Mechel OAO (MTL) Q2 2011 (1H 2011) Earnings Call October 11, 2011 10:00 am ET Executives Oleg Korzhov - Acting CEO & SVP for Economics & Management Stanislav Ploschenko - CFO Analysts Dmitry Smolin - URALSIB Capital Dan Yakub - Citi Andrey Lobazov - Alfa-Bank Sergei Donskoi - Société Générale Efat Pellier - Merrill Lynch George Buzhenitsa - Deutsche Bank Vadim Kotikov - URALSIB Vasily Kuligin - Renaissance Capital Presentation Unidentified Company Representative
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 US GAAP financial measures are contained in the earnings press release which is available on our website at mechel.com.At this point, I would like to turn the call over to Mr. Oleg Korzhov. Mr. Korzhov, please go ahead. Oleg Korzhov Good day and good morning ladies and gentlemen. Welcome to the conference call. We are going to discuss the financial statements of the company for the first six months of 2011. I will start my presentation with a general overview of the work done and of the current situation and then I will pass the floor to the Senior Vice President for Finance, Stanislav Ploschenko, who will cover financial results. Summarizing the work of the company in the first six months of the year, I must notice first of all that this period of time was the time of consistent building up of production of all the main types of products. It was also the time for intensive work in the area of investment projects in all divisions of the Mechel Group. Today, I can state that we have managed to achieve very high results. Our largest scale investment project is the construction of the Elga Coal Mining Complex, where we’re ahead of schedule; completed construction of the Ulak-Elga Railway Link to the 209 kilometer point. This is the area where we have coal reloading station. This allowed us to start mining of the deposits already in early August and by this time at Elga deposit we have mined over 50,000 tonnes of coal. The coal from the Elga deposit is already being delivered to its first customers. Today, development of the deposit infrastructure is going at full speed. The railway is planned to be fully completed till the end of the year and we will soon start construction of seasonal washing plants which will enable processing of run of mine coking coal locally at the deposit already in the second quarter of the next year.
So this way, we launched an important strategic project and it is almost impossible to overestimate the importance of this project for the company. When Elga reaches full capacity, Mechel will substantially improve its position among the largest global producers of coking coal.During the first half of the year, all the efforts of the company in its mining division was aimed at accelerating the achievement of 100% capacity utilization at Neryungrinskaya washing plant at Yakutugol. We wish this objective by the end of June and from implementation of certain technical solutions the plant set a production record in July. On the whole, since the start of the year, against the favorable background of prices in the markets of metallurgic coal from quarter-to-quarter we have been growing the production of this type of product. Although there were certain challenges due to spontaneous heating of coal, of the mine Olzherasskaya-Novaya in August last year and also the Sibirginskaya mine in June this year, because of this the production of coal mining of Novaya coal mines was suspended. Currently, some new work has been done there to construct a new long wall features and although already in this quarter we plan to start new long wall face and to resume production of coal at Olzherasskaya-Novaya mine and in the next quarter at the Sibirginskaya mine. At the same time, we are constructing the second vertical shaft at the Sibirginskaya mine which will enable us to bring production there to 2.4 million tonnes of high quality coking coal already in 2014. We continue acquiring mining complexes for other another production facility at the Southern Kuzbass in order to improve capacity for metallurgical coal, mining already in the beginning of next year. At our American enterprise, Bluestone, in the last several months, we put into operation new and also formerly idle mines, Spider Ridge and (inaudible). This is done to raise production of very valuable grade of coking coal that are in high shortage; I am talking about the low volatility and high volatility grades of coking coal.
In the steel segment of Mechel, the production dynamics since the beginning of the year was also positive. We attribute this to optimization of the loading of the main technological machinery as well as launching of new capacities and the constantly improving price situation in the markets. Because of the successes of our sales division, Mechel Service Global we have managed to considerably progress in conquering new segments of the market and in expanding the geography of sales of metallurgical products of the company.Despite scheduled repairs of the Blast Furnace Number 5 at Chelyabinsk Metallurgical Plant in May this year at the end of Q2, the steel division notably improved the sales of its key products, rebar and hardware by 46% and 12% respectively. This was made possible first of all due to a very well developed warehouse and network of Mechel Service Global and accurate planning which is based on seasonal fluctuations of prices on construction materials. On the whole in the second quarter against the background of growing prices, we managed to sell the major part of our stock that we accumulated in the first quarter ahead of the start of the construction season in Russia. I must note that Mechel Service Global experienced a very dynamic, very rapid growth and today we have more than 140 warehouses located in all regions of Russia and in many countries of Europe; proximity to the end consumer and diversification by markets and types of products allow us to efficiently plan production as well as they enable additional stability in the times of increased volatility of the markets. Read the rest of this transcript for free on seekingalpha.com