As a consequence of the worsening economic climate, Evraz’s bottom line for the first half of the current year was USD 999 million in the negative. Such significant losses are much higher than what was originally estimated. Despite the downturn, company officials remain hopeful that results will improve in the third and fourth quarters of the year, as emerging world markets recover.
Evraz is finalizing discussions with Russia’s VTB to extend the due date on a RUR 10-billion loan for 4 years. The company has made a decision not to pay any dividends in 2009.
Slow performance
Evraz lost just under USD 1 billion from its operations in the first two quarters of 2009, according to the information contained in the company’s earnings statements. The statements conform to International Financial Reporting Standards.
By comparison, in quarter I and quarter II of last year, the company’s profit stood at USD 2 billion.
The losses Evraz experienced came as a shock to many analysts. The estimate for losses provided earlier was only USD 351 million. The company issued a statement noting that the results were exacerbated by a change in accounting policies, a factor that accounted for USD 833 million of the losses. Otherwise, the loss would be only USD 166 million.
According to the papers Evraz released, the company’s EBITDA indicator was USD 468 million, reflecting an almost 88 percent drop compared to the results for the first half of 2008. Revenues stood at USD 4.64 billion, which is nearly 57 percent lower than one year ago. Industry analysts predicted that the EBITDA figure would be USD 563 million, and that revenues would total USD 4.66 billion.
Capital expenditures decreased by more than 60 percent in the first two quarters to USD 203 million. One positive factor, however, is that the company’s net debt went down from USD 9.03 billion to USD 7.83 billion.
According to the president of Evraz Alexander Frolov, constructive developments on the most significant foreign markets, to which the company exports, will pave the way to recovery. The rise in demand from metallurgy-product-consuming nations in the Middle East, Asia, and Africa is what seems to be fueling the gradual increase in Russia’s steel production that began in July of 2009. The last six months of the year should bring better financial results than the first.
Another problem that Evraz ran up against as a consequence of the global economic downturn is that its operations located in other countries, namely in North America and Europe, have suffered more extensively and are not rebounding as quickly as the company’s domestic production units. Even though the depletion of product stock in these western markets has already taken place, the demand is exceptionally week.
In the first half of the year, the company’s proceeds from sales outside the Russian market accounted for 73 percent of revenues in the steel category. In the first half of last year, outside sales accounted for only 58 percent.
Every single production operation that Evraz has in Russia is currently online, albeit to varying degrees of capacity. The plants Evraz owns in the United States and Europe are now running at only 50 percent of their production potential.
Loan extension
Evraz is closing negotiations with Russia’s VTB to extend the date of maturity on an existing RUR 10-billion loan. Mr. Giacomo Baizini, the vice president of Evraz, said that the group seeks to push back the due date on the loan for 4 years.
The loan was procured a year ago and would ordinarily be due in October of 2009.
At the same time, the company is making strides to be current on other loans it received.
The supervisory board of Russia’s Vnesheconombank, with which Evraz has a USD 1.2 billion loan, agreed to extend the duration of financing arrangements that were agreed upon previously for one more year. After restructuring its debt, Evraz will have only USD 900 million in short-term obligations.
No plans are yet discussed for increasing the enterprise’s charter capital for paying the debt. At the same time, according to Mr. Baizini, such a course of action is not totally out of the question in view of the opportunities Evraz may have for gaining access to capital markets.
Company officials warn that on the day Evraz makes public its performance results for 2009 as a whole, several conditions contained in the debt instruments held by its creditors could be breached, leading to cross defaults.
Should such a scenario transpire, the creditors would be in a position to exercise their lawful rights and demand payment of the balance on the loans immediately. Alternative ways of addressing this situation include asking debt holders not to make such unreasonable demands in light of the worsened market conditions. Sanctions in the form of late charges may be imposed on the steelmaker for asking the creditors to postpone their demands.
According to Evraz vice president for international relations Mr. Pavel Tatianin, the company does not intend to exhaust its RUR 8.8 billion credit line with Sberbank, unless the market situation changes for the worst.
Sberbank and Evraz made the financing contract in early August of 2009. So far, no funds were drawn against the credit line. As Mr. Tatianin explained, the line was established as a contingency to be resorted to only if the company gets short on operating capital.
If the market situation remains normal, Evraz is unlikely to use the credit line, as the interest rate scheme set up in the financing contract is not particularly advantageous.
Non-payment of dividends
Evraz has made a decision not to pay any dividends in 2009. Whether to pay dividends in the future will be determined largely by the business climate in the industry, Evraz’s leverage, and the flow of cash.
Reports that have been issued before this announcement came noted that Evraz did in fact alter its policy with respect to dividends. Under the new guidelines, Evraz cannot direct more than a quarter of its net profit to dividend payments. In the previous dividend policy, a quarter of the net profits was only the floor for dividend earmarks, not the ceiling.
The company made no dividend payments for last year. The company also issued statements of its plans to amend the dividend policy one more time. The allocation of funds for the payment of dividends will resume only after the full-scale recovery of the market takes place. The payment of dividends in the first two quarters of last year was USD 8.25 per share.
New purchases
Evraz has been conducting negotiations aimed at facilitating the acquisition of Carbofer General Trading, which would allow boosting its metallurgy product sales to end consumers. Carbofer General Trading is based in Switzerland. In 2007, Evraz sold its own sales unit Evrazmetall to Carbofer. The details of that transaction have not been made public.
In the view of Alexander Frolov, the closer Evraz is to the actual consumers of metallurgy products, the greater sales the company would have. Company officials in general think that the Carbofer acquisition would be highly desirable.
Carbofer Metall constitutes a consortium of close to 30 sales divisions of Carbofer General Trading in Russia. The company has over 700 employees. In 2008, the volume of the company’s sales was 9.7 million tons of metals. Revenues for 2008 were USD 3 billion.
With respect to other asset dispositions, Evraz is not making plans to sell the 10-percent share of the capital stock it owns in Delong Holdings. Instead, the company anticipates strengthening its cooperation with the Chinese partner. Evraz declined to exercise its option to sell Delong’s stock prior to the option’s expiration in August.
Company officials are trying to proceed very cautiously, avoiding rash decisions as to what next step of development Evraz should take. Nevertheless, Alexander Frolov thinks that China does represent a strategic market for the company.
Evraz is 72-percent owned by Lanebrook, whose beneficiaries include Millhouse, as well as the holding company of Russia’s tycoon Roman Abramovich (50 percent), and Evraz executives Alexander Abramov and Alexander Frolov (also 50 percent)
The assets Evraz has are spread across Russia, Ukraine, the U.S., Canada, the Czech Republic, Italy, and South Africa. In 2008, the company’s results showed that production of steel rose by more than 7 percent, reaching 17.67 million tons.