Q1 2017 Mechel PAO Earnings Call
May 31, 2017 AM CEST
MTLR.MZ - Mechel PAO
Q1 2017 Mechel PAO Earnings Call
May 31, 2017 / 03:00PM GMT
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Corporate Participants
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* Oleg V. Korzhov
Mechel PAO - Chairman of the Management Board, CEO, General Director & Director
* Sergey Viktorovich Rezontov
Mechel PAO - CFO and Member of Management Board
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Conference Call Participants
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* George Buzhenitsa
Deutsche Bank AG, Research Division - Research Analyst
* Nikolay Sosnovskiy
* Oleg Petropavlovskiy
BCS Financial Group, Research Division - Metals and Mining Senior Analyst
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Presentation
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Unidentified Company Representative, [1]
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Thank you and good day, everyone. I would like to welcome you to Mechel's conference call to discuss our first quarter 2017 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 the conference call may contain projections or other forward-looking statements regarding future events or future financial performance of Mechel as defined in the safe harbor provisions of the U.S. 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 them -- these statements. We refer you to the documents Mechel files from time to time with the U.S. 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. A reconciliation of non-IFRS financial measures to the most direct and 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 & Director [2]
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(foreign language) Good afternoon, ladies and gentlemen. We are glad to welcome you at the conference call dedicated to Mechel's results in the first quarter of 2017.
(foreign language) In this quarter, the group on the whole, has shown good financial results even despite the small decline compared to the previous quarter. Consolidated revenue went down by 3% and totaled RUB 77 billion, EBITDA went down by 7% and amounted to some RUB 23 billion while net profit attributable to Mechel's shareholders went up by nearly 9x and reached RUB 14 billion.
(foreign language) A little more than a month has passed since our last conference call where we discussed our 2016 results. Since then, our work has not undergone any conceptual changes. Nevertheless, I will note several important points regarding our current operations.
(foreign language) First, I would like to note that the second quarter is the first time in several years when quarterly benchmark prices were not fixed. Negotiations on fixing the quarterly prices were halted until Australian coal suppliers, which suffered interruptions due to Hurricane Debbie could be recommenced. In May, these negotiations resumed, but the price has not yet been fixed. We expect that to happen very shortly. Until the new benchmark is determined, contract shipments are being made according to the previous quarter's prices.
(foreign language) By mid first quarter, spot prices went down to some $150 per tonne. At the same time, prices on the Russian market, which was traditionally late in following the international coal market's high price trend of last year and early this year, went up. We have accordingly corrected our own coal price product sales in the first quarter. The share of our internal consumption and supplies to the Russian market has gone up. The share of exports in our coking coal concentrate sales went down from nearly 90% in the fourth quarter to 80% in the first quarter.
(foreign language) On the whole, the price levels which formed on the market in the end of the first quarter and which persist today are fairly comfortable and enable most major coal companies to work with acceptable economic conditions.
(foreign language) In order to maintain mining volumes this year, we pay a lot of attention to revamping equipment and truck fleet at our mining facilities. In the first quarter, we put into operation several new machines. For the year, we plan to supply nearly 30 whole trucks, excavators, bulldozers and other equipment to our facilities. This year, assembly of an ASH 20/90 walking excavator will begin at Elga open pit.
(foreign language) Our steel enterprises also conduct repairs and equipment modernization, and work planned for this year and the next year is in place, including reconstruction of an oxygen converter workshop at Chelyabinsk Metallurgical Plant, reconstruction of furnaces at Bratsk Ferroalloy Plant and planned works on other facilities.
We also continue with our programs for mastering new types of products. For example, we work on mastering production of new profiles at Chelyabinsk Metallurgical Plant's universal rolling mill, including rails for European railroads and setting up production of multi-strength steel wire ropes with polymer coating at the Beloretsk Metallurgical Plant, which is something we previously mentioned.
(foreign language) I would like to say a few words about our efforts to bring down our debt burden. We continue negotiations with a syndicate of banks. We have had several meetings and determined ways of our future cooperation and we're generally hopeful that as to the kind of solutions that we'll be able to arrive, we will definitely be able to sustain and enact it. And regarding these loans, we have already restructured, we fulfill our financial obligations in full. As a result of the first quarter, our net debt-to-EBITDA ratio continued its decrease and went down to 5.3.
