Mechel PAO
Q4 2016 Earnings Call Transcript

Published: 29 Apr 2017

[Alexey Lukashov:]

Thank you and good day everyone. I would like to welcome you to Mechel’s conference call to discuss our full year 2016 results, which we reported today. With us from management today are Mr. Oleg Korzhov, Mechel’s CEO; and Mr. Sergey Rezontov, Mechel’s CFO. After management has made their formal remarks, we will take your questions to the presentation team. Please note that during this call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions, and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the United States Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. In addition, we will be using non-IFRS financial measures, including EBITDA, in our discussions today. Reconciliation of non-IFRS financial measures to the most directly comparable IFRS financial measures are contained in the earnings press release, which is available on our website at www.mechel.com. At this point, I would like to turn the call over to Mechel’s CEO, Mr. Korzhov. Please go ahead.

[Oleg Korzhov:]

Good afternoon, and good morning, ladies and gentlemen. We are glad to welcome you to the conference call, dedicated to the company’s 2016 financial results.

[Operator:]

And sir, you are reconnected to the conference. The group has demonstrated improvements of all its financial results. Consolidated revenue is RUB276 billion up 9% year-on-year. EBITDA went up by 45% to reach RUB66.2 billion. The last time we had such result was in 2011. EBITDA margin reached 24% results unmatched since 2007. And I would like to note that this the first time since 2011 that Mechel has earned net profit of RUB7.1 billion. In 2016 our priority task was to promote our key investment projects wherein the group has invested its own funds and loaned finances over the past few years. We spent no effort in bringing these projects to planned capacity in the shortest possible time to begin earning our deserved profits. For example, last year Chelyabinsk Metallurgical Plant’s universal rolling mill produced 570 tons of rail and beams which is nearly half of its project capacity with rails accounting for more than 60% of annual output. I think it is no secret to anyone that last year’s chief event which had the most dramatic positive effect on our financial results was the fulfilled growth of coking coal concentrate prices. By the end of the year prices begin to retreat from historical highs but we took care to take full advantage of the favourable situation in the fourth quarter and we increased sales of coking coal concentrate to third parties with export accounting for 90% of this product's sales. As a result the mining division's share in the fourth quarter’s consolidated EBITDA was nearly 73% and the fourth quarter's EBITDA accounted for 37% of the entire years EBITDA. With a particular attention to maintenance and repairs of equipment at Elga Coal Complex where from past two years we have been forced to save costs investing only when absolutely necessary. Trade Port Posiet reaching coal shipping capacity of 7 million tons was an important event for 2016. Last year the port shipped nearly 70% of our coal to Asia Pacific. Its 2016 results won the port the Best Stevedore Company award from Russia’s Federal Sea and River Transport Agency. I would like to note that last year we have invested a lot of effort into optimizing our steel division's expenditures producing processes and technology workflows. This enabled us to significantly improve its efficiency, distributing the load on our facilities and our trade flow to increase production of high margin products and curtail high costs. [Audio Gap] [Audio Gap] Last year we also received financing for our project at Beloretsk Metallurgical Plant from Russia's Industrial Development Fund and the project is now steaming ahead. Recently the Industrial Development Fund's Expert Council approved financing for yet another project of ours expansion of the product range of Chelyabinsk Metallurgical Plant's universal rolling mill. In 2017 development of our key investment projects remains our chief task. That includes primarily the increase of the load of Chelyabinsk Metallurgical Plant's universal rolling mill up to 75% from its project capacity and mastering production of new type of profiles including those meant for export. We have already mastered production of two types of beams and earned European certificates for our entire future beam range which were planned to export very soon. We will also work on mastering... [Audio Gap] As far as the Elga project, we are currently upgrading its motor fleet aiming to bring Elga in the second half of the year to monthly mining capacity equal to 5 million tons a year which is how much we will be mining at this deposit with current coal processing capacities. Currently our plan for 2017 is 4.5 million tons of run of mine coal. I want to particularly note that in December soon after we have had our conference call with you regarding the nine months of 2016 results, we have signed a debt restructuring agreement with VTB Bank which meant that similar agreements signed earlier with Gazprombank and SpareBank came into effect. We have carried forward payments of the principle amount of the debt from 2017 to 2020 gaining us two more years to stabilize and strengthening the group’s financial position. We have thus completed our long restructuring process with state lender banks. There are still some unresolved issues with other lenders, but we will do all we can to reach agreements with them this year. Having mentioned our debt which Sergey Rezontov will further elaborate on I would also like to note that in 2016 we reduced our net debt to EBITDA ratio from 11 to 6.6. The ratio indeed remains very high and we still need to bring it further down, but still it's reduction by half is a good trend. Now I would like to give the floor to our Chief Financial officer, Sergey Rezontov, who will give details on the financial results of all of our business segments. Thank you for your attention.

