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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Evraz Plc | LSE:EVR | London | Ordinary Share | GB00B71N6K86 | ORD USD0.05 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 82.68 | 0.00 | 00:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Dec 2019 to Dec 2024
TIDMEVR
RNS Number : 0638Q
Evraz Plc
27 August 2014
EVRAZ ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR H1 2014
27 August 2014 - EVRAZ plc ("EVRAZ" or "the Company") (LSE: EVR) today announces its unaudited interim results for the six months ended 30 June 2014 ("the Period").
H1 2014 HIGHLIGHTS
Commenting on the financial results in respect of H1 2014, Alexander Frolov, Chief Executive of EVRAZ, stated:
"EBITDA totalled US$1,080 million in H1 2014 compared to US$925 million for the corresponding period of 2013. This 17% increase largely reflects actions taken by the Company in terms of asset optimisation and the implementation of cost efficiencies. A strong free cash flow performance of US$444 million for the first half of the year allowed us to decrease net debt to US$6,095 million as at 30 June 2014. Our net leverage consequently declined from 3.6x at the year end to 3.1x, thereby strengthening the Company's financial position."
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Six months to 30 June
(US$ million) 2014 2013(1) Change
------------------------------------------ ------------- ----------------- -------
Consolidated revenue 6,805 7,319 (7)%
------------------------------------------ ------------- ----------------- -------
Profit from operations 297 145 105%
------------------------------------------ ------------- ----------------- -------
Consolidated EBITDA(2) 1,080 925 17%
------------------------------------------ ------------- ----------------- -------
Net profit/(loss) 1 (146) n/a
------------------------------------------ ------------- ----------------- -------
Earnings/(loss) per share, basic (US$) 0.03 (0.09) n/a
------------------------------------------ ------------- ----------------- -------
Net cash flows from operating activities 844 628 34%
------------------------------------------ ------------- ----------------- -------
CAPEX(3) 365 492 (26)%
------------------------------------------ ------------- ----------------- -------
30 June 2014 31 December 2013
------------------------------------------ ------------- ----------------- -------
Net debt 6,095 6,534(4) (7)%
------------------------------------------ ------------- ----------------- -------
Total assets 16,333 17,689 (8)%
------------------------------------------ ------------- ----------------- -------
(1) Figures for H1 2013 were restated due to reclassification of subsidiary that ceased to be held for sale and the completion of initial accounting for Raspadskaya acquisition
(2) Please refer to Appendix 1 for reconciliation of profit/(loss) from operations to EBITDA
(3) Including payments on deferred terms recognised in financing activities
(4) Hereinafter debt and cash balances include the amounts held at operations that were classified as assets/liabilities held for sale, which were separately presented in the statement of financial position as of 31 December 2013 (cash - US$7 million; net debt - US$69 million). Please refer to Appendices 4 and 5
Steel:
-- Steel segment revenue of US$5,898 million (-8% vs. H1 2013) -- Crude steel production of 7.8 million tonnes (-4%) -- Total external sales of steel products of 7.7 million tonnes (-1%)
Coal:
-- Coal segment revenue of US$665 million (-7% vs. H1 2013)
-- Raw coking coal production of 9.8 million tonnes (+7%) including 4.4 million tonnes from Raspadskaya
-- Sergey Stepanov was appointed General Director of Raspadskaya Coal Company with effect from 1 July 2014.
