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 announced its audited IFRS consolidated financial statements for the 12 months ended 31 December 2016 in compliance with Clause 8.4 and Condition 4(w) of the trust deed dated 22 March 2017 ("the Trust Deed") executed between Madison Pacific Trust Limited as trustee and Metinvest B.V. as issuer.

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.
Summary - financial results FY2016 FY2015 Change, y-o-y
US$ mn %
Income statement highlights        
  Revenues 6,223 6,832 -609 -9%
  Adjusted EBITDA1 1,153 525 628 >100%
    Margin 19% 8%   11 pp
  Adjusted EBITDA1 excl. impairment of trade and other receivables2 1,380 817 563 69%
  Net profit 118 -1,003 1,121 -
    Margin 2% -15%   17 pp
Cash flow highlights        
  Net cash from operations 490 637 -147 -23%
  Net cash used in investing activities -331 -237 -94 40%
    incl. purchase of PPE and intangible assets3 -358 -275 -83 30%
  Net cash used in financing activities -105 -321 216 -67%
Summary - financial results 31.12.2016 31.12.2015 Change, YTD
US$ mn %
  Total debt4 2,969 2,946 23 1%
  Cash and cash equivalents5 226 180 46 26%
Key ratios         
  Net debt6/EBITDA7 2.4x 5.3x   -2.9x
  Consolidated Net Leverage Ratio8 2.1x N/A   -


1) Adjusted EBITDA is calculated as earnings before income tax, finance 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 of EBITDA of joint ventures. We will refer to adjusted EBITDA as EBITDA throughout this release.
2)  Following further delays in payments from some key customers beyond the originally expected dates and certain operational and financial issues for them, the Group recognised full impairment of trade receivables from some of its key customers totalling US$220 mn in 2016 (2015: partial impairment of US$254 mn). The overall impairment of trade and other receivables was US$227 mn in 2016 and US$292 mn in 2015.
3) Comprises Capital Expenditures defined in the Trust Deed.
4) Total debt is calculated as the sum of bank loans, bonds, trade finance, seller notes and subordinated shareholder loans.
5)  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.
6) Net debt is calculated as the sum of long-term and short-term loans and borrowings and seller notes less cash and cash equivalents.
7)  EBITDA for the last 12 months.
8)  Calculated in line with the Trust Deed.

Summary - production results FY2016 FY2015 Change, y-o-y
kt %
Crude steel 8,393 7,669 724 9%
  Azovstal 3,705 3,206 499 16%
  Ilyich Steel 2,736 2,645 91 3%
  Yenakiieve Steel 1,952 1,818 134 7%
Iron ore concentrate 29,640 32,208 -2,568 -8%
  Northern GOK 11,634 13,152 -1,518 -12%
  Ingulets GOK 12,783 12,903 -120 -1%
  Central GOK 5,224 6,154 -930 -15%
Coking coal concentrate 3,051 3,285 -234 -7%
  Krasnodon Coal 750 346 404 >100%
  United Coal 2,302 2,940 -638 -22%



  • In 2016, disruptions to the Group’s operations continued due to the ongoing conflict in Eastern Ukraine. Logistical constraints remained one of the biggest challenges.
  • In January, the Group sold its stake in Black Iron (Cyprus) Limited for US$6 mn.
  • In September, Metinvest established an Operations directorate based on its Mining and Metallurgical divisions (now segments). The main objective of the move is to ensure close cooperation between the Group's mining and metallurgical production assets and centralise the management of all production processes.
  • Ilyich Steel completed the major overhaul of blast furnace no. 4 in May.
  • Azovstal started pulverised coal injection (PCI) at blast furnace no. 4 in November.
  • Northern GOK commissioned the first facility of the iron ore crushing and conveying system at the Pervomaisky open pit mine in July.
  • The Group launched 47 new steel products, mainly heavy plates, hot-rolled and cold-rolled coils, as well as galvanised products used in construction, machine-building and pipe production.


  • On 4 January 2017, the Group’s seller notes were restructured. Their maturity was extended by five years to 31 December 2021.
  • On 15 March 2017, assets owned by PJSC Yenakiieve I&SW (including its Makiivka branch), Ukrainian-Swiss JV Metalen, PJSC Khartsyzk Pipe, PJSC Krasnodon Coal, PJSC Komsomolske Flux, PJSC Donetsk Coke and PJSC Yenakiieve Coke, which are located in the territory not controlled by the Ukrainian government, were seized following an ultimatum issued by the unrecognised local authorities to re-register these assets, and Metinvest declared a complete loss of control over operations there.
  • On 22 March 2017, Metinvest successfully concluded the restructuring of its bonds and pre-export financing (PXF) facilities, issued new bond totalling US$1.2 bn and amended, restated and combined four PXF facilities into one facility totalling US$1.1 bn, both due in 2021.