Now I give the floor to our Chief Financial Officer, Sergey Rezontov, who will speak in detail about the company's financial results. Thank you.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [3]
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Good afternoon, ladies and gentlemen. Starting from this year, the group is aiming to shorten the time period for disclosure of its financial results for each quarter. We are therefore working intensively in order to decrease the disclosure period up to 60 days after the end of each quarter and less than 100 days after the end of the year. We have recently published our financials for full year 2016. And now, I would like to welcome you to conference call to present financial results of Mechel Group for first quarter 2017 and answer your questions.
Our presentation is available on the web page mechel.com, and I hope that you have had an opportunity to download it and look through the figures provided and the market overview.
Taking into account that we presented our -- we presented to you with the latest market overview 1 month ago, I'm not going to spend much time on detailed description but we'll focus only on the key facts and the results.
In the coal sector, quarterly benchmark price was fixed at the record high level over the last 6 years, which was supported by high spot prices at the end of 2016. The premium high coking coal benchmark was fixed at the level of $285 and the semi-soft and PCI coals at the level of $171 and $180, respectively.
During the quarter, spot price for the hot coking coal went down from $221 to $158, but we didn't have the major effect on us as we fixed prices for most of our sales, including domestically, had a fixed price at the end of first quarter. We also extended annual contracts with almost all our traditional Asian customers at fixed sales volume, which represent a substantial part of our sales on Asian markets. For the time being, we don't have fixed benchmark for the second quarter and we will resell coal at the price of the previous quarter. After establishing the benchmark, contractual prices will be recalculated.
Iron ore prices continued to grow in first quarter 2017 and went up 21% comparing with the fourth quarter 2016, with a higher level which followed the increase of steel prices, which resulted from the Chinese government order to decrease production on the facilities, which impact on the ecological situation. This action created (inaudible) on certain steel products in China and subsequently worldwide in first quarter 2017.
In the beginning of the second quarter, iron ore prices started to decrease to [$6] to $63 under pressure from the prices for finished steel products and increase of raw materials on the seaborne market by 50 million tonnes in Asia.
The steel market influenced by seasonal factor decreased in consumption volumes during this period. Prices on the international markets went down by $20, $30 per tonne, which together with the appreciation of Russian ruble led to the decrease of the steel prices on the domestic market by approximately RUB 2,000 per tonne. Domestic markets for rebar still had a price premium compared with the exit price furnished for certain finished products.
We will now move to the description of financial results in each of Mechel Group's segments along with Mechel Group's consolidated results.
All comparisons are made between the first quarter 2017 and fourth quarter 2016 as these periods have seen the market conditions and demonstrated the dynamics of Mechel Group quarter-to-quarter.
Mining segment. During the first quarter 2017, segment's revenue demonstrated decrease by 3.5% to RUB 40 billion due to the decrease of the third-party sales volumes compensated by the increase of intersegment sales by RUB 3 billion. At the same time, operating profit increased from RUB 14 billion to RUB 17.3 billion based on high average sale prices and increase of -- in the intersegment sales.
EBITDA increased to RUB 20 billion plus 11% quarter-on-quarter and EBITDA margin reached 49%. In first quarter 2017, the portion of our coking coal and anthracite revenue decreased from 71% to 68%, which further decreased our revenue from Asian markets, which reached 58% comparing with the 70% last quarter. The decrease is a result of more beneficial terms of sales in domestic markets.
We remain one of the lowest cash cost producer for both coking and steam coal. In first quarter 2017, the increase of cash cost is a result of seasonal factor, increase of the energy cost as well as the increase of our spending on maintenance and investments in both open pit and underground mines.
Our investment program in the mining segment is one of the most important focuses for us this year. We have already invested in equipment such as excavators at our mining facilities and we plan to acquire an extra 35 trucks and 2 excavators, which will start operating during 2017 and beginning 2018.
At the Elga coal mine, we continue construction of electrical power network in order to switch power consumption from digital generators to power grid and substantially decrease our energy costs.
