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Trading update for the first nine months of 2016

9 December 2016

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 nine months ended 30 September 2016.


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

(US$ million)

9M 2016

9M 2015

Change

Revenues

4,568

5,397

-15%

Adjusted EBITDA 1

989

816

21%

margin

22%

15%

7 pp

CAPEX 2

199

191

4%

(US$ million)

30 Sep 2016

31 Dec 2015

Change

Total debt

2,907

2,946

-1%

Cash and cash equivalents 3

239

180

33%

Net debt 4

2,668

2,766

-4%


1. Adjusted EBITDA is calculated as earnings before income tax, financial income and costs, depreciation and amortisation, impairment and devaluation of property, plant and equipment, foreign exchange gains and losses (starting from 1 January 2015), the share of results of associates and other expenses that the management considers non-core, plus the share in EBITDA of joint ventures. We will refer to adjusted EBITDA as EBITDA throughout this release.

2. CAPEX is calculated on an accrual basis (recognition).

3. Cash and cash equivalents do not include blocked cash for cash collateral under issued letters of credit and irrevocable bank guarantees and include cash blocked for foreign currency purchases.

4. Net debt is calculated as the sum of long-term and short-term loans and borrowings and seller notes less cash and cash equivalents.

 

Revenues

In 9M 2016, Metinvest’s consolidated revenues decreased by 15% y-o-y to US$4,568 million. This was primarily due to lower selling prices of steel, iron ore and coal products, which hit their lowest over the last 10 years in 1Q 2016. Since then, prices have recovered to some extent but have remained volatile. In addition, weak demand in key markets caused sales volumes of flat products, pipes, coke and pellets to drop.

Revenues in Ukraine totalled US$1,148 million in 9M 2016, down 5% y-o-y. The decline was mainly driven by lower sales prices of key products, as well as lower volumes of coke and coking coal concentrate. This was partly compensated by higher sales volumes of flat, long and iron ore products. Meanwhile, the share of Ukraine in consolidated revenues increased by 3 percentage points (pp) y-o-y to 25%.

International sales dropped by 18% y-o-y to US$3,420 million, while the breakdown by market changed. The proportion of sales to Europe rose by 3 pp y-o-y to 36%, mainly due to higher sales volumes of long and iron ore products. The share of the Middle East and North Africa (MENA) dropped by 3 pp y-o-y to 16% amid lower selling prices of key products and sales volumes of pig iron, billets and pellets. The proportion of sales to Southeast Asia decreased by 4 pp y-o-y to 8%, driven by lower selling prices and volumes of flat and iron ore products. The share of North America increased by 1 pp y-o-y to 5%, mainly due to greater sales of pig iron and coking coal concentrate.

 

Revenues by market9M169M15Change, y-o-y
US$m% of revenuesUS$m% of revenuesUS$m%pp of revenues
Total revenues 4,568 100% 5,397 100% -828 -15% -
Ukraine 1,148 25% 1,204 22% -56 -5% 3
Europe 1,624 36% 1,804 33% -180 -10% 3
MENA 735 16% 1,041 19% -306 -29% -3
CIS (ex Ukraine) 409 9% 460 9% -51 -11% -
incl. Russia 356 8% 347 6% 9 3% 2
Southeast Asia 356 8% 646 12% -291 -45% -4
North America 244 5% 191 4% 53 28% 1
Other regions 53 1% 51 1% 2 5% -

 

Metallurgical segment

The Metallurgical segment generates revenues from sales of pig iron, steel and coke products and services. In 9M 2016, its top line fell by 14% y-o-y to US$3,681 million. The drop was attributable to lower sales of flat (US$351 million), semi-finished (US$164 million), tubular (US$62 million) and coke (US$93 million) products. Meanwhile, sales of long products and other products and services rose by US$73 million and US$22 million respectively. The share of finished products in the steel sales mix rose to 77% in 9M 2016, up 2 pp y-o-y, as more square billets were reallocated for making higher-margin long products. In 9M 2016, the segment accounted for 81% of external sales (79% in 9M 2015).

Metallurgical segment
Sales by market
9M169M15Change, y-o-yChange, y-o-y %
US$m% of revenues000 tUS$m% of revenues000 tUS$m000 tUS$m000 t
Total sales 3,681 100% 9,349 4,256 100% 9,505 -575 -156 -14% -2%
Ukraine 806 22% 1,858 844 20% 1,827 -38 31 -5% 2%
Europe 1,448 39% 3,541 1,668 39% 3,597 -220 -56 -13% -2%
MENA 734 20% 2,147 1,011 24% 2,443 -277 -296 -27% -12%
CIS (ex Ukraine) 409 11% 838 460 11% 887 -51 -49 -11% -6%
incl. Russia 356 10% 712 347 8% 710 9 2 3% 0%
Southeast Asia 67 2% 203 116 3% 262 -50 -59 -43% -22%
North America 164 4% 610 106 2% 367 58 243 55% 66%
Other regions 53 1% 151 51 1% 122 2 29 5% 24%

