Half Year 2017 Mechel PAO Earnings Call
Aug 23, 2017 AM EDT
MTLR.MZ - Mechel PAO
Half Year 2017 Mechel PAO Earnings Call
Aug 23, 2017 / 03:00PM GMT
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Corporate Participants
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* Alexey Lukashov
* Oleg V. Korzhov
Mechel PAO - Chairman of the Management Board, CEO, General Director & Director
* Sergey Viktorovich Rezontov
Mechel PAO - CFO & Member of Management Board
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Conference Call Participants
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* Boris Sinitsyn
VTB Capital, Research Division - Research Analyst
* Dmitry Kumanovsky
LenMontazhStroy Investment Company, Research Division - Head of Research
* Nikolay Sosnovskiy
* Oleg Petropavlovskiy
BCS Financial Group, Research Division - Metals and Mining Senior Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the Mechel Reports the First Half of 2017 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 first 6 months 2017 results, which we reported today. With that, 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. Reconciliations 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 & Director [3]
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(foreign language) Good afternoon, ladies and gentlemen. Welcome to the conference call for the company's financial results of the first half of 2017. For the company, these 6 months financial results were an improvement over last year's first half. Consolidated revenue went up by 15%, reaching RUB 149 billion. EBITDA went up by 56% and reached RUB 40 billion. Net profit attributable to Mechel shareholders went down by 40% to nearly RUB 5 billion.
(foreign language) As we have already discussed earlier, as it is written in our press release, the main reason of the half year to half year improvement was the growth of average coal prices, which began in the last year's second half and enabled us to fix on the high level of prices for this year's first quarter. However, a stronger ruble became a negative factor impacting our margin and financial results. Sergey Rezontov will speak of this in more detail.
(foreign language) Despite high volatility in global coking coal markets, the current coal price levels enable coal companies to work effectively and earn operating profit. Starting in late June, spot prices for hard coking coal again demonstrated positive dynamics and recently approached a fairly high level of USD 200 per tonne.
(foreign language) The steel product market also demonstrated volatile dynamics in this accounting period, though certainly not as volatile as the commodity market. Average steel prices have ultimately been higher in this half a year than in the first half of last year, which had this positive impact on our steel division's results, though pressure from high-commodity prices were stronger and was reflected in the weakening of the steel division's financial results in this year's second quarter.
(foreign language) Macroeconomic environment and the state of our key markets are definitely important factors for the company's results -- that the company's results depend on. But our management's chief attention is still focused on the group's operations: expanding our product range, moving into new markets, optimizing our production costs, implementing modernization programs and monitoring our products' quality.
(foreign language) In the mining segment, the focus was on adding to our motor pool of mining equipment and increasing the intensity of overburdened mining. Over the first half of this year, we acquired and launched into operation new trucks, excavators and bulldozers. For example, in April, Yakutugol bought 5 new haulers and the new EKG-18 excavator began working at the Neryungri open pit in May. It is the second such machine to be launched there this year. In the second half of this year, we expect more machines to arrive and begin operating, including over 30 new hauler trucks, which will enable us to step up stripping works and then mining.
(foreign language) In the steel segment, we concentrated on modernizing our facilities and mastering new types of products to minimize production and sales of semifinished products and increase the share of high value-added products. For example, at Izhstal, steel production in the first half of this year, the production went up by 34% year-on-year and production of alloyed steel went up by more than 50%. Sales of high-speed and stainless steel went up by 34% and 37%, accordingly. Beloretsk Metallurgical Plant this year increased the share of high-margin products and its sales by nearly 6%. Stainless steel products accounted for the major growth of the plant sales, which grew double and a half.
(foreign language) Chelyabinsk Metallurgical Plant began its expansion into bulk ingot market. In July, the plant produced a 50-tonne oversized ingot. The new technology of producing bulk ingots from specialty steels will enable the plant to enter the new segment of the oversized products market and to make supplies both domestically and internationally. Chelyabinsk Metallurgical Plant's 50-tonne ingots will be supplied as billets to Mechel's and other steel facility, Urals Stampings Plant. Urals Stampings Plant will use them to produce a new type of product, bulk forgings, which are highly in demand in mechanical engineering.
