and Sberbank came into effect. We have carried forward payments of the principal amount of the debt from 2017 to 2020, gaining us 2 more years to stabilize and strengthen the group’s financial position. We have, thus, completed our loan restructuring process with state lender banks. There are still some unresolved issues with other lenders, but we will do all we can to reach agreements with them this year.
(foreign language)
Having mentioned our debt burden, which Sergey Rezontov will further elaborate on, I would also like to note that, in 2016, we reduced our net debt to EBITDA ratio from 11 to 6.6. The ratio indeed remains very high, and we still need to bring it further down. But still, its reduction by half is a good trend.
Now I would like to give the floor to our Chief Financial Officer, Sergey Rezontov, who will give details on the financial results of all of our business segments. Thank you for your attention.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [6]
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Good afternoon, ladies and gentlemen. I would like to welcome you to our conference call to present financial results of Mechel Group for the year of 2016 and answer your questions. Our presentation is available on our web page, mechel.com, and I hope that you have had an opportunity to download it and look for the figures provided and market all of you.
First, we will start with the view of our key markets. Despite our fact that the year 2016 started with the record lowest prices, both in the coking coal and the steel markets, such a terrible situation didn't continue for a long time. This was because it resulted in the initiation of the bankruptcy for a number of the world's largest coal mining companies and decrease of the demand for steel products on the global markets. In order to support the industries with the Chinese government, (inaudible) industrial producers. And these, together with a number of other factors, led to the sharp increase of the steel prices and moderate increase of coal prices during the first half 2016.
In the second half of 2016, few market prices have decreased compared with the second quarter of the year by 10% and remained stable. As opposite to the steel market, prices on the coking coal market continued to increase and went above $300 per tonnes of hot coking coal on FOB basis. Post-measure events weather conditions, and a number of other factors have a very significant impact and could lead to the shop increase of prices on the market, which has already been demonstrated in third quarter 2016 and repeated in April 2017 after take long in Australia.
In fourth quarter 2016, the benchmark price per tonne was fixed at the level of $200 and spot went to $300 per tonne. In the first quarter 2017, the benchmark price was fixed at $285 and average spot price was $170.
At the present time, there is no benchmark price for the second quarter 2017 since Japanese and Australian companies have agreed to fix prices after the completion of their reparation works on the railroads in Australia.
Nevertheless, hot coking coal prices from our perspectives are balanced for the suppliers and the buyers in the range between $150 and $200 per tonne. Mechel sells 50% of its coal products based on the price it's linked to the benchmark and 50% on the spot market.
We will now move to the description of financial results in each of Mechel Group's segments as well as consolidated group's results, which more or less reflected the above-mentioned market movements.
During the fourth quarter 2016, mining segment demonstrates the record third-party revenues at a level of RUB 29.7 billion, which is plus 49% quarter-on-quarter as a result of both spot and benchmark coking coal prices increase as well as the increase of third-party sales by approximately 6% to 2.2 million tonnes. The group achieved 93% of its coking coal sales on the exit market as well as decreased intersegment sales with an increased purchase of coals from third parties on the quarterly fixed prices.
For the full year 2016, coking coal sales to the third parties increased by 10% to 5.8 million tonnes while the anthracite and PCI sales decreased from 4 million to 3.1 million tonnes. It was a change in the buyer’s demand.
Our steam coal sales increased by 20% year-on-year to RUB 5.9 million, out of which 57% were exported sales. Almost 100% of mined iron ore was used for internal consumption.
In 2015, we keep average mine in cash cost in the open-pit mines of Yakutugol at low level of approximately $13 per tonne, and Elga were -- at a level $15 per tonne. This partially includes transportation cost for the enrichment capacity in the Southern Kuzbass, which were -- was slightly above 20% of coals mined by Elga.
