Consolidated revenue stood at 74.9 billion rubles, minus five percent compared to the second quarter of 2019.

Mechel PAO, a leading Russian mining and steel group, announced financial results for the third quarter of 2019. Mechel’s chief executive officer Oleg Korzhov commented on the results as follows, “Consolidated EBITDA went down by nine percent in the third quarter of 2019 quarter-on-quarter. This was due mainly to the weakness of coal markets, as well as a decrease in steel output and steel product sales because of repairs at Mechel’s facilities, including the overhaul of one of the Chelyabinsk Metallurgical Plant’s blast furnaces. Major planned repairs at Mechel’s steel facilities will continue to affect Mechel’s operational performance in the medium term, but they are essential for ensuring stable output in the future. I would like to draw your attention to the group’s success in restoring coal mining volumes and iron ore concentrate production. This trend, which became apparent in the second quarter of 2019, persisted into this reporting period.”

In the third quarter of 2019, Mechel’s mining facilities increased coal mining by 15 percent and iron ore raw materials production by 27 percent quarter-on-quarter. This enabled the company to improve sales volumes of nearly all of the mining division’s products quarter-on-quarter.

Since steel output decreased, the steel division’s facilities focused on producing high value-added products, namely structural shapes from the Chelyabinsk Metallurgical Plant’s universal rolling mill, including rails, as well as stainless longs and flats. The overall decline in output mostly affected sales volumes of less profitable products, such as rebar and wire rod.

Oleg Korzhov noted, “As principal debt payment amortization draws near, we are actively negotiating the postponement of Mechel’s debt’s maturity with Mechel’s key creditor banks. Sberbank’s transfer of its rights to debt payment on the loan denominated in rubles and U.S. dollars, originally issued to the group’s subsidiaries the Chelyabinsk Metallurgical Plant, the Southern Kuzbass Coal company, and the Bratsk Ferroalloy Plant for a total of 49 billion rubles, to VTB Bank increased the share of VTB Bank in the group’s debt portfolio to 51 percent.”

Consolidated Q3 & 9M 2019 results

Mechel’s chief financial officer Nelli Galeyeva commented as follows, “Consolidated EBITDA for the first nine months of 2019 totaled 44.1 billion rubles. The profit attributable to Mechel’s equity shareholders went up by 1.2 billion rubles year-on-year, reaching 12.2 billion rubles over these nine months. The dynamics of foreign exchange gains on foreign currency obligations had a major impact on this indicator in connection with the ruble’s strengthening against the U.S. dollar and the euro in the reporting period.”

The operating cash flow went up to 15.8 billion rubles in the third quarter of 2019 as compared to 12.8 billion rubles in the second quarter of 2019 and remains sufficient for both the group’s operational needs and decreasing debt leverage. In the third quarter of 2019, the group’s financial expenses went down by 0.4 billion rubles from 9.9 billion rubles in the second quarter of 2019 to 9.5 billion rubles, which was due to the Russian Central Bank’s lowering the key interest rate and other floating rates. Mechel paid a total of 8.0 billion rubles in interest in the third quarter of 2019, including capitalized interest and lease interest, which corresponds with the average quarterly interest amount. The current average interest rate and the average interest rate paid is 7.4 percent.

The group’s net debt, excluding fines and penalties on overdue amounts and options, went down by 15 billion rubles as compared to December 31, 2018, amounting to 408 billion rubles. The net-debt-to-EBITDA ratio amounted to 6.9 at the end of the third quarter of 2019 as compared to 6.4 at the end of the second quarter of 2019. This figure increased due to the EBITDA’s decrease compared to the previous reporting period. The debt portfolio’s structure remained largely unchanged, with 65 percent of Mechel’s debt nominated in rubles and the remainder in foreign currency. Russian state-controlled banks account for 89 percent of Mechel’s lenders.

Mining segment

Revenue from contracts with foreign customers in the third quarter of 2019 went down by seven percent quarter-on-quarter, as global coal markets weakened and sales volumes of coking coal concentrate decreased. The division’s revenue in the first nine months of 2019 was stable year-on-year despite a slight decrease in coal product sales volumes because prices went up.

The division’s EBITDA in the third quarter of 2019 demonstrated a nine-percent decrease quarter-on-quarter, with the main negative factor being the decrease in prices for the division’s entire product range except iron ore concentrate. The lower year-on-year EBITDA in the first nine months of 2019 was a result of increased production and sales costs due to outrunning stripping volumes and the division’s sweeping repair program.