Iron ore:
-- Iron ore segment revenue of US$659 million (-27% vs. H1 2013)
-- Production of iron ore products was 11.3 million tonnes (-4%) on the back of lower output by the Russian operations largely driven by the disposal of high cost operation EVRAZ VGOK and three mines of Evrazruda
Vanadium:
-- Vanadium segment revenue of US$255 million (-5% vs. H1 2013)
-- The vanadium division produced 10,404 tonnes (-4%) of vanadium slag and sold 9,393 tonnes (+5%) of final vanadium products
Investments:
-- Capital expenditure of US$365 million (vs. US$492 million in H1 2013) following completion of some major projects and the thorough revision of investment plans
-- PCI project at EVRAZ ZSMK continued in H1 2014 and hot tests started in July
-- Yerunakovskaya VIII coking coal mine launched in February 2013 and fully ramped up by February 2014
-- Development of Mezhegey coking coal deposit continued -- EVRAZ Caspian Steel rolling mill in Kazakhstan commenced production
M&A developments:
-- Disposal of EVRAZ Vitkovice Steel based on the enterprise value of US$287 million completed in April 2014
-- Sale of 34% of issued share capital of EVRAZ Highveld Steel and Vanadium for approximately US$27 million in August 2014
Debt and liquidity:
-- Net debt of US$6,095 million vs. US$6,534 million as at 31 December 2013
-- Net leverage at 3.1 times last twelve months EBITDA compared to 3.6 times as at 31 December 2013
-- US$425 million 5-year pre-export finance facility signed in August 2014
Dividends:
-- The US$90.4 million dividend (6 cents per share) pay out in July 2014 represented the approximate cash portion of the proceeds from the sale of EVRAZ Vitkovice Steel, leaving US$196.6 million for the reduction of debt
Chief Executive Officer's ReporT
EBITDA totalled US$1,080 million in H1 2014 compared to US$925 million for the corresponding period of 2013. This 17% increase largely reflects actions taken by the Company in terms of asset optimisation and the implementation of cost efficiencies. A strong free cash flow performance of US$444 million for the first half of the year allowed us to decrease net debt to US$6,095 million as at 30 June 2014. Our net leverage consequently declined from 3.6x at the year end to 3.1x, thereby strengthening the Company's financial position.
The volume of steel sales for H1 2014 amounted to 7.7 million tonnes (finished and semi-finished). Revenue experienced a 7% decline to US$6,805 million compared with H1 2013, a decrease which primarily reflects lower selling prices as a result of overcapacity in the global steel industry.
In response to a challenging environment, EVRAZ's Board and management have adjusted certain corporate priorities and, in line with the Company's long--term strategy, implemented changes designed to maintain competitiveness. We believe that we are beginning to see clear and positive results from our efforts. During the reporting period we delivered successfully against the targets, operational plans and cost reduction programmes, which we announced at the time of the 2013 results. We reported progress in this regard at our Investor Day held in London on 11 June 2014 (the presentation can be seen on http://www.evraz.com/investors/presentations/).
Overview of Health, Safety and Environmental performance
When we described the Company's strategy two years ago, we stated that the most important objective was to enhance health and safety conditions. This continues to be the case. Constant endeavour is required in this vital area involving the determination of rigorous safety standards, the training of employees and persistent diligence in order to ensure that our policies and procedures are properly followed. It is with deep regret that I have to report that seven employees and six contractors lost their lives in work-related incidents during the first six months of 2014. Any fatality is unacceptable to myself, my co-Directors and all of the management team and every effort is made to investigate the causes of such accidents and ensure that corrective measures are taken. Unsafe behaviour on the part of employees and contractors accounts for approximately 90% of accidents. Our priority is to change attitudes and behaviour, particularly within our CIS facilities.
H1 2014 market environment
The global steel industry has continued to struggle in the face of excess capacity. Lower raw material prices have helped although some of the benefit has been eroded as a result of lower selling prices. Put briefly, the situation in the steel sector remains challenging, with margins under pressure. We are adopting a cautious outlook towards raw material prices: negative on iron ore and neutral to positive in respect of coking coal.
We have immense faith in our core steel markets, Russia and North America. In Russia, construction and infrastructure are critical to economic growth and are supported by the government. Steel consumption enjoys the potential to be boosted by, for example, regional development projects and the 2018 FIFA World Cup. EVRAZ currently posesses an excellent portfolio of construction and infrastructure products for the Russian market. In the US, corporate earnings, employment growth and credit availability are improving, thereby positively affecting steel demand. EVRAZ also commands a strong exposure to the oil and gas sector in North America. In addition, we are the global leader in rails with a strong presence in both the Russian and North American markets, and the largest producer of coking coal in Russia.
Strategic priorities
Our operating strategy is aimed at building on our core value drivers: economically efficient low cost production of steel making raw materials (iron ore and coking coal), high quality steel assets in attractive markets, and a competitive product portfolio encompassing an increasing range of higher value products. We have set the following four strategic priorities in line with our strategy:
- Cost cutting initiatives; - Selective investments in low-risk, high return projects; - Customer focus to leverage our leading market positions; - Deleveraging.