(foreign language) Chelyabinsk Metallurgical Plant is also mastering production of new types of products at its universal rolling mill and certifying them. In August, Chelyabinsk Metallurgical Plant got a certificate stating that 2 of its 3 rail profiles are compliant with the European TSI standard. These products are in demand in the European Union where they're actively used for railroad construction, including that of high-speed railways. Thus, since the beginning of this year, we have laid down important basis for maintaining and restoring our mining volumes for our mining facilities and expanding the range of high value-added products in the steel division.
And 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 & Member of Management Board [4]
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Thank you very much, Oleg, and good afternoon, ladies and gentlemen. I would like to welcome you to our conference call to present financial results of Mechel Group for first half 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 latest consolidated financial results of Mechel Group. And traditionally, I will start with a brief market overview.
During this half of the year, we have seen another up-and-down adventure on the commodity markets, with rising and falling level of both coal and steel prices reflecting the ever-changing economic and environmental events.
In the beginning of the year, coal market started with record-high prices at benchmark level of $285, which decreased total reference price of $195 during the second quarter. Meanwhile, the spot market was very volatile. Spot market prices started to decrease in the beginning of the year to $140 on additional supply. The cyclone in Australia ramped up the prices back to $300 plus. After completion of the reconstruction of railroad and port market, supply restored and the prices cooled down to $150, where they saw the gradual increase to $200 currently as a result of increased demand for hard coking coal and anthracite in China and shortage of supply on seaborne market. All these circumstances led to the decision to revise principal of quarterly benchmark prices in the long-term contracts by the Asian customers. Coal prices have become dependent on and are now calculated based on the average spot indexes of 3 months, starting from the second quarter 2017.
I would like to remind that last year, benchmark prices for hard coking coal was in the range between $81 and $84 per tonne. Prices on our long steel products on a global and export markets traditionally are dependent on the export billets for Black Sea prices as well as currency exchange rate of domestic market sales.
During the first half of the year, billet prices was more stable and fixed at the range between $385 and $405 compared to the range of $294 and $395 during the first half of the previous year. At the same time, average domestic market prices for rebar this year fell from RUB 27,000 to RUB 24,000, following the currency appreciation. Since July, we have seen the increase of the billet prices up to $505 per tonne, which, together with the currency depreciation and seasonable demand, influenced the increase of our rebar prices on the domestic market to RUB 29,300 per tonne.
Comparing the environment on financial markets half on half, we can point out that the average ruble-dollar exchange rate during last year was RUB 70.26, unlike RUB 57.99 this year, which is more than 17% appreciation of the currency, where the cost of borrowings of the domestic markets has reduced since the Russian Central Bank rate was decreased twice to 9% per annum.
Performance of our mining segment during the first half benefited from the high level of coal prices. Consolidated third-party revenue increased to RUB 51.5 billion, was 29% half-on-half. Operating profit amounted to RUB 29.2 billion, which is almost 3x increase compared to the previous year, and EBITDA reached RUB 34.6 billion, was 139% half-on-half, bringing the EBITDA margin to 46%.
During this year, the group suffered from the decrease of the production and sales volumes of coal due to the low level of stripping at mine site and lack of the investments during the previous periods as a result of lack of available financing and cash deficits. However, we're implementing the multipronged approach for restoring, stripping and production volumes on all our mines, including increased maintenance CapEx by twice compared to the previous year.
We're also busy with arrangement of long-term financing for equipment, including leasing for a total amount up to RUB 5 billion as well as outsourcing all these works to third parties, which started in July this year.
The share of our sales to Asian market has increased from 52% previous year to 63% this year. That proves our focus on this particular market.
Then last, but not the least, our revenue from sales of coking coal products also increased from 61% to 66% half-on-half. On Elga Coal Deposit, for the first half of the year, we have mined 1.93 million tonne of coal from the beginning of the year and beneficiated 1 million tonne of coal at site, out of which 56% was coking coal.
In addition, using the washing capacity of Southern Kuzbass, we have reached 540,000 tonnes of coal, which give us total sale of 1.36 million tonnes of coal from Elga, out of which sales on export and domestic market are almost equal. Elga is operationally profitable for the group and brings additional cash flows.
