Metinvest Announces 2q and 1h 2015 Operational Results

Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), announces its operational results for the second quarter of 2015 and the first six months ended 30 June 2015.

OPERATIONAL HIGHLIGHTS

METALLURGICAL DIVISION

HOT METAL PRODUCTION

Crude steel production

In 2Q 2015, hot metal production increased by 19% q-o-q, as output rose by 38 thousand tonnes at Azovstal, 42 thousand tonnes at Ilyich Steel and 246 thousand tonnes at Yenakiieve Steel, the latter after a long period of downtime in 1Q 2015.

Driven by the higher hot metal output, crude steel production rose by 32% q-o-q in 2Q 2015. Volumes increased by 51 thousand tonnes at Azovstal, 178 thousand tonnes at Ilyich Steel and 301 thousand tonnes at Yenakiieve Steel. At Ilyich Steel, the 30% increase in steel output exceeded the 5% growth in hot metal production due to the reallocation of merchant pig iron for steelmaking.

In 1H 2015, hot metal output fell by 33% y-o-y, as operations were significantly affected by the conflict in Eastern Ukraine, which escalated considerably in 2H 2014. Production declined due to:

• the complete shutdown of Yenakiieve Steel from 7 February to 16 March 2015;
• constraints in raw material supplies to Azovstal and Ilyich Steel in 1H 2015;
• interruptions in natural gas supplies to the steel plants in Mariupol on 12-14 June 2015, after artillery shelling damaged a key gas pipeline.

These events caused hot metal output to decrease by 350 thousand tonnes at Azovstal, 952 thousand tonnes at Ilyich Steel and 616 thousand tonnes at Yenakiieve Steel.

The decline in hot metal output caused a comparable fall in crude steel production, which dropped by 32% y-o-y in 1H 2015. Production decreased by 352 thousand tonnes at Azovstal, 847 thousand tonnes at Ilyich Steel and 651 thousand tonnes at Yenakiieve Steel.

Metal product output[1]

In 2Q 2015, output of merchant semi-finished products fell by 7% q-o-q due to a decrease of 136 thousand tonnes in production of merchant pig iron, which was partly compensated by an increase in production of slabs (18 thousand tonnes) and square billets (78 thousand tonnes). The decrease in merchant pig iron output was mainly driven by lower production at Ilyich Steel. Pig iron was diverted to crude steel smelting to fulfil higher-margin orders.

Production of merchant slabs increased by 18 thousand tonnes q-o-q in 2Q 2015 due to the overall increase in crude steel output. Output of square billets rose by 78 thousand tonnes, as production at Yenakiieve Steel recovered after its suspension in 1Q 2015.

In 1H 2015, output of merchant semi-finished products dropped by 37% y-o-y due to lower production of all types of semi-finished products: pig iron fell by 278 thousand tonnes, merchant slabs by 235 thousand tonnes, and square billets by 155 thousand tonnes. Merchant pig iron production declined due to lower hot metal output and its redistribution to make finished goods. The fall in production of merchant slabs and square billets at Azovstal and Yenakiieve Steel was due to the reallocation of those products in favour of flat and long products, respectively.

Production of finished goods increased by 343 thousand tonnes q-o-q in 2Q 2015.

Output of flat products rose by 180 thousand tonnes q-o-q in 2Q 2015, mainly due to an increase of 148 thousand tonnes in the production of and orders for finished goods from Azovstal and Ilyich Steel. Production at the European re-rolling plants increased by 32 thousand tonnes q-o-q, reflecting lower production in 1Q 2015 as maintenance and repairs were completed in January.

Output of long products increased by 157 thousand tonnes q-o-q, of which 137 thousand tonnes was due to:

• the resumption of production at the Makiivka branch of Yenakiieve Steel following repairs of damage caused by artillery shelling (shutdown of the 150 rolling mill from 10 February to 9 April and the 390 rolling mill from 8 February to 1 April);
• an increase of 16 thousand tonnes in production at Azovstal;
• a rise of 4 thousand tonnes in production at Promet Steel in Bulgaria.

Output of tubular products increased by 10 thousand tonnes q-o-q, driven by a rise of 2 thousand tonnes in large-diameter pipe (LDP) production at Khartsyzk Pipe and 8 thousand tonnes in pipe production at Ilyich Steel.