Commenting on the results, Yuriy Ryzhenkov, Chief Executive Officer of Metinvest, said:

“While the situation on the global and domestic markets improved somewhat in 2016, there was ongoing turbulence, and Metinvest underscored its dedication by delivering commendable results.

Global steel, iron ore and coal prices remained highly volatile. After hitting new multi-year lows in the first quarter of the year, steel prices rebounded. The market in China, in particular economy stimulus measures and steel and iron capacity cuts there, is the main driver. We believe that the fundamental indicators do not yet support the case for a sustained recovery.

In Ukraine, there were the first indications of economic improvement since 2012. Real GDP growth was 2.3% in 2016 and the recovery accelerated by the year-end. This led to a 25% increase in internal apparent steel demand in 2016. We are encouraged by this positive news and the potential for continued growth in the country’s steel market, while acknowledging that the economic and geopolitical situation remains fragile.

Amid improved steel prices worldwide and recovering demand in Ukraine, the Group delivered a healthy increase in steel production, which rose by 9% year-on-year to 8,393 thousand tonnes in 2016. Iron ore concentrate output fell by 8% year-on-year to 29,640 thousand tonnes, which deteriorated amid the underinvestment of recent years, while coking coal production dropped by 7% year-on-year to 3,051 thousand tonnes, mainly due to the unfavourable market environment in the first half of 2016.

Revenues totalled US$6,223 million in 2016. While this was down 9% year-on-year as expected, the decrease was driven mainly by lower realised prices and lower iron ore sales volumes. At the same time, EBITDA more than doubled to US$1,153 million amid greater finished steel product output and cost reductions. We delivered a positive net profit of US$118 million, compared with a loss in 2015.

The successful restructuring of 94% of Metinvest’s debt portfolio, totalling US$2.8 billion, which was concluded after the reporting period, was a landmark moment for the Group and its creditors. The fair and equal treatment of all external lenders and the commitment of all parties enabled a UK court to sanction the restructuring of bonds and pre-export finance facilities in February 2017. The completion of the process gives us the option of returning to the global financial markets. Following this, in early 2017, international rating agencies Moody’s and Fitch both upgraded Metinvest’s credit ratings to ‘Caa2’ (‘stable’ outlook) and ‘B’ (‘stable’ outlook), respectively.

We appreciate that the Group significantly underinvested in CAPEX in 2016. This was due to a combination of factors, including poor liquidity, market uncertainty and safety issues in the conflict zone. Nevertheless, we were able to focus resources on vital projects and delivered on important long-term investments. In 2017, the Group expects to increase CAPEX spending compared with recent levels, albeit within the limit of US$636 million set by the debt restructuring documentation for the year.

Regarding the geopolitical situation in Eastern Ukraine, 2016 was another complex year for Metinvest and its employees. While the majority of the Group’s assets have been safe and functioning normally, including all of the steelmakers in Mariupol and iron ore assets in Kryvyi Rih, Avdiivka Coke, which is close to the front line, has experienced constant disruptions due to military action. Moreover, in March 2017, as Metinvest refused to re-register entities located on the non-government-controlled areas, their assets were seized and Metinvest declared a complete loss of control over operations there. The Group will use all available national and international legal means to protect its rights to these assets. The current situation forced us to adjust production processes and look for alternatives sources of raw materials. It is worth mentioning that around 20,000 employees worked at the facilities seized, and we have offered alternate positions to all personnel affected.

There are challenges posed by volatile market conditions and the geopolitical situation in Ukraine, but we successfully cope with them. With the right team in place and a clear vision, I believe that we can prevail under even the most adverse external circumstances. On behalf of our management, I would like to thank all stakeholders for their ongoing support, including our shareholders, investors, partners, suppliers, customers, employees and local communities.”


Results of operations FY2016 FY2015 Change, y-o-y
US$ mn % of revenues  US$ mn % of revenues US$ mn % pp of revenues
Revenues 6,223 100% 6,832 100% -609 -9% -
Cost of sales -4,833 -78% -6,087 -89% 1,254 -21% 11
Gross profit 1,390 22% 745 11% 645 86% 11
  Distribution costs -660 -11% -920 -13% 260 -28% 2
  General and administrative expenses -183 -3% -199 -3% 16 -8% -
  Other operating expenses -222 -4% -300 -4% 78 -26% -
Operating profit 325 5% -674 -10% 999 - 15
  Finance income 26 0% 26 0% - 0% -
  Finance costs -397 -6% -647 -9% 250 -39% 3
  Share of result of associates and JV 205 3% 131 2% 74 56% 1
Profit before income tax 159 3% -1,164 -17% 1,323 - 20
Income tax -41 -1% 161 2% -202 <-100% -3
Net profit 118 2% -1,003 -15% 1,121 - 17



Metinvest’s revenues are generated from sales of its steel, iron ore, coal and coke products and resales of products from third parties. Unless otherwise stated, revenues are reported net of value-added tax and discounts and after eliminating sales within the Group.

