Nine Months 2017 Mechel PAO Earnings Call

Nov 28, 2017 AM EST
MTLR.MZ - Mechel PAO
Nine Months 2017 Mechel PAO Earnings Call
Nov 28, 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 Krasnojenov
      Joint Stock Company Alfa-Bank, Research Division - Head of Research and Senior M&M Analyst of Moscow 
   *  Denis Vorchik
      URALSIB Capital LLC, Research Division - Analyst
   *  Dmitriy Markov
   *  Nikolay Sosnovskiy

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Presentation
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Operator   [1]
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 Good day, and welcome to the Mechel Reports the 9-month 2017 Financial Results Call. Today's conference is being recorded.

 At this time, I'd like to turn the conference over to Mr. Alexey Lukashov, Director, Investor. 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 9 months 2017 results, which we reported today.

 With us, from management team 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 the call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the safe harbor provision 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 the projections or forward-looking statements.

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

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

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 Oleg V. Korzhov,  Mechel PAO - Chairman of the Management Board, CEO, General Director & Director   [3]
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 (foreign language) Good afternoon and good morning, ladies and gentlemen. We are glad to welcome you to the conference call for the company's financial results of the first 9 months of 2017.

 (foreign language) For our company, these 9 months' financial results were an improvement year-on-year. Consolidated revenue went up by 13%, reaching RUB 223 billion while EBITDA went up by 42% and reached RUB 59 billion. Net profit attributable to equity shareholders of Mechel nearly doubled to RUB 11 billion. The third quarter's results were also better than those of the second quarter with revenue up 2% and EBITDA up 9%. In the third quarter, we netted RUB 6 billion of profit, which is more than the net profit over the first half of this year. (foreign language) These good results reflect the favorable price situation in metallurgical coal and steel markets. After a period of high volatility early in the year, the price for hard coking coal reached its minimum of USD 140 per tonne in June and began growing. By late August, prices topped $200 and remained on that level almost until the end of the quarter. After a brief correction in October, in early November, prices were again on the rise, reaching once more the level of $200 per tonne. As a result, the average price level in the third quarter was comparable to that of the second quarter. With this, the mining division's EBITDA over this year's 9 months nearly doubled year-on-year.

 (foreign language) Steel markets looked better in the third quarter than in the first half of the year. Billet prices were growing as North African states increased their demand and Russia's domestic rebar market also demonstrated positive price dynamics. Prices for rolls of small unit sizes grew particularly strong due to shortages as producers preferred the more economically efficient export shipments of semifinished products. By late September, global markets of raw materials, semifinished products and rolls began to weaken followed by the domestic rebar markets.

 (foreign language) Despite the financial results' overall positive dynamics, we have to admit that their growth was restrained by a decrease in coal production and sales as well as high production costs year-on-year. We have already mentioned that we are implementing a sweeping program of overburden mining and acquisition of new mining machinery. This process is still underway with new excavators, heavy-duty trucks and equipment arriving at our facilities and being launched as planned. We pay a lot of attention to repairs and restoring equipment as well as preparing reserves for future mining. In order to speed up the increase of our overburden mining volumes, we brought in several contractors with a mining fleet of their own. In the third and fourth quarter, we can already see the results of these efforts, but a more marked increase of mining volumes will follow in 2018.

 (foreign language) In the steel division, we focused our efforts on repairing our production facilities, mustering new types of products and increasing environmental safety at our plants. This year, we conducted a series of repairs on our major facilities at Chelyabinsk Metallurgical Plant; a sinter plant, 2 blast furnaces, 3 converters, 3 concasters and other equipment have undergone a plant general overhaul. At Izhstal, 2 furnaces and a concaster were overhauled.

