Mechel PAO
Q4 2012 Earnings Call Transcript

Published: 17 Apr 2013

[Operator:]

Thank you and good day everyone. I would like welcome to you to Mechel’s Conference Call to discuss our Full Year 2012 financial results which were reported today. With us from management today are Mr. Evgeny Mikhel, Mechel's CEO; Mr. Stanislav Ploschenko, Mechel's CFO; and Mr. Oleg Korzhov, Mechel's Senior Vice President for Economics and Management. 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 U.S. 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 don’t intend to update these statements. We refer you to the documents Mechel files from time-to-time with the U.S. 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-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures are contained in the earnings press release, which is available in our website at www.mechel.com. At this point, I’d like to turn the call over to our Mechel's CEO, Mr. Mikhel. Please go ahead.

[Evgeny Mikhel:]

[Foreign Language] Good afternoon and good morning, ladies and gentlemen. We are happy to welcome you to the conference call on the company’s financial results for 2012. [Foreign Language] Last year has been very difficult for the world economy in general and for mining industry in particular. All this entire year, we have been looking at declining prices in all the markets which are major for our company. This certainly brought about deterioration of the financial performance of Mechel, compared to the previous year. Significant impact on the performance was provided by the results of the fourth quarter when we saw coke and coal prices dropping by 29% and rebar prices fell by 14%. Besides the financial results of 2012 was significantly impacted by non-recurring paper write-offs in some of the investments we had in our steel companies, and also the provisions for deteriorating issued loans. Therefore as a result of 2012 performance consolidated revenue of Mechel amounted to $11.3 billion, EBITDA was $1.3 billion and net losses amounted to $1.7 billion. [Foreign Language] Despite the negative dynamics in the market and our financial performance in the reporting year, we were able to achieve some success and create serious foundation for 2013 which is already bringing certain results. Our main priority is to reduce leverage.As you know, in 2012, we have passed a program for sales of non-core assets. We have already made serious advances in this direction, in particular, a significant part of assets in which we have had a scalable or deeper write-offs at this time have already been sold. This company no longer brings negative contribution to the financial state of our company.And this has a positive effect on the operational cash flow. As a result, we have created conditions for deleveraging. The remaining non-core assets are more valuable financially. The sales of these assets are supposed to bring our company significant funds which will make it possible for us to further reduce leverage. The work on sales of these assets is underway. We have already received price indications on some of them and we are now in an advanced phase of negotiations with potential buyers. [Foreign Language] It is very important to be disciplined and responsible in distribution of capital at the time of uncertainty in the world economy and high level of volatility in commodity markets. In light of this, we have to a large extent reviewed the volume of our CAPEX in 2012, reducing it by 50% compared to the previous year. The main focus was placed on development of Elga deposit and completion of construction of the universal rolling mill at Chelyabinsk Metallurgical Plant. These are two strategic projects which have the biggest potential for creation of shareholders value and the return from this project can be expected in near future. [Foreign Language] In October of 2012 at Elga, we have launched a seasonal Russian plant. Therefore, at this deposit we have created all necessary primary infrastructures to put Elga deposits into industrial level of production and washing of coal. We have built the railroad to the deposits. We have built a temporary rotational camp and we have allocated necessary mining equipment and vehicles. We have productively completed the construction of the universal rolling mill. In near future, we are planning to spot hot testing the equipment of the mill. When this mill is launched into production, this is will not only allow Mechel to master new technology, new top of products with high added value, it will also put Chelyabinsk Plant at a new level of its development. It will greatly increase its level of efficiency. It will reduce cost and it will provide compliance of the company’s operations with the highest industry standards and with environment standards as well. [Foreign Language] I will say that despite the difficult macroeconomic situation and the issues that the mining industry has faced, overall, in 2012, we have demonstrated positive dynamics in most operational indicators.The volume of coal production compared to the previous year has increased by 1%. I must note that we have seen a change in the structure of productions of our mining division, and the change was towards the increase of high margin types of coal. In production of PCI coals for as to industry compared to the previous year we have had an increase of 23%. Certainly, that happened due to reduction of production of cheaper steam coal. In steel division our production of steel increased by 7%. Sales of power products have increased by 7% compared to the previous year. At the same time we have confirmed our leadership in production of such high-margin type of metal projects as metalware. The increase in production here amounted to 2%. [Foreign Language] In conditions when a number of coal producers are forced to reduce the volume of their production. In those assets where with current pricing on coal production is making losses. Mechel being a leader in the industry in terms of profitability is increasing its production and it is actively expanding the geography of its markets. It's also working on the expansion of the customer base. One of the results of this work is a recent contract on supply of coking coal to one of world's leading steel makers, Baosteel. We are currently completing negotiations on long-term contracts with a number of other leading world producers. [Foreign Language] In general, last year we not only have reviewed the model of the group’s development, but we have made several specific steps towards implementation of the reviewed strategy. We have identified and partially sold some non-core assets which significantly impacted the shareholding value of the company. It is important that despite deteriorating prices and significant volume of capital investments, we were able to reduce the level of leverage within the group by $320 million not accounting for currency exchange fluctuations. We are fully dedicated to the goal of reducing leverage optimization of the structure of our business. I am confident that further implementation of our strategy will allow us to strengthen our leader’s positions in mining industry and in steel production and it will contribute to the growing shareholding value of Mechel. And now, I am passing the floor to Senior Vice President for Finance, Stanislav Ploschenko, who is going to give you more details on the financial performance in all segments of our business. Thank you.