Steel segment. Steel segment revenue remained stable quarter-on-quarter and amounted to RUB 44 billion. Operating profit remained at the low level of RUB 1.8 billion under the pressure of higher raw material prices and decrease of average weighted price for finished products. EBITDA of RUB 3.6 billion had decreased 50% quarter-on-quarter, but at least half of which was earned by the mining segment of the group. As a result of all the above factors, EBITDA margin decreased from 16% to 8%.
The group maintains sales on the domestic market as a priority and its share remains the same from quarter-to-quarter and amounted to 7% -- 76% in first quarter 2017 from the total segment revenue compared to 66% in the last quarter.
The group's production mix remained focused on high-margin products, including specialty steel, rails and beams. Production on our key investment project in the steel segment, the universal rolling mill, amounted to 157,000 tonnes in first quarter, from which 93,000 was attributed to rails. We will continue to improve the efficiency of our steel operations by an increase of investment, mostly in maintenance, which the group investment and maintenance CapEx is expected to reach a total of RUB 6 billion this year. This should result in improved production stability, together with an additional range of our steel products mix. Over the first quarter 2017, our steel mills have already produced more than 115 new products for our customers.
Power segment. Seasonal factor lead to the operation's profit of RUB 0.5 billion and EBITDA of RUB 0.7 billion in our power segment. Revenues remain stable. Positive operation results are a result of synergic effects and the completion part of our maintenance works.
Consolidated results. Quarter-to-quarter, consolidated financial results demonstrated stable performance of the Mechel Group in all segments as was the case in the previous quarter. Our consolidated revenue amounted to RUB 77.4 billion minus 3% quarter-on-quarter, which is the result of slight decrease of third-party sales in the mining segment as explained above.
Operations profit increased to RUB 18 billion, an increase amounted to 30% quarter-on-quarter as a result of one-off -- write-offs in fourth quarter 2016. And EBITDA amounted to RUB 22.8 billion, which is a decrease of RUB 2 billion compared with the previous quarter because of higher iron ore prices supplied by the third-party starts to segment.
EBITDA margin demonstrated good results at a level of 29.5%. For the first quarter, we have earned RUB 14.7 billion of net income attributed to shareholders, but it's important to outline that approximately RUB 9.7 billion is a result of appreciation of the currency effects through the regulation of our debt obligation.
Average exchange rate for the quarter is RUB 58.8 compared with RUB 63 through the previous quarter. At the end of the period, the rates were RUB 60.7 and RUB 56.4, respectively.
Cash flow and balance sheet. As outlined during our previous conference call, the group continued to focus on generating positive cash flow as one of our key priorities. Through the reporting period, the group continued to improve working capital and accumulated a rates surplus of RUB 8.2 billion at the end of the period. This should have positive effect on stability of our operations going forward.
Group's capital expenditures for the first quarter amounted to RUB 2.2 billion, including RUB 1.1 billion of lease payments. Our interest payment in first quarter 2017 amounted to RUB 7.9 billion and decreased by 7% comparing with the previous period. The average interest rate and paid portion of the interest rates under our debt is 9.4% and 7.8%, respectively.
Improved financial performance has allowed us to decrease our debt through amortization of restructured debts and fulfillment of our leasing payments by RUB 6 billion. Together with partial amortization of debt, the group has decreased the debt to 4 -- RUB 122 billion following the appreciation of the ruble and regulation of the dollar-denominated debt in our accounts.
The structure of our debt remains unchanged, where we have 67% of rubble denominated debt with the remaining portion of currency denominated debt. With strong financial results for the last quarter, EBITDA for the last 12 calendar months amounts to almost RUB 79 billion, which supported a decrease of net debt-to-EBITDA ratio to 5.3.