 (foreign language) Chelyabinsk Metallurgical Plant expanded its product range for the European market. Certificates of compliance were awarded to 2 new types of H-beams and 2 new rail profiles produced at the universal rolling mill. The welded beam workshop was also launched, which will enable the plant to expand its construction product range. In October and November, we made our first rail shipments to Eurasian Economic Union states, Belarus and Kazakhstan. Next year, we plan to expand sales into those and other new markets. Apart from that, Chelyabinsk Metallurgical Plant passed compliance audit for production of reinforcement steel for the European market. Rolls production at Chelyabinsk Metallurgical Plant's universal rolling mill over these 9 months grew by 1/3 year-on-year.

 (foreign language) I would separately would like to note that last week, Mechel-Coke, which supplies Chelyabinsk Metallurgical Plant with raw materials, launched an upgraded benzene facility. The project was implemented as part of Russia's environment year. Modernization of the cooler units using state-of-the-art technologies enabled Mechel-Coke to completely get rid of a major source of air pollution. (foreign language) In this way, implementation of our programs aimed at the steel division's development together with normalization of prices for coal and iron ore yield results. Even though the division's financial performance over these 9 months did not improve over the same period last year when costs of metallurgical raw materials were at their historical lows, the third quarter's EBITDA more than doubled quarter-on-quarter.

 And now I would like to give the floor to our Chief Financial Officer, Sergey Rezontov, who will give more details on the financial performance 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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 Good afternoon, ladies and gentlemen. I would like to welcome you to our conference call to present financial results of Mechel group for 9 months 2017. Thank you very much, Oleg, for your brief overview of the market environment and the introduction.

 And now I want to switch to a more detailed analysis of specific trends on our core markets and our latest consolidated financial results of the group as a whole and in segments. After my presentation, we will welcome your questions and we will be delighted to answer them. Slides that accompany my presentation are available on the webpage, mechel.com. Traditionally, I will start with a brief market overview.

 Prices on the coal market are dependent on stockpile levels, which plunged across the supply chain in the second quarter of 2017 before recovering during the second half of the year. Taking into account this factor as well as the relatively scarcity of premium quality coal, the market prices them with a premium -- to the high range hard coking coal and semi-soft coals. After a record level of coking coal prices in the fourth quarter 2016, we saw general trends take a downturn as well as an up-and-down rally with a peak over $300 per tonne back in April 2017 and lowest level of $140 per tonne in June 2017. A relatively stable -- stability came to the coking coal market only in third quarter 2017 when after plummeting to the level of $140 in June 2017, the prices rebounded in -- $200 in September. Between August and today, coal prices fluctuated in the range of $117 to $110 (sic) [$170 to $210] per tonne. Since the second quarter 2017, the quarterly benchmark was replaced by a so-called "reference price," calculated as the average spot index over 3 months. During the last 2 quarters, it was fixed at a level of $194 in the second quarter and $170 in the third quarter.

 Analysts project that stockpile should drop again in the second quarter of 2018 due to the annual factor as Chinese steel mills ramp up in anticipation of higher consumption activity and Australian producers is affected by the wet season as well as labor strikes, a factor that hadn't been fully resolved before making a full recovery in the second half of the year. Nowadays, we again see pressure on the prices and the cycle was a trend of growing prices. Prices in our long steel products, including rebar on Russian domestic market traditionally depend on the exports of billet FOB Black Sea prices as well as currency exchange rates. In July and September, billet prices demonstrated fast growth due to the high demand in the steel from North Africa. Since May, Egypt has improved temporary [incidental] duty on the rebar inputs from China, Tokyo and Ukraine until December 2017. All these factors resulted in billet prices skyrocketing this year up to $525, $530 FOB Black Sea per tonne in September. The average for black sea billet price increased in the third quarter by 22% up to $480 per tonne year-on-year.

 The domestic market followed these dynamics and average rebar prices moved from RUB 27.9000 in the first quarter to RUB 25.3000 in the second quarter and back to RUB 29.3000 in the third quarter. Average quarter sales prices for rebar were 15% higher than in previous quarter. Average rebar prices on the domestic market for these 9 months of the year increased 6.1% year-on-year.