[Stanislav Ploschenko:]

Good morning and good evening ladies and gentlemen. The unprecedented turbulence on the commodity markets we witnessed in the fourth quarter could not leave the results of the mining segment unaffected.At certain times the contract and spot price for coking coal differed by as much as 17%, inevitably influencing volumes in revenue making Q4 the worst quarter in the reported year. Overall sales were down 13% to $676 million. The main factors affecting the revenue were at 25% decrease in sales of coking coal and a 10% decrease in sales of Anthracites and PCI. The lower quarter on quarter cooking coal revenue was due to 15% decrease in average sales price and 12% decrease in volumes. Most of the volume shortfall was driven by a lower shipment to Ukraine and South Korea with China where sales volumes grew by 23% quarter-on-quarter been the balancing factor albeit at the lowest spot price for the reported period. Another factor contributing to lower sales volumes was the halt of U.S. mining operations in Q4, restarting in January this year which draw volumes back in Q1. As a result, the average FCA price for export sales decrease by 29% to $86 a tonne whereas the domestic market demonstrated a higher resilience with price only 8% down to $117 a tonne. The PCI and Anthracites sales volumes were lower due to weaker demand from Europe and Asia, partially compensated by increased sales to Gardel Brazil resulting in just a 3% downtick in sales volumes in the reported period. The 15% reduction in the average export FCA prices was the main the contributor to the revenue decrease. Thermal coal sales revenue was up by 5% managed to lower volumes as a third quarter was boosted by winter field stocking which was not the case in the fourth one. The decrease was partially offset by $10 per ton FCA increase in export thermal prices, primarily driven by sales to (Turkey), where we managed to take the full advantage of the price volatility with the iron ore sales. Despite a 14% decrease in the average sales price, the revenue was slightly up at $108 million. That was due to several factors. First of all, we have managed to increase sales to the domestic market more than twofold, taking advantage of the 10% average FCA price growth. Less than half of that increase came from sale down of stock, the rest coming from the direction of sales. Firstly, due to reduction of exports to China, where the average FCA price on the contrary fell by 18%. And secondly, through a 96% reduction of intersegment sales volume to Chelyabinsk steel plant, where price arbitrage had a compelling case of purchasing from third parties rather than using their own product. Overall cost of sales increased by 7%. The increase was driven by seasonal inflation in energy costs due to switch to winter fuel and the need to begin dry iron ore at caution of mining plant. However, the cash cost did not change significantly. They edged only $2 up in Southern Kuzbass, compared to just $1 at Yakutugol.A similar $2 increase took place at the iron ore operations. Additionally, inventory write-down increased by $90 million. Production at Elgawas the most significant factor behind that. Most of the mining at Elga during Q4 related to overburden removal. Given the misbalance between saleable production and overburden related mining cost, we booked an expensive $8 million. The rest of the write down is distributable to the average sales price drop. Sales and distribution expenses increased by 12%. About 40% of that increase is related to the geography of iron ore sales has increased the CPT sales to domestic buyers at the expense of delivery to Chelyabinsk Plant which had been done on the FCA basis. The rest was mostly driven by an increase of CIF and CFR sales from 41% to 52% of export sales as opposed to FOB, which came with increase of sales in coking coal to China. In the fourth quarter, we posted a one of $27 million accrual of mineral extraction tax risk, which was only partially compensated by $13 million gain at Bluestone resulting in $17 million increase in nonprofit taxes. This accrual relates to ongoing litigation with respect with the determination of the tax base. The accrual recognizes that the difference between the amount actually paid for the previous four years and the amount claimed by the tax authorities. Again Bluestone relates to an agreement to reach toward local tax authorities with respect to its proper base against which the West Virginia franchise tax should be calculated. Another one off event affecting the profitability of the segment was the recognition of $70 million cost associated with settling between our Bluestone operations and several customers which related to events prior to its acquisition. Although we took a one off reduction to our EBITDA, this settlement substantially widened the North American market for Bluestone products which had been rather limited with outstanding lawsuits. This is crucial for the immediate future of Bluestone as sales to the domestic market offer much better economics than depressed sales to Europe or export to China, where export price volatility and freight make economics unstable. We also made accruals of $5 million in expenses relating to our ongoing litigation with Grenco and several construction contractors. We also reassessed the gain from restructuring of accounts payable of $70 million recognized in Q3 and decided that these gains should reduce the amount of construction and progress related to Helga project on our balance sheet in Q4, based on a substance of the transaction. Stripped of this reversal for the difference between the segments' EBITDA between Q3 and Q4 should be reduced by $32 million. Reselling and distribution costs were partially offset by personnel consulting and miscellaneous administrative expenses saving of about $6 million. For the quarter the combined effect of lower revenue and increased cost of sales in one-off accruals posted in operating expenses drove the EBITDA significantly lower quarter-on-quarter to just $33 million. The steel segment on the contrary demonstrated a remarkable resilience in the fourth quarter. On the one hand, the robust sales we witnessed in Q3, slowed down towards the year end reflecting seasonal factors. The volumes were also affected by our production adjustments aimed at curbing loss making manufacturing lines which went as far as idling entire mills.For example, our former Romanian plants. The pressing environment was also volatile