Southern Kuzbass cost are high and reached approximately $29 per tonne, partially as the coal in mine -- in the underground mines. Our key investment projects in the mining segment, the development of the Elga Coal Complex, demonstrated stable performance during the year and produced 3.7 million tonnes of coal. Both portions of coking coal exceeded 75%, with improved market conditions in the production and sale activities from Elga have become operationally profitable.
Total mining segment revenue for full year 2016 increased to RUB 89.6 billion, 11% surplus year-on-year. And almost 75% of revenue, approximately RUB 67 billion, gained from export sales. Operation profit has doubled to RUB 31 billion and EBITDA increased 1.5x to RUB 41.9 billion. EBITDA margin has increased year-on-year from 25% to 34%. Geography of our sales is shifting to Asian markets, which quantity has exceeded 58% of our total sales. The sales in the European market were 11% and the domestic market were 25% of our total sales, respectively.
During fourth quarter 2016, our steel segment demonstrated stable production volumes comparable with the previous quarter. For the full year, total volume of steel sales reached 4.6 million tonnes plus 2.7% year-on-year, which is a result of high utilization of our production capacities.
Group maintains sales on the domestic market as a priority, and its share amounts to 90% in first quarter and 86% for the full year. Groups production mix remained focused on higher margin products, including specialized steel, shapes, rails and beams.
Steel segment revenue in 2016 amounted to RUB 161.6 billion plus 11% year-on-year. Gross profit increased to RUB 42 billion plus 26% year-on-year and EBITDA RUB 23 billion, that is 35% above the previous year.
Savings EBITDA margin in 2016 is approximately 14%. Although in 2015, it was only 11%. Improvement of duration and financial figures as a result of recovered prices and -- as well as more efficient reparations and production needs. We have demonstrated steady ramp up of production on our key investment projects in the steel segment.
Universal rolling mill capacity utilization increased quarter-by-quarter in 2016. During 2016, we have produced 517,000 tonnes of rails and beams at the universal mill, which is almost 3x above 2015, with the maximum utilization during the fourth quarter at a level of 160,000 tonnes. Supply of rails to the Russian Railways amounted to approximately 300,000 tonnes. In January 2017, universal mill produced 1 million tonnes of products since the launch of the production.
For the full year 2017, we have agreed to increase supply to the Russian Railways to 630,000 tonnes of 100 meter rails. We'll continue to improve efficiency of our steel operations by increased utilization of the universal mill. We expect that this should exceed 65% during 2017, with further increase thereafter.
The power segment revenue for the full year decreased by 7% year-on-year because of the warmer average temperatures experienced during the year. In the meantime, gross profit increased to RUB 11.6 billion, 2.6% increase year-on-year and operation profit of RUB 700 million compared with almost 0 at the end of the last year.
EBITDA reached RUB 1.7 billion. The main drivers for the improved operational results were decreased costs after the completion of the modernization program as well as favorable market conditions for the sale prices.
Quarter-to-quarter during 2016 year, Mechel demonstrated improvement on financial results on a consolidated basis. Our consolidated revenue amounted RUB 276 billion plus 9% year-on-year, which is a result of the surplus achieved by both the mining and steel segment. Gross profit went up by 27% to RUB 130 billion. Operation profit increased 76% to RUB 43 million. Our EBITDA exceeded RUB 6 billion plus 47% year-on-year with EBITDA margin of 24%.
There are expenses of the group went up 10%, entirely due to the increase of the transportation tariffs and the changed basis of the delivery of -- for our steel products, which have increased volumes of deliveries of our products to our final customers using our own transportation.
Our finance cost increased from RUB 41 billion in 2015 to RUB 49 billion in 2016, due to the increase of average interest rates after the conversation -- conversion of U.S. dollar denominated debt into rubles. A positive effect on total interest expenses volumes is, going forward, will be decreased and will result of the key Central Bank rate decrease, which is the basis for our confirmation of interest under the restructured facilities with Russian state banks. Group strategy going forward is to find all positive means to decrease interest expenses, which will allow us to generate greater free cash flow for repayment of debt.