[Sergey Rezontov:]

Good afternoon, ladies and gentlemen. I would like to welcome you to our conference call to present financial results of Mechel Group for the year of 2016 and answer your questions. Our presentation is available on our web page, mechel.com, and I hope that you have had an opportunity to download it and look through the figures provided and market all of you. First, we will start with the view of our key markets. Despite the fact that the year 2016 started with a record lowest prices, both in the coking coal and the steel markets, such a terrible situation didn’t continue for a long time. This was because it resulted in the initiation of the bankruptcy for a number of the world’s largest coal mining companies and decrease of the demand for steel products on the global markets. In order to support the industries the Chinese government – Industrial producers and these, together with a number of other factors, led to the sharp increase of the steel prices and moderate increase of coal prices during the first half 2016. In the second half of 2016, fuel market prices have decreased compared with the second quarter of the year by 10% and remained stable. As opposite to the steel market, prices on the coking coal market continued to increase and went above $300 per ton of hot coking coal on FOB basis. Post-major events, weather conditions, and a number of other factors have a very significant impact and could lead to the sharp increase of prices on the market, which has already been demonstrated in third quarter 2016 and repeated in April 2017 after the cyclone in Australia. In fourth quarter 2016, the benchmark price per tonne was fixed at the level of $200 and spot went to $300 per tonne. In the first quarter 2017, the benchmark price was fixed at $285 and average spot price was $170. At the present time, there is no benchmark price for the second quarter 2017 since Japanese and Australian companies have agreed to fixed prices after the completion of their reparation works on railroads in Australia. Nevertheless, hot coking coal prices from our perspectives are balanced for the suppliers and the buyers in the range between $150 and $200 per tonne. Mechel sells 50% of its coal products based on the prices linked to the benchmark and 50% on the spot market. We will now move to the description of financial results in each of Mechel Group’s segments as well as consolidated group’s results, which more or less reflected the above-mentioned market movements. During the fourth quarter 2016, mining segment demonstrates record third-party revenues at a level of RUB29.7 billion, which is plus 49% quarter-on-quarter as a result of both spot and benchmark coking coal prices increase as well as the increase of third-party sales by approximately 6% to 2.2 million tonnes. The group achieved 93% of its coking coal sales on the exit market as well as decreased intersegment sales with an increased purchase of coals from third parties on the quarterly fixed prices. For the full year 2016, coking coal sales to the third parties increased by 10% to 5.8 million tonnes, while the anthracite and PCI sales decreased from 4 million to 3.1 million tonnes it was a change in the buyer’s demand. Our steam coal sales increased by 20% year-on-year to RUB5.9 million, out of which 57% were exported sales. Almost 100% of mined iron ore was used for internal consumption. In 2015, we keep average mine in cash cost in the open-pit mines of Yakutugol at low level of approximately $13 per tonne, and Elga were at a level $15 per tonne. This partially includes transportation costs for the enrichment capacity in the Southern Kuzbass, which were slightly above 20% of coals mined by Elga. Southern Kuzbass cash costs are high and reached approximately $29 per tonne, partially as the coal in mine, in the underground mines. Our key investment projects in the mining segment, the development of the Elga Coal Complex demonstrated stable performance during the year and produced 3.7 million tons of coal. Both portions of coking coal exceeded 75% with improved market conditions in the production and sale activities from Elga have become operationally profitable. Total mining segment revenue for full year 2016 increased to RUB89.6 billion, an 11% surplus year-on-year and almost 75% of revenue, approximately RUB67 billion, gained from extra sales. Operation profit has doubled to RUB31 billion and EBITDA increased 1.5 times to RUB41.9 billion. EBITDA margin has increased year-on-year from 25% to 34%. Geography of our sales is shifting to Asian markets, which quantity has exceeded 58% of our total sales. The sales in the European market were 11% and the domestic market were 25% of our total sales respectively. During fourth quarter 2016, our steel segment demonstrated stable production volumes comparable with the previous quarter. For the full year, total volume of steel sales reached 4.6 million tons plus 2.7% year-on-year, which is a result of high utilization of our production capacities. Group maintains sales on the domestic market as a priority and its share amounts to 90% in first quarter and 86% for the full year. Group’s production mix remained focused on higher margin products, including specialized steel, shapes, rails and beams. Steel segment revenue in 2016 amounted to RUB161.6 billion plus 11% year-on-year. Gross profit increased to RUB42 billion plus 26% year-on-year and EBITDA RUB23 billion that is 55% above the previous year. Savings EBITDA margin in 2016 is approximately 14%. Although in 2015, it was only 11%. Improvement operation and financial figures as a result of recovered prices and as well as more efficient operations and production mix. We have demonstrated steady ramp up of production on our key investment projects in the steel segment. Universal rolling mill capacity utilization increased quarter-by-quarter in 2016. During 2016, we have produced 517,000 tons of rails and beams at the universal mill which is almost three times above 