More favorable market environment conditions, together with diversification of products for high value-added products, led to the increase of the steel segment revenue to RUB 85 billion, bringing an increase 9% half-on-half. At the same time, operating profit decreased almost 2x due to the high cost for raw materials, such as coal, iron ore and scrap. A substantial part of steel segment profit was shifted to the results of the mining segment through the intergroup sales.
Steel segment EBITDA amounted to RUB 6 billion, which is lower by 36% than in the previous year and resulted in EBITDA margin of 6%. Compared to the previous year, prices and product mix result give us a surplus of EBITDA of 6.6 billion and 2.4 billion, respectively. However, cost of raw materials decreased to this figure by 12.6 billion since they have largest impact on the cost as they represent 75% of the cost structure.
Steel segment substantially improved its product mix. The portfolio of revenue from the rebar sales decreased from 29% in first half 2016 to 24% in first half 2017, which means that the group has increased by 5% the portion of high value-added products in its portfolio. Carbon long products increased from 23% to 28% half-on-half.
Universal rolling mill product continued to demonstrate stable products volumes, which give us a total production of 313,000 tonnes for first half 2017, an increase of 47% to the previous year.
We persist in this penchant of our customer base for rails and currently supply them not only to Russian Railways but also to the third buyers. The positive effect of product mix was partially offset by the downward trend in the steel prices in the second quarter. Steel market bottomed out in May, June. However, taking into account the current increase of the market prices and probably flattish cash cost, we expect that during third quarter 2017, our steel segment will improve its financial results.
Mechel continued to report strong financial results and improved its performance quarter-to-quarter on a consolidated basis. Consolidated revenue came to 149 billion, plus 15% half-on-half, driven by the high coal prices and better product mix in the steel segment. Gross profit increased by 19% from RUB 58 billion to RUB 68.8 billion and the operation profit increased even higher by 78% from RUB 17.2 billion to RUB 30.7 billion. That is also a result of implementation of measures dedicated to decrease of commercial administrative expenses, which resulted in total of RUB 2.7 billion.
EBITDA totaled for the first half of the year RUB 40.2 billion, which is split at RUB 22.8 billion and RUB 17.4 billion between first and second quarter, respectively. EBITDA margin remained to be at the high level of approximately 27%. Group's net profit attributed to equity shareholders amounted to RUB 5 billion.
The group has managed to restore and maintain a stable and positive level of the working capital in the first quarter and second quarter of this year. We have achieved our goal to stabilize operating performance in all our segments and operations and secure the current working capital needs in order to maintain stable production and performance.
We believe that the group doesn't need any substantial investments in working capital anymore. And with the next periods, we will follow market trends in supply and demand relating to the working capital financing. Also, in the first half 2017, in July, we have managed to settle the most of our overdue commercial debts in order to have more free cash flow to decrease our leverage.
Our free cash flow from operations has increased to RUB 31.6 billion and 64% half-on-half, which consists of RUB 14 billion in the first quarter this year and RUB 17.6 billion in the second quarter this year. This brings to 25% increase quarter-to-quarter.
As we said before, we keep on increasing our investments in our operations. Group's capital expenditure for the first half 2017 amounted to RUB 5.4 billion, including the first Q amounted to RUB 2.3 billion and second Q, RUB 3.1 billion. In first half 2016, our capital expenditures amounted only RUB 2.2 billion.
Our interest payment in the first half 2017 amounted to RUB 15.9 billion and decreased by 8% following decrease of the average interest rate and paid portion of interest rate and our debts, which were 9.1% and 7.8% per annum, respectively.
Improved financial performance supported us to decrease our debt through amortization of the restructured debt and fulfillment of our leasing payments by RUB 13.3 billion. The group's debt principal decreased to RUB 410 billion for amortization and regulation of dollar-denominated debts in our accounts due to the appreciation of the ruble.
Structure of our debt remains unchanged, where we have 67% of the ruble-denominated debt with the remaining portion of the currency-denominated debt. We continue restructuring of our debts and we are currently focused on completion of restructuring with Elga open debt to Vnesheconombank and our debt to the syndicate of international creditors.