During full year 2016, the [strength] of our reporting currency ruble from RUB 72.88 at the beginning of the period to RUB 60.66 at the end of the year has led to the -- to an additional positive FX effect in the amount of RUB 26 billion.
Income tax expenses in the amount of RUB 4.9 billion includes change in reassessment of deferred tax assets. Because of all of our financial factors, group's net income attributed to shareholders has become positive for the first time since 2011 and amounted for 12-month 2016, RUB 7.1 billion.
One of our key priorities for us is generating positive cash flow. The stable situation in our core markets permitted us to generate enough operation cash flow to recover working capital, partially rebate, overdue rate and other payables, finance our investment activity as well as fulfill our payment obligations under restructured loan agreements.
During 2016, we have managed to cover substantial trade working capital deficit from minus RUB 14.2 billion to the loss of RUB 1.8 billion. This has allowed us to improve the stability and efficiency of our production units’ performance. Our total cash flow generated for the year amounted to RUB 53.2 billion from operating activities, whilst we received RUB 34.3 billion from sale of noncontrolling stake in Elga and used all generated cash flow for servicing of our interest expense in the amount of RUB 33 billion, have net repayment of debt including lease in the amount of RUB 41.6 billion. Last year, the group was able to pay interest amounted only to RUB 28.9 billion, due to partial capitalization of interest rates.
Group's total debt excluding -- just from bank option on Elga for the last year decreased from RUB 487 billion to RUB 433 billion, which is the result of both appreciation of local currency as well as partial repayment of debt. In the meantime, with the increase of the EBITDA, net debt-to-the-EBITDA ratio has decreased from 11% to 6.7%. As a result of the restructuring of power loans with Russian state banks, ruble bonds leasing in our bilateral facilities agreement, the group was fully in compliance with the new signed payment and repayment schedules.
In April 2017, new restructuring terms was with Russian State Banks become effective, which include extension of the maturity profile of debts until second quarter 2022, beginning of the repayment in 2020 and partial capitalization of interest. We were fully in compliance with the financial covenants stipulated by the restructured agreements. But to breach a number of nonfinancial covenants and close before provisions, therefore, substantial amount of our long-term debt has been reclassified for the short term. We continue our negotiations with the syndicate of international lenders and ECA creditors on restructuring terms.
The average interest rate through the debt portfolio nowadays is 9.7%, and it trends to lower value as the rate is mostly into the Central Bank key rate. And the average paid interest rate amounts to 7.75%.
While looking positively at operations performance of Mechel Group going forward, also our financial results are very dependent from the prices on our core markets. We see high uncertainty in development of prices in commodity markets during this year, an imminent risk of prices correction, but we see that the prices have resistance at certain levels, which provide comfort to the company that we can fulfill our financial obligations.
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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Alexey Lukashov, [7]
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Thank you. We will now take questions. (Operator Instructions)
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Questions and Answers
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Operator [1]
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(Operator Instructions) We'll take our first question from Oleg Petropavlovskiy with BCS.
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [2]
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I have 3 questions for you. First of all, can you please elaborate on your outlook for coal mining ordinance in 2007 that -- 2017, sorry, that they will be flat? Can you please give us a breakdown for coking coal, PCI, anthracite and thermal coal?
(foreign language)
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Alexey Lukashov, [3]
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Oleg Korzhov will answer.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [4]
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(foreign language)
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [5]
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My next question is about your CapEx. You guide that this year, it will rise by more than 2.5x compared to 2016. What are main projects which are you going to finance with this number -- with this money?