Metallurgical segment
Sales by product
9M169M15Change, y-o-yChange, y-o-y %
US$m000 tUS$m000 tUS$m000 tUS$mdue to pricedue to volume
Semi-finished products 528 1,946 692 2,091 -164 -145 -24% -17% -7%
   Pig iron 260 1,073 293 1,039 -34 34 -11% -15% 3%
     incl. Zaporizhstal 27 120 56 185 -30 -65 -52% -17% -35%
   Slabs 186 594 213 564 -27 30 -13% -18% 5%
   Square billets 83 279 186 488 -104 -209 -56% -13% -43%
Finished products 2,742 6,561 3,083 6,404 -341 157 -11% -14% 2%
   Flat products 2,139 5,125 2,490 5,228 -351 -103 -14% -12% -2%
     incl. Zaporizhstal 702 1,955 896 2,077 -193 -122 -22% -16% -6%
   Long products 603 1,435 530 1,111 73 324 14% -15% 29%
   Tubular products 1 1 63 65 -62 -64 -99% 0% -98%
Coke 118 842 212 1,010 -93 -168 -44% -28% -17%
Other products and services 292 - 270 - 22 - 8% - -
Total sales 3,681 9,349 4,256 9,505 -575 -156 -14% -12% -2%

 

Pig iron 

In 9M 2016, sales of pig iron decreased by 11% y-o-y to US$260 million, primarily due to a slump in selling prices. At the same time, sales volumes increased by 3% y-o-y (or 34 thousand tonnes) to 1,073 thousand tonnes, driven by higher overall production (38 thousand tonnes) and destocking (66 thousand tonnes). This was partly offset by lower re-sales of Zaporizhstal’s pig iron, which declined by 65 thousand tonnes y-o-y to 120 thousand tonnes in 9M 2016. Sales volumes in Southeast Asia increased by 24 thousand tonnes y-o-y, due to shipments to a new client in Bangladesh. Sales volumes in North America increased by 216 thousand tonnes y-o-y, as new long-term contracts with US customers were concluded. To fulfil its obligations under these contracts, Metinvest redirected volumes from other markets: 126 thousand tonnes from MENA, 12 thousand tonnes from Europe and 35 thousand tonnes from other regions.

Slabs 

In 9M 2016, sales of slabs declined by 13% y-o-y to US$186 million. This was caused by a drop in the average selling price (-18 pp), partly compensated by higher sales volumes (+5 pp). In the period, volumes increased by 30 thousand tonnes y-o-y to 594 thousand tonnes, amid greater demand in Southeast Asia, MENA and other regions. At the same time, volumes to Europe decreased by 33 thousand tonnes y-o-y, mainly due to lower sales to Italy.

Square billets

In 9M 2016, sales of square billets decreased by 56% y-o-y to US$83 million, of which 13 pp was attributable to a slump in the average selling price and 43 pp to a drop in sales volumes, mainly to MENA, amid lower production. Meanwhile, MENA remained the main market, accounting for 51% of total sales volumes, supported by regular sales to key clients. Sales volumes to other regions increased by 20 thousand tonnes y-o-y, due to some sales in the Dominican Republic. 

Flat products

In 9M 2016, sales of flat products decreased by 14% y-o-y to US$2,139 million, due to a decline in the average selling price (-12 pp) and sales volumes (-2 pp). Total volumes declined by 103 thousand tonnes y-o-y to 5,125 thousand tonnes. At the same, re-sales of Zaporizhstal’s flat products dropped by 122 thousand tonnes y-o-y to 1,955 thousand tonnes, reducing their share in total sales volumes by 2 pp y-o-y to 38% in 9M 2016. Volumes to Europe fell by 127 thousand tonnes y-o-y, caused by lower sales to Italy. Volumes to Southeast Asia dropped by 118 thousand tonnes y-o-y amid antidumping duties and protective measures imposed by the Indian government and the redirection of volumes to other markets. In contrast, sales volumes in Ukraine increased by 74 thousand tonnes y-o-y as a result of higher sales of galvanised and polymer-coated sheets in 9M 2016. Sales volumes to Russia rose by 33 thousand tonnes y-o-y, due to lower sales in the comparable period of 2015, when that market was less attractive than others. 

Long products 

In 9M 2016, sales of long products rose by 14% y-o-y to US$603 million, driven by a 29% y-o-y increase in sales volumes to 1,435 thousand tonnes amid higher demand and overall production. As such, sales to all regions increased, except the CIS (ex Ukraine). Meanwhile, the negative y-o-y price trend on all markets for long products was due to weaker scrap and billet quotations.