with a general downward trend countered only by hardware products where prices were up as much as 4% quarter-on-quarter due to a change in a product mix and long stainless products where average sales price edged 7% higher. On On the other hand the production adjustments efforts mentioned above began to bear fruit already in the fourth quarter resulting in a significant decrease of cost of sales which led to an 8% quarter-on-quarter growth of gross profit and an improvement of the gross margin from 13% to 15% even against the background of decrease in revenue. That improvement is entirely attributable to the better production and sales planning and the cash cost of Billet and Rebar remained almost flat demonstrating that the effect of decreasing raw materials prices did not reach to the production yet in the reported period. The selling and distribution expenses grew by 10% quarter-on-quarter entirely due to the consolidation of COGNA, the still distribution business in Central and Eastern Europe. Without that effect the dynamics of the expenses were in line with the revenue. So the items that affected the operating expenses most significantly were impairment of long lived assets and goodwill and provision for receivables from the related parties. The four month posted $205 million impairment of goodwill over the next steel mill which we added in Q4 and due to negative economics and a likewise outlook at the Ukrainian market. The plant is now for sale as we announced previously, another $63 million came from impairment of goodwill in COGNA due to the extended European market weakness and lack of positive prospects for its recovery. Due to worsening outlook at steel production based on scrap and not integrated into raw materials, we revised the recoverability of the loan to a Estar and decided to create a 100% provision on that which affect the P&L with another $619 million. We also revised the economics of Estar's scrap collecting business, which we decided to integrate earlier in the year and reverse the deal. We still keep the business but it will not compensate for the outstanding loan to Estar. For the time being, we also decided not to integrate Steel Mill as we have previously announced. Since the goodwill impairment and the provision for the amounts due from Estar do not affect the EBITDA, the latter was entirely driven by increased profitability brought about by production adjustments which over pace the downward dynamics in the revenue and result in a slight uptake in EBITDA, even over the successful third quarter to $76 million, with EBITDA margins recovering to the level of Q4 with the best in the year 2012 of 4.6%. It is notable that on the annual basis our steel segment also demonstrated a remarkable economic resilience. Despite increased volatility in the market which resulted in revenue reduction the gross margin remained flat where the EBITDA decreased only 9% on a virtually unchanged percentage of the revenue. The performance of the ferroalloy segment was heavily influenced by our decision to shut down the South Urals Nickel Plant in October due to its continuous loss making given the present nickel price trend. Consequently, nickel sales were down 75% quarter-on-quarter representing a $24 million fall in the revenue. This was somewhat offset by 25% growth in ferrochrome sales coming from cleaning out the stock at our trader accumulated in the previous periods, while sales of ferrosilicon remained unchanged. For the combined price trends mirror the general downward pace with chrome average price down 7%, ferrosilicon down 3% while a 6% uptake in Nickel price could not visibly improve the economics. As a result, the third party revenue went down 25% quarter-on-quarter to $69 million while intra-group revenue dropped 37% as nickel sale to the steel segment sale. While the revenue was down due to cut in nickel production, our cost cutting efforts brought down the cost of sales faster resulting in the positive gross income versus the $7 million loss recorded in the third quarter. This was mostly due to the shutdown of the nickel plant and the reduction of chrome ore cash cost which was the effect of better geological conditions in our mining operations. The selling and distribution expenses fell by 28% mostly due to the reduction in nickel sales and the effect Russia entering the WTO which affected the export tax on ferrochrome sales with a 20% reduction. The administrative expenses grew by 176% to $28 million entirely due to the provision for the layoff of staff at the South Urals Nickel plant due to its foreclosure. And other $23 million of operating expenses came from impairment of mineral license at Shevchenko nickel deposit at Northern Kazakhstan, which was acquired to get over with the chrome business of ore resources. On the provisions for the layoff of personal at South Urals Nickel plant and the provisions of best receivables from certain up takers tend the EBITDA into more negative territory than in Q3 with a $30 million loss. The overall EBITDA for the year 2012 cost $49 million negative number versus to $46 million positive from 2011 mostly due to the deterioration in nickel prices. The power segments performance was not surprised in reported period with a 57% growth in the top line enhanced an almost two times growth of the gross income to $92 million or 27% of the revenue, thus only 19 in Q3. The similar dynamics in the cost of sales however, could not compensate for the growth and revenue in the high season and an up with a $15 million EBITDA in reported period versus $6 million loss in the previous one. The segments bottom line was affected by the discontinued operations represented by the result of (inaudible) for which an SBA was fined in the end of Q4. Almost the entire negative effect is attributable to the impairment of goodwill and long assets in-line with selling price. Overall for the year 2012, the segment demonstrated a 3% improvement in the revenue of almost flat gross margin and 11% improvement of EBITDA to $45 million year-on-year. On a consolidated basis, the revenue went down by 7% to $2.5 billion as the coal mining, steel and ferroalloy segments we are only 30% compensated by the growth in the power segments revenue, even after accounting for discontinued operations. That could not prevent the gross income reducing by 13% to $640 million with the gross margin edging down to 25% of the revenue. The SG&A expenses were up 16% entirely due to the changed basis of delivery and