 Comparing the environment on the financial markets, we can point out that the ruble appreciation against dollar was 3.2% in the third quarter 2017 compared to the second quarter and amounted to RUB 59 via RUB 57 in the previous quarter. And the average ruble and dollar exchange rate during the 9 months last year was RUB 68.4 comparing to RUB 58.4 this year, which is approximately 15% depreciation in the currency.

 Cost of borrowings in our domestic market has gone down since the beginning of the year. The Russian Central Bank reviewed the key rate 3 times to the level of 8.25% per annum.

 Mining segment. The views of the benchmark prices in the third quarter 2017 comparing to the second quarter was compensated by the currency depreciation, but overall financial results of the mining segment for the quarter has slightly decreased compared to the previous quarter due to the high expenses, which were mostly due to the intensified stripping works on all our mines. The segment's operation profit decreased by 9% quarter-on-quarter and amounted to RUB 10.9 billion. Revenue from sale of coking coal products in the 9 months 2017 increased by 49% period-on-period, representing a 45% share of the mining segment's total revenue. Coking coal sales in the third quarter decreased by 3% quarter-on-quarter as a result of interruption of railcar supply coming from the rolling stock shortage at Russian Railways as well as cyclone on the Far East, which frozen transportation for a couple of weeks in August.

 Comparing 9-month period's financial figures, we must note that superior results of the mining segment was driven by the favorable global coal market conditions and positive price dynamics. The mining segment's revenue from sale to the third parties went up by 24% to RUB 74.7 billion.

 Operation profits grew 2.5x compared to the same period last year to RUB 40.1 billion. The mining segment's EBITDA ramped up to RUB 47.3 billion, representing a 45 -- 44% EBITDA margin compared to almost RUB 24 billion EBITDA last year and 29% EBITDA margin.

 Our efforts to restore stripping and production volumes at our mines naturally resulted in their cash costs increase. Thus, cash costs in Southern Kuzbass grew in the third quarter by 9% quarter-on-quarter to 200 -- RUB 2,500 per tonne. At Korshunov's mine, the cost -- the cash costs grew up 10% to RUB 2,200 per tonne. Cash costs at Yakutugol stabilized at a level of RUB 930 per tonne.

 The share of our sales on Asian markets has increased from 53% previous year to 64% in 9 months 2017. The Chinese share of 32% compared to 24% for the same period last year. This was a result of Mechel's consistent efforts to ramp up sales volumes to the Asian, in particular, Chinese market. At the Elga Coal Deposit over 9 months of this year, we have mined 3 million tonnes of coal, with coking coal accounting for 81% over the total amount. We are proud to say that export sales from Elga Coal Complex doubled due to the production volume increase. In addition, using the washing capacities of the Southern Kuzbass in 9 months 2017, we have enriched about 700,000 tonnes of coal, which give us a total of approximately 2 million tonnes of coal from Elga. [Out-of-reach] export and domestic market sales are almost equal. Elga is operationally profitable for the group and brings additional cash flow.

 Steel segment. In this year, third quarter, the steel segment demonstrates a sound improvement of its financial results. Increase of prices for the final products and decrease of the cost on raw materials enabled the steel segment again to get additional -- to get EBITDA of RUB 6.2 billion over the last quarter, which is similar to the EBITDA amount through the first 6 months of the year. Our strategy of increasing our share of high-margin products led to the steel segment's revenue growth in the 9 months 2017 by 9% period-on-period to RUB 129 billion. At the same time, operation profit decreased by 32% year-on-year as raw material costs were much higher in the first half of the year led to the low EBITDA margin. The steel segment's EBITDA for the 9 months amounted to RUB 12.2 billion, which is lower by 23% than in the same period last year and resulted in EBITDA margin of 9%. Compared to the second quarter 2017, the steel segment's EBITDA grew 2.4x to RUB 6.1 billion. As -- at the same time, the EBITDA margin in the second quarter was 13.2%. Over these 9 months, the steel segment increased its sales volumes of higher value-added products, such as flat steel, stampings and long steel products, including rebar and wire rods by 28%, 25% and 16%, respectively. Cash costs for rebar and wire rod in the third quarter 2017 fell by 6% and 8%, respectively, due to the lower cost of iron ore. Cash costs of carbon flat products and billets remained flat quarter-on-quarter. The share of our sales on Russian market grew from 70% to 75% in 9 months 2017 as the domestic market margin profit from rebar sales was higher than the export of billets. The average realized domestic FCA price for rebar in the third quarter went up 16% quarter-on-quarter to RUB 28.4000 per tonne, of hardware by 5%.