Revenues by market FY2016 FY2015 Change, y-o-y
US$ mn % of revenues US$ mn % of revenues US$ mn % pp of revenues
Total revenues 6,223 100% 6,832 100% -609 -9% -
  Ukraine 1,606 26% 1,619 24% -13 -1% 2
  Europe 2,267 36% 2,255 33% 12 1% 3
  MENA 949 15% 1,305 19% -357 -27% -4
  CIS (ex Ukraine) 591 9% 602 9% -11 -2% -
  Southeast Asia 413 7% 751 11% -338 -45% -4
  North America 320 5% 229 3% 91 40% 2
  Other regions 77 1% 71 1% 7 9% -

In 2016, Metinvest's consolidated revenues decreased by 9% y-o-y to US$6,223 mn. External revenues dropped by US$380 mn y-o-y in the Metallurgical segment and by US$229 mn in the Mining segment. This was driven by lower average selling prices of steel, iron ore and coal products, which hit multi-year lows in 1Q 2016. Since then, prices have somewhat recovered but have remained highly volatile. In addition, iron ore sales volumes dropped amid lower overall production following underinvestment in CAPEX during liquidity constraints between 2014 and 1H 2016; and higher intragroup consumption amid greater crude steel output. In 2016, the Metallurgical segment accounted for 81% of external sales (79% in 2015) and the Mining segment for 19% (21% in 2015).

In 2016, revenues in Ukraine amounted to US$1,606 mn, almost unchanged y-o-y. On a y-o-y basis, lower sales of coke and coking coal concentrate were offset by higher sales of flat, long and iron ore products amid greater local demand, as the Ukrainian economy started to recover. Real GDP increased for the first time since the end of 2012, by 2.3% in 2016, while quarterly economic growth accelerated from 0.1% y-o-y in 1Q 2016 to 4.8% y-o-y in 4Q 20161. Apparent consumption of steel products (excluding pipes) in Ukraine rose by 24.7% y-o-y to 5.1 mt2 in 2016, driven mainly by inventory replenishment amid expectations of further growth in steel product prices and a recovery in real demand in key steel-consuming industries. Construction activity rose by 17.4% y-o-y1, the machine-building industry by 2.0% y-o-y1 and the hardware sector by 6.5% y-o-y2. Regarding iron ore products, sales in Ukraine increased, as a couple of Metinvest’s key customers in the country managed to partly restore operations and boosted consumption, despite the ongoing conflict. As a result, the share of Ukraine in consolidated revenues climbed by 2 pp y-o-y to 26%.

International sales accounted for 74% of consolidated revenues in 2016. The share of Europe, Metinvest’s largest market, reached 36%, up 3 pp y-o-y, amid higher sales volumes of finished steel (+208 kt) and iron ore products (+1,474 kt), as well as higher selling prices of iron ore concentrate and pellets. The proportion of sales to the Middle East and North Africa (MENA) decreased by 4 pp y-o-y to 15% amid a 27% y-o-y drop in sales to the region, caused by lower selling prices of key products, as well as lower sales volumes of semi-finished products (-553 kt) and pellets (-484 kt). The share of sales to Southeast Asia decreased by 4 pp y-o-y to 7% as a result of a 45% decline in sales to the region, due to lower sales volumes of iron ore (-4,379 kt) and flat (-97 kt) products amid lower selling prices for both. The share of North America increased by 2 pp y-o-y to 5% in 2016, mainly due to higher sales volumes of pig iron (+330 kt) and finished steel products (+68 kt). The shares of the CIS (ex Ukraine) and other regions remained unchanged y-o-y at 9% and 1% respectively.


Metallurgical segment

The Metallurgical segment generates revenues from sales of pig iron, steel and coke products and services. In 2016, its revenues decreased by 7% y-o-y to US$5,027 mn. In particular, sales of semi-finished products dropped by US$206 mn, flat products by US$129 mn, tubular products by US$58 mn, coke by US$34 mn and other products and services by US$66 mn. This was partly compensated by an increase in sales of long products of US$113 mn.