one-off accruals in the mining and ferroalloy segment and consolidation of COGNA in the steel segment. The revenue reduction across all the segments, but the power one, couples with the given increase in the operating expenses resulted in a decline of the consolidated EBITDA to $100 million. The net interest expenses grew 16% to $167 million mostly due to posting of the fees previously capitalized on the international debt, due to its refinancing in December 2012. The positive FX effect was $83 million. The income tax expense was 40% down to $42 million mostly due to reduction in the profitability in the mining segment. In the fourth quarter we posted another $291 million of impairment of goodwill and long-lived assets, consistent of impairment of goodwill on both the Donetsk steel mill and COGNA and the investments in the nickel deposits on the balance of Oriel Resources. On top of that came $619 million of additional provisions of the amount due from Estar discussed above in the steel segment analysis. All of that combined into a $1.1 billion loss in the fourth quarter. The revenue for the year 2012 decreased by 10% to a $11.3 billion with EBITDA costing $1.33 billion versus $2.4 billion a year ago, largely affected by the relativity in the mining segments result due to the negative price trends throughout the year. The net interest expense totaled $600 million, the FX effect stood at $89 million for the year. Provisions on amount due from related parties and impairment of goodwill and long-lived assets totaled to $1 billion, 627 million for the full year resulting in a $1.7 billion net loss for the year, after taking into accounta $108 million loss from discontinued operations. Let's now turn to the cash flow statements. I am proud to say that our efforts aimed at improving the business cash generation capability continued to payoff in the last quarter of the year. Despite the fact that the reported period is usually marked by the investment in stock of raw materials, and a slowdown of sales, which was particularly exacerbated by a very high volatility in our core markets. And despite a substantial working capital divestment, we had undertaken in the previous parts of the year, we managed to optimize the working capital even further reducing it by near $300 million. $148 million only came from inventory management totaling $635 million of working capital reduction for the year, which completely fulfills our expectations announced almost one year ago of the ability to optimize the working capital in the next 12 months. Thus, the cash flow from operations totaled $208 million in Q4 making up $1.311 billion for the year which is the highest result since 2008 and almost 50% more than in the previous year. The investment cash flow or cash out flow totaled $1 billion for the year. The difference between the cash flow from operations and investments was used to repay the debt. The net debt reduction before the aspect of exchange rate for the year totaled $577 million which we’ll regard as a great achievement in the year of volatile markets given our CAPEX program. And the thing that most of the debt reduction took place in Q4 where the market demand and price levels were particularly subdued due to the certain comfort about the cash flow capability of our group in the year 2013. Reporting now in April, I can say that the first three months did not give us any surprise in our expectations to keep debt under control. The net debt stood at 9.6 billion as of the reporting date, the short-term debt being $1.46 billion or 16% of the total debt. Since then, we have been undertaking a number of steps to further improve the maturity profile of our debt portfolio. The biggest contribution to this picture was the recently announced five year 40 billion ruble loan agreement with VTB. The proceeds from which will be mostly used to refinance existing indebtedness with VTB Bank as well as to refinance other debt including reduction of ruble bonds. With this loan, cash and other outstanding (inaudible) facilities, we now have enough resources to cover older payments following due till the end of the year which dramatically differs from the situation one year ago when we had $2.65 billion short-term debt, we had to deal with, with limited resources. And in deteriorating markets, we are faced with a necessity to revise a debt covenant we agreed a year ago, which we successfully renegotiated with our creditors opening room for further refinancing with both Russian and foreign banks in the year 2013. Our next task is to provide additional cushion for repayments in 2013 and begin to tackle the same issue for the period 2014, 2015 before we move towards the year-end. To conclude ladies and gentlemen, the fourth quarter proved to be the most challenging in the year. The volatility in our commodity markets especially in the mining segment, weighed on the EBITDA margin which were also suppressed by one-off accruals in the mining and ferroalloy segments. Nonetheless, the efforts we have been undertaking since the beginning of the year, in aligning our production with the current markets foreclosing loss making operations and adjusting our working capital translated into a significant efficiency improvement in our steel division and resulted in a record operating cash flow for the last full years. Looking ahead I can say that after the demonstration of the resilience on the part of the steel segment in the recorded period, the main feature of our business model the ability to adapt was fully realized in the first quarter of 2013 by our mining segment. We were able to redirect all the excessive volumes from Europe to Asia where prices stabilized and we started our North American operations following growth of the order book after we settled our disputes with the domestic off takers. At the same time, the steps that we have been taking in optimizing our business structure as we announced one year ago, already began to materialize in the investment of loss making efforts which further improved the economics of our steel division in 2013. The last but not the least, we are proud to report that after its first introduction in 2006 we successfully certified in 2012, the system of internal controls for the preparation of financial statements under the Sarbanes-Oxley Act, which establishes the highest standard of the company’s financial reporting quality. Thank you for your attention ladies and gentlemen, the management now is ready to take your questions.