 For ferrosilicon on average -- on an average basis, domestic [and sales] price by 7% to RUB 63,000 per tonne while the sales prices for the carbon long and flat products remained flat. The universal rolling mill produced a record 90.8000 tonnes of rails in the third quarter and up 29% quarter-on-quarter. This resulted in carbon long steel products revenue share reached up to 28% of the total steel segment revenue in the third quarter 2017. Total production at the universal rolling mill in the third quarter has reached 170,000 tonnes, representing a 9% growth compared to the previous quarter. In third quarter 2017, Mechel sold about 90% of its rails to the Russian Railways. In September, Mechel Group won a tender on supply of 35,000 tonnes of rails for construction in the third cycle in Moscow, which will become the second-largest railway cycle of Moscow underground.

 For the consolidated results, Mechel continues to report strong financial results and improvement of its performance quarter-on-quarter. Group's operation profit in third quarter has grown 25% to RUB 15.7 billion and EBITDA has grown 8.6% to RUB 18.9 billion compared with the second quarter. Consolidated revenue for 9 months 2017 grew by 13% to RUB 222 billion, driven by higher coal prices and better product mix in the steel segment. Gross profit increased by 16% from RUB 88 billion to RUB 102 billion. Operating profit increased even higher by 61% from RUB 28.8 billion to RUB 46.4 billion. That is also a result of efforts dedicated to decreasing of the commercial administrative expenses leading to savings of RUB 2.2 billion. EBITDA total for the first 9 months of 2017 are RUB 59 billion, increased by 42% comparing with the previous 6 -- previous 9 months of 2016. EBITDA margin remained at a high level of approximately 27%. Group's net profit attributed to equity shareholders grew twofolds and amounted to RUB 11 billion.

 Improved financial performance of the group this year also supported extensive increase of the free cash flow available for financing of our operation expenses, investment and payment in our -- under our financial obligations. Cash flow from operation activity for 9 months this year amounted to RUB 45.5 billion, which is approximately 39% higher than the previous year. At the same time, cash flow from operation activity in the third quarter this year has decreased comparing with the second quarter from RUB 17.6 billion to RUB 13.8 billion due to the decrease and repayment of trade and other payables by RUB 3.4 billion, which is mainly related to the repayment of our overdue debts to the [gas] supply and [our tech] and other from the long-term financing receipt from the Gazprombank. The group has managed to restore and maintain a stable and positive level of working capital since this year.

 As we said before, we keep increasing our investment in our operations. Group's capital expenditure, including lease payments for 9 months, amounted to RUB 7.6 billion compared to RUB 4.7 billion for the same period last year. Our finance cost has decreased from RUB 43 billion to RUB 36 billion period-on-period, following decrease on the average interest rate under our debts from 10% to 8.7%. Most of our ruble debts with Russian banks and bonds are linked to the key Central Bank rate. Therefore, its decrease led to the fall off of our interest expenses.

 Some of paid interest due in 9 months 2017 amounted to RUB 25 billion and decreased by 4% compared with the previous year since the paid portion of interest remained almost unchanged at the level of 7.9% per annum. The group's debt principal amounted to RUB 399 billion following amortization and regulation of dollar-denominated debt in our accounts due to depreciation of ruble. Structure of our debt remains unchanged where we have 67% of ruble-denominated debt with the remaining portion of currency-denominated debt. We continue restructuring of our debts, and in September 2017, we completed restructuring of Elga debt to Vnesheconombank. We continue to develop on restructuring of fixed debt and the ECA-covered debts. With strong financial results for the last quarter, EBITDA for the last 12 calendar months amounted to RUB 83.7 billion, which supports maintaining of stable net debt-to-EBITDA ratio at the level of 5.1, calculated as a principal debt plus lease and less cash to EBITDA.