Metallurgical segment
Sales by market
FY2016 FY2015 Change, y-o-y Change, y-o-y %
US$ mn % of revenues kt US$ mn % of revenues kt US$ mn kt US$ mn kt
Total sales 5,027 100% 12,301 5,407 100% 12,273 -380 28 -7% 0%
  Ukraine 1,129 22% 2,476 1,151 21% 2,169 -22 307 -2% 14%
  Europe 1,989 40% 4,762 2,090 39% 4,769 -101 -7 -5% 0%
  MENA 948 19% 2,683 1,266 23% 3,265 -318 -582 -25% -18%
  CIS (ex Ukraine) 591 12% 1,170 602 11% 1,219 -11 -50 -2% -4%
  Southeast Asia 76 2% 226 116 2% 262 -40 -35 -35% -14%
  North America 217 4% 767 111 2% 379 106 388 96% >100%
  Other regions 77 2% 216 71 1% 209 7 7 9% 3%
Metallurgical segment
Sales by product
FY2016 FY2015 Change, y-o-y Change, y-o-y %
US$ mn kt US$ mn kt US$ mn kt US$ mn due to price due to volume
Semi-finished products 675 2,423 880 2,880 -206 -457 -23% -7% -16%
  Pig iron 350 1,392 379 1,467 -29 -75 -8% -2% -5%
    incl. Zaporizhstal 37 157 84 332 -48 -175 -57% -4% -53%
  Slabs 227 711 274 782 -47 -71 -17% -8% -9%
  Square billets 98 320 228 631 -130 -311 -57% -8% -49%
Finished products 3,783 8,798 3,857 8,354 -74 444 -2% -7% 5%
  Flat products 2,954 6,854 3,084 6,726 -129 128 -4% -6% 2%
    incl. Zaporizhstal 953 2,537 1,098 2,659 -145 -122 -13% -9% -5%
  Long products 824 1,937 710 1,562 113 374 16% -8% 24%
  Tubular products 5 7 63 66 -58 -59 -91% -2% -89%
Coke 171 1,080 206 1,040 -34 40 -17% -21% 4%
Other products and services 398 - 464 - -66 - -14% - -
Total sales 5,027 12,301 5,407 12,274 -380 27 -7% -7% 0%

Pig iron
In 2016, sales of pig iron decreased by 8% y-o-y to US$350 mn, of which 5 pp was attributable to lower sales volumes and 2 pp to a drop in the average selling price. Volumes decreased by 75 kt y-o-y to 1,392 kt due to a decline in re-sales of Zaporizhstal’s pig iron of 175 kt. This was partly compensated by higher overall production and destocking during the year. At the same time, sales volumes in Southeast Asia increased by 24 kt due to shipments to a new client in Bangladesh. Sales volumes to North America rose by 330 kt, as new long-term contracts with US customers were concluded. To fulfil its obligations under these contracts, Metinvest redirected volumes from other markets: 226 kt from MENA, 98 kt from Europe, 32 kt from Ukraine and 74 kt from other regions.

In 2016, sales of slabs declined by 17% y-o-y to US$227 mn, driven by a lower average selling price (-8 pp) and a decrease in sales volumes (-9 pp). Volumes dropped by 71 kt y-o-y to 711 kt due to higher flat product output. Sales to Europe declined by 81 kt, mainly amid lower sales to Italy, Romania and Poland. Sales to MENA decreased by 41 kt due to stronger competition in the region, mainly from Brazilian suppliers. Sales to Southeast Asia increased by 36 kt amid greater demand in South Korea and Indonesia.

Square billets
In 2016, sales of square billets dropped by 57% y-o-y to US$98 mn, caused by a slump in sales volumes (-49 pp) and a lower average selling price (-8 pp). Sales volumes decreased by 311 kt y-o-y to 320 kt following greater long product output. This resulted in a decline in sales to MENA of 286 kt. Meanwhile, MENA remained the key market, accounting for 55% of total sales volumes, supported by regular sales to key clients.

Flat products
In 2016, sales of flat products decreased by 4% y-o-y to US$2,954 mn, driven by a drop in the average selling price (-6 pp), which was partly offset by an increase in sales volumes (+2 pp). Volumes rose by 128 kt y-o-y to 6,854 kt amid greater production. Sales volumes in Ukraine increased by 91 kt as a result of higher sales of galvanised and polymer-coated sheets. Sales to the CIS rose by 42 kt due to loyalty programmes for clients and lower sales in 2015, when the market was less attractive than others. Volumes to Europe increased by 41 kt due to greater demand in the Netherlands, Czech Republic, Croatia and other countries of Central and Eastern Europe. Sales to other regions rose by 43 kt due to sales of plates and coils to Mexico and Columbia. Sales to North America increased by 25 kt. In contrast, volumes to Southeast Asia dropped by 97 kt amid antidumping duties and protective measures imposed by the Indian government and the redirection of volumes to other markets. Volumes to MENA decreased by 16 kt. At the same time, re-sales of Zaporizhstal’s flat products dropped by 122 kt to 2,537 kt, reducing their share in total sales volumes to 37% in 2016 (40% in 2015).