[Vladislav Zlenko:]

Thank you. We will now take questions. We'd ask that participants please state their name and company before asking their question and allow some time after for translation. When questions are answered in Russian, they will be followed by translation. So you may ask your questions in Russian also and we will translate.

[Operator:]

Thank you. (Operator Instructions). .Our first question comes from the line of Anton Rumyantsev from Sberbank. Please go ahead.

[Anton Rumyantsev:]

Good evening, gentlemen. Thank you for the presentation. I have got several questions. The first one is, given the pretty hard fall of coking coal prices, which you have shown in your statements in the fourth quarter; could you please share with us your outlook for the average realized coking coal price dynamics in the first quarter? Maybe you could share with us your outlook even for the first half of the year if you have got the (inaudible) amount of contracts signed. And I am also interested in your expectations on the mining cash cost dynamics in the first quarter should they stay flat or maybe fall for some reason? And the last thing, you told that you plan to cut CAPEX in 2013 by 50%, could you give us a breakdown of how much the plant was spent on Elga development, universal mills and other projects? Thank you.

[Vladislav Zlenko:]

[Foreign Language]Oleg Korzhov will answer the first question.

[Oleg Korzhov:]

[Foreign Language] We’re not prepared to give our forecast for as long as six months but if we compare the first quarter to the first quarter of last year, we see that these spot prices have grown by $15 to $20 and the contract prices have been down by $5. [Foreign Language] In the second quarter, the spot prices have been down 10% and contract prices have been up $7.

[Vladislav Zlenko:]

The remaining questions will also be answered by Oleg Korzhov.

[Oleg Korzhov:]

[Foreign Language] Now the second question that you asked about the cost of production, we do not see any significant factors that could bring about changes in our costs, the only thing I can say is that the first quarter is usually showing lower volumes and that certainly has its effect. Also, we have seen a 7% increase in railroad tariffs, that also is going to make its contribution to the picture. [Foreign Language] As well investment program, the plan is to invest about $400 million during this year out of which $130 million will be spent on supporting our existing facilities and just $170 million will be spent into new projects. [Foreign Language] We have already said that we have three major investment projects and we were going to distribute our funds between is the following, we are going to send about $70 million to $100 million on our universal rolling mill and about $100 million will go into Elga deposit and the other project is completion of the Posiet Port facilities which will take another $20 million to $25 million.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. The next question comes from the line of Sergey Donskoy from Societe Generale. Please go ahead.

[Sergey Donskoy:]

I have several questions, but if I may just first start with one follow-up. Speaking of your CAPEX program for 2013, do you continue to build the second stage of Sibirginskaya underground mine at Southern Kuzbass? Or this project has been postponed? And I will ask my further questions after you answer this one.

[Vladislav Zlenko:]

[Foreign Language] Oleg Korzhov will answer.

[Oleg Korzhov:]

[Foreign Language] For this year we plan to have investment into Sibirginskaya mine at a minimum level we have most of the equipment already acquired for this project and we are going to use our own company resources to further develop the second stage at Sibirginskaya mine. We are going to invest approximately $10 million this year into this project using the unit that we have put together for this purpose within our company without going to third-parties.

[Sergey Donskoy:]

Thank you very much. Then proceeding to my questions, first, speaking of the Romanian steel assets, were they lossmaking on the EBITDA level in Q4 and for the full year 2012.And if yes, what was this loss? That is question number one. Question number two, by our estimates, Bluestone coal production in Q4 was less than 200,000 tonnes of raw coal, including zero output of thermal coal. Is this correct? What was the situation in Q1 and your outlook for the full year, especially taking into account the successful settlement of lawsuits? Question number three, could you just clarify what was the total net effect of all one-offs that impacted EBITDA of the mining segment? You have mentioned a few of them and it would probably help if you could just also give the net total. And lastly, could you discuss the realized prices for coking coal in Q4 by division? Thank you.

[Vladislav Zlenko:]

[Foreign Language]

[Sergey Donskoy:]

The last question was what was the total net effect of one-offs that affected the mining segment in the fourth quarter.

[Vladislav Zlenko:]

[Foreign Language] The first question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

As far as the negative EBITDA contribution to our consolidated accounts coming from the Romanian asset is concerned, in 2012, the total negative EBITDA was $80 million. $21 million was posted in the fourth quarter only. Total amount of one-offs in the mining segment in the fourth quarter was $71 million. [Foreign Language]

[Vladislav Zlenko:]

The second question will be answered by Oleg Korzhov

[Oleg Korzhov:]

[Foreign Language] In fact because of the economic situation in Q4 we started reduction of output at Bluestone. We started this in October and by the year end the production came to halt. [Foreign Language] We had fairly good stocks in our warehouses and therefore we continued to sell Bluestone products from the warehouses, from the stocks. [Foreign Language] And so in Q4 we had the following situation. We have produced about 300,000 tonnes of coal. [Foreign Language] We have produced 160,000 tonnes of final product. [Foreign Language] And our sales amounted to 450,000 tonnes of coal. [Foreign Language] Out of which 150,000 tonnes was steam coal.

[Vladislav Zlenko:]

Could you please repeat the fourth question?

[Sergey Donskoy:]

Well, actually, there was also a second part to this question. This part was what is the production outlook for Bluestone for the current year given the successful settlement of the lawsuits. That was the second part of this question. And my last question was some color on Q4 realized prices for coking coal by division. [Foreign Language]

[Stanislav Ploschenko:]

In Q1 of 2013 because of the economic situation, we have started putting some of the Bluestone assets back into production mode. [Foreign Language]We are going to keep a close eye on the economic situation and if it remains unchanged compared to what we see today, the production at Bluestone may amount to 3 billion tonnes to 3.5 billion tonnes. [Foreign Language]And the volume of the final product may amount to 2 million tonnes to 2.5 million tonnes. [Foreign Language]As of the Q4 prices by divisions, at South Kuzbass, we produced mostly coking coal concentrate and the prices were $120 CSE. [Foreign Language]PCI prices amounted to $115 to $120 FOB with logistics costs FCA amounted to $55 to $60. [Foreign Language]Thermal coals sold at $50 to $55 FCA. [Foreign Language]At Yakutugol, spot prices were in the neighborhood of $135, $140 CIS and FCA was $80 to $85. [Foreign Language]Contract prices to Japan and Korea were $145 to $155 FOB and FSA was $105 to $115. [Foreign Language] At Bluestone, we produced two types of products, one with high volatility and the prices there were between $140 and $150 FOB and FCA were $90 to$100. [Foreign Language]The first number was for low volatility. The high volatility went at $120 FOB, FCA being at the level of $70.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. The next question comes from the line of VasiliyKuligin from Renaissance Capital. Please go ahead.