(foreign language)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [6]
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We have the amount of coal production plant within the coal division in terms of volume, which will exceed to 2016. The total in plant production from Kuzbass is going to be about 10 million tonnes. In Yakutugol, it's going to be 8.5 million tonnes. And at Elga, as I said, it's going to be about RUB 4.5 million tonnes. But at the same time, the production of coal is planned at approximately the level of 20 million tonnes, out of which, the coking concentrate will be about 10 tonnes, the thermal coal, a little bit in excess of 6 tonnes and the production of anthracite and PCI is going to be at about 3.3 tonnes.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [7]
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(foreign language)
So in answering this question, which was about the capital expenditures, indeed, our plan for 2017 calls for quite an ambitious spending in terms of our investment program because, in the first place, this is related to the fact because during the past 2 to 3 years, we have -- because we have been limited in terms of the available financial resources, we paid not sufficient attention to maintenance, capital expenses, and so in order to maintain our equipment in more or less working stages and to be able to maintain the volumes of output. So RUB 18.5 billion of the capital expenses, which was planned almost half of it, which is about RUB 6-some billion is what we plan for the maintenance purposes. But at the same time, I would like to say that despite this being 3x more than the similar actual course in 2016, this is -- we are realistic and optimistic. We believe this is what it is because back in 2015, it was about RUB 6.8 million. In 2012, we spent RUB 3.8 million. Even back in 2012, we spent RUB 6.8 million.
So out of all the investment, it was RUB 6 billion for 2017. It doesn't seem to be too an exaggerated figure, while we still have the needs to carry forward. So the amount that I made reference to would be categorized in the following way: We are going to spend part of it on metallurgical division, which is almost half of it will be the preparation for the capital maintenance of a furnace, which we're planning in the spring of 2018. In the second half of this year, we will undertake a number of expenses, which we aimed at buying the equipment in order to upgrade this particular furnace. Speaking about the mining division, the reliance share of this amount is specifically dedicated to maintaining it in good operational condition, which is RUB 4.7 billion. At the same time, practically, 60% of this amount, which is RUB 2.8 billion, are the cost to acquire the equipment because during the past 3,4 years, we practically didn't buy any transportation or any mining equipment. So based upon the pricing environment and the need to maintain the output volumes, we are making attempts to acquire such equipment and we'll try and optimize our expenses through various leasing arrangements if that would work out. But nevertheless, the -- we see this very important need to specifically organize in this way.
So then as far as our investment projects are concerned, which account for the second half of the quoted amount, here, we have certain projects, which apply to the metallurgical division. And so what we're planning is for about RUB 800 million. We're planning to allocate to a similar kind of session where we'll be upgrading furnace by 2018, where we would be changing the last converter of the Chelyabinsk Metallurgical plant. And that would go for RUB 1.5 billion, and half of this would be funded in 2017 in order -- so as to decommission this facility and to bring it back into full operation, so RUB 700 million. This year, we're also planning to change and upgrade one of the furnaces at the Bratsk Ferroalloy factory. We bought an equipment for the new furnace and it has been idling around for several years. So this year, considering its tear and wear and need to change the furnace, we are going to ultimately complete this project by the end of the year, and that would call for about RUB 600 million. We also have 2 major projects for the Beloretsk Metallurgical Plant. One of them is multi-threaded metal ropes, and we have funding almost 50-50 with the Russian industrial funding. And so we intend to fund it completely.
And the second project as part of the out-of-court settlement with the Russian environmental oversight agency, we are supposed on to undertake a number of environmental projects, which would go for about RUB 450 million, RUB 500 million. RUB 1.8 billion is the amount we intend to spend on Elga projects, where we have some very ambitious plans that we have come to entertaining because this year, we will have to complete the construction and finish the upgrading of the construction of our enrichment factory. We are also planning towards the end of this year, the great power will come to Elga. So we plan to build all of the internal grades in the facility so as to have the complete supply to Elga of the federal grade electricity, so as to avoid no burning diesel. And so we intend also to expand the shift camp because we experience certain lack of residential space for the personnel. So that would call for additional RUB 300 million and buying the mining and transportation equipment for Elga, which is -- requires some changing. So these are all the necessary costs in order to be able to operate forward. So I believe that the main highlights are the ones that I mentioned. So in case you might have any specific questions about it, you are welcome.
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [8]
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And my last question, please. Can you please tell us what happened with Elga's cash cost in the fourth quarter? They rolled by more than 30%, something like this, in rubles?
