Page 122 - RusRPTJun20

were 3% above the 1Q19 volumes and just slightly below 2Q19 and 3Q19 (the second and third quarters tend to see seasonally higher demand for steel). The q/q decline in steel product sales was mainly attributable to a 15% drop in semi-finished products, while finished steel sales declined only 6% q/q, leading to a better sales mix q/q and supporting realized prices (up 4.5% on average at the Russian division and 3-6% at the US division). The cash cost performance in 1Q20 was strong thanks to the weaker ruble, with the cash cost of slab at the Russian division down 8% q/q to $223/tonne EXW. Mined coking coal production fell 5% q/q in line with previous plans to curb output following weak demand late last year. External coking coal sales volumes jumped 30% q/q to 3.3mn tonnes (well above the normal quarterly level of 2.7-2.8mn tonnes) as rail transportation to the East was more available and Evraz managed to maximize coal shipments in 1Q20 by selling inventories accumulated last year. The company plans to further decrease coking coal production at its mines in 2Q20 by carrying out planned longwall moves at Raspadskaya and suspending operations at Mezhegeyugol, its smallest coal asset. It said that it would decide about increasing coking coal capacity utilization in July, when there will be better visibility for demand in 2H20. So far, Evraz sees weak demand in terms of volumes (with lockdowns extended in Japan and India) and a poor outlook for prices (as of yesterday, spot HCC was estimated by CRU at $110/tonne FOB Australia).
Russian steel maker​ ​Mechel​ shows a 29% q/q rise in EBITDA in 1Q20, killed by FX loss​. Mechel has finally reported its 1Q20 results, both operating and financial, showing nothing unexpected – leverage remains high and the company still needs coking coal prices globally to improve in order to become financially healthy. Although the operating side remained generally okay, with flat m/m and y/y data, the financial side showed some recovery on the EBITDA level, which was killed by the FX loss on debt revaluation, given ruble depreciation. Weak RUB cannot help, risks to output and negative equity. There are three key dynamics in Mechel’s results that we want to highlight. The first is the strong financial leverage whose non-ruble denominated part is a large overhang on Mechel’s financials, killing the benefits of the weaker ruble. Second are the low Capex rates, as investments are less than half of depreciation, implying falling PP&E and declining output volumes in the future. Finally, the company has massive negative equity and remains afloat thanks to external support. In particular, equity to asset ratio is an incredible -83% now.
Novolipetsk Metallurgical Kombinat​ (NLMK) reported 1Q20 IFRS results at the start of May​. They beat the consensus across the board. EBITDA grew 24% q/q to $594mn (5% above the consensus) on ruble depreciation and lower coking coal prices. The consolidated cash cost of slab dropped 11.5% q/q to $215/tonne. FCF was strong at $331mn on solid earnings and a working capital release ($85mn). Capex was in line with our estimate at $288mn. Like Severstal and MMK, NLMK reduced its full-year capex guidance, cutting it by 20% to $900-950mn thanks to ruble depreciation and slower implementation of some of its secondary growth projects (a power station, adding HVA capacities). Meanwhile, projects targeting an increase in steel production to 14mn tonnes per year at the Lipetsk site (BF and BOF upgrades) remain on track. NLMK said if markets deteriorate further, it can cut capex for this year by up to $750mn. A dividend of R3.21 per share was announced, for a total payout of $263mn (a 2.5% yield) - above our estimate of $180mn because of higher reported FCF. The payout is only 75% of headline FCF (versus the policy of paying out 100% of FCF and excess capex), but similar to that for 4Q19 (a 75% payout, after a dividend revision; the amount was half of the
122​ RUSSIA Country Report​ June 2020 ​ ​www.intellinews.com