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

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 Alexey Lukashov,    [5]
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 Thank you. We will now take questions. (Operator Instructions)

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) We'll go first to Nikolay Sosnovskiy with Prosperity Capital Management.

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 Nikolay Sosnovskiy,    [2]
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 I've got a few questions. First one, on production numbers. Basically, we are almost at the year-end. Can you please somehow -- mainly the production targets for this year for coking coal concentrate [BCI and interested] in steam coal? And also, given that the budget for next year is likely almost ready, your targets for 2018? This is my first question. (foreign language)

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 Alexey Lukashov,    [3]
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 The 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) So considering the results of this year, we are making plans for the mining division to produce about 21 million tonnes of coal, out of which we plan to have Kuzbass to produce about 8.5 million; Yakutugol, 8.5 million; and Elga Coal Complex, at 4,300,000. For next year, we are making plans for the production volumes, which will be greater than what we did this year. We plan that they would amount to approximately 23 million, 23.5 million tonnes, including -- we plan to increase the output from South Kuzbass by about 1 million and in total that would reach up to 9.5 million tonnes. Yakutugol shall remain at approximately the same level with maybe a little bit more, so we'll end up having 8.5 there, and then we shall see. And from Elga, we plan to produce 5,300,000 tonnes of coal. So now if we are to consider the structure of what we are going to ship, having produced this amount of coal next year, we plan to ship approximately 20 million tonnes, out of which the coking concentrate will be at 9 million; the thermal coal at approximately 7.5 million tonnes; and anthracite and PCIs will be at 3.5 million tonnes. So if you would need any more itemization, I would be ready to say.

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 Nikolay Sosnovskiy,    [5]
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 So the first question is very clear. And my second question is basically on CapEx, kind of linked to the first question. I noticed that in third quarter, your CapEx has declined quite materially from like almost $40 million to below $20 million in third quarter. So what are your expectations for the fourth quarter? And if CapEx remains the same low, can it somehow negatively affect production plans for next year? Because obviously, to increase volumes, you need more equipment. (foreign language)