(foreign language)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [9]
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(foreign language)
So in Q4, the arrangement for the sales of the projects from Elga changed into Elga coal mining complex started increasing the volumes of transportation and changing the pace for the sales of coals. Whereas in the past, Elga traded with the ordinary coal towards Kuzbass on the FCA basis. Then starting from that period, the deliveries of Elga and shipments of the Elga Coal towards the Kuzbass were performed by the Elga Coal itself, and so Elga Coal was selling the coking coal. And so as far as the increase of cost was concerned for the transportation of this coal for the enrichment using the capacities in the South Kuzbass.
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [10]
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So should we expect them to stay at fourth quarter level going forward? Or they may fall?
(foreign language)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [11]
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(foreign language)
We expect that this level shall remain and will depend upon the volume of the coal enrichment at the Elga Coal Complex by itself. With the growth of the enrichment amount at Elga, this cost will decrease.
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Operator [12]
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(Operator Instructions) We'll next go to Nikolay Sosnovskiy with Prosperity Capital Management.
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Nikolay Sosnovskiy, [13]
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(foreign language)
It's almost the same question, and I wanted to ask you to be more specific about Elga and the costs related to date. And possibly explain the following thing, whereas physically your costs didn't change and effectively, the revenue which you have had remains unchanged. So it turns out that it's something of an optical reallocation, of course, which was to put upon Elga and disappeared from the South Kuzbass while effectively, the mining EBITDA portal was not affected at all, do I understand this correctly?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [14]
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(foreign language)
You are quite right in understanding it this way because, with the change of the basis of shipment from full, we also had our sales price changing. So altogether, in EBITDA, the cost was compensated by the sales. So it remain unchanged.
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Nikolay Sosnovskiy, [15]
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(foreign language)
And my other question is also about Elga. You mentioned that the mining equipment is not in the best of conditions. And so my question is, to what extent the fleet was in size to the output that Elga was showing for the past few years because as far as I remember, you commissioned the project in 2011 and 1 million tonne was produced by the end of 2014, and the reasonable amounts is what we have been seeing on it during the past 2 to 3 years. And has it indeed during the past 2 to 3 years, there was such an overuse of the equipment that it was so seriously torn and worn, and it requires a change. So is it a function of some overuse of the equipment, which is greater than -- at other assets or an insufficiency of the fleet? Could you please explain?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [16]
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(foreign language)
So there are several points, which I would deem necessary to explain, call your attention to with respect to the Elga project. The effect of the matter is that, recently, with the completion of the construction of the railroad, we had a certain number, a certain amount of equipment released which was busy with the construction during the 2014 and '15 when we produced 4.5 million tonnes of coal, the basic source, I would like to describe it this way, of material, what this particular equipment. And quite naturally, equipment usually fails or breaks down. For example, if you take a look at the ballast rods, they run for about 5 years, and so we bought them about 4 or 5 years ago. So 10 to 15% is what you have to change every year in terms of the equipment. And during the past 3 to 4 years, we have some lacking -- lack the necessary amounts to change the equipment. So we realized 2 things. Firstly, we wanted to increase our volumes of output in 2017 and produce RUB 4.5 million tonnes. I would note that, in 2016, that was 3.7 million with the equipment, which we had, and we want to achieve the volume of output next year at about RUB 5 million, RUB 5.2 million, and that is why, back in the middle of last year, we started actively upgrading our equipment. We expanded our maintenance programs, specifically with Elga equipment, but not all of it can be repaired, some of it has simply to be changed. So I would say that it's an aggregation of different factors, which all led us to having 2017, if not the definitive one then a very important and significant in terms of the acquisition of new equipment.
