Magnitogorsk Iron and Steel Works boosts net profit 120% in Q3 compared with Q2; revenue up 35%

In the third quarter of 2009, Magnitogorsk Iron and Steel Works increased its net profit figure by more than 120 percent compared to the results from the second quarter of the year.

In accordance with International Financial Reporting Standards, the company ended the third quarter with more than USD 76 million in revenue over the result in quarter II. In the three quarters of 2009, the company’s bottom line was USD 1.404 billion.

For the fourth quarter (actual results not yet released as of the date of publication), Magnitogorsk Iron and Steel Works was expecting to see revenues increase by another 15 percent. The company’s investment program for 2010 comes with a price tag of USD 1.7 billion. The project to be undertaken this year is the renovation of the Belon coal unit that will allow increasing the output of coking coal by 44 percent.

Viktor Rashnikov, who serves as the Chairman of Magnitogorsk Iron and Steel Works, owns 87 percent of the company’s stock.

Q3 figures

The results of Magnitogorsk Iron and Steel Works for the third quarter reflect the company’s ability to sustain profitable operations despite the economic slowdown. In the first 9 month of 2009, the company’s debt went down by 9 percent, leveling off at USD 1 569 million. Earnings before interest, taxes, depreciation, and amortization (EBITDA) were USD 309 million, a number representing a 49-percent increase over the second quarter result of USD 207 million. The third quarter also saw a 9-percent decline in short-term debt to USD 830 million. For 2010, the company expects that the debt-to-EBITDA ratio will be close to 2.   

Even while the company by all accounts can be said to have weathered the recession relatively well, the results are somewhat lower than originally anticipated. After the second quarter, analysts believed that net profits would rise by 130 percent to USD 138 million, producing the total year-to-date result of USD 1.505 billion. The EBITDA figure was estimated at USD 361 million.

The volume of investment in quarter 3 was USD 296 million. In the second quarter of 2009, the enterprise had substantially higher capital expenditures – USD 571 million – all for bringing into operation Mill 5000.

Steel production at Magnitogorsk Iron and Steel Works in the fourth quarter was estimated to reach 2.3 million tons. Meanwhile, the plant’s capacity allows for boosting production by 50 percent if the economic situation is stable.

The actual and anticipated losses of other companies belonging to Magnitogorsk Iron and Steel Works negatively affected the financial statement of the holding enterprise. The company had to create a USD 47 million reserve for problematic accounts receivables generated by traders inside the Magnitogorsk Iron and Steel Works group.

The company’s operating profit rose to USD 82 million in quarter 3 from 17 million in the second quarter of 2009.

ING Bank financial analysts said that the good results of the enterprise as a whole were undermined by the weak performance of daughter companies and one-time expenses. But for the additional outlays, the financial indicators would have been the same as predicted in the forecast. 

According to experts with UniCredit Securities, the results of Magnitogorsk Iron and Steel Works – particularly the results of the main production company – were normal. Lower profit margins, may have had a negative impact on the market.

Financial advisors at the Alemar investment company commented that while the results were not coextensive with the expectations, Magnitogorsk Iron and Steel Works did quite well when compared to other Russian steel manufacturers. In fact, Magnitogorsk Iron and Steel Works was the only company in the ferrous metallurgy sector to show a profit during the first three quarters of 2009.

Q4 revenue

Magnitogorsk Iron and Steel Works was anticipating an increase in revenue of 15 percent for the last quarter of 2009. The estimated volume of steel production for 2009 was 8.75 million tons as of December. Output in quarter IV was forecast at 2.3 million tons.

The prices of steel products in the third quarter of the year were 50 percent higher compared to the second quarter. It was expected that the upward trend in prices would continue for the final months of 2009.

In accordance with Russian accounting practices, Magnitogorsk Iron and Steel Works’ revenue for 2009 was estimated at RUR 132 billion.

Investment

For the new year, Magnitogorsk Iron and Steel Works made plans to invest USD 1.7 billion for working on its Turkish venture, as well as for renovating its Belon coking unit.

The capex figure in 2008 was USD 1.5 billion. In 2009, capital expenditures at the main Magnitogorsk facility were RUR 34.6 billion, compared to RUR 34 billion in 2008. The combined investment figure for the main plant for 2010 has been estimated at RUR 35.3 billion. The number may be subject to change.

Priority projects for 2010 include the creation of a cold-rolled steel processing line with the capacity of 2 million tons. This type of high-quality steel would be primarily used for the automobile industry. Other projects include the renovation of Steel Mill 2500 for hot rolled steel, the building of a steel mill in Turkey, and the development of the Bakalskoye mine located in Chelyabinsk oblast.

Output

In 2010, Magnitogorsk Iron and Steel Works expects increasing steel production by 28 percent, taking the total quantity of steel produced to 11.2 million tons. Higher production expectations are justified in view of the plant’s launch of the Mill 5000, as well as the technical adjustments to the color coating line no. 2.

Higher output of long steel products is also anticipated. The company also plans to boost significantly the production of extra-value products. High-value-added products will account for 36 percent of Magnitogorsk Iron and Steel Works’ production in 2010, compared to only 28 percent in 2009.

Magnitogorsk Iron and Steel Works is also pursuing a project in Turkey that will increase the company’s production figures by 570 000 tons. Altogether, Magnitogorsk Iron and Steel Works executives estimate 2010 results at 11.77 million tons of steel products.

The production arm of the joint venture between Magnitogorsk Iron and Steel Works and a Turkish company Steel Works Atakas is situated in the city of Iskanderun.  Once operational, the Turkish plant will produce as much as 750 000 tons of cold rolled sheet, 900 000 tons of galvanized coils, 2.3 million tons of hot rolled sheet, and 400 000 tones of coated sheet per year. Magnitogorsk Iron and Steel Works is the controlling shareholder of the new enterprise.

The Turkish operation will also have metal service centers based in Istanbul and Iskanderun. The joint enterprise will also have its own sea port for large vessels.

Coking coal

The retrofitting of the Belon coking coal unit at Magnitogorsk Iron and Steel Works will allow increasing production by 44 percent over the course of 2010.

By 2013, the unit’s renovation would permit raising total output by a whole 70 percent to 6.8 million tons of coaking coal. 2009 production level was estimated at 3.9 million tons. Coking coal concentrate output – currently standing at 2.75 million tons – is expected to go up to 4.3 million tons, a change that would reflect a 56 percent increase. 

Capital expenditures at Belon are likely to be around USD 110 to USD 118 million during the current year.

In October of 2009, Magnitogorsk Iron and Steel Works completed the acquisition of 100 percent of Onarbay Enterprises Ltd that owns 82.6 percent of Belon, which operates in the coal-rich Kuzbass in Kemerovo oblast. Magnitogorsk Iron and Steel Works, which originally owned 43.1 percent of Belon, bought Belon’s director general Andrei Dobrov out of the company for around USD 300 million.

Production facilities comprising the Belon group include the Chertinskaya-Koksovaya, the Listvyazhnaya, the Novaya-2, and the Kostromovskaya deep mines, the Novobochatsky strip mine, as well as the Listvyazhnaya and the Belovskaya enrichment plants.