Cost efficiency remains a primary focus. In 2014, we targeted US$400 million of cost savings. Some of the savings are derived from actions taken in 2013, such as the suspension, shutdown or disposal of inefficient iron ore and coal mines in Russia together with underutilised steel facilities in Russia, the US and Italy. Other cost optimisation initiatives have been implemented during the first half of this year, in particular the sale of our plant in the Czech Republic and headcount reductions. The full effect of these actions has yet to be realised. However, we have noted the positive effect on our cash costs; for example, the blended cash cost of iron ore concentrate decreased from US$66/t in H1 2013 to US$52/t in H1 2014, of which US$6.7/t is due to the rouble devaluation, with the remainder being the result of management actions.
With a number of major capital intensive projects now successfully completed, we will focus on low capex and fast payback efficiency projects, which have a projected internal rate of return of at least 40%. We have already announced projected capex spending of a maximum of US$900 million for each of the years 2014 and 2015. In H1 2014, capex amounted to US$365 million, which is in line with plan.
During difficult market conditions good customer relations are particularly important. Customer focus underlines all our activities, be it working with existing partners, e.g. Russian Railways, or new partners. We have placed considerable emphasis on meeting customer product requirements, examples of which include the development of new types of rails, including head-hardened rails for high-speed tracks, and new types of construction rebars.
Our financial strategy is currently focused on deleveraging. We have demonstrated a consistent record of debt reduction throughout the last four years and we are on course to achieve our target of a net debt to EBITDA (for the last 12 months) ratio of less than 3 times by the end of 2016.
Geopolitical situation
With key assets located in Russia and the Ukraine, EVRAZ is not immune to geopolitical risks. To date, neither our operations nor our assets in the Ukraine have been affected by the unrest in the country. In addition, EVRAZ has not been subject to sanctions introduced by a number of countries. We are watching the developments in the region closely and are consulting legal and other advisers, nationally and internationally, in order to analyse the risks and prepare, to the extent feasible, contingency plans.
Outlook
We remain confident in the strong long-term fundamentals of our business model and are undertaking all appropriate measures to ensure sustainable profitability in the current market environment. While we cannot control many of the challenges that the global economy and steel sector present, we believe that the benefits derived from asset portfolio optimisation, our efficiency improvement and cost reduction programme, lower capital expenditure and progressive product mix development will put us in a strong position to enhance shareholder value.
Alexander Frolov
Chief Executive Officer
EVRAZ plc
Financial Review
Giacomo Baizini, Chief Financial Officer, commented:
"The Company showed a net profit of US$1 million for the first half of 2014, compared to a net loss of US$146 million in the first half of 2013. This is mainly the result of an improvement in business performance: the contribution of asset optimisation and cost efficiency actions can be estimated at US$193 million in the first half of this year, excluding the effect of fluctuations of foreign exchange."
"Both the Russian rouble and the Ukrainian hryvnia devalued against the US dollar, 12.8% and 28.6% respectively in H1 2014 compared to the average rate in H1 2013. This had an additional positive effect on costs in Russia and Ukraine, but was counterbalanced by a delay in the readjustment of the local currency prices of domestic steel sales."
"Free cash flow for the period was positive at US$444 million, due to improved business performance but also as a result of the disposal of EVRAZ Vitkovice Steel. US$90.4 million of the disposal proceeds were paid out in dividends in July, but the rest has been retained to reduce debt. From the end of last year to 30 June 2014 net debt decreased by 7.2% to US$6,095 million, meaning that net leverage decreased from 3.6x to 3.1x. This put the company in an increasingly secure financial position, further consolidated by the signing of a US$425 million 5-year pre-export finance facility in August. This now largely resolves the liquidity and refinancing needs of the company until Q4 2015."