2015, with the maximum utilization during the fourth quarter at a level of 160,000 tons. Supply of rails to the Russian Railways amounted to approximately 300,000 tons. In January 2017, universal mill produced 1 million tons of products since the launch of the production. For the full year 2017, we have agreed to increase supply to the Russian Railways to 630,000 tons of 100 meter rails. We’ll continue to improve efficiency of our steel operations by increased utilization of the universal mill. We expect that this should exceed 65% during 2017, with further increase thereafter. The Power segment revenue for the full year decreased by 7% year-on-year because of the warmer average temperatures experienced during the year. In the meantime, gross profit increased to RUB11.6 billion, 2.6% increase year-on-year and operation profit of RUB700 million compared with almost zero at the end of the last year. EBITDA reached RUB1.7 billion. The main drivers for the improved operational results were decreased costs after the completion of the modernization program as well as favorable market conditions for the sale prices. Quarter-to-quarter during 2016 year, Mechel demonstrated improvement on financial results on a consolidated basis. Our consolidated revenue amounted to RUB276 billion plus 9% year-on-year, which is a result of the surplus achieved by both the mining and steel segment. Gross profit went up by 27% to RUB130 billion. Operation profit increased 76% to RUB43 million. Our EBITDA exceeded RUB6 billion plus 47% year-on-year with EBITDA margin of 24%. The expenses of the group went up 10%, entirely due to the increase of the transportation tariffs and the changed basis of the delivery of our steel products, which have increased volumes of deliveries of our products to our final customers using our own transportation. Our finance cost increased from RUB41 billion in 2015 to RUB49 billion in 2016, due to the increase of average interest rates after the conversion of U.S. dollar denominated debt into Rubles. A positive effect on total interest expenses volumes is going forward will be decreased and will be result of the key Central Bank rate decrease, which is the basis for our confirmation of interest under the restructured facilities with Russian state banks. Group strategy going forward is to find all positive means to decrease interest expenses, which will allow us to generate greater free cash flow for repayment of debt. During full year 2016, the strengthening of our reporting currency Ruble from RUB72.88 at the beginning of the period to RUB 60.66 at the end of the year has led to an additional positive FX effect in the amount of RUB26 billion. Income tax expenses in the amount of RUB4.9 billion includes change in reassessment of deferred tax assets. Because of all of our financial factors, group’s net income attributed to shareholders has become positive for the first time since 2011 and amounted for 12-month 2016, RUB7.1 billion. One of our key priorities for us is generating positive cash flow. The stable situation in our core markets permitted us to generate enough operation cash flow to recover working capital, partially rebate, overdue rate and other payables, financed our investment activity as well as fulfilled our payment obligations under restructured loan agreements. During 2016, we have managed to cover substantial trade working capital deficit from minus RUB14.2 billion to the plus of RUB1.8 billion. This has allowed us to improve the stability and efficiency of our production units’ performance. Our total cash flow generated for the year amounted to RUB53.2 billion from operating activities whilst we received RUB34.3 billion from sale of non-controlling stake in Elga and used all generated cash flow for servicing of our interest expense in the amount of RUB33 billion have net repayment of debt including lease in the amount of RUB41.6 billion. Last year, the group was able to pay interest amounted only to RUB28.9 billion due to the partial capitalization of interest rates. Group’s total debt excluding – just from bank option on Elga for the last year decreased from RUB487 billion to RUB433 billion, which is the result of both appreciation of local currency as well as partial repayment of debt. In the meantime, with the increase of the EBITDA, net debt-to-the-EBITDA ratio has decreased from 11% to 6.7%. As a result of the restructuring of power loans with Russian state banks, ruble bonds, leasing in our bilateral facilities agreement, the group was fully in compliance with the new signed payment and repayment schedules. In April 2017, new restructuring terms was with Russian State Banks become effective, which include extension of the maturity profile of debts until second quarter 2022, beginning of the repayment in 2020 and partial capitalization of interest. We were fully in compliance with the financial covenants stipulated by the restructured agreements. But to breach a number of non-financial covenants and close before provisions, therefore substantial amount of our long-term debt has been reclassified for the short term. We continue our negotiations with the syndicate of international lenders and ECA creditors on restructuring terms. The average interest rate through the debt portfolio nowadays is 9.7%, and it trends to lower value as the rate is mostly linked to the Central Bank key rate. And the average paid interest rate amounts to 7.75%. While looking positively at operations performance of Mechel Group going forward also our financial results are very dependent from the prices on our core markets. We see high uncertainty in development of prices in commodity markets during this year, an imminent risk of prices correction, but we see that the prices have resistance at certain levels which provide comfort to the company that we can fulfil our financial obligations. Having said that, ladies and gentlemen, I would like to thank you for your attention and welcome you to open the Q&A session.