Long products
In 2016, sales of long products increased by 16% y-o-y to US$824 mn. This was caused by a hike in sales volumes (+24 pp), partly offset by a lower average selling price (-8 pp). Volumes rose by 374 kt y-o-y to 1,937 kt amid stronger demand and overall production. As such, sales climbed to all regions, except the CIS and MENA. The negative y-o-y price trend on all markets was due to weaker scrap and billet quotations.

Tubular products 
In 2016, sales of tubular products (large-diameter pipes) decreased by 91% y-o-y to US$5 mn, caused mainly by a slump in sales volumes amid a lack of orders.

In 2016, sales of coke decreased by US$34 mn y-o-y to US$171 mn. This was driven by a lower average selling price (-21 pp), partly offset by higher sales volumes (+4 pp). Volumes increased by 40 kt y-o-y to 1,080 kt, primarily due to higher sales to a key client in Ukraine.

Mining segment 

The Mining segment generates revenues from sales of iron ore, coal and other products and services. In 2016, its revenues decreased by 16% y-o-y to US$1,196 mn, mainly due to lower sales volumes amid a fall in overall output of iron ore products and coking coal. In addition, average selling prices dropped, following global benchmarks. As a result, external sales of iron ore concentrate decreased by US$85 mn, pellets by US$76 mn and coking coal concentrate by US$43 mn. In addition, external sales of other products and services decreased by US$25 mn y-o-y.

Mining segment
Sales by market
FY2016 FY2015 Change, y-o-y Change, y-o-y %
US$ mn % of revenues kt US$ mn % of revenues kt US$ mn kt US$ mn kt
Total sales 1,196 100% 19,448 1,425 100% 22,016 -229 -2,568 -16% -12%
  Ukraine 477 40% 8,168 468 33% 7,315 9 854 2% 12%
  Europe 278 23% 4,251 165 12% 2,790 113 1,461 69% 52%
  MENA 1 0% 14 39 3% 498 -39 -484 -98% -97%
  CIS (ex Ukraine) - - - - - - - - - -
  Southeast Asia 337 28% 5,656 635 45% 10,034 -298 -4,379 -47% -44%
  North America 103 9% 1,359 118 8% 1,379 -15 -20 -13% -1%
  Other regions - - - - - - - - - -
Mining segment
Sales by product
FY2016 FY2015 Change, y-o-y Change, y-o-y %
US$ mn kt US$ mn kt US$ mn kt US$ mn due to price due to volume
Iron ore products 978 17,732 1,139 20,083 -161 -2,352 -14% -2% -12%
Merchant iron ore concentrate 554 11,769 639 13,159 -85 -1,390 -13% -3% -11%
Pellets 424 5,963 500 6,925 -76 -962 -15% -1% -14%
Coking coal concentrate 136 1,716 179 1,933 -43 -216 -24% -13% -11%
Other products and services 82 - 107 - -25 - -23% - -
Total sales 1,196 19,448 1,425 22,016 -229 -2,568 -16% -4% -12%

Iron ore concentrate
In 2016, sales of iron ore concentrate declined by 13% y-o-y to US$554 mn, of which 11 pp was attributable to lower sales volumes and 3 pp to a lower average selling price. Volumes decreased by 1,390 kt y-o-y to 11,769 kt in 2016, due to a drop in overall output, partly compensated by destocking. Sales volumes in Europe increased by 681 kt amid greater purchases by key clients. To fulfil the orders, volumes were redirected from Southeast Asia. Sales volumes in Ukraine fell by 149 kt amid weaker demand from local clients. The average selling price decreased by 3% y-o-y due to greater volumes sold in 1H 2016 (+37% in comparison with 2H 2016) at prices lower than in 2H 2016, when the benchmark rose by 24% h-o-h to an average of US$65/t.

In 2016, sales of pellets decreased by 15% y-o-y to US$424 mn, driven mainly by lower sales volumes. Volumes fell by 962 kt y-o-y to 5,963 kt in 2016, due to lower production and an increase in stocks. Given the greater demand and market premiums in Ukraine and Europe, volumes in these regions rose by 1,185 and 793 kt, respectively. This reduced the remaining available volume and resulted in lower sales to Southeast Asia (2,456 kt) and MENA (484 kt). The average selling price dropped by 1% y-o-y due to the low level of the benchmark in early 2016, when it hit a multi-year bottom.

Coking coal concentrate
In 2016, sales of coking coal concentrate decreased by 24% y-o-y to US$136 mn, of which 13 pp was attributable to a lower average selling price and 11 pp to a fall in sales volumes. Volumes dropped by 216 kt y-o-y to 1,716 kt amid lower production, which resulted in lower sales in all markets. The average selling price in Ukraine declined by 9% y-o-y following a decrease in the share of more expensive coal in sales in that market. The average selling price for hard coking coal in North America fell by 14% y-o-y, mainly due to long-term contracts concluded in the beginning of the year at market prices then.


