Trading update for the first quarter of 2017

Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), today published a trading update for the first quarter ended 31 March 2017.

The information in this press release has been prepared based on preliminary financial results. Intragroup transactions have been eliminated in consolidation. This announcement does not contain sufficient information to constitute a full set of financial statements. The following preliminary results may differ from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The numbers in this press release have not been audited or reviewed.

Metinvest B.V. publishes consolidated financial statements prepared in accordance with IFRS for the six months ending 30 June and for the year ending 31 December.

Due to rounding, numbers presented throughout this release may not add up precisely to the totals provided and percentages may not precisely reflect absolute figures.

FINANCIAL HIGHLIGHTS 

Revenues

In 1Q 2017, Metinvest’s consolidated revenues increased by 44% y-o-y to US$1,853 mn. This was primarily due to a recovery in global prices of steel, iron ore and coal products, after they hit their lowest over the last several years in 1Q 2016.

Revenues in Ukraine amounted to US$462 mn in 1Q 2017, up 65% y-o-y, primarily due to higher selling prices, as well as greater sales volumes of finished steel products. This was partly offset by lower sales volumes of coke and iron ore products. The share of Ukraine in consolidated revenues increased by 3 pp y-o-y to 25%.

International sales accounted for 75% of consolidated revenues in 1Q 2017. The share of Europe reached 37%, up 2 pp y-o-y, following a 53% increase in sales to the region amid higher sales volumes of slabs (+48 kt) and iron ore products (+653 kt), as well as a rise in selling prices of all products. Although sales to the Middle East and North Africa (MENA) rose by 35% y-o-y amid greater sales volumes of long products and higher selling prices, the proportion of that region in consolidated revenues decreased by 2 pp y-o-y to 16% due to comparatively higher growth in sales to other markets. The share of sales to Southeast Asia decreased by 5 pp y-o-y to 8%, as sales to that region declined by 8% y-o-y, mainly due to lower shipments of iron ore products (-2,241 kt). The share of North America remained flat y-o-y at 4%, while sales to that region increased by 24% y-o-y, primarily due to greater sales volumes of finished steel products, as well as higher selling prices of pig iron and long products. The share of the CIS (ex Ukraine) climbed by 2 pp y-o-y to 9%, driven by a 76% y-o-y rise in sales to the region amid higher selling prices and sales volumes of flat products.

Metallurgical segment

The Metallurgical segment generates revenues from sales of pig iron, steel and coke products and services. In 1Q 2017, its top line rose by 46% y-o-y to US$1,473 mn, driven by higher selling prices of steel and coke products, as well as greater demand for slabs. As such, sales of flat products rose by US$321 mn, slabs by US$50 mn, long products by US$49 mn, coke by US$28 mn and other products and services by US$27 mn. This was partly offset by lower sales of square billets of US$17 mn. The share of finished products in the steel sales mix rose to 81% in 1Q 2017, up 5 pp y-o-y, due to lower sales of pig iron and square billets. In 1Q 2017, the segment accounted for 79% of external sales, flat y-o-y.

Pig iron
In 1Q 2017, sales of pig iron increased by 5% y-o-y to US$68 mn due to higher selling prices, while sales volumes decreased by 38% y-o-y (or 129 kt) to 210 kt, driven by lower overall production (81 kt) and re-sales of Zaporizhstal’s pig iron (50 kt), negligibly offset by destocking. Given the lower available volumes and weaker market demand, sales to MENA, Europe and Southeast Asia decreased by 80 kt, 49 kt and 24 kt, respectively. Sales volumes to North America and Ukraine remained largely unchanged, while those to other regions increased by 25 kt.

Slabs 
In 1Q 2017, sales of slabs doubled y-o-y to US$94 mn, driven by a surge in the average selling price (+86 pp) and a 30% rise in sales volumes. Volumes increased by 51 kt y-o-y to 222 kt amid greater demand and overall production. As such, sales to Europe, Southeast Asia and Ukraine rose by 48 kt, 16 kt and 5 kt, respectively. At the same time, volumes to MENA decreased by 18 kt, mainly due to lower sales to Turkey.

Square billets 
In 1Q 2017, sales of square billets decreased by 38% y-o-y to US$27 mn, driven by a drop in sales volumes (-58 pp), which was partly compensated by a higher average selling price (+20 pp). Volumes declined following the shutdown of Yenakiieve Steel in February 2017, given the rail blockade in the zone between the territory controlled by Ukraine and the non-controlled area, and the subsequent loss of control over the enterprise from 15 March 2017. This resulted in a decline in sales to all markets. Available volumes were distributed to MENA to fulfil orders of key clients.

Flat products
In 1Q 2017, sales of flat products increased by 54% y-o-y to US$914 mn, due to a hike in the average selling price. Total volumes remained flat y-o-y at 1,700 kt, while re-sales of Zaporizhstal’s flat products dropped by 107 kt y-o-y to 619 kt, reducing their share in total sales volumes by 7 pp y-o-y to 36% in 1Q 2017. Sales volumes were redistributed to key regions depending on where the margins were greatest.

Long products 
In 1Q 2017, sales of long products rose by 33% y-o-y to US$195 mn. This was caused by a higher average selling price (+38 pp), partly offset by lower sales volumes (-5 pp) amid lower production and the loss of control over Yenakiieve Steel. Meanwhile, volumes were allocated between markets to maximise margin.

Coke
In 1Q 2017, sales of coke doubled y-o-y to US$64 mn, reflecting a similar move in the average selling price. This was partly offset by lower sales volumes, which contracted by 61 kt y-o-y to 210 kt, driven by lower sales in Ukraine.