[Alexey Lukashov:]

Thank you. We will now take questions. [Operator Instructions] Thank you. We will now take questions. [Operator Instructions] When questions are answered in Russian they will be followed by translation. [Operator Instructions].

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Oleg Petropavlovskiy with BCS.

[Oleg Petropavlovskiy:]

Good evening, this is Oleg Petropavlovskiy from BCS. Thank you for the presentation. I have three questions for you, first of call can you please elaborate on your outlook for coal mining volumes in 2007 that – 2017, sorry, that they will be flat? Can you please give us a breakdown for coking coal, PCI, anthracite and thermal coal?

[Alexey Lukashov:]

Oleg Korzhov will answer.

[Oleg Korzhov:]

[Foreign Language]

[Oleg Petropavlovskiy:]

Thank you very much. My next question is about your CapEx. You guide that this year; it will rise by more than 2.5 times compared to 2016. What are main projects which are you going to finance with this number – with this money?

[Oleg Korzhov:]

We have the amount of coal production plant within the coal division in terms of volume, which will exceed to 2016. The total in plant production from Kuzbass is going to be about 10 million tons. In Yakutugol, it’s going to be 8.5 million tons and at Elga, as I said, it’s going to be about 4.5 million tons. But at the same time, the production of coal is planned at approximately the level of 20 million tons, out of which the coking concentrate will be about 10 tons, the thermal coal, a little bit in excess of six tons and the production of anthracite and PCI is going to be at about 3.3 tons. So in answering this question, which was about the capital expenditures, indeed our plan for 2017 calls for quite an ambitious spending in terms of our investment program, because in the first place, this is related to the fact because during the past two to three years, because we have been limited in terms of the available financial resources, we paid not sufficient attention to maintenance, capital expenses. And so in order to maintain our equipment in more or less working stages and in order to be able to maintain the volumes of output, so RUB18.5 billion of the capital expenses, which was planned almost half of it, which is about RUB6-some billion is what we plan for the maintenance purposes. But at the same time, I would like to say that despite this being three times more than the similar actual cost in 2016, this is realistic and optimistic. We believe this is what it is because back in 2015, it was about RUB6.8 million. In 2012, we spent RUB3.8 million. Even back in 2012, we spent RUB6.8 million. So out of all the investment cost RUB6 billion for 2017 doesn’t seem to be too an exaggerated figure, while we still have the needs to carry forward. So the amount that I made reference to would be categorized in the following way

[Alexey Lukashov:]

And next question?

