Metinvest published a trading update for the first quarter ended 31 March 2016

OREANDA-NEWS. 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 2016.

FINANCIAL HIGHLIGHTS

(US$ million)	1Q 2016	1Q 2015	Change
Revenues	1,287	1,821	-29%
Adjusted EBITDA [1]	118	341	-65%
margin	9%	19%	-10 pp
CAPEX [2]	54	38	42%
(US$ million)	31 Mar 2016	31 Dec 2015	Change
Total debt	2,917	2,946	-1%
Cash and cash equivalents [3]	196	180	9%
Net debt [4]	2,721	2,766	-2%

Revenues

In 1Q 2016, Metinvest’s consolidated revenues decreased by 29% y-o-y to US$1,287 million. This was primarily due to a fall in sales of flat (US$274 million), semi-finished (US$98 million), iron ore (US$94 million), coke and chemical (US$27 million) and tubular (US$25 million) products. The Metallurgical division accounted for 79% of external sales (78% in 1Q 2015) and the Mining division for 21% (22% in 1Q 2015).

Revenues in Ukraine totalled US$280 million in 1Q 2016, down 18% y-o-y. The decline was mainly driven by lower selling prices of key products, partly offset by higher sales volumes of flat, long, coke and chemical, and iron ore products.

International sales decreased by 32% y-o-y to US$1,007 million in 1Q 2016, while their share in consolidated revenues dropped by 3 percentage points (pp) y-o-y to 78%. The most significant changes in sales geography were in the Middle East and North Africa (MENA), Southeast Asia, North America and the Commonwealth of Independent States (CIS). The proportion of sales to MENA fell by 3 pp y-o-y to 17% due to lower selling prices of key products and sales volumes of pig iron, billets, flat products and pellets. The share of sales to Southeast Asia decreased by 2 pp y-o-y to 13%, driven by lower selling prices and volumes of flat products, slabs and pellets. The share of North America increased by 1 pp y-o-y to 4%, mainly due to higher sales of pig iron. The share of the CIS increased by 1 pp y-o-y to 7%, mainly amid higher sales of flat products to Russia. The proportion of sales to Europe and other regions remained unchanged y-o-y at 35% and 2% respectively.

Revenues by market	1Q 2016		1Q 2015		Change, y-o-y
	US$m	% of revenues	US$m	% of revenues	US$m	%	pp of revenues
Total revenues	1,287	100%	1,821	100%	-535	-29%	0
Ukraine	280	22%	340	19%	-60	-18%	3
Europe	450	35%	641	35%	-191	-30%	0
MENA	225	17%	380	21%	-155	-41%	-3
CIS (ex Ukraine)	92	7%	110	6%	-18	-17%	1
incl. Russia	89	7%	69	4%	20	28%	3
Southeast Asia	163	13%	271	15%	-108	-40%	-2
North America	57	4%	52	3%	6	11%	2
Other regions	20	2%	28	2%	-7	-27%	0

Metallurgical division

The Metallurgical division generates revenues from sales of pig iron, steel and coke products and services. In 1Q 2016, the division’s top line fell by 29% y-o-y to US$1,012 million, of which steel sales accounted for 88%. The drop was attributable to lower selling prices and volumes of pig iron, slabs and pipes. This was partly compensated by higher volumes of square billets, long products, and coke and chemical products.

Metallurgical division Sales by market	1Q 2016			1Q 2015			Change, y-o-y		Change, y-o-y %
	US$m	% of revenues	000 t	US$m	% of revenues	000 t	US$m	000 t	US$m	000 t
Total sales	1,012	100%	3,268	1,426	100%	3,103	-414	164	-29%	5%
Ukraine	201	20%	680	231	16%	587	-31	93	-13%	16%
Europe	425	42%	1,224	595	42%	1,194	-170	30	-29%	3%
MENA	224	22%	803	372	26%	835	-148	-31	-40%	-4%
CIS (ex Ukraine)	92	9%	265	110	8%	203	-18	62	-17%	31%
incl. Russia	89	9%	231	69	5%	148	20	83	28%	56%
Southeast Asia	18	2%	75	63	4%	136	-45	-61	-71%	-45%
North America	32	3%	162	27	2%	87	6	75	21%	87%
Other regions	20	2%	58	27	2%	62	-7	-4	-26%	-6%