Cost of sales

Metinvest’s cost of sales consists primarily of the cost of raw materials; the cost of energy materials; payroll and related expenses for employees at its production facilities; depreciation and amortisation; impairment of property, plant and equipment; repair and maintenance expenses; outsourcing; taxes; and other costs.

In 2016, the cost of sales declined by 21% y-o-y to US$4,833 mn. The decrease of US$1,254 mn was primarily attributable to (i) favourable movements in the USD/UAH exchange rate, which accounted for US$366 mn or 29% of the total drop; (ii) a fall in the cost of goods and services for resale of US$337 mn, mainly goods from Zaporizhstal; (iii) a decrease in impairment charges accrued during the reporting period of US$328 mn; (iv) lower purchase prices of raw materials (US$94 mn), primarily coal and coke; (v) a drop in natural gas costs of US$120 mn amid lower prices (US$76 mn) and consumption (US$44 mn); and (vi) a decline in services and other costs of US$94 mn, mainly driven by a net reversal of an inventory written-down in 2016 of US$45 mn, created at the end of 2015 due to sales of respective inventories, an increase in steel prices and a recovery in gross margins. They were partly offset by higher purchases of raw materials of US$69 mn and higher electricity costs of US$56 mn amid increased electricity tariffs (US$40 mn) and higher consumption (US$16 mn).

As a percentage of consolidated revenues, the cost of sales dropped by 11 pp y-o-y to 78% in 2016.

Distribution costs

Distribution costs consist largely of transportation costs, salaries paid to sales and distribution employees, and commissions paid by Metinvest’s European subsidiaries to third-party sales agents and trade offices for their services and costs of materials.

In 2016, distribution costs decreased by 28% y-o-y to US$660 mn. The decline was primarily attributable to a drop in sea freight costs due to lower shipment volumes (mainly iron ore products to Southeast Asia), driven by a change in the sales structure and lower sea freight tariffs amid decreased crude oil prices. Other transportation costs declined amid lower expenses on loading, unloading and storage in port. These factors were partly offset by an increase in railway costs following an upward indexation in tariffs of 15% on 30 April 2016 and higher rail shipment volumes.

As a share of consolidated revenues, distribution costs decreased by 2 pp y-o-y to 11% in 2016.

General and administrative costs

General and administrative costs consist largely of salaries paid to administrative employees; consultancy fees (except fees in relation to debt restructuring); audit, legal (except fees in relation to debt restructuring) and banking services expenses; insurance costs; and lease payments.

In 2016, general and administrative expenses decreased by 8% y-o-y to US$183 mn, driven by favourable movements in the USD/UAH exchange rate, which mainly impacted wages and salaries, and lower service fees. In addition, in the reporting period, the Group changed the presentation of expenses related to the debt restructuring. These expenses, totalling US$9 mn in 2016, were reclassified from general and administrative expenses to finance costs to better reflect the nature of such expenditures. This resulted in a change in comparative information for 2015 amounting to US$12 mn.

As a share of consolidated revenues, general and administrative costs remained flat y-o-y at 3% in 2016.

Other operating income / expenses

Other operating income and expenses consist primarily of sponsorship and other charity expenses, foreign-exchange gains less losses, maintenance of social infrastructure, impairment of goodwill and trade and other accounts receivable, and gains or losses on disposals of property, plant and equipment.

In 2016, other operating expenses amounted to US$222 mn (down 26% y-o-y), mainly due to an impairment of trade and other receivables recognised totalling US$227 mn. During the year, following further delays in payments from some customers beyond the originally expected dates and certain operational and financial issues among them, Metinvest recognised a full impairment of trade receivables from those customers of US$220 mn (2015: partial impairment of US$254 mn). In addition, operating foreign-exchange gains decreased by 85% y-o-y to US$18 mn, principally due to a lower gain from the revaluation of trade receivables and trade payables. At the same time, there was no impairment of goodwill in 2016, compared with US$74 mn charged in 2015.

As a share of consolidated revenues, other operating expenses remained flat y-o-y at 4% in 2016.

Operating profit

In 2016, operating profit totalled US$325 mn, compared with an operating loss of US$674 mn in 2015. This primarily reflected a reduction in expenses of US$1,608 mn, which was partly offset by a drop in consolidated revenues of US$609 mn. In 2016, the operating margin amounted to positive 5%, compared with negative 10% in 2015.


In 2016, EBITDA soared by US$628 mn y-o-y to US$1,153 mn3. The contributions from both segments increased: by US$251 mn from the Metallurgical segment and by US$460 mn from the Mining segment. Meanwhile, corporate overheads and eliminations rose by US$83 mn, mainly due to higher eliminations.