Vnesheconombank has approved the restructuring plan and we are working on its execution. We have engaged advisers to support the restructuring of (inaudible) facility, and ECA-covered debt provided the banks with the updated financial model reviewed by one of the advisers from the Big Four. We confirm our strong interest and commitment to find a solution with international creditors and are working -- and are looking forward to their response on our restructuring proposal made in the previous quarter.
With strong financial results for the last year, EBITDA for the last 12 calendar months amounted to 80.7 billion, which supported maintain of stable net debt to EBITDA ratio at 5.3 level.
Also, one of our positive achievement this year was that the Mechel Group fulfills its obligation to pay dividends to the preferred stockholders in full in August. We are very interested to maintain long-term relationship with our shareholders and analysts who provide coverage on our company, and we appreciate them for their support and hope that the new coverage will be reestablished and initiated shortly.
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) And 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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(foreign language) There are 3 questions. The first one, could you please provide the guidance as to the CapEx for the second 6 months of the year and also the full results for the end of the year? The second question, what is your vision for the production of coal concentrate for the second half of the year given the increase in the investment that you've just described? And the third question is, what are you -- do you have any plans with respect to the subsidiary companies which still have minority shareholders? Do you have any strategy with respect to the exit of the companies?
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Unidentified Company Representative, [3]
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The first question will be answered by Oleg Korzhov.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [4]
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(foreign language) Now to answer your first question. Indeed, we have very ambitious plans for the investment during the first -- or during the year 2016. We planned to invest RUB 12.5 billion in total, but then we had to correct our plans and we had to postpone the reconstruction of certain facilities to 2018, which will enable us to smooth out the investment during 2017. In particular, we will be shifting the investment into the reconstruction of the blast furnace and the last converter in Chelyabinsk together with the furnace in a [BCF] for 2018. In the first 6 months of 2017, we have already invested approximately RUB 2 billion, which is roughly 70% more than during the previous period of 2016. And we have additionally leased equipment to approximately RUB 0.5 billion. And in mining -- in our mining segment, we have planned to increase our investment by 1.52x. Thank you.
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Unidentified Company Representative, [5]
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Your second question will also be answered by Oleg Korzhov.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [6]
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(foreign language) To answer your second question, the plan for the second -- as regards to plans for the second half of 2017 in production and shipping of the coal products. Since the beginning of the year, the 3 facilities that we have, have together jointly delivered 10,300,000 tonnes of coal products. Production went up about 10%. In the first 6 months of the year, we produced 8,800,000 tonnes of coal. And in the next 6 months of the year, we plan to produce anywhere between 9 and 9.2 million tonnes of coal. And you asked specifically about coal concentrate. The -- during the first 6 months of the year, the total production was 4,100,000 tonnes. And in the second half of the year, we plan to produce 4,300,000 or around that figure.
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Unidentified Company Representative, [7]
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The next question will be answered by Sergey Rezontov.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [8]
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(foreign language) As to the buyback of minority shares. Well, usually, such practice results in a withdrawal of cash from the group. We have to, according to the arrangements that we have with the crediting banks, we must give their approval, their agreements for such a transaction. It is in the bank's interest to lower the debt of the company, so we never ask them until now about the potential buyback of the minority shares. But more -- if the company has more cash than the banks, certainly, would prefer that the company invest this cash into paying back the debt. So we do not believe that the banks would approve of such a deal on our side. Thank you.
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Operator [9]
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Next, we'll hear from Nikolay Sosnovskiy with Prosperity Capital Management.
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Nikolay Sosnovskiy, [10]
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(foreign language) The first question comes in 2 parts. The first part is related to CapEx investment overall. What led to the reduction in CapEx from 12.5 billion to the current values? Why do you have to review your CapEx program for this year? Was it due to your ambitious expectations of this year or something else changed, the macroeconomic environment? Were there any other reasons? And the second part of the same question is, could you please provide details if you have them close at hand as to the CapEx related to fixed assets and CapEx related to leasing? What is your final plan for 2017? What will it look like given the transfer of part of this investment to 2018 as related to the blast furnace and the converter?