Statement of operations
Revenues (US$ million) ----------------------------------------------------------------- Segment H1 2014 H1 2013 Change Relative change ------------------ -------- -------- ------- ---------------- Steel 5,898 6,393 (495) (7.7%) ------------------ -------- -------- ------- ---------------- Coal 665 722 (57) (7.9%) ------------------ -------- -------- ------- ---------------- Iron ore 659 900 (241) (26.8%) ------------------ -------- -------- ------- ---------------- Vanadium 255 268 (13) (4.9%) ------------------ -------- -------- ------- ---------------- Other operations 434 465 (31) (6.7%) ------------------ -------- -------- ------- ---------------- Eliminations (1,106) (1,429) 323 (22.6%) ------------------ -------- -------- ------- ---------------- Total 6,805 7,319 (514) (7.0%) ------------------ -------- -------- ------- ----------------
Group revenues for H1 2014 decreased by 7.0% to US$6,805 million, with revenues from the Group's steel segment amounting to US$5,898 million or 87% of total Group's revenue.
Steel sales volumes (including intersegment) slightly decreased to 7.7 million tonnes compared to 7.8 million tonnes in H1 2013. The decline in revenues was largely due to a decrease in prices, in line with the general negative trend in steel pricing, as well as the lag of domestic steel prices in Russia and Ukraine in adjusting to the depreciation of the local currencies versus the US dollar that occurred in H1 2014. The sale prices of steel products decreased by 4.6% in H1 2014 compared to H1 2013. This was accompanied by a decrease in sales of non-core products by the subsidiaries of the Steel segment, including coke, chemicals and scrap.
Steel revenues were also impacted by changes in the Group's product mix during 2013-2014 due to the suspension of operations of EVRAZ Claymont Steel and EVRAZ Palini e Bertoli, the EVRAZ Vitkovice Steel disposal and the closure of EVRAZ ZSMK plate rolling mill. While sales volumes of flat-rolled steel products declined, a part of semi-finished production was switched from internal consumption to external sales. Lower sales volumes of flat-rolled steel products were partially offset by higher sales of railway and tubular products. Changes in sales mix contributed to a 1.0% decrease in revenues.
Iron ore revenues decreased by 26.8% to US$659 million in the period, compared to US$900 million in H1 2013. The decrease in revenues was primarily due to disposal of a number Evrazruda's iron ore mining and processing facilities in December 2013 (Abakan iron ore mine, Teya iron ore mine, Mundybash beneficiation plant), closure of the Irba mine at Evrazruda from April 2013 and the EVRAZ VGOK disposal in September 2013. The decline in iron ore product prices by 9.7% in H1 2014 compared to H1 2013 also contributed to lower iron ore revenues.
Revenue by region (US$ million) Region H1 2014 H1 2013 Change Relative change ------------------- -------- -------- ------- ---------------- Russia 2,793 3,094 (301) (9.7%) ------------------- -------- -------- ------- ---------------- Americas 1,751 1,616 135 8.4% ------------------- -------- -------- ------- ---------------- Asia 1,052 1,050 2 0.2% ------------------- -------- -------- ------- ---------------- Europe 508 766 (258) (33.7%) ------------------- -------- -------- ------- ---------------- CIS 489 539 (50) (9.3%) ------------------- -------- -------- ------- ---------------- Africa 207 250 (43) (17.2%) ------------------- -------- -------- ------- ---------------- Rest of the world 5 4 1 25.0% ------------------- -------- -------- ------- ---------------- Total 6,805 7,319 (514) (7.0%) ------------------- -------- -------- ------- ---------------- EBITDA (US$ million) ----------------------------------------------------------------- Segment H1 2014 H1 2013 Change Relative change ------------------ -------- -------- ------- ---------------- Steel 771 651 120 18% ------------------ -------- -------- ------- ---------------- Coal 132 109 23 21% ------------------ -------- -------- ------- ---------------- Iron ore 216 231 (15) (6%) ------------------ -------- -------- ------- ---------------- Vanadium 20 34 (14) (41%) ------------------ -------- -------- ------- ---------------- Other operations 52 61 (9) (15%) ------------------ -------- -------- ------- ---------------- Unallocated (115) (100) (15) 15% ------------------ -------- -------- ------- ---------------- Eliminations 4 (61) 65 n/m ------------------ -------- -------- ------- ---------------- Total 1,080 925 155 17% ------------------ -------- -------- ------- ----------------
Steel segment EBITDA in H1 2014 is higher than in H1 2013 as a result of asset optimisation and cost reduction activities, as well as the decrease in expenses in US dollar terms at Russian and Ukrainian subsidiaries due to the local currencies depreciation in H1 2014. Lower prices on coking coal and iron ore also impacted positively the segment results. The economy on the cost side was partially offset by decline in steel products sales prices due to both global weak market environment and lag in price adjustment in Russia and Ukraine after currency depreciation. In addition, the Steel segment EBITDA was influenced by the better performance of EVRAZ's North American assets.