EBITDA by segment FY2016 FY2015 Change, y-o-y
US$ mn % of segment revenues US$ mn % of segment revenues US$ mn pp of segment revenues
Metallurgical segment 737 14% 486 9% 251 5
  - incl. JV 165   153   12  
Mining segment 548 24% 88 3% 460 21
  - incl. JV 120   59   61  
Corporate o/hs and eliminations -132   -49   -83  
Total EBITDA 1,153 19% 525 8% 628 11
Total EBITDA excl. impairment of
trade and other receivables
1,380 22% 817 12% 563 10

The y-o-y increase in consolidated EBITDA was primarily attributable to cost reductions amid:

  • a positive effect from the hryvnia devaluation of US$341 mn, as the USD/UAH exchange rate averaged 25.55 in 2016, compared with 21.84 in 2015;
  • a drop in the cost of goods and services for resale amid a lower cost of Zaporizhstal’s goods, a fall in fixed costs and lower impairment of trade and other accounts receivable;
  • lower transportation expenses (US$281 mn) amid lower freight costs and other logistical expenses, partly offset by higher railway expenses;
  • lower natural gas costs (US$120 mn), partly offset by higher spending on electricity (US$56 mn) and fuel (US$12 mn); and
  • lower raw material market prices, mainly of coal, coke and scrap (US$94 mn), partly offset by greater consumption driven by higher crude steel production (US$69 mn).

In addition, contributions from JVs increased, namely by US$61 mn from Southern GOK and US$12 mn from Zaporizhstal.

These factors were partly offset by lower revenues amid a decrease in average selling prices (US$434 mn) and lower sales volumes in the Mining segment (US$175 mn).

In 2016, the consolidated EBITDA margin increased by 11 pp y-o-y to 19%. The EBITDA margin of the Metallurgical segment rose by 5 pp y-o-y to 14% and that of the Mining segment by 21 pp y-o-y to 24%.


Finance income          

Finance income comprises interest income on bank deposits and loans issued, imputed interest on other financial instruments and other finance income.

In 2016, Metinvest’s finance income remained unchanged y-o-y at US$26 mn. As a percentage of consolidated revenues, finance income remained flat y-o-y at 0% in the reporting period.

Finance costs

Finance costs include interest expenses on bank borrowings and debt securities, finance foreign-exchange net losses, interest cost on retirement benefit obligations and other finance costs.

In 2016, finance costs dropped by 39% y-o-y to US$397 mn mainly due to a decrease in foreign-exchange losses from financing activity, which arose on intragroup loans and dividends. As a percentage of consolidated revenues, finance costs decreased by 3 pp y-o-y to 6% in 2016.


Share of result of associates and joint venture

In 2016, the share of net income from associates and joint ventures increased by 56% y-o-y to US$205 mn, mainly due to better results from Zaporizhstal (US$38 mn) and Southern GOK (US$29 mn).

Income tax expense

Metinvest is subject to taxation in several tax jurisdictions, depending on the residence of its subsidiaries. In 2016, corporate income tax rates were 18% in Ukraine, 10% in Switzerland, 10%-34% in the EU and 35% in the US.

In 2016, the income tax expense amounted to US$41 mn, compared with a benefit of US$161 mn in 2015. This was principally driven by a decrease in deferred tax income of US$148 mn, mainly due to lower taxable losses in 2016. In addition, current tax increased by US$54 mn, as several entities reported higher profit before income tax during the reporting period. The effective interest rate amounted to 26% in 2016.

Net profit

In 2016, net profit totalled US$118 mn, compared with a net loss of US$1,003 mn in 2015. This was principally due to a drop in operating expenses and finance costs amounting to US$1,858 mn, as well as a higher share of results of associates and JVs of US$74 mn. These factors were partly offset by lower revenues (US$609 mn) and the higher income tax charge (US$202 mn). As a result, the net margin amounted to positive 2% in 2016, compared with negative 15% in 2015.


Net cash from operating activities

In 2016, Metinvest generated US$490 mn of cash from operating activities, down 23% y-o-y. The principal reason for the decrease was a change in working capital, which had a negative impact on the net cash flow totalling US$438 mn in 2016. It was mainly due to an increase in trade and other accounts receivable of US$442 mn amid selling price growth since the beginning of the year, as well as higher cash blocked on bank accounts for the opened cash-covered letters of credit for coal purchases and other purposes. Inventories increased by US$195 mn amid a rise in stocks of steel products and higher costs of production since the beginning of the year due to raw material price growth, which was offset by an increase in trade and other accounts payable of US$199 mn. In comparison, in 2015, the change in working capital had a positive impact on the net cash flow of US$351 mn.