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Nikolay Sosnovskiy, [17]
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(foreign language)
One little question to continue that. I understand that the railroad was not being built with the pit trucks and the excavators that are used then on the railroad didn't have the capacity of the scoop of 20 cubic meters. If you are going to change the equipment, it's going to be something that is more suitable to be operating in the pit environment. So in this case, should we expect any improvement in terms of the cost per tonne if you're going to use it with a passing utility at Elga?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [18]
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(foreign language)
I should say that you are quite right in what you're trying to say because using construction equipment in mining is certainly far from being the best option. But as I tried explaining, we had to do it being forced by the lack of financial resources and without a doubt the changing the construction equipment. Although, I should say that in a number of examples, it really produced the good results in utility. And so changing the equipment for a better one will be reflected up on the reduction of cost and the better productivity, and definitely one should expect lower cost further on.
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Nikolay Sosnovskiy, [19]
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(foreign language)
And my last question is about the financials, and that is directed to Sergey Rezontov. The total interest of payment that is stated in the P&L, could you elaborate on what it is made up of, what was the total one. And how much out of it was specifically dedicated to the interest payment? Have there been any fines and penalties because of the covenant changes? And what do you expect in terms of the interest payment for 2017 towards the end of it in total?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [20]
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(foreign language)
The interest that the group is sourcing is about RUB 33.9 billion. At the same time, this amount of payment contains about RUB 5 billion, which is overdue interest payments related to the banking loans accumulated during the previous periods. In this way, as part of the interest burden for the future period, the group is expecting that the amount of the interest payment would be approximately RUB 30 billion. And undoubtedly, the amount of interest to be paid by the group depends upon the feed rates, which we have in the overall group credit portfolio. Like I stated during my part of the presentation, the average portfolio rates is about 9.7%, although the paid interest is at 7.75% and the period of interest capitalization were lost until Q2 2020. And bearing in mind these figures and these conditions, we expect that the average amount of interest to be paid within the year will be approximately RUB 30 billion.
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Nikolay Sosnovskiy, [21]
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(foreign language)
And as far as this unpaid RUB 5 billion of interest, what is the total unpaid amount of interest? How much of that remains for 2017, '18, to be paid as part of the annualized payment?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [22]
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(foreign language)
So in terms of the annual amount -- the total amount of unpaid overdue interest by the group is about RUB 7 billion. This amount comes from such loans as the ones guaranteed by the export credit agencies and the syndicated loan. And so according to the terms of restructuring that we're going to discuss with the banks, we expect the possibility of a partial capitalization of this interest or a staged repayment of this interest in the course of 1 or 2 years.
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Operator [23]
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(Operator Instructions) We'll go next to Ksenia Svetlova with BNP Paribas.
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Ksenia Svetlova, [24]
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Yes. And I would like to come back to the CapEx program which you just had announced. And one question please, would you need to agree to these capital investment plans with your creditors, so under the restructured loans on these amounts, or it was already included into the list of the parameters CapEx plan under the restructuring agreements?
(foreign language)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [25]
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(foreign language)
When dealing with the banks, we are regularly updating the group's financial model on an annual basis and clear this financial model through the banks. So when restructuring our debt, we have agreed with the banks, our long-term financial model which takes them to count the increase of CapEx for the subsequent periods. So currently, we do not expect to experience any issues when re-endorsing or reapproving this financial model with our lenders, particularly since the banks can see that the additional CapEx is aimed at increasing the output and raising productivity, which positively affects the financial performance of the group.
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Ksenia Svetlova, [26]
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And just maybe one small question about the new Kazakhstan steel segment program. Do you think there can be any impacts in the steel segment output in terms of volumes and revenues, considering that there'll be certain decommissioning of the capacities for the reconsideration period?
(foreign language)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [27]
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(foreign language)
In terms of the maintenance that we're planning, this is planned not for 2017, but for 2018. And at the same time, undoubtedly, at the point in time, when the capital overhaul is going to be done, because we're planning to simultaneously decommission the blast furnace in one converter. For this period of time, we'll witness a reduction of the output, which is quite logical, because that will be something on an extended and a capital overhaul and upgrading. But this is a forced measure, because in terms of the length of service of this crew, we're not able to further operate it in the condition that it is. But once it is recommissioned from this operation, that would positively affect our volume of output because their productivity would grow significantly. So in part, it's going to be compensated for by the fact that it is going to be recommissioned as a new one. But we're talking about the volumes of 2018. We are not planning to reduce our output in terms of the steel iron and the rolled products into 2017. We're planning to raise it, as opposed to the statistics and our performance in 2016.