[Oleg Petropavlovskiy:]

Thank you very much and my last question, please. Can you please tell us what happened with Elga’s cash cost in the fourth quarter? They rolled by more than 30%, something like this, in rubles?

[Oleg Korzhov:]

So in Q4, the arrangement for the sales of the products from Elga changed into Elga coal mining complex started increasing the volumes of transportation and changing the base for the sales of coal, whereas in the past, Elga traded with ordinary coal towards Kuzbass on the FCA basis. Then starting from that period, the deliveries of Elga and shipments of Elga Coal towards the Kuzbass were performed by the Elga Coal itself, and so Elga Coal was selling the coking coal and so as far as the increase of cost was concerned for the transportation of this coal for the enrichment using the capacities in the South Kuzbass.

[Oleg Petropavlovskiy:]

So should we expect them to stay at fourth quarter level going forward? Or they may fall?

[Oleg Korzhov:]

[Foreign Language] We expect that this level shall remain and it will depend upon the volume of the coal enrichment at the Elga Coal Complex by itself. With the growth of the enrichment amount at Elga, this cost will decrease.

[Oleg Petropavlovskiy:]

Thank you very much.

[Operator:]

[Operator Instructions] We’ll next go to Nikolay Sosnovskiy with Prosperity Capital Management.

[Nikolay Sosnovskiy:]

It’s almost the same question, and I wanted to ask you to be more specific about Elga and the costs related to date. And possibly explain the following thing, whereas physically your costs didn’t change and effectively, the revenue which you have had remains unchanged. So it turns out that it’s something of an optical reallocation, of course, which was put upon Elga and disappeared from the South Kuzbass while effectively, the mining EBITDA total was not affected at all, do I understand this correctly?

[Oleg Korzhov:]

You are quite right in understanding it this way because, with the change of the basis of shipment from coal, we also had our sales price changing. So altogether, in EBITDA, the cost was compensated by the sales. So it remained unchanged.

[Nikolay Sosnovskiy:]

And my other question is also about Elga. You mentioned that the mining equipment is not in the best of conditions. And so my question is, to what extent the fleet was in size to the output that Elga was showing over the past few years because as far as I remember, you commissioned the project in 2011 and 1 million tonne was produced by the end of 2014, and the reasonable amounts is what we have been seeing on it during the past two to three years. And has it indeed during the past two to three years, there was such an overuse of the equipment that it was so seriously torn and worn, and it requires a change. So is it a function of some overuse of the equipment, which is greater than at other assets or an insufficiency of the fleet? Could you please explain?

[Oleg Korzhov:]

So there are several points, which I would deem necessary to explain or draw attention to with respect to the Elga project. The fact of the matter is that, recently, with the completion of the construction of the railroad, we had a certain number, a certain amount of equipment released which was busy with the construction during the 2014 and 2015 when we produced 4.5 million tonnes of coal, the basic source, I would like to describe it this way, of material, what this particular equipment. And quite naturally, equipment usually fails or breaks down. For example, if you take a look at the ballast rods, they run for about five years, and so we bought them about four or five years ago. So 10% to 15% is what you have to change every year in terms of the equipment. And during the past three to four years, we have some lacking, lacked the necessary amounts to change the equipment. So we realized two things. Firstly, we wanted to increase our volumes of output in 2017 and produce RUB4.5 million tonnes. I would note that, in 2016, that was 3.7 million with the equipment, which we had, and we want to achieve the volume of output next year at about RUB 5 million, RUB5.2 million, and that is why, back in the middle of last year, we started actively upgrading our equipment. We expanded our maintenance programs, specifically with Elga equipment, but not all of it can be repaired, some of it has simply to be changed. So I would say that it’s an aggregation of different factors, which all led us to having 2017, if not the definitive one then a very important and significant in terms of the acquisition of new equipment.

