Metinvest announces financial results for the full year 2013

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 consolidated financial results for the 12 months ended 31 December 2013.

FINANCIAL HIGHLIGHTS

FINANCIAL MANAGEMENT HIGHLIGHTS

• Repaid a US$175 million three-year amortised stand-by credit line from Sberbank of Russia, a US$85 million revolving credit line from ING Bank N.V., a US$75 million two-year pre-export finance facility from Rabobank International and a US$40 million three-year loan facility from Amsterdam Trade Bank N.V.

• Received an additional US$260 million as an extension to a US$300 million three-year pre-export finance facility secured at origination in November 2012, and secured a new US$300 million five-year pre-export finance facility

OPERATIONAL AND CSR HIGHLIGHTS

• Appointed a new Group CEO, Yuriy Ryzhenkov, and CFO, Aleksey Kutepov
• Opened a sales office and a metals service centre in Nizhny Novgorod, in the Volga Federal District of Russia, a sales office and a warehouse in Bryansk, in the Central Federal District of Russia, and a sales unit in Belarus with a warehouse in Minsk

• Signed new annual social partnership agreements with regional councils in nine cities where Metinvest operates. The agreements represent joint efforts between the Group and local communities and administrations to raise living standards in Ukraine’s regions to European levels.

CORPORATE STRUCTURE HIGHLIGHTS

• SCM Group transferred 23.5% of Central GOK and 15.0% of Northern GOK to MetalUkr Holding Limited (MetalUkr), which is wholly owned by Metinvest B.V., and 26.0% of Zaporizhia Coke, 31.3% of Donetsk Coke and 40.0% of Yenakiieve Coke to Metinvest B.V. SMART Group transferred 3.1% of Ingulets GOK to Metinvest B.V.

• MetalUkr transferred 78.31% of Northern GOK, 99.48% of Central GOK, 0.25% of Azovstal and 1.21% of Khartsyzk Pipe to Metinvest B.V.

Commenting on the results, Yuriy Ryzhenkov, CEO of Metinvest, said: “Despite ongoing challenges in the global steel market, we delivered a robust financial and operational performance in 2013, including double-digit growth in EBITDA. We also maintained our level of investment, targeting projects that will increase our operational efficiency, enhance employee safety and reduce our environmental footprint. We kept CAPEX stable at US$747 million and continued to implement our Technological Strategy, which seeks to balance our ambitious modernisation plans and conservative financing strategy.

Regarding the overall economic situation, which is the main driver of the global steel market, cautious optimism is appearing. Against this background, our output was broadly stable in 2013. We produced 12,391 thousand tonnes of crude steel, 36,926 thousand tonnes of iron ore concentrate and 11,393 thousand tonnes of raw coking coal.

Our headline financial results reflect a stable top line and underlying growth in EBITDA as well as an improved EBITDA margin. For the full year, consolidated revenues rose by 2% to US$12,807 million. Operating profit increased by 4% to US$1,026 million, giving an operating margin of 8%, while adjusted EBITDA rose by 15% to US$2,291 million, driving the EBITDA margin to 18%.

The improved EBITDA was partly due to the Metallurgical division swinging to a positive contribution, as global steel prices outperformed those of raw materials and we further improved the operational efficiency of our mills, supply chain and downstream logistics. The EBITDA of the Mining division remained broadly stable.

In addition, we sustained our investments in technology and further streamlined our business processes. Major projects in our Metallurgical division included the launch of pulverised coal injection (PCI) at Ilyich Steel and the ongoing construction of a PCI system and a new air separation unit at Yenakiieve Steel. In the Mining division, we continued construction of a crusher and conveyor system at the Pervomaisky quarry at Northern GOK, finished construction of the Affinity mine at United Coal, adding another 1.2 million tonnes of high-grade coking coal capacity, and commissioned new advanced safety systems at Krasnodon Coal. As a committed corporate citizen, we continued to invest in the environment, preparing for building a new sinter plant at Yenakiieve Steel and fitting new filters on the existing sinter plant at Ilyich Steel.