Metallurgical division Sales by product	1Q 2016		1Q 2015		Change, y-o-y		Change, y-o-y %
	US$m	000 t	US$m	000 t	US$m	000 t	US$m	due to price	due to volume
Semi-finished products	152	669	250	679	-98	-10	-39%	-38%	-1%
Pig iron	65	338	110	353	-46	-15	-41%	-37%	-4%
incl. Zaporizhstal	10	53	27	80	-17	-27	-63%	-30%	-33%
Slabs	44	171	83	190	-39	-18	-47%	-38%	-10%
Square billets	44	159	57	136	-14	23	-24%	-41%	17%
Finished products	740	2,121	1,032	2,015	-291	106	-28%	-33%	5%
Flat products	593	1,702	867	1,706	-274	-3	-32%	-31%	0%
incl. Zaporizhstal	216	726	341	729	-125	-3	-37%	-36%	0%
Long products	147	418	139	284	7	134	5%	-42%	47%
Tubular products	0	0	25	26	-25	-26	-99%	0%	-99%
Coke and chemical products	65	478	92	409	-27	69	-30%	-46%	17%
Coke products	46	379	72	332	-26	47	-36%	-51%	14%
Chemical products	19	99	20	77	-1	22	-4%	-32%	29%
Other products and services	56	N/A	53	N/A	3	N/A	6%	N/A	N/A
Total sales	1,012	3,268	1,426	3,103	-414	164	-29%	-34%	5%

Pig iron 

In 1Q 2016, sales of pig iron decreased by 41% y-o-y to US$65 million, driven by a slump in the average selling price (-37 pp) and lower sales volumes (-4 pp). Sales volumes of pig iron declined by 15 thousand tonnes y-o-y to 338 thousand tonnes in 1Q 2016 due to lower overall production. In addition, re-sales of Zaporizhstal’s pig iron dropped by 27 thousand tonnes y-o-y to 53 thousand tonnes in 1Q 2016. Given the unfavourable market prices, sales volumes to Europe and MENA were down by 28 thousand tonnes and 50 thousand tonnes y-o-y respectively. At the same time, volumes were redirected to Southeast Asia and North America, where they increased by 24 thousand tonnes and 70 thousand tonnes y-o-y respectively, due to new contracts with customers in the regions.

Slabs 

In 1Q 2016, sales of slabs slumped by 47% y-o-y to US$44 million, of which 38 pp was attributable to a fall in the average selling price and 10 pp to lower sales volumes. Volumes declined by 18 thousand tonnes y-o-y to 171 thousand tonnes in 1Q 2016. Sales to Europe and Southeast Asia decreased as volumes were redirected to MENA. Volumes to MENA (mainly Turkey) increased by 19 thousand tonnes y-o-y due to higher sales to a key client. The decline in the average selling price followed the benchmark for slabs FOB Black Sea, which dropped by 28% y-o-y.

Square billets

In 1Q 2016, sales of square billets decreased by 24% y-o-y to US$44 million, caused by a lower average selling price (-41 pp), which was partly compensated by higher sales volumes (+17 pp). Volumes increased by 23 thousand tonnes y-o-y to 159 thousand tonnes in 1Q 2016, mainly due to destocking during the reporting period. Sales volumes to Europe rose by 49 thousand tonnes y-o-y, driven by ongoing sales to key clients. Volumes to other regions increased by 20 thousand tonnes y-o-y, due to a one-off sale at a higher price. Sales to MENA decreased by 45 thousand tonnes y-o-y amid weaker demand and stronger competition from Chinese steel exporters in the region. The average selling price followed the dynamics of billet FOB Black Sea quotations, which dropped by 28% y-o-y.

Flat products 

In 1Q 2016, sales of flat products decreased by 32% y-o-y to US$593 million, driven mainly by a lower average selling price. Sales volumes remained almost unchanged y-o-y at 1,702 thousand tonnes in 1Q 2016. Zaporizhstal’s share in total sales volumes of flat products remained flat y-o-y at 43%. Volumes in Ukraine increased by 18 thousand tonnes y-o-y amid a recovery in local steel demand. Sales to the CIS rose by 69 thousand tonnes y-o-y, driven mainly by higher sales to Russia due to loyalty programmes for clients and sector sales. Volumes to MENA increased by 18 thousand tonnes y-o-y amid higher sales of galvanised flat products to the Middle East and ongoing sales in Algeria and Egypt. At the same time, sales volumes in Europe decreased by 50 thousand tonnes y-o-y due to weaker demand. Sales to Southeast Asia dropped by 65 thousand tonnes y-o-y amid strong competition from Chinese steel producers, a lower effective average selling price and the redirection of volumes to other markets. The average selling price followed the dynamics of HRC FOB Black Sea quotations, which dropped by 30% y-o-y.
 
Long products 

In 1Q 2016, sales of long products increased by 5% y-o-y to US$147 million. This was caused by a hike in sales volumes (+47 pp), partly offset by a decline in the average selling price (-42 pp). Volumes increased by 134 thousand tonnes y-o-y to 418 thousand tonnes in 1Q 2016 due to higher overall production. As such, sales to all regions increased. The negative price trend on all markets for long products was due to weak demand: the adverse market environment, falling scrap and billet quotations, and low buying activity.