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Alexey Lukashov, [28]
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(foreign language)
And there is one additional comment that I would like to offer, because we have additional option. With the reduction of the steel output in the converter shop, we are in a position to increase the output of steel through our electric furnaces and change our iron with scrap and not to downgrade our levels in terms of the steel output. But because the cost in this particular case is different than the decision whether to produce product or not, we will be making in every particular case, if we believe is economically viable. But in any case, the capacity that we might lose in terms of the furnaces, we might compensate for with the use of the electric furnaces.
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Operator [29]
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The next question, from Nikolay Sosnovskiy.
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Nikolay Sosnovskiy, [30]
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(foreign language)
One additional question, because you mentioned that the capital maintenance in (inaudible) is going to take place in 2018, in what way that might affect your CapEx? Whereas this year it's going to be RUB 12.5 billion, will it additionally grow in 2018? Or you will buy additional mining equipment, and so you will reduce your purchasing and inside the group, you will redistribute the CapEx between the metallurgical division and the mining division. So what are we to expect for 2018?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [31]
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(foreign language)
So let me explain, because this year, we were planning some sizable spending to acquire mining and transportation equipment, which accounts for quite a sizable percentage. But on the other hand, I said that, we, for quite a few years, didn't spend enough on the mining and transportation equipment. So I don't think that the purchasing volumes will significantly change next year. So the amount of spending that we had to maintain in our performance was a standard for the company, not longer than 3 or 4 years ago. And this year, we're not planning to completely change all the equipment this year. While this year, we will put main emphasis upon Yakutugol as the most problematic asset, while next year we will be rehabilitating and buying equipment into the South Kuzbass. As far as the metallurgical division is concerned, as I said, this year, we're only doing preparatory work for these new major investment projects. And if changing a converter is worth RUB 1.5 billion, we're going to invest into it only 50% this year. Then upgrading a blast furnace, in total, would call for RUB 2.5 billion. Out of which, as I said, we will spend only about RUB 400 million to RUB 500 million this year. So as far as the blast furnace shop is concerned, all of the main investment costs or the maintenance costs, actually, will take place only next year. So we plan -- if the cash flow allows us in 2018, and we'll be in a position to do all of these projects. Then most probably, the order of magnitude of our CapEx next year is going to be approximate to this year, though some of the investment projects we will finish, as I said, because I've told you only about a few, while we have quite a list. But in total, the order of figures is going to be approximately the same.
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Operator [32]
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And next, we'll go to Robbie Gautam with Federated Investors.
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Robbie Gautam, [33]
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Yes, just a couple of things. I wanted to understand, firstly, what is the sale amount for the 49% of Elga? I got the figure around RUB 34 billion. Could you kindly confirm that? Secondly, I wanted to kind of understand your -- the settlement of loan lease and other obligations. Which are the major loans that you have settled? The third question is, I do see that you have mentioned that there are -- there've been restructured payments with the Russian state banks when you go from 2020 in the second quarter to second quarter 2022. Now is this all or major of the debt? It is not very clear, so we wanted to -- I wanted to have an idea about the debt maturity profile for Mechel in the next 5 years or 7 years?