 

Tubular products

In 9M 2016, sales of tubular products amounted to US$1 million, down 99% y-o-y, as Khartsyzk Pipe has been idle since June 2015 amid a lack of orders. 

Coke 

In 9M 2016, sales of coke declined by 44% y-o-y to US$118 million, of which 28 pp was attributable to a lower average selling price and 17 pp to a decrease in sales volumes. Volumes contracted by 168 thousand tonnes y-o-y to 842 thousand tonnes, 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 9M 2016, its top line dropped by 22% y-o-y to US$887 million, mainly because of a slump in iron ore and coal products, as well as lower sales volumes of pellets. In 9M 2016, the segment accounted for 19% of external sales (21% in 9M 2015).

Mining segment
Sales by market
9M169M15Change, y-o-yChange, y-o-y %
US$m% of revenues000 tUS$m% of revenues000 tUS$m000 tUS$m000 t
Total sales 887 100% 15,544 1,140 100% 16,570 -253 -1,026 -22% -6%
  Ukraine 342 39% 6,324 360 32% 5,170 -18 1,154 -5% 22%
  Europe 175 20% 3,005 135 12% 2,187 40 818 29% 37%
  MENA 1 0% 14 30 3% 372 -29 -358 -97% -96%
  CIS (ex        
  Ukraine)
- - - - - - - - - -
    incl. Russia - - - - - - - - - -
  Southeast Asia 289 33% 5,152 530 46% 7,870 -241 -2,718 -45% -35%
  North America 80 9% 1,049 85 7% 970 -5 78 -6% 8%
  Other regions - - - - - - - - - -

Mining segment
Sales by product
9M169M15Change, y-o-yChange, y-o-y %
US$m000 tUS$m000 tUS$m000 tUS$mdue to pricedue to volume
Iron ore products 718 14,196 914 15,230 -196 -1,034 -21% -15% -7%
Merchant iron ore concentrate 436 9,838 489 9,515 -53 323 -11% -14% 3%
Pellets 282 4,358 424 5,714 -143 -1,356 -34% -10% -24%
Coking coal concentrate 107 1,347 132 1,340 -25 7 -19% -20% 1%
Other products and services 63 - 95 - -32 - -34% - -
Total sales 887 15,544 1,140 16,570 -253 -1,026 -22% -16% -6%

 

Iron ore concentrate 

In 9M 2016, sales of merchant iron ore concentrate declined by 11% y-o-y to US$436 million, mainly due to a lower average selling price. It followed the benchmark [1], which declined by 7% y-o-y to an average of US$54/tonne in 9M 2016, from an average of US$59/tonne in the corresponding period of 2015. At the same time, total sales volumes increased by 3% y-o-y (or 323 thousand tonnes) to 9,838 thousand tonnes, driven by destocking in 1Q 2016. Sales in Europe increased by 429 thousand tonnes y-o-y amid greater purchases by key clients. To fulfil the orders, volumes were redirected from Southeast Asia (110 thousand tonnes). Sales volumes in Ukraine remained flat y-o-y.

 

Pellets

In 9M 2016, sales of pellets decreased by 34% y-o-y to US$282 million, of which 10 pp was attributable to a drop in the average selling price and 24 pp to lower sales volumes amid lower production. Given the greater demand and market premiums in Ukraine and Europe, volumes in these regions rose by 1,242 thousand tonnes and 369 thousand tonnes y-o-y respectively. This reduced the remaining available volume and resulted in lower sales to Southeast Asia (2,608 thousand tonnes) and MENA (358 thousand tonnes). The average selling price followed the benchmark5, which dropped by 7% y-o-y.

Coking coal concentrate 

In 9M 2016, sales of coking coal decreased by 19% y-o-y to US$107 million, primarily caused by a lower average selling price. Volumes increased by 1% y-o-y (or 7 thousand tonnes) to 1,347 thousand tonnes in 9M 2016, driven by greater sales in North America. The average selling price moved largely in line with the benchmark [2] for hard coking coal, which dropped by 20% y-o-y.

 

EBITDA

In 9M 2016, Metinvest’s consolidated EBITDA climbed by 21% y-o-y to US$989 million. The contributions from the Metallurgical and Mining segments increased by US$126 million and US$105 million y-o-y respectively, partly offset by a rise in corporate overheads and eliminations of US$57 million.