[Nikolay Sosnovskiy:]

One little question to continue that. I understand that the railroad was not being built with the pit trucks and the excavators that are used then on the railroad didn’t have the capacity of the scoop of 20 cubic meters. If you are going to change the equipment, it’s going to be something that is more suitable to be operating in the pit environment. So in this case, should we expect any improvement in terms of the cost per tonne if you’re going to use it with a better utility at Elga?

[Oleg Korzhov:]

I should say that you are quite right in what you’re trying to say because using construction equipment in mining is certainly far from being the best option. But as I tried explaining, we had to do it being forced by the lack of financial resources and without doubt the changing the construction equipment. Although, I should say that in a number of examples, it really produced the good results in utility. And so changing the equipment for a better one will be reflected upon the reduction of cost and the better productivity, and definitely one should expect lower cost further on.

[Nikolay Sosnovskiy:]

And my last question is about the financials, and that is directed to Sergey Rezontov. The total interest of payment that is stated in the P&L, could you elaborate on what it is made up of, what was the total one and how much out of it was specifically dedicated to the interest payment? Have there been any fines and penalties because of the covenant changes? And what do you expect in terms of the interest payment for 2017 towards the end of it in total?

[Sergey Rezontov:]

The total amount of the interest that the group is sourcing is about RUB33.9 billion. At the same time, this amount of payment contains about RUB5 billion, which is overdue interest payments related to the banking loans accumulated during the previous periods. In this way, as part of the interest burden for the future period, the group is expecting that the amount of the interest payment would be approximately RUB30 billion. And undoubtedly, the amount of interest to be paid by the group depends upon the rates, which we have in the overall group credit portfolio. Like I stated during my part of the presentation, the average portfolio rate is about 9.7%, although the paid interest is at 7.75% and the period of interest capitalization were lost until Q2 2020. And bearing in mind these figures and these conditions, we expect that the average amount of interest to be paid within the year will be approximately RUB30 billion.

[Nikolay Sosnovskiy:]

And as far as this unpaid RUB5 billion of interest, what is the total unpaid amount of interest? How much of that remains for 2017, 2018 to be paid as part of the annualized payment?

[Sergey Rezontov:]

And so, in terms of the annual amount – the total amount of unpaid overdue interest by the group is about RUB7 billion. This amount comes from such loans as the ones guaranteed by the export credit agencies and the syndicated loan. And so according to the terms of restructuring that we’re going to discuss with the banks, we expect the possibility of a partial capitalization of this interest or a staged repayment of this interest in the course of one or two years.

[Alexey Lukashov:]

Next question please?

[Operator:]

[Operator Instructions] We’ll go next to Ksenia Svetlova with BNP Paribas.

[Ksenia Svetlova:]

Yes. Good evening, thank you very much for these details and presentation and I would like to come back to the CapEx program which you just had announced. And one question please, would you need to agree to these capital investment plans with your creditors, so under the restructured loans on these amounts, or it was already included into the list of the parameters CapEx plan under the restructuring agreements?

[Oleg Korzhov:]

When dealing with the banks, we are regularly updating the group’s financial model on an annual basis and clear this financial model through the banks. So when restructuring our debt, we have agreed with the banks, our long-term financial model which takes them to count the increase of CapEx for the subsequent periods. So currently, we do not expect to experience any issues when re-endorsing or reapproving this financial model with our lenders, particularly since the banks can see that the additional CapEx is aimed at increasing the output and raising productivity, which positively affects the financial performance of the group.

[Ksenia Svetlova:]

Thank you very much. And just maybe one small question about the new Kazakhstan steel segment program. Do you think there can be any impacts in the steel segment output in terms of volumes and revenues, considering that there’ll be certain decommissioning of the capacities for the reconsideration period?