Tubular products

In 1Q 2016, there were no sales of tubular products, compared with US$25 million in the corresponding period of 2015, as Khartsyzk Pipe has been idle since June 2015 amid a lack of orders.

Coke and chemical products

In 1Q 2016, sales of coke and chemical products decreased by 30% y-o-y to US$65 million. This was driven by a substantially lower average selling price (-46 pp), partly compensated by higher sales volumes (+17 pp). Sales volumes of coke and chemical products rose by 69 thousand tonnes y-o-y to 478 thousand tonnes in 1Q 2016, primarily due to an increase in coke output at Avdiivka Coke.
 
Mining division

The Mining division generates revenues from sales of iron ore, coal and other products and services. In 1Q 2016, the division’s top line dropped by 30% y-o-y to US$275 million, mainly because of a slump in prices of iron ore products and coking coal concentrate, as well as lower sales volumes of pellets.

Mining division Sales by market	1Q 2016			1Q 2015			Change, y-o-y		Change, y-o-y %
	US$m	% of revenues	000 t	US$m	% of revenues	000 t	US$m	000 t	US$m	000 t
Total sales	275	100%	6,119	395	100%	5,270	-121	849	-31%	16%
Ukraine	79	29%	2,051	109	28%	1,347	-30	704	-27%	52%
Europe	25	9%	496	46	12%	681	-20	-186	-45%	-27%
MENA	1	0%	14	8	2%	93	-7	-79	-91%	-85%
CIS (ex Ukraine)	0	0%	0	0	0%	0	0	0	N/A	N/A
incl. Russia	0	0%	0	0	0%	0	0	0	N/A	N/A
Southeast Asia	144	53%	3,239	207	52%	2,862	-63	377	-30%	13%
North America	25	9%	319	25	6%	286	0	33	0%	12%
Other regions	0	0%	0	0	0%	0	0	0	N/A	N/A

Mining division Sales by product	1Q 2016		1Q 2015		Change, y-o-y		Change, y-o-y %
	US$m	000 t	US$m	000 t	US$m	000 t	US$m	due to price	due to volume
Iron ore products	228	5,702	322	4,869	-94	833	-29%	-46%	17%
Merchant iron ore concentrate	155	4,363	160	2,856	-5	1,507	-3%	-56%	53%
Pellets	73	1,339	162	2,013	-89	-673	-55%	-21%	-33%
Coking coal concentrate	36	417	46	401	-10	16	-22%	-26%	4%
Other products and services	11	N/A	27	N/A	-16	N/A	-61%	N/A	N/A
Total sales	275	6,119	395	5,270	-120	849	-30%	-47%	16%

Iron ore concentrate

In 1Q 2016, sales of merchant iron ore concentrate declined by 3% y-o-y to US$155 million, caused by a lower average selling price (-56 pp), which was partly compensated by greater sales volumes (+53 pp). Volumes increased by 1,507 thousand tonnes y-o-y to 4,363 thousand tonnes in 1Q 2016 due to destocking and higher production in 1Q 2016. Sales volumes in Ukraine rose by 238 thousand tonnes y-o-y, as a key client resumed operations. Sales volumes to Southeast Asia increased by 1,476 thousand tonnes y-o-y. Meanwhile, sales volumes in Europe dropped by 207 thousand tonnes y-o-y amid weak demand. Average selling prices in all regions followed the benchmark 62% Fe iron ore CFR China, which declined from US$62/tonne in 1Q 2015 to US$49/tonne in 1Q 2016 (down 22% y-o-y). 

Pellets 

In 1Q 2016, sales of pellets decreased by 55% y-o-y to US$73 million, of which 33 pp was attributable to lower sales volumes and 21 pp to a fall in the average selling price. Sales volumes declined by 673 thousand tonnes y-o-y to 1,339 thousand tonnes in 1Q 2016 following lower production of pellets. As a result, sales in Southeast Asia decreased by 1,099 million tonnes y-o-y. At the same time, sales in Ukraine increased by 482 thousand tonnes y-o-y amid higher consumption by a key client, which resumed operations. Average selling prices in all regions followed the benchmark 62% Fe iron ore CFR China, which declined by 22% y-o-y. 

Coking coal concentrate 

In 1Q 2016, sales of coking coal concentrate decreased by 22% y-o-y to US$36 million, mainly due to a lower average selling price. Sales volumes rose by 16 thousand tonnes y-o-y to 417 thousand tonnes in 1Q 2016 due to higher sales in North America. The average selling price in Ukraine decreased by 40% y-o-y, following a decrease in the share of more expensive coal in sales in that market. At the same time, the average quarterly contract price for hard coking coal in North America fell by 10% y-o-y, largely in line with the benchmark for hard coking coal FOB Australia, which dropped by 31% y-o-y.