We are looking positively in the great performance of Mechel Group going forward. Also, our financial results are very dependent on prices in our core markets. Our ability to generate free cash flow enables to decrease the average interest rates of our debt and completion of our -- the restructuring of all of our debts, including the expansion of the repayment profile. We see high uncertainty in the development of prices on the commodity markets during this year and an imminent risk of a price correction, but we will also see that the prices have resistance at a certain level, which provides comfort to the company, we will be able to fulfill our 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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Questions and Answers
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Operator [1]
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(Operator Instructions)
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [2]
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Okay. We will now take questions. (Operator Instructions)
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Operator [3]
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(Operator Instructions) It appears our first question comes from Nikolay Sosnovskiy with Prosperity Capital Management.
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Nikolay Sosnovskiy, [4]
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Actually, I had 1 question on prices in your mining segment. If I look at Slide #14, coking coal prices, anthracites and PCI steam coal, but mostly coking coal price in the first quarter 2017 quarter-on-quarter is down rubles and, I guess, while FX changed to something like 6%, 7% quarter-over-quarter significantly, but still not that much. But the markets, underlying market price benchmark was up like 40%, 50% quarter-on-quarter and Russian price was up close to 40% and in U.S. dollars. So the question is, why your average realized prices in the first quarter didn't increase?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [5]
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(foreign language) Sergey Rezontov for the last.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [6]
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Yes, yes. (foreign language)
In terms of our sales prices for the first quarter at the level of the end prices, where the end buyers were buying, there are 2 coal places certain price increase. However, looking at this whole period it is necessary also to take into account the fact that there occurred an appreciation of the ruble, i.e. against more or less stable dollar prices, the appreciation of the ruble led to the ruble-denominated prices going down.
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Nikolay Sosnovskiy, [7]
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(foreign language) And I would like to then make my question a little bit more specific, because you made the reference that this is happening because of the exchange rate differences, but the change was almost about 6% or 7%, while the dollar prices and in terms of the export, they changed by about 40%, 50%. And so if we are to consider this being reflected in the ruble side, this would've been 40% or 50%, but you are showing a decline and that is what I'm trying to understand.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [8]
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(foreign language) All right. So then what I should say that in the course of the first quarter that happened, depreciation of the ruble at the level of about 6% and in our presentation, we demonstrated that the first quarter price was RUB 7,936 while the fourth quarter price was RUB 8,457, which is exactly the price decline quarter-on-quarter by 6%. So I should say that this is the way we understand the answer to your question should be.
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Nikolay Sosnovskiy, [9]
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(foreign language) And so well then I will try and once again make my question explained better. So if we take a look at this 60% in terms of the quarter-on-quarter comparison and the ruble-denominated price went down although the 6% in dollars was the same. And so if in the fourth quarter as well as in the first quarter, it remains the same in U.S. dollars. How does that correlate to the fact that the market prices in U.S. dollars grew from $200 to $285 for hard coking coal and exports from $120, $130 to $180 and higher in the domestic market. So why in U.S. dollars one doesn't notice growth?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [10]
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(foreign language) So then if you take a look at the first quarter, sales prices indeed the level of benchmark grew up to $200 to $285 while the spot prices in the Chinese market went down from $230 to $150. That is why the average price levels quarter-on-quarter remained the same.
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Nikolay Sosnovskiy, [11]
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(foreign language) Then I would like to ask yet additional question. As far as I understand, in Russia, you are selling most of your coal under contracts and, respectively, and the prices of $120 and $180, should work for a bigger, for a larger amount of volume. So practically everybody but also in as far as export is concerned, correct me if I'm wrong, the larger amount of volumes were under quarterly contracts and only some of them less than half under spot prices. So if there was such a change on the spot side, it could affect the average sales price but similarly because you are selling a major part of what you're selling under the contract then there shouldn't be a greater manifestation of the dynamics following it.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [12]
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(foreign language) During the fourth quarter, in terms of the spot prices for when selling to China, we already as of the middle of the fourth quarter approximately we have reviewed our prices for our domestic market delivery, raising them to quite high spot level prices and this price spot contracting remained both for the second half of the fourth quarter as well as for the first quarter. So the selling price for domestic market were the same one in the fourth and the first quarter.
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Operator [13]
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Our next question comes from Oleg Petropavlovskiy with BCS.