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Unidentified Company Representative, [11]
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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 & Director [12]
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(foreign language) To answer your first question. Indeed, the situation in the markets today is relatively fine for us and -- however, we're always looking for ways to optimize our payment and to minimize the debt portfolio of the company. So this review of the plans for CapEx was not due to the ambitious expectations that we have at the end of 2017 when we were planning this investment. In fact, we knew that the equipment that was mentioned in the presentation needs to be maintained, but we examined this equipment, we analyzed the -- analyzed it once again and we saw that it was okay also to postpone the maintenance and the repair until later periods. So the equipment still has serviceability, still has a useful life in it. It is still operational and it is quite capable of operating until the, say, middle of 2018 when it will be maintained and repaired. So to go back to your question, we could have made that investment into maintenance now. But if we can't postpone it, why not do it? And the total investment -- the total CapEx for 2017, as we see today, will amount to roughly RUB 5.56 billion. As to which part of this will be leasing and which part will be fixed assets will depend on our arrangements and contracts with the leasing companies and the terms and conditions that they will offer us.
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Nikolay Sosnovskiy, [13]
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(foreign language) What about 2018? If a substantial portion of the investment is not transferred to 2018, does it mean that we'll see a substantial increase in the CapEx program in that year?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [14]
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(foreign language) It means that next year, the CapEx program will be roughly RUB 10 billion to RUB 12 billion. We'll spend RUB 6 billion this year and the program have the same 6 year -- RUB 6 billion plan for 2018. But since the other RUB 6 billion is now being moved over to 2018 from this year, it means that next year we'll be investing anywhere between RUB 10 billion to RUB 12 billion.
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Nikolay Sosnovskiy, [15]
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(foreign language) And the second question is about the interest payments. Could you please go through the interest payments once again? What will be the total amount of interest payments for this year, both regular ones and non-regular ones, the accrued ones? And also, what are your expectations for 2018? And also, if you could cover the regular -- the scheduled payments and nonscheduled ones, accrued ones.
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Unidentified Company Representative, [16]
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Sergey Rezontov will answer.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [17]
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(foreign language) In the first 6 months of 2017, the total interest payments amounted to RUB 15.9 billion, out of which 2.5 billion were outstanding payments for accrued interest. In the next 6 months of the year, we expect to pay out about RUB 15 billion of interest payments to include our outstanding interest on the restructured loans. As to the future payments, the interest payment depends on the interest rates, I mean, the total value -- the total amount of that. And it all -- according to the arrangements, the agreements that we have with the banks who restructure our loans, the interest rate is linked to the key rate of the Central Bank. Therefore, if the key rate of the Central Bank goes down, the total value -- the interest rate on our loan goes down as well and the total value of the payment goes down.
(foreign language) As I have mentioned in my presentation, the average interest rate on the group's portfolio is about 9%. However, on the interest that we are paying out now, the interest rate is anywhere between 7% and 8.5% or at least this concerns some of the payments that we are making. We have an agreement with the government-owned banks according to which the accrued interest is partially capitalized. Therefore, when the key rate of the Central Bank is reduced, the interest payments, they're also going down.
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Nikolay Sosnovskiy, [18]
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(foreign language) Okay. You've mentioned that you've, so far, you have already paid out RUB 15.9 billion of interest payments, which is include about RUB 2 billion of nonscheduled, let's call them that, payments. The rate of around 8%, which gives us 1% or 1.5% that is being capitalized in your arrangements with the state-owned banks. But there's a difference in the numbers in the papers that we've received; there's a reference to RUB 15.9 billion, but then again, there's a reference to RUB 4.1 billion. So where does this difference come from?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [19]
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(foreign language) So those difference arises from the way the figures are represented in different financial statements. In the income statement, all possible interest payments are represented. They include all financial expenses such as paid out interest, accrued, capitalized, Gazprombank option, interest, leasing, financial rent. While in the cash flow statement, only the actually paid out interest is reflected. So hence, those difference in the way the figures are stated in the income statement and in the cash flow statement.
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Nikolay Sosnovskiy, [20]
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(foreign language) The question is about current liabilities, which we see represented at around RUB 60 billion, RUB 58 billion and the cost of production, which today as of the end of the first 6 months is around RUB 80 billion. In annualized terms, let's take it to be roughly RUB 160 billion, and this difference between RUB 60 billion and RUB 160 billion, do you think it's okay? Because your receivables and your inventory, they seem to be they're fine at the moment and do not require any working capital on that side. But what about your partners and your contractors? Don't -- aren't you afraid that they will try to drive a hard bargain now having seen those financial results? And your payables will start going down to the levels of, I don't know, [is that] years and this will, in turn, drive up the need in working capital?