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 Alexey Lukashov,    [6]
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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   [7]
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 (foreign language) Not everything is so pathetic and saddening amongst the figures that you are quoting. So when I would talk about CapEx side, I would categorize it into 2 parts: the cost that we usually do for the maintenance CapEx and investments. So this year -- and I would rather begin with 2016 because for maintenance investment, the company spent RUB 2 billion, so whenever we're planning for the budget of next year, we're planning and we were saying that the management's CapEx would amount to RUB 6,400,000,000. And today, we are aiming for the maintenance CapEx level worth about 200 -- RUB 2,700,000,000. But at the same time, it is worthwhile noting that quite a big number of equipment that we are purchasing, we are purchasing not to spending money, but we lease it. So whenever we talk about the CapEx spending here, we naturally do it this way. So this year, during the 9 months, we acquired leased equipment worth RUB 2,700,000,000 on top of the RUB 2,700,000,000 that I already mentioned. So in this way, in Q4 for about additional RUB 1 billion, we are going to lease equipment. And so considering the year-end, we would plan to have our maintenance cost in terms of leasing would be at about RUB 6,300,000,000 against the planned RUB 6,400,000,000. So the maintenance CapEx we maintain exactly at the level that we originally planned. But at the same time, we'd like to note that this year, again, with a view to the next year, we have slightly altered our approaches to acquiring equipment, considering the fact that we don't have sufficient resources of our own to finance our CapEx with money. And specifically, when acquiring equipment and leasing equipment is where we do encounter certain limitations from the banks. So today, we are actively engaged in bringing in contractors for stripping and mining operations. In the case of South Kuzbass this year, we entered into a contract to have an outside contractor, which is transporting the strip rock. And this contractor came with this 6 new [galazes] into South Kuzbass. And next year, this contract will continue because it's a long-term contract. As far as Yakutugol is concerned, as of right now, we already have 5 units of equipment operational and 5 trucks. And so next year, we're currently in negotiations with a contractor, which will bring in 2 excavators, 2 drilling rigs and about 17 trucks. So -- and as far as the caution of mining enrichment plant where we have certain issues in as far as the stripping operations are concerned, we're currently in negotiation to -- negotiating to a counterparty, which will bring in 10 new galazes and will repair the 7 of the last trucks which we have because they need repair, and consequently, do not operate. So apart from what I've just described, which is the maintenance CapEx and in view of the amount of equipment that we are going to purchase and exactly as we planned them as of the third quarter, would considerably increase our capacity to produce and to strip by having sourced capacity brought in, and this is the kind of work which will continue next year. Similarly, I would like to note that as the result of various estimations, the price for the services that we pay for the outside contractors as well as the cost of -- if we were to do this whole work ourselves, it would be comparable. So this kind of rationale enables us to be able to avoid having the funds diverted away from what we currently have in mind in terms of our settlement with the banks and our obligations. (foreign language) And I would like to additionally comment, not about the maintenance CapEx, but specifically on our investment projects where we have some considerable money not, I would say, saved but we were able to reduce this fund. Because in our annual budget for investment projects, we were planning to spend RUB 6 billion, but we currently see that we are in a position to spend about RUB 2 billion. But this reduction of funding which we see evolving as an actuality is conditioned by certain objectives because this year, we planned 3 major projects, which was the overhaul of the blaster furnace at the -- in the Chelyabinsk, then changing for a new one of the third or the last one of the 3 converters and upgrading a furnace at the Bratsk Ferroalloy facility. And so these are the 3 major projects, which were sitting in the original amount. As a result, we made a decision considering the technical status of all these 3 facilities and again from the point of view of optimizing our cash flow, we made a decision to postpone funding for these project until next year. And in our next year's plans, we're planning to put on hold the renovation of the blast furnace and 3 converters. We will be doing that in the beginning of the second quarter and we were planning to stop it in the second quarter anyway. But this did not affect our operational performance in any way. And I believe that on the contrary, we did the right thing because without changing these equipment, we have them operating exactly with the same kind of performance as they would have been changed. So we were able to maintain our obligations and keep up the production statistics as originally planned.

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 Nikolay Sosnovskiy,    [8]
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 Okay. That's very clear. And my last question on the Bratsk F facility negotiation, can you please update what's the status of these negotiations with creditors? (foreign language)

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 Unidentified Company Representative,    [9]
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 (foreign language) So the structure of the syndicate has somewhat changed because some of the banks exited it and sold their share in this syndicated project, while currently we are in negotiations with the banks which bought out their participation in this syndicated loan and more than half of lenders already support the conditions for restructuring, which we have proposed and which we continue talking to them about. We are continuing to talk to the remaining lenders, trying to pull in the required number into this syndicated loan project in order to restructure it according to originally planned timing and time frame.

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Operator   [10]
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 We'll go next to Boris Krasnojenov with Alfa-Bank.