Production of finished goods decreased by 31% (1,276 thousand tonnes) y-o-y in 1H 2015 as a result of the conflict in Eastern Ukraine, which escalated considerably in 2H 2014:

• output of flat products decreased by 611 thousand tonnes, mainly driven by lower production of plates (458 thousand tonnes) and coils (163 thousand tonnes) at Ilyich Steel and plates (35 thousand tonnes) at Azovstal, and partly compensated by an increase in production of 45 thousand tonnes at the European assets;
• output of long products decreased by 543 thousand tonnes due to a decline in production at Azovstal (99 thousand tonnes) caused by a lack of orders, the suspension of operations at Yenakiieve Steel and its Makiivka branch (343 thousand tonnes), and a decrease in production at Promet Steel (100 thousand tonnes) caused by a shortage of billets from Yenakiieve Steel in February-March 2015;
• output of rail products fell by 62 thousand tonnes at Azovstal due to decreased demand;
• output of pipe products dropped by 60 tonnes, mainly due to a decrease in LDP production at Khartsyzk Pipe (54 thousand tonnes). The conflict in the region limited supplies of coating materials for pipes and shipments of finished goods. In addition, since June 2015 there has been a lack of orders.

Coke production[2]

Coke output increased by 9% (76 thousand tonnes) q-o-q in 2Q 2015, as production rose by 94 thousand tonnes at Donetsk Coke and 25 thousand tonnes at Avdiivka Coke; both assets are located in the conflict zone in Eastern Ukraine. Zaporizhia Coke decreased production by 47 thousand tonnes due to overhauls of core equipment. Azovstal's coke output rose slightly (4 thousand tonnes) compared with the previous quarter.

Coke production decreased by 39% (1,154 thousand tonnes) y-o-y in 1H 2015 as a result of raw material supply constraints and unstable operations at Avdiivka Coke, Azovstal and Donetsk Coke due to the conflict in Eastern Ukraine.

On average, in 1H 2015, the Group used around 77% of total coke output for its own steel production.

MINING DIVISION

Iron ore concentrate and pellet output[3]

In 2Q 2015, overall production of iron ore concentrate rose by 12% (908 thousand tonnes) q-o-q. Northern GOK and Ingulets GOK increased output by 549 thousand tonnes and 325 thousand tonnes, respectively, in response to a recovery in:

• internal consumption of iron ore concentrate by Metinvest's steel plants in 2Q 2015;
• shipments to third parties.

Central GOK boosted output by 34 thousand tonnes q-o-q in 2Q 2015 as a result of increased working hours.

In 2Q 2015, output of merchant iron ore products increased by 13% (611 thousand tonnes) q-o-q, as:

• merchant concentrate output increased by 882 thousand tonnes due to higher production of total concentrate (831 thousand tonnes) and lower production of pellets (51 thousand tonnes);
• merchant pellet output decreased by 271 thousand tonnes, of which 41 thousand tonnes was due to lower production and 230 thousand tonnes due to an increase in internal consumption.

In 1H 2015, total iron ore concentrate production dropped by 12% (2,205 thousand tonnes) y-o-y, mainly driven by high inventories due to the inability to ship products and lower intragroup consumption amid the conflict in Eastern Ukraine (Yenakiieve Steel was idle from 7 February to 16 March, while Ilyich Steel and Azovstal reduced production).

Merchant concentrate output decreased by 247 thousand tonnes y-o-y to 6,190 thousand tonnes in 1H 2015. This was mainly driven by a fall in merchant concentrate production of 659 thousand tonnes at Ingulets GOK, which was partly compensated by an increase in output of 412 thousand tonnes at Northern GOK and Central GOK.

In 1H 2015, merchant pellet production declined by 172 thousand tonnes y-o-y. This was due to an overall decrease in concentrate output given the aforementioned reasons.

Coal concentrate production[4]

Coal concentrate output dropped by 6% (53 thousand tonnes) q-o-q in 2Q 2015, as United Coal decreased production by 11 thousand tonnes and Krasnodon Coal by 42 thousand tonnes.

Lower volumes at Krasnodon Coal were due to logistical constraints to shipping products and the lack of timber supplies used to support production faces in 2Q 2015 due to the conflict in Eastern Ukraine. Output at the Barakova and Sukhodolskaya-Vostochnaya mines decreased by 22 thousand tonnes each. The minor increase in production at the Samsonovskaya-Zapadnaya mine (2 thousand tonnes) was caused by the need to end exploiting the reserves and dismantle mining equipment.

Coal concentrate production decreased by 31% (724 thousand tonnes) y-o-y in 1H 2015. This was due to a decrease in coal extraction of 1,055 thousand tonnes at Krasnodon Coal, which was partly compensated by an increase in production of 331 thousand tonnes at United Coal.

The rise in output at United Coal was the result of:

• an increase in production of 108 thousand tonnes at the Affinity mine, which was idle during the same period of 2014;
• a rise in output of 126 thousand tonnes at the Wellmore mines due to the launch of new coal mining capacity at the end of 2014;
• an increase in output of 182 thousand tonnes at the Carter Roag mines amid improved geological conditions;
• a drop in output of 85 thousand tonnes at the Pocahontas mines due to downtime in 2015.