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Unidentified Company Representative, [21]
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Sergey Rezontov.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [22]
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(foreign language) Okay. At the moment, our trade and accounts receivable, they stand at about RUB 38 billion and -- so this payment outstanding is 45 days for accounts payable. In 2017, working capital was at a normal level, which is attributable to strong operating results and also to the fact that the company manage to pay out the majority of its accounts payable that dated back from 2014 and 2016. So we covered those problematic accounts payable, the problematic debt that we have for gas and for transportation. And at the moment, we have relations with partners and with the contractors based on market terms and they are strong. Thank you.
We'll hear from Boris Sinitsyn with VTB Capital.
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Boris Sinitsyn, VTB Capital, Research Division - Research Analyst [23]
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(foreign language) Three questions. The first one is about the volume of production sales until the end of 2017 for coal specifically. Do you expect any fluctuations there or any review of your plans given the information that some media was publishing about the delays that exist today in transhipment at the railway ports in the Far East? The second question is on the Gazprombank option for Elga. At which coal price does this option exists? Today, do you expect that there will be a revaluation of this option at the end of the year given that during 2017, the prices on coal were higher than in 2016? And the third question is about the railway link to Elga. What is its current balance sheet value?
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Unidentified Company Representative, [24]
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The first question will be answered by Oleg Korzhov.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [25]
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(foreign language) We'll start with the simplest, the third question, the current balance sheet value of the railway link is RUB 65 billion.
(foreign language) And this is Russian accounting standards value.
(foreign language) Now to answer your first question. The second week of August proved to be very difficult in the Far East. The weather was very bad, and this resulted in limited supply of cars in the Far East ports, and in particular in the Posiet port. So as a result, we had our stock, some provisions of coal on that line and they were unloaded, and we tried to at least partially redirect the flows of the coal from that port to the other ports that we have a connection to Temryuk and Vanino to the west and we succeeded in at least partially redirecting those flows. And as of now, there aren't any substantial issues in the railway link and overall in the Far East and the railway runs as normal. There are still some insubstantial volumes of unloaded coal, but we'll do our best to make sure that in September, they no longer prove to a challenge for the company. We'll do everything possible to resolve that matter.
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Unidentified Company Representative, [26]
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Next question will be answered by Sergey Rezontov.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [27]
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(foreign language) Okay. The 49% of the option today amounts to RUB 34.9 billion. And to put it simply, Gazprombank holds an option for Mechel at the value of RUB 34.9 billion plus actual costs associated with this option, which means various accrued interest and the interest accrues at the key rate plus 2%. So basically, that's the current option value, it goes up quarter-on-quarter with the charged interest, with the accrued interest. There are also certain aspects in the accounting principles of IFRS that apply to that particular option. They are related to the net present value of the option, but you can consider it to be RUB 34.9 billion plus the accrued interest.
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Operator [28]
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(Operator Instructions) We'll hear from [Alex Naumov] with VTB Asset Management.
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Unidentified Analyst, [29]
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(foreign language) There are 5 questions. The first one, what is your forecast for coking coal in 2019? The second question is, can you provide any update on the Elga? Is there any news on your negotiations to attract an external investor? The third question is about an update on the concession -- of the railway line concession? The fourth question is about the current status of the claims from Estar and Varshavsky? Are there any [mid-term] risks for Mechel in relation to those court claims? And the fifth question is today, an article was published in Kommersant newspaper stating that it was about EVRAZ and Sibuglemet stating that Mechel or claiming rather that Mechel has allegedly a minority share in a Sibuglemet subsidiary. The article maintains that as part of its restructuring process, Sibuglemet intends to buy out that minority share. Do you have any comments about this? Does Mechel indeed have a share in this company?
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Unidentified Company Representative, [30]
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The first question will be answered by Oleg Korzhov.