Iron ore segment EBITDA was negatively impacted by falling prices for iron ore products which were partially compensated by decrease in costs.
Increased year on year Coal segment EBITDA was related to a decrease in costs associated with Russian rouble weakening, portfolio optimisation at Yuzhkuzbassugol (including the shutdown of Abashevskaya and Kusheyakovskaya mines as well as the sales of loss-making Tagaryshskaya, Gramoteinskaya and Yubileynaya mines) and operational improvements at operating mines. Another contributing factor with regard to improved EBITDA was the increase in sales volumes of coking and steam coal.
The decrease in Vanadium segment EBITDA largely reflected the fall in prices of vanadium in alloys and chemicals.
The decrease in the Other operations segment EBITDA is mainly attributable to weak results of Zabsib Heat and Power Plant.
Eliminations mostly reflect the unrealised profits or losses of the Iron ore and Coal segments in transactions with the subsidiaries relating to the Steel segment.
Cost of revenues, expenses and results (US$ million) -------------------------------------------------------------------------------------------------------- Item H1 2014 H1 2013 Change Relative change --------------------------------------------------------- -------- -------- ------- ---------------- Cost of revenue (5,192) (5,886) 694 (11.8%) --------------------------------------------------------- -------- -------- ------- ---------------- Gross profit 1,613 1,433 180 12.6% --------------------------------------------------------- -------- -------- ------- ---------------- Selling and distribution costs (543) (608) 65 (10.7%) --------------------------------------------------------- -------- -------- ------- ---------------- General and administrative expenses (390) (438) 48 (11.0%) --------------------------------------------------------- -------- -------- ------- ---------------- Impairment of assets (147) (7) (140) n/m --------------------------------------------------------- -------- -------- ------- ---------------- Foreign exchange gains/(losses), net (180) (179) (1) (0.6%) --------------------------------------------------------- -------- -------- ------- ---------------- Other operating income and expenses, net (56) (56) 0 0.0% --------------------------------------------------------- -------- -------- ------- ---------------- Profit from operations 297 145 152 104.8% --------------------------------------------------------- -------- -------- ------- ---------------- Interest expense, net (287) (357) 70 (19.6%) --------------------------------------------------------- -------- -------- ------- ---------------- Gain/(loss) on financial assets and liabilities, net (43) (71) 28 (39.4%) --------------------------------------------------------- -------- -------- ------- ---------------- Gain on disposal group classified as held for sale, net 113 54 59 109.3% --------------------------------------------------------- -------- -------- ------- ---------------- Other non-operating gains/(losses), net 5 90 (85) (94.4%) --------------------------------------------------------- -------- -------- ------- ---------------- Profit before tax 85 (139) 224 n/m --------------------------------------------------------- -------- -------- ------- ---------------- Income tax benefit/(expense) (84) (7) (77) n/m --------------------------------------------------------- -------- -------- ------- ---------------- Net profit 1 (146) 147 n/m --------------------------------------------------------- -------- -------- ------- ----------------
The Group's cost of revenue decreased by 11.8% to US$5,192 million in H1 2014 compared with US$5,886 million in H1 2013. This was mostly due to a fall in staff costs, auxiliary materials, semi-finished products, depreciation charges, transportation and raw materials costs.