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [14]
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(foreign language) Oleg Petropavlovskiy from BCS There are 2 questions that I have. First of all, my questions about a possible dividend for the preferred stock and do you have any sort of a solution in the company whether you're obliged, and will you be paying and are you negotiating with the banks with regard to this particular point? And my second question is about your cash cost for Elga Coal in rubles it continues to grow in U.S. dollars growth in the first quarter was even greater quarter-on-quarter.
(technical difficulty)
(foreign language) To allocate for dividend payment for the preferred stockholders. On our side, we did everything possible and we try and do so and that is the first phase that we're going through, which is receiving the pay from the banks. And the second thing, which is not in the control of the company, that is the shareholders meeting which is supposed to make a decision and endorse this particular dividend payment. And now in terms of the resolution of the shareholders meeting, we don't know, but on our part, we are doing everything possible in order to make it happen.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [15]
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(foreign language) Well, and as far as Elga is concerned and in the current period of time, since we are experiencing low prices, the Elga production primarily in terms of our cash cost, we are trying to increase the stripping that we're doing because as I used to say, since last year, we have experienced a greater amount of what we watch in terms of the positive dynamics. And we have reconsidered our program for the Elga project. As a result of which, we have undertaken quite a voluminous maintenance program in order to increase the volume of stripping, without which no production can be imagined. And so we have reached a certain volume of stripping work. And so the kind of dynamics that you can see is something that is definitely is the result of the quite an effort that we are pushing forward with in terms of our maintenance program, which enables us to upgrade our equipment. And so today, I would say that we have achieved the optimum correlation between stripping and production. And so this kind of dynamics indeed was following quarter in, quarter out quite nicely. And so as far as the maintenance program is concerned, it will continue being worked on in the first, second and the third quarter and the condition of the equipment at Elga is improving. And that gives us the reason to believe that we will be able to further upgrade our performance.
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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [16]
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(foreign language) And if I may, I would also like to ask you little additional question. In the first quarter, your CapEx of RUB 1.1 billion and so because of that, I would like to ask you whether you might offer us some kind of guidance for the rest of the year, what could be your expectations?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [17]
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(foreign language) So in terms of what we have as the Board of Directors, we have RUB 12.5 billion, which is planned out of, which approximately half of this amount, RUB 6.5 billion, we plan to spend to maintain our operations and RUB 6.2 billion into our investment projects. But in as far as the allocation is concerned, which might be of interest, the RUB 4.3 billion we are planning to spend on our steel division, approximately RUB 7,800,000,000 we are planning to spend on our mining division and RUB 7.8 billion, which is the lion's share of this cost, almost half of it is we plan to acquire new mining equipment. Now transportation division, approximately RUB 0.5 billion, about RUB 700 million would be dedicated to power. And indeed, during the first quarter, our costs amounted to approximately RUB 750 million, which is somewhat out of range in terms of what we were expecting and considering through the budget. But simply every process requires a certain ramping up in terms of timing, tendering, contracting, et cetera. So first quarter was slow going, but in the second quarter, we believe that our investment activities is going to be twice as bigger than what it used to be. Now whether we'll be able to do the whole program or not, it will all depend upon the prices, market environment and the coal prices that will expect us in 2017. But currently based upon our understanding and the current company economics and the coal price, we believe that RUB 12.5 billion is the kind of money that we'll have available next year, but in case there will be any issues, we'll certainly be sitting down and reviewing the whole thing.
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Operator [18]
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Our next question comes from George Buzhenitsa with Deutsche Bank.