[Oleg Korzhov:]

In terms of the maintenance that we’re planning, this is planned not for 2017, but for 2018. And at the same time, undoubtedly at the point in time, when the capital overhaul is going to be done, because we’re planning to simultaneously decommission the blast furnace in one converter. For this period of time, we’ll witness a reduction of the output, which is quite logical, because that will be something on an extended and a capital overhaul and upgrading. But this is a forced measure, because in terms of the length of service of this crew, we’re not able to further operate it in the condition that it is. But once it is recommissioned from this operation that would positively affect our volume of output because their productivity would grow significantly. So in part, it’s going to be compensated for by the fact that it is going to be recommissioned as a new one. But we’re talking about the volumes of 2018. We are not planning to reduce our output in terms of the steel iron and the rolled products into 2017. We’re planning to raise it, as opposed to the statistics and our performance in 2016. And there is one additional comment that I would like to offer because we have additional option. With the reduction of the steel output in the converter shop, we are in a position to increase the output of steel through our electric furnaces and change our iron with scrap and not to downgrade our levels in terms of the steel output. But because the cost in this particular case is different than the decision whether to produce product or not, we will be making in every particular case, if we believe is economically viable. But in any case, the capacity that we might lose in terms of the furnaces, we might compensate for with the use of the electric furnaces.

[Ksenia Svetlova:]

Thank you very much.

[Oleg Korzhov:]

Next question please.

[Operator:]

Now we will take a follow up question from Nikolay Sosnovskiy.

[Nikolay Sosnovskiy:]

One additional question, because you mentioned that the main sort of capital maintenance in [indiscernible] is going to take place in 2018 in what way that might affect your CapEx? Whereas this year it’s going to be RUB12.5 billion will it additionally grow in 2018 or you will buy additional mining equipment, and so you will reduce your purchasing and inside the group you will redistribute the CapEx between the metallurgical division and the mining division. So what are we to expect for 2018?

[Oleg Korzhov:]

So let me explain, because this year, we were planning some sizable spending to acquire mining and transportation equipment, which accounts for quite a sizable percentage. But on the other hand, I said that, we for quite a few years didn’t spend enough on the mining and transportation equipment. So I don’t think that the purchasing volumes will significantly change next year. So the amount of spending that we had to maintain in our performance was a standard for the company, not longer than three or four years ago. And this year, we’re not planning to completely change all the equipment this year. While this year, we will put main emphasis upon Yakutugol as the most problematic asset, while next year we will be rehabilitating and buying equipment into the South Kuzbass. As far as the metallurgical division is concerned, as I said this year, we’re only doing preparatory work for these two major investment projects. And if changing a converter is worth RUB1.5 billion, we’re going to invest into it only 50% this year. Then upgrading a blast furnace in total would call for RUB2.5 billion out of which, as I said, we will spend only about RUB400 million to RUB500 million this year. So as far as the blast furnace shop is concerned all of the main investment costs or the maintenance costs, actually will take place only next year. So we plan – if the cash flow allows us in 2018, and we’ll be in a position to do all of these projects. Then most probably, the order of magnitude of our CapEx next year is going to be approximately this year, though some of the investment projects we will finish, as I said, because I’ve told you only about a few while we have quite a list. But in total, the order of figures is going to be approximately the same.

[Alexey Lukashov:]

Next question please.

[Operator:]

And next, we’ll go to Robbie Gautam with Federated Investors.

[Robbie Gautam:]

Yes, just a couple of things. I wanted to understand firstly what was the sale amount for the 49% of Elga? I got the figure around RUB34 billion. Could you kindly confirm that? Secondly, I wanted to kind of understand the settlement of loan lease and other obligations. Which are the major loans that you have settled? The third question is, I do see that you have mentioned that there are – there have been restructured payments with the Russian state banks, when you go from 2020 in the second quarter to second quarter 2022. Now is this all or major of the debt? It is not very clear, so we wanted to – I wanted to have an idea about the debt maturity profile for Mechel in the next five years or seven years? Thank you.