(foreign language)
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Boris G. Nikishichev, Mechel PAO - Former Member of Management Board [34]
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(foreign language)
I will answer your questions in English in order to simplify communication on this subject. You correctly mentioned that the sale of 34 -- the sale of 49% of Elga amounted to RUB 34.3 billion, which is roughly $0.5 billion. On the second question on the repayments, which have been done by the company over 2016, these repayments include both the repayment of the loans, which was an agreement through the restructuring with the banks, plus the repayment on some ruble bonds, which is also the result of the new amortization profile agreed with the bondholders, plus the repayment of the lease payments in accordance with the leasing agreements and their agreed leasing schemes. On the third question relating to the restructuring with the Russian banks, the restructuring has become effective in April 2017. And the repayment profile of the steps includes a grace period on which the company doesn't make any principal repayment till the second quarter 2020. And following this, there will be monthly -- equal monthly repayments till the second quarter 2022. The restructuring -- the portion of the Russian banks, plus other loans which have been restructured, amounts to approximately 75% of the total group's debt portfolio. Therefore, nowadays, the group has restructured 75% of the debt portfolio for a 5-year period. And the remaining part relates to the syndicate and the ECA loans, which I'm currently discussing, and taking into account to believe that the lenders of the company shall have the pari-passu principles of the debts. The restructuring with the other creditors should be on similar terms. Therefore, the average repayment profile of the debt after the completion of the restructuring will be 5 years.
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Robbie Gautam, [35]
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That's the average maturity life?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [36]
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2.
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Operator [37]
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And there are no further questions at this time.
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Alexey Lukashov, [38]
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Maybe you can ask once again.
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Operator [39]
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(Operator Instructions) And let's go to [Alexey Khraskov] with Bank (inaudible).
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Unidentified Analyst, [40]
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(foreign language)
The first question is the amortization of your fixed assets and the upgrading of the mining assets, in totality, is RUB 13.7 billion. What is your guidance for these line items for the next year, please?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [41]
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(foreign language)
So answering the first question, is the level of amortization for the subsequent period is going to be approximately leaner, because the level of amortization depends upon the amount of fixed assets during the past period and the current periods. No substantial amounts of capital expenditure. The group is not planning to make; and therefore, the level of amortization of the subsequent periods is going to be a lenient one.
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Unidentified Analyst, [42]
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(foreign language)
And the second question is this, could you please tell us what is the expectation for the discussion of the payment of dividends for the preferred shares, which is conditioned by the charter of the group? And do I understand correctly that, hypothetically, in case it is to be paid, you will need to receive clearance from all of the lenders, including from the banks that you have currently reached agreement on restructuring, and specifically, I mean, the syndicated loan?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director and Director [43]
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(foreign language)
So answering this question, I would say that the size of the dividends on the preferred stock is about 25% from the net profit under the annual consolidated [5 4 S] report. Now whether we're going to allocate this to the dividends or not is not yet clear. It depends upon several factors. First of all, it has to be approved by the shareholders' meeting. On the other hand, the dividends will pose an effect the evaluation of the company. But on the other hand, we still understand that the company is not yet in a stable financial position. The markets remain volatile. So speaking about the results of 2016 with reference to the dividend payments is something that is possible with some limitations. On the one hand, it would be really good to pay this money to our shareholder.
But on the other hand, we also understand that by paying that we would reduce our capacity to fund our operations and reduce the debt burden. Secondly, we do have other limitations. It is correctly stated in paying dividends under the covenants with the bank, we're not going to be able to pay that without receiving an approval from the banks. And definitely the banks on the one hand should be interested in seeing the company value grow. But on the other hands, the banks are inclined to see us pay all of our financial commitments according to the schedules when achieving additional cash flows to direct this money to repay our lending obligations. So in any case, that would have to be a conversation with the bank. And we still can wait and see whether it will come. There is still time left to clear it with the banks in terms of dividend payments and submit it to the shareholders' meeting. So at this point of time, we don't have an answer to this question. As far as the syndicated lenders are concerned, we will definitely also be raising this issue with them in terms of our bills to pay dividends.
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Operator [44]
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There are no further questions at this time.
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Alexey Lukashov, [45]
------------------------------
Ladies and gentlemen, thank you for taking the time to join Mechel's Full Year 2016 Financial Results Conference Call today. The replay of this 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 [46]
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That does conclude today's call. We thank everyone again for their participation.
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