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George Buzhenitsa, Deutsche Bank AG, Research Division - Research Analyst [19]
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(foreign language) The CapEx and your target RUB 12.5 billion, do I understand correctly that this is the expected figure? And my second question about CapEx is what is your budget for 2018 or at least what kind of vision you have about it and as far as the dividends are concerned, could you explain the situation with the preferred stock, do I understand correctly that the management in its guidelines is calculating dividend stock, preferred stock bearing in mind all of the exchange rate differences and other unrealized income and expenses or will it be just the net profit without the unrealized income expenses. And again, a question about dividends, what is the management's position about the dividends for ordinary stock. And my third question is about the either sale or transfer of part of the treasury stock to VTB, could you possibly disclose the details of this deal?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [20]
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(foreign language) So as far as the question as far as I understood about whether leasing payments are included in the program that we're showing, the fact of the matter is that the investment program with the company is being approved by the end of the year and before we put together plans in November and December. So that is the period of time when we simply define the amount of upgrading investments and equipment in order to continue implementing our production plans and continue further. But within this period of time, we don't have an understanding as to who are we going to agree with and what will the terms be where we have to pay for the equipment that we plan to acquire. It all is taking place as part of our contractual relations, so without a doubt RUB 12.5 billion is the maximum figure because it is simply the result of the calculus. But in the course of what we're currently doing, we're simply trying to optimize our cash flow. And so we do consider various options between companies to release equipment or simply to defer payments in between the 3 to 5 years when speaking to contractors we're similarly talking about the firm payments within a certain period of time and that's why the amount of RUB 12.5 billion simply is just mathematics. But further on I know we talk about the cash flow, our target is to optimize it in order to try and delay as much amount to be paid to future periods and then typically within our contractual work, that is what we are doing. Now in as far as 2018 expenses are concerned, in our understanding, the maintenance and the cost to sustain ourselves should remain at approximately at the same level, RUB 6 billion, approximately our investment projects. They are going to be dependent upon what we will be able to do this year because, as I said, and as far as the cash flow is concerned, there is a certain understanding, but it doesn't reach out beyond the third quarter, maybe even within a shorter timeframe. So in case there will be a possibility to fund our investment spending in 2017 in full, then most probably, in 2018, this figure is going to be slightly lower. And if not, then quite obviously, all of these expenses will be carried forward into 2018. So far what I would take it that the investment program is going to be at about the level of RUB 12 billion to RUB 13 billion.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [21]
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(foreign language) And according to the charter of the company the dividends due to the preferred stockholders are estimated based on the net profit of the group, which is due to shareholders with the deduction of the minority due amounts. So net profit includes all of the adjustments which are made at higher levels, including the exchange rate differences and other adjustments.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [22]
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(foreign language) And the issue of the amount due to be paid to the ordinary stockholders will depend upon the recommendations which will be issued to the Board of Directors during the general shareholders meeting.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [23]
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(foreign language) And as far as your question about the terms and conditions of our agreement with VTB is concerned with regards to the preferred stock, the 5% preferred stock, this agreement was concluded as part of the general restructuring with this bank. And so the details of this agreement were disclosed by Mechel when it published Form 20-F disclosure by the end of April.
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Operator [24]
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(Operator Instructions) Our next question comes from Alex [Naumov] with VTB Asset Management.
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Unidentified Analyst, [25]
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(foreign language) You mentioned Elga project and its cash costs and you also spoke about the costs, and my question is about the cash cost at other coal producing units of the company. And basically, after guidance for 2018, this is my first question. The second question is whether you could comment about whether RUB 12 billion includes Elga project or not, I mean, in terms of required CapEx and, respectively, if they do, then could you mention what is a potential timeframe within which the Elga project may reach its next level. I mean, to commission the next batch of 9 million tonnes of coking coal. My third question, I guess that you might have heard that recently Vice President of Nippon Steel was interviewed by Reuters and where he came out with a potential conditional definition of coal prices setting, I mean, the new formula and his comment on that. And additionally, he also stated that his company is considering acquisitions of the coal assets in Russia. So if you could possibly comment on this, it really would be good. And the last question is, are there any other kind of negotiations with the Russian railroad company with regards to the Elga railroad?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [26]
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(foreign language) So I'm answering the question about the cash cost in between the billing sequence of the company. As you could see on Slide #14 of the presentation, cash costs in South Kuzbass grew from RUB 1,900 to RUB 2,341 and about half of this amount is the cost of the great expenses on spare parts of the materials to the program of maintenance and capital investment. In the subsequent periods, we expect that due to the seasonal factor these cash costs should go down because the remaining parts of the cash cost growth is a result of the greater energy, other industrial expenses, which in part are all seasonal in nature. But at the same time, without a doubt the company is to increase its stripping activities in South Kuzbass. Cash will remain at the same level. Now at Yakut Coal, cash cost grew slightly. The growth was from RUB 924 up to RUB 1,018 here in the similar token, to a larger extent, the cash cost growth here comes from the seasonal factor and somewhat greater energy expenses and energy resources which are being used locally. Elga Coal Complex and the comment on it was already voiced that the cash cost growth comes to a large extent great -- because of greater stripping, but also due to some seasonal factors as well. Now the Korshunovsky mining and refining plant one in terms of its cash cost went down by RUB 150.