[VasiliyKuligin -- Renaissance Capital:]

Good evening, gentlemen. Thank you for your presentation. Three questions from me. First, are you going to consolidate your power segment in first quarter '13 financial results? And the second part of the question is what is the progress with the ferroalloys segment spinoff, if any. The second question is can we expect any further one-off items negatively affecting your bottom line, your net income line in the first quarter '13 or further? And the third question relates to dividends. Do you plan to pay any dividends for preferred shares for 2012 or we can expect them to become voting? Thank you.

[Vladislav Zlenko:]

[Foreign Language] All these question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

The power segment and the ferroalloys segment will continue to be reported in segmental analysis in the Q1 because they still existed as independently managed divisions inside our group. As we diverse the assets belonging to the power segment and the ferroalloys segment we will revise our approach whether they should be separately managed and if not then we will cease to report them in our segmental accounting. [Foreign Language] As far as the further write-offs are concerned and impairment, we believe that as of today, also bearing in mind the negative background of the price trends and market situation globally in our core market we have impaired and we have cleaned up the balance sheet of the group to the outmost extent, therefore we do not expect any further write-offs as of today in the future. [Foreign Language] As far as the dividends are concerned clearly we have a net loss for the year, nevertheless, since we Russian registered legal entity, we are paying dividends under Russian accounting which, where we have substantial accumulative net income but taken into account the scarcity of projected cash flow for the group we will recommend to the board of directors not to recommend to the shareholder meeting to pay any dividend on the ordinary stock, and we will recommend a minimum amount to be paid on the preferred shares so that that they do not become voting. [Foreign Language]

[Operator:]

Thank you the next question comes from the line of Victor Drozdov from VTB Capital. Please go ahead.

[Victor Drozdov:]

Hello. Thank you for your presentation. I have several questions. Firstly, given the recent news flow and (inaudible) potential participation in Elga project as a strategic investor, could you please comment on the 25% sale in national mining? The next question is as for net debt level of $9.1 billion you mentioned in your press release, could you please provide info on the amount of short-term bank deposits being included into this fund amount? And one follow-up question. You have highlighted that now our total net effect of all one-offs on EBITDA level was at $71 million. Will this amount be included into net debt to LTM EBITDA calculation as of the end of 2012? Thank you.

[Stanislav Ploschenko:]

We’re continuing negotiations with a number of interested parties globally, and precisely in Asia with regard to sale of 1.12.26 minority stake in Mechel mining. The negotiations are not over yet, and I can’t comment on how far the proceedings have gone and who is leading, but we are negotiating with all the major mining and steel companies in the region including Baosteel. [Foreign language]

[Stanislav Ploschenko:]

As far as the number – the amount of deposits is concerned it’s pretty negligible. I guess your questions comes from the difference between $9.6 billion net debt reported in our presentation and 9.1 report in the press release. $9.6 million is calculated according to the formula for calculation of the net debt for the purpose of calculating the debt covenants in our loan agreements and net debt in our accounts includes leasing which is not including in a more standards on a debt calculation. [Foreign language]

[Stanislav Ploschenko:]

The one-offs which are reported affect the EBITDA. We calculate and report the EBITDA in the way which is taken for the covenant calculation. So anything affecting the EBITDA in our reporting is included for the purposes of covenant calculation. [Foreign language]

[Vladislav Zlenko:]

Next question please. Operator The next question comes from the line of Alec Trepowski from BCS, please go ahead.

[Alec Trepowski:]

Good evening gentlemen, thanks for your presentation. This is Alec Trepowski from BCS. A couple of questions on your EBITDA; first of all could you please share with us, maybe you have some estimates, what EBITDA you would report that if there were no one-offs in the fourth quarter of 2012? And also do you have any estimate for other potential effort of divestment on your EBITDA in first quarter 2013 or maybe in 2013 as a whole? [Foreign language]

[Unidentified Company Representative:]

Stanislav Ploschenko will answer.

[Stanislav Ploschenko:]

As I have already commented, we had about $71 million of one-off effects in the mining segment and about $20 million in the ferroalloy segment, totaling 91. So without those one-offs, the total EBITDA would be in the range of $191 million in the fourth quarter. [Foreign language] The EBITDA of the assets that we have divested so far which are Romanian assets, Romanian steel mills, I was and I already mentioned in today's conference call, $80 million negative for the year 2012, if that answers your question. [Foreign language]

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. The next question comes from the line of Alexander (inaudible) from Softlink. Please go ahead.

[Unidentified Analyst:]

In my side, there is three questions; what is your production plan on steel, coking coal and all round production. The second your target structure on your debt, what is share for rubles and dollar debt do you see in 2013 and for the future periods. The third question, where do you see your debt effective rate in Holland, in context of loans, Please convert it in dollars, thank you. [Foreign language]

[Vladislav Zlenko:]

The first question will be answered by Oleg Korzhov. [Foreign language]

[Oleg Korzhov:]

The volume of our production in terms of steel and raw products, it will depend on the market situation, much will depend on the situation in Ukraine. [Foreign language] For now the plan is to produce within the group 5.5 to 6 million tonnes of steel. [Foreign language] Raw products will be produced in the amount of 6.5 million tones. [Foreign language]. As of the production and shipment of iron ore concentrate, the situation is quite clear and the corresponding number will be 4.5 million tonnes. [Foreign language]. Coal in 2013, we are going to have the output of 24.5 to 25 million tones. [Foreign language].