A detailed breakdown of the cost of revenue is as follows:
% of % of
(US$ million) H1 2014 revenue H1 2013 revenue Change Relative change
------------------------------ -------- --------- -------- --------- ------- ----------------
Revenue 6,805 7,319 (514) (7)%
------------------------------ -------- --------- -------- --------- ------- ----------------
Cost of revenue 5,192 76% 5,886 80% (694) (12%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Raw materials, incl. 1,731 25% 1,819 25% (88) (5%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Iron ore 432 6% 371 5% 61 16%
------------------------------ -------- --------- -------- --------- ------- ----------------
Coking coal 272 4% 368 5% (96) (26%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Scrap 636 9% 710 10% (74) (10%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Other raw materials 391 6% 370 5% 21 6%
------------------------------ -------- --------- -------- --------- ------- ----------------
Semi-finished products 95 1% 217 3% (122) (56%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Auxiliary materials 393 6% 516 7% (123) (24%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Services 360 5% 351 5% 9 3%
------------------------------ -------- --------- -------- --------- ------- ----------------
Goods for resale 276 4% 298 4% (22) (7%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Transportation 340 5% 437 6% (97) (22%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Staff costs 851 13% 988 13% (137) (14%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Depreciation 379 6% 487 7% (108) (22%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Electricity 238 3% 258 4% (20) (8%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Natural gas 175 3% 225 3% (50) (22%)
------------------------------ -------- --------- -------- --------- ------- ----------------
Other costs 354 5% 290 3% 64 22%
------------------------------ -------- --------- -------- --------- ------- ----------------
The cost of raw materials, the largest single cost item, decreased by US$88 million in H1 2014 driven mostly by lower coking coal and scrap costs which fell by US$96 million and US$74 millionrespectively.This decline was related to lower coal and scrap prices as well as the shutdown of EVRAZ Claymont which consumed purchased scrap for steelmaking in H1 2013. This decrease was partially offset by an increase in iron ore costs of US$61 million mainly due to lower intragroup sales resulting from the EVRAZ VGOK disposal in September 2013, closure of the Irba mine at Evrazruda and the disposal of Evrazruda's assets in Khakassia. EVRAZ has also implemented operational improvement plans that resulted in optimisation of yields at the Russian steel mills.
The costs for semi-finished products fell by 56% primarily due to lower consumption of slab purchased from third parties by EVRAZ North America's assets which were substituted by shipments from EVRAZ NTMK, as well as lack of pig iron consumption by EVRAZ Vitkovice Steel which was also substituted by EVRAZ NTMK and purchased slabs.
Auxiliary material costs decreased by 24%, or US$123 million, which includes material decrease due to Russian rouble and Ukrainian hryvnia weakening, disposal and suspension of subsidiaries and cost optimisation programmes, primarily in the Coal segment.
The transportation services decrease of 22% related to the Russian rouble weakening and a slight decrease of production volumes, on one hand, and tariffs increase, on the other hand.
Staff costs decreased by 14%, or US$137 million, which reflects the impact on costs in Russia and Ukraine of local currency weakening, the disposal and optimisations of assets, and personnel optimisation programmes.
Total depreciation, depletion and amortisation in cost of goods sold amounted to US$379 million in H1 2014 compared to US$487 million in H1 2013. The depletion charge was significantly reduced in the Coal segment driven by a lower depreciation and depletion expense at Yuzhkuzbassugol due to the revision and detailing of future mining plans and lower mineral deposits depletion. In addition, remaining useful lives of plant and equipment were reassessed and extended at EVRAZ NTMK, EVRAZ ZSMK and EVRAZ DMZ. This was also accompanied by a decrease of the US dollar amount of depreciation at our Russian and Ukrainian sites due to local currencies weakening.
Electricity costs decreased by 8%, or US$20 million. The decrease was related to lower consumption volumes, predominantly because of assets optimisation and disposals (notably, EVRAZ Claymont operations in North America, Yuzhkuzbassugol mines, part of Evrazruda assets and VGOK), and was also positively impacted by operational improvements. Natural gas expenditure also decreased by 22%, or US$50 million, due to a number of factors including the disposal of Central Heat and Power Plant in H2 2013 which consumed significant volumes of natural gas, operational improvements at EVRAZ DMZ, the disposal of EVRAZ Vitkovice Steel and the suspension of operations at Palini e Bertoli. Electricity and natural gas prices were generally stable in US dollar terms, while in Russia increased rouble prices were offset by Russian rouble weakening.
Other costs include taxes, change in WIP and finished goods, and certain energy costs. The increase in other costs in H1 2014 by 22% is mostly driven by a decrease in stock of WIP and finished goods.