EBITDA

In 1Q 2016, Metinvest’s consolidated EBITDA dropped by 65% y-o-y to US$118 million. The overall decrease was driven by declines in contributions from both divisions – the Metallurgical by US$201 million and the Mining by US$33 million – which were partly offset by a decrease in corporate overheads and eliminations of US$11 million.

EBITDA by division	1Q 2016		1Q 2015		Change, y-o-y
	US$m	% of division revenues	US$m	% of division revenues	US$m	pp of division revenues
Metallurgical division	52	5%	253	18%	-201	-13
Mining division	73	16%	106	14%	-33	2
Corporate o/hs and eliminations	-7		-18		11
Total EBITDA	118	9%	341	19%	-223	-10

The y-o-y reduction in EBITDA was primarily attributable to a decrease in selling prices (US$623 million). In addition, the contribution of the JVs to EBITDA declined by US$55 million, primarily due to a decrease in the share of Zaporizhstal’s EBITDA of US$49 million. These factors were partly compensated by:

• an increase in sales volumes of US$89 million;
• a positive effect from hryvnia devaluation of US$102 million;
• a decline in other costs of US$137 million, mainly due to a drop in the cost of goods and services for resale, as well as the reversal of an inventory impairment provision created in December 2015;
• lower spending on energy due to a decrease in consumption (US$32 million) and lower prices of natural gas (US$27 million);
• a drop in logistics costs of US$52 million, mainly due to lower freight costs;
• a decrease in the cost of raw materials due to lower market prices of coal, scrap, iron ore and coke (US$96 million), partly offset by higher consumption (US$80 million).

In 1Q 2016, the consolidated EBITDA margin decreased by 10 pp y-o-y to 9%. The EBITDA margin of the Metallurgical division dropped by 13 pp y-o-y to 5% in 1Q 2016, while the Mining division’s increased by 2 pp y-o-y to 16%. 

Debt management

In 2016, Metinvest made significant progress in the debt restructuring discussions with its creditors. The Group has obtained a moratorium on enforcement actions by noteholders and signed a standstill agreement with PXF lenders both with effect to 27 May 2016 to ensure a stable platform for negotiating the restructuring of its debt.

On 24 May 2016, Metinvest 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, the Heads of Terms include:

• an extension of Metinvest’s debt maturities by up to 5.5 years until the end of 2021, including 2.5 years of grace period on scheduled amortisation of principal until the end of 2018;
• a broadening of the security package in favour of the PXF lenders and noteholders;
• limitations on dividends and other payments to shareholders and tightening of the covenant package; and
• no debt write-off.

To document and implement a consensual restructuring based on the Heads of Terms, Metinvest extended the moratorium under the notes and signed a second standstill extension agreement with its PXF lenders both with effect to November 2016 at the latest. 

Capital expenditure

Capital expenditure increased by 42% y-o-y to US$54 million in 1Q 2016. Due to the tight liquidity situation and 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 1Q 2016, spending on maintenance projects rose by US$7 million y-o-y to 58% of capital expenditure (65% in 1Q 2015), while spending on expansion projects increased by US$9 million y-o-y to 42% (35% in 1Q 2015). The Mining division accounted for 46% of capital expenditure (64% in 1Q 2015) and the Metallurgical division for 52% (30% in 1Q 2015).

Metallurgical division

Metinvest continued to implement several projects in the Metallurgical division: the replacement of turbine air blower no. 3 at Azovstal (completed in May, after the reporting period); the reconstruction of the sinter plant at Ilyich Steel (preparatory work to replace the filters of sintering machines nos. 4-5 is ongoing); the construction of the pulverised coal injection (PCI) facilities at Yenakiieve Steel (PCI injection started into blast furnace no. 5 in February and blast furnace no. 3 in April, after the reporting date).

Numerous projects have been started or resumed: the construction of the PCI unit at blast furnace no. 4 at Azovstal (resumed in February); the major overhaul of blast furnace no. 4 at Ilyich Steel (started in early 2016 and completed in May, after the reporting period); and the reconstruction of the dust-trapping facilities in converter no. 2 at Ilyich Steel. 

Mining division

Major investment projects in the Mining division include the construction of deep-quarry crusher and conveyor systems at Northern GOK 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. Construction of the Zapadny conveyor line at Ingulets GOK and the rebuilding of the Lurgi 278-B pelletising machine at Northern GOK remain frozen due to limited funding, delays in transferring sites for the construction of conveyor lines and the need to update design documentation.