[Vladislav Zlenko:]

Next question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

As of the structure of our debt in terms of our ruble-denominated and foreign currency-denominated debt, I would not set any goals in terms of such distribution. The main thing is to get funds at the attractive price. Ideally, we would be looking at 50/50 split between our ruble-denominated and other currencies denominated that’s because of our structure of sales. [Foreign language] As of the interest rate, I can tell you the accumulative number for the year which was 7.8%.

[Vladislav Zlenko:]

Next question please.

[Unidentified Analyst:]

Sorry if I may the last question for me about your covenants for the 2013 do you plan a large sheet as market conditions stay durable? Thank you. [Foreign language]

[Stanislav Ploschenko:]

You called the situation terrible which is not how we see, we don’t see it further deteriorating either I can say that we have constant agreement with our lenders on the level of governance and we are not going to review it. Thank you.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. The next question comes from the line of Denis Gabrielik of Otkritie. Please go ahead.

[Denis Gabrielik:]

Hello, thanks for the presentation, a couple of questions from my side. Firstly, on CAPEX, you said that, in 2013, you plan to spend $400 million. What about 2014 and '15? Should we expect some increase or you plan to keep CAPEX at this level? Second question regarding Bluestone, looking at the current situation in the market, at what price, coking coal price Bluestone would be breakeven at the EBITDA level? Yes, that's it. [Foreign language]

[Vladislav Zlenko:]

The first question will be answered by Oleg Korzhov. [Foreign language]

[Oleg Korzhov:]

We were saying earlier that we have changed our strategy in terms of our capital expenditures this year we are filizing to the projects that is the (inaudible) steel mill and the (inaudible) facilities. [Foreign language] We are not planning to fund our (inaudible) deposits project through our operating money; we are going to use project financing to fund that development.

[Oleg Korzhov:]

With the current market situation we do not plan to launch any new investment projects in 2014 or '15. [Foreign language] So within our CAPEX program for 2014 and 2015, we are going to be spending out a 130, $150 million to maintain our current operating facilities. [Foreign language] We may be spending negligible amounts of money onto other projects but such investments will be very minor. We're not planning like I said to launch any major investment projects. [Foreign language] As of your Bluestone question when it will work at breakeven level the coking coal price should be at $92-95 to make that happen.

[Vladislav Zlenko:]

On the same basis?

[Denis Gabrielik:]

Yes on FOB basis. Transportation is 60? [Foreign language]

[Oleg Korzhov:]

$50.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you our next question comes from the line of Sergey Donskoy from Societe Generale. Please go ahead.

[Sergey Donskoy:]

Yes, thank you. I have two or three small follow-ups. First, could you please clarify if the mentioned write-downs in the ferroalloys segment in the amount of $23 million also included provisions for bad debts, which were mentioned in the presentation? Second question, given the reduced amount of CAPEX, do you plan to somehow revise your development plans for Elga? Do you think that you will try to slow track this project? And I may also ask one question later. [Foreign language]

[Vladislav Zlenko:]

And the first question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

No the mentioned number does not include bad debt provision it’s entirely attributable to the provision for layoff of personnel at South Urals Nickel Plant. With a bad debt provision for the fourth quarter in the ferroalloys segment was around $8.5 million. [Foreign language]

[Vladislav Zlenko:]

Next question will be answered by Oleg Korzhov [Foreign language]

[Oleg Korzhov:]

Whether or are not the implementation of Elga deposits development will slowdown will depend on when we find the project financing solution for this project. [Foreign language]

[Oleg Korzhov:]

As of today we have done a lot of preparation work and if we find a source of funding for the projects where we are clear with the source of funding we can quickly catch up with the way of work and be back at the rate that we use to have after power in slow down. [Foreign language]

[Oleg Korzhov:]

There were similar points, similar items that effect the completion of Elga project. One of them is that we have full clarity on the equipment and all the hardware that is needed for the project. We are also in good shape in terms of the construction site for the facilities there and the most sensitive issue is completion of bridge construction for the project and in this final area we are not slowing down our work we are going at constant pace.

[Vladislav Zlenko:]

Next question please.

[Sergey Donskoy:]

If I may, just one small follow-up on this. Could you please clarify just how much CAPEX remains to be invested into the first stage of Elga, including construction of the first stage of the processing plant? Thank you. [Foreign language]

[Sergey Donskoy:]

Excuse me. I was speaking about just the first stage or the full-scale production and processing facility of the 10 million tones, just clarify. [Foreign language]

[Oleg Korzhov:]

We are talking about production and processing capability of 12 million tonnes with the existing capability for 3 million tonnes and an additional plant under construction for 9 million tonnes.

[Vladislav Zlenko:]

Next question please.

[Operator:]

The next question comes from the line of George Buzhenitsa Deutsche Bank, please go ahead.

[George Buzhenitsa:]

Good evening gentlemen. Thank you for the conference call. I have a couple of short questions. First is on the effective interest rate in 2013. Can you please give us your view on what is it going to be? Second one is on the revised financial convents. You have earlier reported receiving lenders' approval on waivers and amendments to some credit facilities; can you update us on the revised financial covenants there? The third one would be on your application to the VTB for project financing. You mentioned that you are seeking project financing for Elga. So if this is successful, how is it going to impact your plans to sell a non-controlling stake in Mechel Mining? Thank you. [Foreign language]

[Oleg Korzhov:]

The interest rates in 2013 are going to grow somewhat but it, it’s not because of the greater risks associated with our company as viewed by the banks. It’s because of the growing cost of funds for the banks. [Foreign language]

[Oleg Korzhov:]

As of the financial; finance that were reviewed and coordinated, we are going to have the following $7.5 for.