Selling and distribution expenses decreased by 10.7% to US$543 million in H1 2014 from US$608 million in H1 2013. The key drivers were lower sales volumes to third parties and the Russian rouble weakening. This was accompanied by the impact of the EVRAZ Vitkovice Steel disposal and the suspension of operations at EVRAZ Claymont and EVRAZ Palini e Bertoli.
General and administrative expenses declined by 11.0% to US$390 million in H1 2014 versus US$438 million in H1 2013. This decrease was caused by the rouble and hryvnia weakening and the asset portfolio optimisation efforts. In H1 2014, EVRAZ also began a G&A expenses reduction programme the main results of which are expected within the following 12 months.
Impairment losses during the reporting period include US$(77) million relating to several of the Yuzhkuzbassugol mines, which were idled (Kusheyakovskaya and Abashevskaya) and a US$(55) million impairment for EVRAZ Highveld Steel and Vanadium resulting from a decrease in prices for steel and changes in forecast production volumes.
Foreign exchange losses arose, in particular, due to US dollar-denominated amounts payable by subsidiaries in Ukraine, where the national currency depreciated by 48%. In addition, there are some intra-group debts between subsidiaries with different functional currencies and, consequently, gains/(losses) of one subsidiary recognised in the Statement of Operations are not offset with the exchange differences of another subsidiary with a different functional currency.
Interest expenses incurred by the Group have fallen steadily over recent years as a result of the refinancing of debt at lower interest rates. Also the Company's debt has decreased during 2013 and in the first half of 2014. The interest expense for bank loans, bonds and notes amounted to US$296 million in the first half of 2014 and US$373 million in the comparative period of 2013. It was also impacted by a decrease in the interest expense of Russian rouble bonds due to the rouble weakening.
Losses on financial assets and liabilities amounted to US$(43) million and included, inter alia, $25 million realised gains and US$(76) million unrealised losses on the change in the fair value of derivatives - currency and interest rate swaps for the rouble-denominated bonds.
In the reporting period the Group had an income tax expense of US$(84) million in comparison with a US$(7) million expense in the first half of 2013. The change reflects better operating results of the Group as well as a change in the recognition of deferred income tax assets due to the revision of profit forecasts for certain subsidiaries.
Cash flow
(US$ million) ---------------------------------------------------------------------------------------------------------------------- Item H1 2014 H1 2013 Change Relative change ----------------------------------------------------------------------- -------- -------- ------- ---------------- Cash flows from operating activities before change in working capital 970 743 227 30.6% ----------------------------------------------------------------------- -------- -------- ------- ---------------- Changes in working capital (126) (115) (11) 9.6% ----------------------------------------------------------------------- -------- -------- ------- ---------------- Net cash flows from operating activities 844 628 216 34.4% ----------------------------------------------------------------------- -------- -------- ------- ---------------- Short-term deposits at banks, including interest 3 680 (677) (99.6)% Purchases of property, plant and equipment and intangible assets (339) (492) 153 (31.1)% Purchase of subsidiaries, net of cash acquired (102) 82 (184) n/m Proceeds from sale of disposal groups classified as held for sale, net of transaction costs 296 (1) 297 n/m Other investing activities 19 (31) 50 n/m Net cash flows from / (used in) investing activities (123) 238 (361) n/m ----------------------------------------------------------------------- -------- -------- ------- ---------------- Net cash flows from financing activities (960) (670) (290) 43.3% ----------------------------------------------------------------------- -------- -------- ------- ---------------- Effect of foreign exchange rate changes on cash and cash equivalents (20) (49) 29 (59.2)% ----------------------------------------------------------------------- -------- -------- ------- ---------------- Net increase/(decrease) in cash and cash equivalents (259) 147 (406) n/m ----------------------------------------------------------------------- -------- -------- ------- ----------------
Cash flows from operating activities before changes in working capital increased by 30.6% in H1 2014 to US$970 million reflecting better operational results compared to H1 2013.
In H1 2014, the US$126 million outlfow in working capital was mainly related to the repayment of a US$312 million payable to Yuzhny GOK, a supplier of sinter to EVRAZ DMZ in Ukraine.
Free cash flow for the period was a positive US$444 million.