Mining segment

The Mining segment generates revenues from sales of iron ore, coal and other products and services. In 1Q 2017, its top line increased by 38% y-o-y to US$380 mn, driven mainly by higher iron ore and coal selling prices, which followed global benchmarks. This was partly offset by a fall in sales volumes, caused by lower overall production of iron ore and coal products, as well as greater intragroup consumption. As a result, external sales of pellets rose by US$66 mn, iron ore concentrate by US$18 mn and other products and services by US$30 mn, while those of coking coal concentrate dropped by US$9 mn. In 1Q 2017, the segment accounted for 21% of external sales, flat y-o-y.

Iron ore concentrate
In 1Q 2017, sales of merchant iron ore concentrate increased by 12% y-o-y to US$173 mn, mainly due to a surge in the average selling price. The latter followed the benchmark [1], which rose by 76% y-o-y to an average of US$86/t in 1Q 2017, up from US$49/t a year earlier. At the same time, total sales volumes dropped by 50% y-o-y (or 2,190 kt) to 2,173 kt, driven by a y-o-y production decline and an increase in inventories in 1Q 2017 compared with destocking in 1Q 2016. Given the premiums in Europe, one of Metinvest’s key markets for iron ore, sales to that region increased by 321 kt. There was a decline in sales volumes in Ukraine (-362 kt), amid weaker demand there. The remaining available volumes were sold to Southeast Asia, although volumes to that region were down 2,148 kt y-o-y.

Pellets
In 1Q 2017, sales of pellets almost doubled y-o-y to US$139 mn, following a hike in the average selling price. Meanwhile, sales volumes contracted by 13% y-o-y (or 169 kt) to 1,170 kt amid lower production. Sales to Europe rose by 333 kt, driven by stronger demand and a favourable market environment. Sales in Ukraine decreased by 395 kt due to lower sales to local customers. The balance was sold to Southeast Asia, although volumes to that region were down y-o-y.

Coking coal concentrate
In 1Q 2017, sales of coking coal decreased by 26% y-o-y to US$27 mn amid a 45% y-o-y drop in volumes. Sales declined by 185 kt y-o-y to 231 kt in 1Q 2017, driven by lower production and higher internal consumption. This resulted in lower sales in North America.

EBITDA

In 1Q 2017, Metinvest’s consolidated EBITDA soared by US$284 mn y-o-y to US$402 mn, mainly amid a surge of US$363 mn in the Mining segment’s contribution. In addition, the Metallurgical segment’s EBITDA increased by US$31 mn. Corporate overheads and eliminations rose by US$110 mn, mainly due to higher eliminations.

The increase in consolidated EBITDA was primarily attributable to the following factors:

• sales price growth (US$667 mn);
• greater contributions from the JVs, namely Southern GOK (US$63 mn) and Zaporizhstal (US$26 mn);
• an effect from hryvnia devaluation of US$33 mn, as the USD/UAH exchange rate averaged 27.24 in 1Q 2017, compared with 25.80 in 1Q 2016.

These factors were partly offset by:

• higher cost of raw materials (US$240 mn), primarily due to increased market prices of coal, coke, scrap and iron ore materials, as well as greater consumption of purchased scrap, ferroalloys and third-party coke;
• lower sales volumes (US$100 mn);
• impairment of inventories of assets seized in March 2017 (US$87 mn);
• greater logistics costs (US$38 mn), mainly due to additional coal purchases, rising freight tariffs and higher transportation costs, directly attributable to acquisitions of materials used in the production process;
• more spending on energy (US$29 mn), due to higher natural gas prices and electricity tariffs, as well as greater consumption of fuel and natural gas;
• increased other costs (US$11 mn), mainly due to higher purchase prices of coal and Zaporizhstal’s steel goods for resale.

In 1Q 2017, the Group’s consolidated EBITDA margin increased by 13 pp y-o-y to 22%. The EBITDA margin rose by 28 pp y-o-y to 44% in the Mining segment and by 1 pp y-o-y to 6% in the Metallurgical segment.

Debt management

During 1Q 2017, Metinvest successfully concluded the restructuring of 94% of its debt portfolio, totalling US$2.8 bn and including US$1.2 bn in bonds, US$1.1 bn in pre-export finance facilities, US$0.4 bn in shareholder loans[2] and US$0.1 bn in seller notes.

At the end of 1Q 2017, total debt stood at US$2,951 mn, net debt at US$2,736 mn and the cash balance at US$215 mn.

Capital expenditure

In 1Q 2017, Metinvest’s capital expenditure almost doubled y-o-y to US$103 mn[3], due to a need to compensate for underinvestment in CAPEX amid liquidity constraints in previous years. In 1Q 2017, the split between maintenance and expansion projects was 89% to 11% (58% to 42% in 1Q 2016). The Mining segment accounted for 71% of capital expenditure (46% in 1Q 2016) and the Metallurgical segment for 28% (52% in 1Q 2016).

Metallurgical segment

Major investment projects at Ilyich Steel include the construction of continuous casting machine no. 4 and the ongoing reconstruction of the sinter plant. At Azovstal, construction of the PCI unit at blast furnace no. 2 continues and its launch is expected in September 2017.

Mining segment 

Several projects are ongoing in the Mining segment. These include the construction of deep-quarry crusher and conveyor systems at Northern GOK (the second facility for rock transportation at the Pervomaisky quarry) and Ingulets GOK (Vostochny conveyor line only), as well as the replacement of gas cleaning units on the Lurgi 552-B pelletising machine at Northern GOK.