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [31]
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(foreign language) We don't yet made any plans, detailed plans for 2018, but we have a vision; we have a certain understanding of how things might stand given the current economic environment and the plans for our investment. We'll start with Elga. We think that production at Elga will amount to 4.5 million tonnes as it was this year. At Yakutugol, the -- probably, production there will be at 2017 levels, which means around 8 or 8.5 million tonnes, but this remains to be seen depending on the availability of the equipment and the mining works planned and the number of other issues. Yes, there is a decrease in the production rate at Yakutugol compared to 2016 and 2017, but this happened according to the plans and is explained by the fact that if in the past, the thickness of coal layer of this strata was 24 meters, at the moment is only 12 meters. So most likely, the production rate at Yakutugol will remain at current levels. It is possible to increase production there, but this will definitely demand more financial investments into this project and at the moment spending those resources on that particular area is not feasible. At Southern Kuzbass, in 2018, the expected production rate will be around 10 million tonnes. So this gives us 23 give-or-take million tonnes of coal production in 2018 in total. Coking concentrate. According to the current estimates in 2018, the company will produce about 10 million tonnes of coking concentrate.
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Unidentified Company Representative, [32]
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The next question will be answered by Sergey Rezontov.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [33]
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(foreign language) As to the question about concession. The group considers concession together with Gazprombank and the Russian Railways, RŽD. We are currently working out a model with regards to concession. We hope to be able to present this private concession initiative sometime around the end of the year, most likely November. As to the other question that you had about an external investor, an outside investor, it is also a possibility that the company is considering and still too early to give any comments on the course of negotiations. And as soon as we have some information that we're willing to share, we will do it. Thank you.
(foreign language) And as to the question about the claims from Mr. Varshavsky and his companies. You know that Mechel has challenged the decision, the resolutions of the courts that have been already passed. We're in the process of appeal and the group is not ready to provide any comments on those claims, but we're in the process of repealing those resolutions. (foreign language) As to your last question, whether Mechel owns any shares at Sibuglemet? No, Mechel does not own any shares at Sibuglemet.
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Unidentified Analyst, [34]
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(foreign language) And one other additional question on your negotiations with respect to potential investors into Elga. When can we expect some update from the management? What was -- is there any indication that you can give us with respect to the time horizon?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [35]
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(foreign language) Establishing a concession goes in several stages. As you know, it's a process and it starts with submitting an application soliciting a private concession initiative, and we expect to be able to do this, as I have already explained, around November or at least at the end of the year. And after that, after we have shared this private concession initiative with the Russian government, it will depend on how -- on when the government and its relative ministries pass their opinion on this initiative. So again, as soon as we have the information, we will be able to share it with you.
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Unidentified Analyst, [36]
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(foreign language) Well, perhaps, I did not put my question clearly enough, but my question was about attracting an external investor into Elga (inaudible). It was about -- it was not about the concessions. It was about an investor.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [37]
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(foreign language) You know that when investors consider a potential investment, first, they have to run a due diligence on the facility. So -- and every investor has its own timetable for those activities. So at the moment, we can't comment on the process on the side of the investors. And in any case, we'll be managing those negotiations with investors in parallel with the application for a concession. So hopefully, at the end of this year, early next year, we will have some news to share. Thank you.
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Operator [38]
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We have a question from Boris Sinitsyn with VTB Capital.
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Boris Sinitsyn, VTB Capital, Research Division - Research Analyst [39]
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(foreign language) Another clarifying question with respect to Gazprombank option for Elga. The strike price or the full option, is it fixed or is it market dependent? Does it depend on some market values such as currency exchange rates or coal prices?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [40]
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(foreign language) The option has a fixed relative price. It's denominated in rubles. It depends on the initial price and on capitalized interest. Since it is in rubles, it doesn't depend on foreign exchange rates or international coal prices.
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Operator [41]
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Our next question comes from Dmitry Kumanovsky with LMS Investment Company.
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Dmitry Kumanovsky, LenMontazhStroy Investment Company, Research Division - Head of Research [42]
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(foreign language) I've been analyzing the net cash flow of the company, and it seems to me that the main practice that the company using in removing the profit from the subsidiary companies is through loans from the parent company. Why do you use this practice and not the classical way of the dividends since Mechel owns -- is almost 100% owner of all its subsidiaries? And do you have any plans or intentions to change that practice in the future?
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Unidentified Company Representative, [43]
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Sergey Rezontov will answer.