Mechel Mining Management’s chief executive officer Igor Khafizov noted, “In the third quarter of 2019 we continued to increase coal mining volumes. Mining at the Southern Kuzbass Coal company grew by 36 percent quarter-on-quarter, and the division’s overall mining went up by 15 percent. We are not leaving it at that and will continue to restore Mechel’s production indicators.”

Iron ore concentrate’s output at the Korshunov Mining Plant went up 27 percent quarter-on-quarter. Mechel’s facilities are keeping up fast-paced preparations of Mechel’s coal and iron ore reserves for mining, with stripping volumes up by 19 percent quarter- on-quarter. This advanced pace of increasing stripping and mining coal and iron ore resulted from Mechel’s mining equipment fleet modernization, as well as bringing in contractors with mining equipment of their own.

Mr. Khafizov added, “I would like to note that as the division’s mining volumes and sales grow, we see a stable downward trend in unit production costs across almost all of Mechel’s facilities since the second quarter of 2019. This enables us to keep up stable efficiency even with the current high volatility at metallurgical commodity markets. Price weakness was largely due to coal import restrictions at Chinese ports. It is expected that early next year those restrictions will be cancelled, which will have a positive impact on global metallurgical coal markets by this year’s end.”

Steel segment

Revenue from contracts with foreign customers in the third quarter of 2019 went down by three percent quarter-on-quarter and by seven percent in the first nine months of 2019 year-on-year, as overall output volumes and steel products sales decreased due to a sweeping program of current and capital repairs to the equipment at the division’s facilities.

The division’s EBITDA in the third quarter of 2019 demonstrated a 30-percent drop quarter-on-quarter, while the EBITDA for the first nine months of 2019 went down by 51 percent year-on-year. This was mostly due to decreased steel output and sales, as well as higher iron ore prices.

Mechel-Steel Management company’s chief executive officer Andrey Ponomarev noted as follows, “Due to Mechel’s facilities’ undertaking extensive repairs, including capital repairs of the key equipment, such as the Chelyabinsk Metallurgical Plant’s blast furnace No. 4, steel output went down both quarter-on-quarter and over the first nine months of 2019 year-on-year. With this in mind, in the third quarter of 2019, the division adjusted its output and sales structure to arrange for the efficient use of its resources and to maximize financial results. Output of the least profitable products went down.”

As a result, sales of rebar and wire rod went down quarter-on-quarter by 19 percent and 28 percent respectively. At the same time, the output of high value-added products increased. Sales of rails spiked by 75 percent quarter-on-quarter, sales of other structural shapes at the Chelyabinsk Metallurgical Plant’s universal rolling mill went up by five percent. Sales volumes of stainless flats went up by 15 percent and stainless forgings by 17 percent. Sales of the most expensive types of nickel-containing longs and wire ropes also increased.

Average sales prices of the most profitable products demonstrated primarily positive dynamics quarter-on-quarter, while prices for rebar and wire rod peaked at the end of the second quarter of 2019 before taking a downward turn early in the third quarter of 2019. These negative dynamics for construction products were due to limited export alternatives, increased competition, market offers, and a seasonal decline in demand.

The repairs program at the division’s facilities continues. This includes the replacement of the Chelyabinsk Metallurgical Plant’s converter No. 1, scheduled for the end of 2019, and capital repairs of the Urals Stampings Plant’s press No. 2. The wire-rope production facility modernization program and stranded ropes output mastering are being successfully implemented at the Beloretsk Metallurgical Plant. These projects will help raise Mechel’s equipment’s reliability and efficiency and improve the quality of Mechel’s products, while reducing the environmental impact.”

Power segment

Mechel-Energo’s chief executive officer Denis Graf noted, “As Mechel’s facilities decreased their capacity utilization and demand for Mechel’s division’s products saw a seasonal decline typical for summer periods, the revenue in the third quarter of 2019 demonstrated negative dynamics quarter-on-quarter. Nevertheless, the EBITDA in this reporting period showed a major increase as costs of sales went down.”

Revenue for the first nine months of 2019 went up year-on-year, primarily due to increased sales volumes, but the growing cost of sales brought down the EBITDA and the EBITDA margin.

Mechel is an international mining and steel company. Its products are marketed in Europe, Asia, North and South America, as well as Africa. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, heat, and electric power. All of its enterprises work in a single production chain, from raw materials to high value-added products.