(foreign language) Now in terms of that amount, which is RUB 12.5 billion, without a doubt, it includes the cost to develop the Elga project further, the total amount of expenditures is expected at RUB 1,800,000,000 billion, primarily these are the expenditures which are helping us in 2018 to achieve the coal production competitors at level 5,400,000 for understanding. In 2018, the budget plans the amount of output which is 4.5 million tonnes. And at the same time, the 1.8 billion that we're talking about includes into them a further fine-tuning of the seasonal enrichment plant which is currently operating in all year round way and also the expenditures related to the electricity supplies, which we plan to commission into operation towards the end of the year. Then another expense related to the building of crushers. So there's a whole set of activities, which towards the end of the year will enable us achieve 5,400,000 output. So principally speaking, without any global infusions, this is the level of production that we plan to maintain during the period of time unless we find sources of funding, as we correctly stated the next stage is 9 million tonnes of output and in order to do this 9 million tonnes of Elga project, several conditions have to be met. The first one is the availability of funding. In the meantime, we do have certain restrictions in order to raise money, so to get some discount from the banks we are looking for various options. And so as to bring in strategic investors into this project. And so that gives it the possibility to bring in new financial resources and achieve an understandable sources of funding and as a consequence, subsequent development then we'll be further talking about this project. At the same time, the amount of financing for this second stage depends upon several factors, the first of which is what we're going to be doing with the railroad, those are 2 different figures in terms of funding with the railroad or without. Now in terms of what is happening with the railroad and with its efforts on it and the amount taking about it, Sergey will tell us about it a bit later.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [27]
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(foreign language) And as far as the second part of the question was concerned, which was pricing as you know, the cost of the hurricane which happened in Australia in the -- towards the end of the first quarter and the beginning of the second quarter, as a result of it, negotiations and pricing in the global market as delivered and benchmarking were put on hold and all the stakeholders were entrenched in an extensive negotiations about the volumes and the sale price. As we know and you very correctly stated that currently negotiations are underway to change the benchmark price formula and to link it to the current spot ratings and different indices based on different proportions within different periods. In any case, our contracts, which we are working under right now, are primarily in the case of Japanese buys are linked to benchmarks. And that is why we're looking forward to see the publication of the benchmark with as to the sale price in the second quarter. But at the same time, nobody is ruling out that such agreements may apply not only to the second but also to the third quarter, because there's just 1 month to go before the prices for the third quarter are fixed. Now with respect to the capabilities and the interest on the part of the Japanese companies to buy coal assets in Russia, Japanese companies has always been keen in buying coal production from the Russian market, because the Russian market is a stable supplier of coal to the Asian markets and specifically to Japan. And to the extent we know, they have always been interested in considering their participation in different projects, but Mechel is not having any negotiations with this company and as far as Mechel's projects are concerned.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [28]
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(foreign language) And with respect to the Elga railroad, I may offer the following comment. The concession arrangement is something which one finds quite commonly in the market, in different sectors, in different industries. And so we believe that the possibility to do this project is solid and expand its throughput capacity as part of the concession arrangement is going to be mutually beneficial, both to Mechel by way of reducing its debt burden as well as to the Russian railroads from a point of view of increasing its cargo base and increasing the throughput as well as growing overall cargo volume through the Russian railroad tracks in the far east. And that is why Russian railroads and Mechel on more than one occasion commented that this kind of concession is considered as one of the ways to jointly work towards expanding the throughput through the Elga railroad.
(foreign language) And so currently, we continue to engage in consultation with respect to this project because the implementation of such concession regiment is somewhat of a very lengthy process which requires involvement of a great number of participants and we are quite hopeful to be able to find certain options and mechanisms to implement this concession arrangement and as soon as they are found, we will definitely be informing everyone about it.