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [44]
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(foreign language) In redistributing the cash inside the group, we use the arrangements that are approved by the crediting banks. The dividends, since they take the cash out of the company, basically, this practice is prohibited for us by the crediting banks.
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Dmitry Kumanovsky, LenMontazhStroy Investment Company, Research Division - Head of Research [45]
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(foreign language) So this price is not going to change as far as I can understand this loan as Mechel needs cash to pay out its debt?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [46]
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(foreign language) Well, yes, it will depend actually on the -- on Mechel's possibility to get the consent of the crediting banks and on how well we are reducing the debt hold on Mechel in the process. So we do not want to make any forecast for the future because, of course, any changes to this practice will depend on the trading results of the subsidiaries and of Mechel and also in the investments into the subsidiaries.
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Operator [47]
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Our next question comes from [Alex Krasikov] with Bank Solidarnost.
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Unidentified Analyst, [48]
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(foreign language) A question that comes in 2 parts. The first part is about the foreign exchange rate effects in 2017, which proved to be higher than what the analysts expected and amount to approximately RUB 8 billion. What is the current volume of liabilities of Mechel denominated in foreign currency, in particular debt, leasing liabilities and any other, if any? And the second part to the same question, what are the other sources of currency exchange rate effects?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [49]
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(foreign language) As of the 30th of June, the debt of the company in foreign currency amounts to $1,850,000,000 and EUR 370 million, that's in the balance sheet. The leasing liabilities amount to USD 21 million. The foreign currency exchange rate effects in the balance sheet are 95% to 99% depend on the revaluation of the currency denominated liabilities and the exchange rate of U.S. dollars and euro.
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Operator [50]
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Next, we'll hear from Evgenia [Pestrova] with [Aegean].
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Unidentified Analyst, [51]
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(foreign language) What are the company's long-term plans for the next 3 to 5 years with respect to iron ore production and investment into iron ore production, please?
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Oleg V. Korzhov, Mechel PAO - Chairman of the Management Board, CEO, General Director & Director [52]
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(foreign language) At the moment, we do not expect to make any changes into our current iron ore business. We own several deposits of iron ore in the Republic of Sakha. We have a license there. And at the moment, exploration is going on there and we are considering the potential investment into the production of iron ore there. But at the moment, our liabilities, our debt, does not enable us to invest heavily into that particular business. And besides, iron ore markets have always been volatile, so for us at the moment, it is not the key opportunity. We have Korshunovsky mining plant, which is our main asset in this business and our main producer of that commodity. We expect its volumes of production to stay at current levels. Potentially, we could, with investment, increase its production. But again, at the moment, we do not consider this to be feasible. Thank you.
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Operator [53]
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Our next question comes from [Alex Naumov] with VTB Asset Management.
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Unidentified Analyst, [54]
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(foreign language) Another question is on the current status of the restructuring of the debt to the syndicated foreign banks. What's the current status of the process? And what is going on with the claims at the moment?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [55]
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(foreign language) In May 2017, the company met with the crediting banks to discuss the terms of restructuring that could be comparable to the ones that the company managed to obtain with the government-owned banks. The foreign syndicate requested that the company prepare a long-term -- a reviewed long-term financial model for the company to be, again, reviewed by an adviser from the Big 4. In July or August, such a model, a reviewed financial model, was provided to the syndicate and we are currently expecting a reply from them. We hope that -- and we have already agreed to hire lawyers that will support the restructuring when it happens. We expect to get good terms from the syndicate that will enable the company to stabilize its financial performance.
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Unidentified Analyst, [56]
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(foreign language) Is my understanding correct that you suggested to the banks to convert this debt into rubles?
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Sergey Viktorovich Rezontov, Mechel PAO - CFO & Member of Management Board [57]
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(foreign language) Well, since the syndicate is made up of foreign banks or international banks and the investment funds, the debt is to be restructured in dollars. And no one is discussing converting this debt into rubles.
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Operator [58]
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That will conclude the question-and-answer session. I'll turn the conference over to Alexey Lukashov for additional or closing comments.
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Alexey Lukashov, [59]
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Okay. Ladies and gentlemen, thank you for taking the time to join Mechel's First 6 Months 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 [60]
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That does conclude today's conference call. Thank you for your participation. You may now disconnect.
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