[Vladislav Zlenko:]

7.5 net debt to EBITDA for the first half of 2020 and for the full year of 2013, six to one in the first half of 2014 and a 5.5 for the full year of 2014. [Foreign language]

[Oleg Korzhov:]

We were saying thus we were seeking project financing for the Elga deposit and we have made applications to a number of financial organizations including Nash econum, if we see project financing for Elga then the need to sell the minority stakes in metro mining is going to be significantly less relevant for us and we will be much more scrupulous in deciding on which terms we could possibly sell.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. Your next question comes from the line of Igor Fedorov from ING Bank. Please go ahead.

[Igor Fedorov:]

Good evening, gentlemen. Just a couple of questions with regards to your debt also. Just for clarification, do I correctly understand that you have covered all potential, all short-term debt after receiving VTB's loans, am I right? And do you have any plans with regards to your local debt bonds program? Do you have any plans to tap the market and when it will be? And third question or just a question will this facility from the potential asset sale be forward to debt caught or cash cushion increase? That would be my first three questions and I have also some questions with regard to your debt. Thank you much. [Foreign Language]

[Vladislav Zlenko:]

All these questions will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

As you can see in the presentation materials, chart 14 after we received a loan from VTB the level of funds in our (inaudible) corresponds to the level of short term debt which is mature in 2013 which is not to say that we are not looking for restructuring of our debt obligations.

[Vladislav Zlenko:]

For this year and going forward beyond 2013.

[Stanislav Ploschenko:]

[Foreign Language] As off the prospect for issuing our ruble-denominated bonds, we can say that we have a prospect for issuance of 30 billion rubles worth of such bonds for three years term. They will be exchange-traded bond, would be; however, at this point in time we are not pursuing this possibility holding it as a potential reserve for a situation if our debt level exceeds related to the cost of debt. Basically what do you feel on our public debt first to level at which we are currently borrowing from the banks.

[Igor Fedorov:]

Can you just tell what is the comfortable level for the yield on the debt market? Would it be 12% or 10% and I suppose its above 16%. [Foreign Language]

[Stanislav Ploschenko:]

12% at most. [Foreign Language] As of the sales of assets the manual resulting from that will be used to repay short term debt.

[Vladislav Zlenko:]

Next question please.

[Igor Fedorov:]

All right. And I have two questions, last two questions. And with regards to covenants, I would suppose you disclosed it last year in the Form 20-F that you have negotiated with your creditors with regards to loans amounting $6.2 billion and last year, it was about two-thirds of your total debt. And you recently announced that you have received consent of incentive covenants and amendments from the bank with regards to $1 billion. And so I am just wondering how much of the debt, of covenanted debt you need to renegotiate this year again as you probably reach these covenants you announced last year. So I believe it was 5.5 as of the end of 2012. So can you just provide any figure of how much of covenanted debt you have for now and how much of efforts you will need to take further this year just to make all your creditors comfortable with your covenant credit situation? Thank you very much.

[Stanislav Ploschenko:]

[Foreign Language] Today over two thirds of our total debt is represented by the debt subject to covenant testing and they're pretty much unified across all our debt portfolio, the announcement that we made about a week ago that we reached an agreement with international banks on the $1 billion syndicate facility was awaiting precisely to this syndicated facility. Since then we reached an agreement with all our creditors with respect to the new covenants. [Foreign Language]

[Igor Fedorov:]

That's great news, gentleman. That is very great news. And my last question with regards to your cash flow from operating activities. As we saw, you increased it in 2012 by using working capital. And what is a target debt level of cash flow from operating activities for this year for you as you mentioned that CAPEX will be $400 million? Thank you very much. [Foreign Language]

[Vladislav Zlenko:]

Stanislav will answer.

[Stanislav Ploschenko:]

In the year 2012, we divested quite substantial amounts from the working capital therefore it is difficult to predict the dynamics of the operating cash flow especially the portion coming from the working capital in this year but we certainly count that we will generate sufficient operating cash flow to cover our investment program and help to do more net debt redemption this year. [Foreign Language]

[Igor Fedorov:]

Thank you very much and good luck.

[Operator:]

Thank you the next question comes from the line of Vasiliy Kuligin from Renaissance Capital. Please go ahead.

[Vasiliy Kuligin:]

Hello once again. One follow-up question from me. On Elga financing, assuming the project financing for the Elga project development is received from (inaudible) Bank, does this mean that the (inaudible) will become the owner of minority stake in Elga or just the stake would just be pledged? And the follow-up question is what is the interest in these two cases for (inaudible) Bank to take part in this? Is the bank just receives an interest payment or it takes -- it will probably take part directly in GAAP profits? Thank you.

[Stanislav Ploschenko:]

I cannot speak on behalf of (inaudible) bank. From the company side I can say that we are not planning to offer the minority stake to the bank as from the structure of the plan it’s too early to talk about it because we have not structured the due yet. We are not going to put the bank into the managing rule within this project either.

[Vladislav Zlenko:]

Next question please.

[Operator:]

(Operator Instructions) Thank you. We have no further questions coming through. I hand the call back over to Mechel management for any comments.

[Vladislav Zlenko:]

Ladies and gentlemen, thank you for taking the time to join Mechel’s 2012 financial results conference call today. The replay of the call will be available on Mechel’s website. If you have any further questions please contact IR office. Thank you again.