The negative impact of working capital was partly compensated by an increase in operating cash flow before working capital changes of US$501 mn, driven by a rise in profit before income tax of US$1,323 mn, partly offset by non-cash expenses. In addition, income tax paid and interest paid decreased by US$74 mn and US$67 mn, respectively. Income tax paid amounted to positive US$35 mn in 2016, as US$71 mn of a corporate income tax prepayment was reimbursed to some Ukrainian subsidiaries of Metinvest B.V. Moreover, a new tax collection system was introduced in Ukraine on 1 January 2016: tax prepayment requirements were lifted and tax is paid quarterly based on actual financial performance of an entity. Interest paid decreased, as in 1H 2016, Metinvest paid only approximately 30% of accrued interest and capitalised the remaining 70% due to liquidity constraints and in line with the first and the second moratorium schemes under the bond and the standstill agreements in relation to the PXF facilities. In 2H 2016, liquidity improved, allowing Metinvest to repay US$40 mn of previously capitalised interest via a cash sweep.

Net cash used in investing activities

In 2016, net cash used in investing activities rose by 40% y-o-y to US$331 mn. This increase was attributable to the need to compensate CAPEX underinvestment amid liquidity constraints in 2014 and 1H 2016. Total cash used to purchase property, plant and equipment, as well as intangible assets, amounted to US$358 mn, up 30% y-o-y. Proceeds received from sales of subsidiaries and associates amounted to US$6 mn, as Metinvest sold its investment in Black Iron (Cyprus) Limited.

Net cash used in financing activities

In 2016, net cash used in financing activities decreased by 67% y-o-y to US$105 mn. The drop was primarily driven by a decline in repayments of loans and borrowings, which fell by US$124 mn y-o-y to US$10 mn in 2016. This was due to the weak cash position, in the context of global debt restructuring discussions, as well as in line with the first and the second moratorium schemes under the bonds and the standstill agreements under the PXF facilities. In addition, net repayments of trade finance totalled US$67 mn in 2016, compared with US$179 mn in 2015. Meanwhile, cash used for other financing activities amounted to US$27 mn in 2016, compared with US$12 mn in 2015. No new proceeds were received in 2016, compared with US$4 mn received under the final drawdown under the ECA facility a year earlier.

As a result of the abovementioned factors, total debt was up by US$23 mn y-t-d to US$2,969 mn as of 31 December 2016. Meanwhile, Metinvest’s cash balance stood at US$226 mn, compared with US$180 mn as of 31 December 2015.

Capital expenditure

Amid the constraints of poor liquidity, market uncertainty and the ongoing conflict in Eastern Ukraine, Metinvest has significantly underinvested in CAPEX since 2014. Several projects have been delayed, frozen or postponed. Nevertheless, the Group has continued to implement numerous investment projects, focusing on vital maintenance projects, as well as top-priority expansion projects offering a fast payback. As liquidity improved in mid 2016, a number of projects have been resumed.

In 2016, Metinvest’s capital expenditure increased by 31% y-o-y to US$374 mn. Spending on maintenance projects amounted to 75% of total investments (73% in 2015) and that on expansion projects to 25% (27% in 2015). The Metallurgical segment accounted for 52% of capital expenditure (48% in 2015) and Mining for 46% (48% in 2015). Capital expenditure on corporate overheads decreased to US$4 mn in 2016, from US$12 mn in 2015.

Metallurgical segment
One key steelmaking project was construction of the PCI unit at blast furnace no. 4 at Azovstal, which was approved at the first stage and resumed in February 2016 (pre-construction work on-site began in August 2015, but halted soon afterwards due to limited funding). The PCI injection started in November 2016 as planned. Next steps are to install this equipment at blast furnaces nos. 2 and 3. Azovstal also completed the replacement of turbine air blower no. 3, launching the equipment in April 2016.

Ilyich Steel completed a major overhaul of blast furnace no. 4 in May to maintain hot metal production capacity. The plant also launched a large-scale revamp project to build continuous casting machine no. 4. The new equipment will allow for greater productivity, significant cost reductions, steel product quality improvements and environmental benefits in Mariupol.

Several environmental projects are ongoing at Ilyich Steel, including to rebuild the sinter plant. In 2016, Ilyich Steel completed the reconstruction of the existing dust-trapping facilities on basic oxygen furnace no. 2, reaching the design parameters in December, ahead of schedule.

Mining segment 
Metinvest continued to implement several projects at its iron ore producers. Northern GOK commissioned the first facility of the iron ore crushing and conveying system at the Pervomaisky open pit mine. Ingulets GOK made further progress in building the Vostochny conveyor line of the crushing and conveying system. Such systems are designed to move bulk materials to the surface for further processing. They enable capacity and production volumes to be maintained at current levels and reduce the cost of iron ore production and transportation. Meanwhile, the replacement of gas cleaning units on the Lurgi 552-B pelletising machine at Northern GOK is ongoing.