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 Boris Krasnojenov,  Joint Stock Company Alfa-Bank, Research Division - Head of Research and Senior M&M Analyst of Moscow    [11]
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 This is Boris Krasnojenov from Alfa-Bank. Two questions from my side. The first question, just for clarification. If I understood correctly, you're forecasting for this year 8 million tonnes of coking coal production. I was looking at your 9-month numbers. Is it possible to derive a conclusion that sales in the fourth quarter are going to -- of coking coal going to exceed 2 million tonnes and basically get back to the level that we've seen in the second quarter? So that's the first question, just for clarification. And the second question, you'd have a -- in presentation, you highlighted the growth of sales to China. So it's roughly 1/3 of your sales. Now could you specify what kind of price benchmarks for coking coal sales and PCI sales you used for Chinese customers? Do you derive the price from the Australian benchmark? Or you used some local, say, yuan-denominated domestic Chinese prices? (foreign language)

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 Alexey Lukashov,    [12]
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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   [13]
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 (foreign language) Positive, yes, is my answer to the first question because we plan that in the fourth quarter, we will produce about 2 million tonnes in terms of what we'll ship in the coking concentrate coal. (foreign language) And as far as the second question is concerned, which is pricing for our shipment to China, the prices in China are being set based on 2, and there's 2 indicators. First, the coking coals and the PCIs, which China buys FOB and which are shipped into China from other countries as well as the domestic prices for similar coals, which are produced in China. In any case when price is being defined, it comes from certain mix from both prices. So when considering and contracting our prices for China, we use both indices in our negotiations to set our Chinese prices.

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Operator   [14]
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 And we go next to Denis Vorchik with URALSIB.

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 Denis Vorchik,  URALSIB Capital LLC, Research Division - Analyst   [15]
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 It's Denis Vorchik from URALSIB. So one question from my side, please. So last week, some media reported that minorities of Korshunovsky mining plant filed some lawsuits regarding some loans to the holding company. So are you aware of any claims that minorities submitted to -- on this case to Security and Exchange Commission in the U.S.? So could you comment on this? And in particular, do you consider making any provisions in Mechel financial statements on this claim? (foreign language)

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 Alexey Lukashov,    [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) The claims which are submitted by minorities are related to the loans which the Korshunov facility issued to the companies in the group. And we stated on more than one occasion that this particular money, which was made available to the group, will be repaid to the Korshunov facility in order to fund the investment program of that company. With respect to setting an impairment, we are not currently planning to have it with respect to these lawsuits.

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Operator   [18]
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 We'll go next to Dmitriy Markov with LMS Investment Company.

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 Dmitriy Markov,    [19]
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 (foreign language) LMS Investment Company raises a question. There are 2 points. The first one, are there any plans with respect to the treasury preferred stock? Are you at all planning to sell it? And the second question, why in Mechel's subsidiaries as such at Korshunov, [mining instruments] enrichment plant and similar others, why don't you start paying dividends instead of stripping money from these companies in favor of Mechel? Because in this [K], Mechel's money will, in this form, will be reputable and there wouldn't be any interest that one will have to paid and minorities would be definitely happy to receive some dividends.

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 Alexey Lukashov,    [20]
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 Sergey Rezontov will answer.

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 Sergey Viktorovich Rezontov,  Mechel PAO - CFO & Member of Management Board   [21]
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 (foreign language) With respect to the first question of the selling the treasury preferred stock, we can say that currently, company is not entertaining any plans to divest from this stock. (foreign language) And with respect to the second question, in the course of 2017 Mechel subsidiary companies and some other subsidiaries have been paying dividends, including -- and some of the dividends were paid to minorities. However, with respect to the companies that you mentioned, and not only those, we -- we're not planning to pay dividends because the money that the company has had were planned to be allocated into the investment projects that these companies were to undertake.

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 Dmitriy Markov,    [22]
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 (foreign language) But are you -- possibly have any plans to start paying dividends after the investment projects are completed?

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 Sergey Viktorovich Rezontov,  Mechel PAO - CFO & Member of Management Board   [23]
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 (foreign language) We will definitely be considering this issue in the future and depending upon the guidance given by the Board of Directors and based on our financial performance in the future.

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Operator   [24]
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 We have no further questions in the queue. (Operator Instructions) And we have no questions at this time.

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 Alexey Lukashov,    [25]
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 Ladies and gentlemen, thank you for taking the time to join Mechel's 9-Month 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   [26]
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 And that does conclude today's conference. Thank you for your participation. You may now disconnect.




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