Pursuing the corporate goal of further strengthening our position in strategic markets, in 2013, we added 30 new value-added steel products to our already well diversified product portfolio, expanding our downstream reach and creating new market opportunities. As a result, last year, we increased revenues by 37% year-on-year in the Middle East and North Africa (MENA), 18% in Southeast Asia and 11% in Europe. The shares of these regions in our overall sales rose by 4 pp², 2 pp and 2 pp, respectively, increasing the share of export sales to 71%, up 4 pp year-on-year. In Ukraine, while sales for both steel and iron ore products fell due to lower consumption, we have maintained our leading market position by working with key customers and developing our distribution network further. Strong demand for iron ore from China and improved sales of steel in MENA mitigated the effect of weak demand in other regions amid falling prices for steel and coal products.

In 2013, we continued to make our corporate structure more streamlined and transparent through the transfer of stakes in operational assets from our two major shareholders, SCM Group and SMART Group, to MetalUkr Holding, which is wholly owned by Metinvest B.V., the Group’s parent company, and a further such transfer from MetalUkr to Metinvest B.V.

Given the current geopolitical situation, I would like to underline that we continue to monitor developments involving our country and communities closely. At the same time, we are committed to continuing our work and are always ready to address concerns and questions from all our stakeholders.

Our business continues to operate as normal and our exposure to the current political and economic volatility remains minimal at this stage. We underline our commitment to our Russian customers and are continuing to work with them as normal.

Looking further into 2014, we think that the global steel industry will remain challenging, with such factors as the potential end of monetary stimulus by the US Federal Reserve, continued slow growth in Europe, and uncertainty regarding the situation in Ukraine pressuring demand. We believe that our investments in technology, improvements in business processes and our strategic advantages will enable us to continue to deliver sustainable value to all our stakeholders.”

Commenting on the results, Aleksey Kutepov, CFO of Metinvest, said: “While our key markets continued to experience turbulence last year, our vertically integrated business model and commitment to cost-cutting again showed that we can be flexible and resilient, and our financial results demonstrate this. Notably, amid lower prices of coking coal and scrap metal, we focused more on enhancing production processes and achieved profitability in the Metallurgical division, whose EBITDA swung into positive territory. The Mining division remained the key contributor to the Group’s results, keeping the EBITDA margin stable at 43%. Overall, despite the flat output, we were able to increase underlying profitability.

We are prepared for prolonged turmoil in the global steel market, and our adherence to a conservative financing strategy continues to pay off. As we reduced net debt by 6% and increased EBITDA by 15%, our net debt–to-EBITDA ratio improved from 1.9x to 1.5x, a comfortable level. We were also able to keep CAPEX stable in order to invest in the future.

During the year, we completed the repayment of four loan facilities. The total principal amount of debt repaid in 2013 was US$632 million. In April, we raised an additional US$260 million by increasing a US$300 million three-year pre-export finance facility secured at origination in November 2012. We had originally planned to increase the facility by US$100 million, but it was oversubscribed through syndication. In November 2013, we secured another US$300 million five-year pre-export finance facility.

In addition, we focused on streamlining the business by reducing the cost of sales and general, administrative, distribution and financing expenses as part of strategic steps to cut expenditure. Meanwhile, a one-off reversal of previously written-off trade receivables from a key customer, as well as fines and penalties paid by customers for overdue trade receivables, and foreign exchange gains contributed to a 4% increase in operating profit. The fall in net income to US$392 million was primarily attributable to higher income tax expense, itself due to a recognised valuation provision of US$155 million against deferred tax assets. In terms of cash flows, we boosted net cash from operating activities by 28% to US$1,465 million and ended the year with a US$783‍ million cash balance.

Despite the uncertain conditions on our markets, we are convinced that our conservative financial management and our focus on improving efficiency will help us to continue delivering robust financial results in the foreseeable future.”

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