EBITDA by segment9M169M15Change, y-o-y
US$m% of segment revenuesUS$m% of segment revenuesUS$mpp of segment revenues
Metallurgical segment 650 17% 524 12% 126 5
- incl. JV 124   136 -12
Mining segment 439 28% 334 15% 105 13
- incl. JV 73   58 16
Corporate o/hs and eliminations -100   -43 -57
Total EBITDA 989 22% 816 15% 173 7


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

 

  • a rise in the Metallurgical segment’s sales volumes of US$15 million;
  • a positive effect of the hryvnia devaluation of US$264 million, as the USD/UAH exchange rate averaged 25.48 in 9M 2016, compared with 21.43 in 9M 2015;
  • a drop in logistics costs of US$172 million, due to lower freight costs (US$136 million) and other transportation expenses, partly offset by higher railway costs following an upward indexation in tariffs of 15% on 30 April 2016 (US$27 million);
  • decreased spending on energy (US$93 million), mainly due to lower expenses on natural gas amid lower prices (US$65 million) and reduced consumption (US$57 million) – which were partly offset by increased electricity tariffs (US$25 million);
  • a decrease in the cost of raw materials amid lower market prices of coal, scrap, iron ore and coke (US$186 million), partly offset by greater consumption volumes driven by higher crude steel production (US$71 million);
  • a decline in other costs of US$353 million, primarily due to a drop in the cost of goods and services for resale.

 

These factors were partly offset by a decrease in selling prices in the Metallurgical segment (US$590 million) and the Mining segment (US$138 million), as well as lower sales volumes in the Mining segment (US$115 million).

In 9M 2016, the Group’s consolidated EBITDA margin increased by 7 pp y-o-y to 22%. The EBITDA margin rose by 5 pp y-o-y to 17% in the Metallurgical segment and by 13 pp y-o-y to 28% in the Mining segment.
 

Debt management

In 2016, Metinvest has made significant progress in the debt restructuring discussions with its creditors.

On 24 May 2016, the Group agreed non-binding heads of terms for restructuring the notes and PXF facilities (the Heads of Terms) with the ad hoc committee of noteholders and the coordinating committee of PXF lenders. Among other terms, this includes an extension of Metinvest’s debt maturities until the end of 2021, including a grace period on the scheduled amortisation of PXF debt principal until the end of 2018.

The Group now intends that the practice statement letter launching the scheme of arrangement to implement the restructuring will be published in the coming weeks. Settlement of the restructuring is expected to occur sometime in the beginning of 2017 in accordance with the normal timetable for an English law-governed scheme of arrangement.

Notwithstanding the occurrence of the termination date of both the moratorium under the notes and the standstill agreement with the PXF lenders on 30 November 2016, Metinvest intends to continue servicing the debt on the terms set out in the Moratorium and the Standstill Agreement. The next interest payment dates will be on 31 December 2016 and, if applicable, 31 January 2017.

 

Capital expenditure

Metinvest maintained low capital expenditure of US$199 million[3] in 9M 2016, up 4% y-o-y. Due to the tight liquidity situation and the high volatility of global steel and iron ore prices, the focus remained on vital maintenance projects, as well as top-priority expansion projects that offer a fast payback. In 9M 2016, the split by maintenance and expansion projects was 71% to 29% (68% to 32% in 9M 2015). The Mining segment accounted for 48% of capital expenditure (52% in 9M 2015) and the Metallurgical segment for 51% (44% in 9M 2015).
 

Metallurgical segment

Major investment projects at Ilyich Steel include the construction of continuous casting machine no. 4 (launched in September 2016), the major overhaul of blast furnace (BF) no. 4 (completed in May 2016), and the ongoing reconstruction of the sinter plant and the existing dust-trapping facilities of converter no. 2. Construction of the PCI facilities at Azovstal (BF no. 4) and Yenakiieve Steel (BF nos. 3 and 5) is in the final stage.

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 first facility for iron ore transportation at the Pervomaisky quarry was launched in May 2016) 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.

 


[1] 62% Fe iron ore fines CFR China

[2] Hard coking coal quarterly contract FOB Australia

[3] Includes US$2 million of corporate overheads

For editors:

Andriy Bondarenko
Head of Investor Relations
Tel: +41 22 591 03 74 (Switzerland)
Tel: +380 62 388 16 24 (Ukraine)
andriy.bondarenko@metinvestholding.com

Yana Kalmykova
Manager of Investor Relations
Tel: +380 62 389 71 36 (Ukraine)
yana.kalmykova@metinvestholding.com

METINVEST GROUP is a vertically integrated group of steel and mining companies that manages every link of the value chain, from mining and processing iron ore and coal to making and selling semi-finished and finished steel products. It comprises steel and mining production facilities located in Ukraine, Europe and the US, as well as a sales network covering all key global markets. The Group is structured into two operating segments, Metallurgical and Mining, and its strategic vision is to become a leading vertically integrated steel producer in Europe, delivering sustainable growth and profitability resilient to business cycles and providing investors with returns above the industry benchmarks. For the nine months ended 30 September 2016, the Group reported revenues of US$4.6 billion and an EBITDA margin of 22%.

METINVEST HOLDING LLC is the management company of Metinvest Group.