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Unidentified Analyst, [29]
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(foreign language) And if I may, let me ask 2 additional questions. First of all, can you possibly confirm or refute your previous guidance for this year and as far as production of concentrate and the coking coal are concerned and, respectively, if possible give us the guidance for the next year. And my next question is (inaudible) at all considering the possibility of selling part of the Elga Coal as an asset in order to, let's say, earn money and reinvest it into developing the project.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [30]
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(foreign language) Now as far as the volumes of the coal production in 2017 is concerned, this year budget has visited the volumes, which is essentially at the actual levels of last year, which is 28 -- 22.8 million tonnes, 23 million tonnes for the year. Currently, as we are targeting to really perform this production plan and the implementation of it depends upon many factors as I use to -- is our ability to work in our investment programs because all that maintenance expenses as well as due to equipment is specifically aimed at achieving the figures, which I previously quoted. At present, we are pushing towards all of such results through all of our assets. So the investment spending that we planned is to be executed and there are no other plans that we are currently having, apart from those endorsed by the Board of Directors. As far as 2018 is concerned, again, this is closely related to the projects we were supposed to do in 2017. In case we are successful, we anticipate that the volumes of coal output might grow. But in the meantime, we haven't yet looked in details into all those yields -- in August, so I'm not able to give you any figures right now about 2018. I would simply just take it that it's going to be plus or minus, most probably plus on top of the volumes, which we're going to do in 2017.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [31]
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(foreign language) And as far as the possibility to sell part of Elga in order to, I think, into its future development, as you might know, in June last year, we do the deal with the Gazprombank where 49% of our Elga asset was sold to Gazprombank. And so the money derived was aimed at reducing the debt burden. So currently we have a 51% stock. As far as and subsequent sale of the stock is concerned, first of all, we always use to say that we're open to any proposition. It all depends upon the amount in question, what kind of stock is in question and what kind of terms and conditions are going to be reached, because with respect to any assets that the company have we are able to enter into a dialogue within the rational range, sensible range. So we currently have an understanding as to the amount of investments we need to make into Elga, but that would mean that based upon the current market environment and based upon the current value of the assets, you will have to sell out of almost everything. So hardly likely go that far. So as I said together with Gazprombank, which is basically the partner that we have in this project just in between ourselves. We are ready to sell some share, Gazprombank sold our own in order to bring a strategic partner who will come with money and will meet certain terms. These are the options which we are reviewing, but nothing is final. We are continuously looking at different options, which could turn Elga project into a more attractive undertaking.
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Operator [32]
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Our next question comes from (inaudible) with VTB Capital.
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Unidentified Analyst, [33]
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(foreign language) So the question is about working capital. If I'm not mistaken, you have demonstrated the build up for more than a year and I would like to hear what you might comment, to what extent you find this comfortable. Do you believe that with the price declining you might end up having certain release in Q2, Q3?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO and Member of Management Board [34]
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(foreign language) Thank you very much for the question. You've absolutely correctly noted that in the course of the past few years, the working capital in the company was a negative 1, which was the reason because of the negative results in the operating income and other activities done by the company. But taking into account the positive dynamics which the company has been able to achieve since 2015 and throughout 2016 and in the beginning of 2017. But by the end of 2016 already, we entered into a positive working capital figure, which continues to grow even now. This working capital level is something that the company requires for its stable operating to maintain the proper load on its assets and maintain a standard stock level, specifically growth of its working capital throughout the first quarter is the reason (inaudible) because of partial growth of the raw materials, the partial growth of the finished product to stock because of the seasonal factor and, to a certain extent, because of the price increase. So we expect that throughout quarter 2 and quarter 3, the working capital shall remain at this level. There might be a very slight decline in the level of the working capital, but one may definitely state the company was able to recover these working capital level and in terms of subsequent periods, we are not planning to see any major growth in it.
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Operator [35]
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And it appears we have no other questions at this time.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [36]
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Ladies and gentlemen, thank you for taking the time to join Mechel's First Quarter 2017 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 [37]
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That does conclude today's conference. Thank you for your participation.
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