[Sergey Rezontov:]

I will answer your questions in English in order to simplify communications on this subject. You are correctly mentioning that the sale of 34 – the sale of 49% of Elga amounted to RUB34.3 billion, which is roughly $0.5 billion. On the second question on the repayments, which have been done by the company over 2016, these repayments include both the repayment of the loans, which was an agreement through the restructuring with the banks, plus the repayment on some ruble bonds, which is also the result of the new amortization profile agreed with the bondholders, plus the repayment of the lease payments in accordance with the leasing agreements and their agreed leasing schemes. On the third question relating to the restructuring with the Russian banks, the restructuring has become effective in April 2017. And the repayment profile of the debt includes a grace period on which the company doesn’t make any principal repayments till the second quarter 2020. And following this, there will be monthly – equal monthly repayments till the second quarter 2022. The restructuring – the portion of the Russian banks, plus other loans which have been restructured, amounts to approximately 75% of the total group’s debt portfolio. Therefore, nowadays, the group has restructured 75% of the debt portfolio for five-year periods. And the remaining part relates to the syndicate and the ECA loans, which I’m currently discussing, and taking into account to believe that the lenders of the company shall have the pari-passu principles of the debts. The restructuring with the other creditors should be on similar terms. Therefore, the average repayment profile of the debt after the completion of the restructuring will be five years.

[Robbie Gautam:]

That’s the average maturity life?

[Sergey Rezontov:]

True.

[Robbie Gautam:]

Thank you very much.

[Operator:]

And there are no further questions at this time.

[Alexey Lukashov:]

Maybe you can ask once again.

[Operator:]

[Operator Instructions] And let’s go to Alexi [ph] with Bank [indiscernible].

[Unidentified Analyst:]

Now the first question is the amortization of your fixed assets and the upgrading of the mining assets, in totality, is RUB13.7 billion. What is your guidance for these line items for the next year, please?

[Oleg Korzhov:]

So answering the first question is the level of amortization for the subsequent period is going to be approximately leaner, because the level of amortization depends upon the amount of fixed assets during the past period and the current periods. No substantial amounts of capital expenditure. The group is not planning to make; and therefore, the level of amortization of the subsequent periods is going to be a linear one.

[Unidentified Analyst:]

And the second question is this, could you please tell us what is the expectation for the discussion of the payment of dividends for the preferred shares, which is conditioned by the charter of the group? And do I understand correctly that hypothetically, in case it is to be paid, you will need to receive clearance from all of the lenders, including from the banks that you have currently reached agreement on restructuring, and specifically, I mean, the syndicated loan?

[Oleg Korzhov:]

So answering this question, I would say that the size of the dividends on the preferred stock is about 25% from the net profit under the annual consolidated IFRS report. Now whether we’re going to allocate this to the dividends or not is not yet clear. It depends upon several factors. First of all, it has to be approved by the shareholders meeting. On the other hand, the dividends will positively affect the evaluation of the company. But on the other hand, we still understand that the company is not yet in a stable financial position. The markets remain volatile. So speaking about the results of 2016 with reference to the dividend payments is something that is possible with some limitations. On the one hand, it would be really good to pay this money to our shareholders. But on the other hand, we also understand that by paying that we would reduce our capacity to fund our operations and reduce the debt burden. Secondly, we do have other limitations. It is correctly stated in paying dividends under the covenants with the bank, we’re not going to be able to pay that without receiving an approval from the banks. And definitely the banks on the one hand should be interested in seeing the company value grow, but on the other hands, the banks are inclined to see us pay all of our financial commitments according to the schedules when achieving additional cash flows to direct this money to repay our lending obligations. So in any case, that would have to be a conversation with the bank and we still can wait and see whether it will come. There is still time left to clear it with the banks in terms of dividend payments and submit it to the shareholders’ meeting. So at this point of time, we don’t have an answer to this question. As far as the syndicated lenders are concerned, we will definitely also be raising this issue with them in terms of those to pay dividends.

[Alexey Lukashov:]

Next question please?

[Operator:]

There are no further questions at this time.

[Alexey Lukashov:]

Ladies and gentlemen, thank you for taking the time to join Mechel’s full year 2016 financial results conference call today. The replay of this call will be available on Mechel’s website. If you have any further questions, please contact the investor relations office. Thank you again from all the team here.