Calculation of free cash flow (US$ million) --------------------------------------------------------------------------------------------- -------- Item H1 2014 --------------------------------------------------------------------------------------------- -------- EBITDA 1,080 --------------------------------------------------------------------------------------------- -------- Changes in working capital, excluding income tax (175) --------------------------------------------------------------------------------------------- -------- Income tax paid (94) --------------------------------------------------------------------------------------------- -------- Other non-cash items 33 --------------------------------------------------------------------------------------------- -------- Net Cash flows from operating activities 844 --------------------------------------------------------------------------------------------- -------- Interest and similar payments (235) --------------------------------------------------------------------------------------------- -------- Capital expenditure, including recorded in financing activities (365) --------------------------------------------------------------------------------------------- -------- Purchases of subsidiaries (net of cash acquired) and interests in associates/joint ventures (102) --------------------------------------------------------------------------------------------- -------- Proceeds from sale of disposal groups classified as held for sale, net of transaction costs 296 --------------------------------------------------------------------------------------------- -------- Other cash flows from investing activities 19 --------------------------------------------------------------------------------------------- -------- Equity transactions (13) --------------------------------------------------------------------------------------------- -------- Free cash flow* 444 --------------------------------------------------------------------------------------------- --------
* Please refer to Appendix 3 for the definition of free cash flow
Capex and key projects
In the first half of 2014, we reduced our total capital expenditure (including payments on deferred terms recognised in financing activities) to US$365 million compared to US$492 million in the first half of 2013 as a result of a comprehensive review of the Company's investment programme. In the first half 2014, the Yerunakovskaya VIII mine reached planned mining volumes, we continued with the certification process of the EVRAZ ZSMK rail mill products and in May we sold the first shipment of 100 metre rails. Also EVRAZ Caspian Steel (former the Vostochny rolling mill) has started commercial operations and we made good progress with the Mezhegey and the EVRAZ ZSMK PCI projects.
A summary of our capital expenditure for 6 months ended 30 June 2014in millions of USD is as follows:
Construction of Yerunakovskaya VIII mine 30 Ramp-up of long-wall 48-3. Production of 1.2 million
tonnes of raw coking coal.
-------------------------------------------------------- ---- ------------------------------------------------------
Mezhegey (Phase I) 22 First batches of coal mined. Ramp-up to be completed
by 2016. Capacity of 1.5 mtpa
-------------------------------------------------------- ---- ------------------------------------------------------
PCI at EVRAZ ZSMK 15 PCI started at EVRAZ ZSMK blast furnace #2. To be
launched at all blast furnaces of EVRAZ
ZSMK by the end of 2014
-------------------------------------------------------- ---- ------------------------------------------------------
EVRAZ ZSMK rail mill modernisation 7 Ramp-up largely completed, technology of new
equipment is being adjusted. Obtained certification
for rails R50 N, R65 1, R65 NE, OR65CR. In May 2014
sales of 100 metre rails started.
-------------------------------------------------------- ---- ------------------------------------------------------
EVRAZ Caspian Steel (Vostochny rolling mill, 6 Construction completed. Mill started shipment of
Kazakhstan) products in H1 2014.
-------------------------------------------------------- ---- ------------------------------------------------------
Other development projects 48
-------------------------------------------------------- ---- ------------------------------------------------------
Maintenance 237
-------------------------------------------------------- ---- ------------------------------------------------------
Total 365
-------------------------------------------------------- ---- ------------------------------------------------------
Financing and liquidity
We started 2014 with total debt of US$8,166 million.
During H1 2014 we repaid short-term lines totalling US$1,060 million, part of which were subsequently redrawn. In January 2014, we borrowed US$70 million under a US Ex-Im guaranteed facility to refinance part of the EVRAZ ZSMK rail mill capex. All the above, together with a number of minor scheduled repayments, resulted in a total debt of US$7,479 million and net debt of US$6,095 million as at 30 June 2014.
On 12 August 2014, we signed a US$425 million 5-year syndicated pre-export financing facility, which covers most refinancing needs until Q4 2015.
Dividends
On 7 July 2014, EVRAZ paid out dividends in the amount of US$90.4 million which represented the approximate cash portion of the proceeds from the sale of EVRAZ Vitkovice Steel.
The dividend policy has been revised to support the financial strategy of deleveraging and envisages that regular dividends will be paid only when the net leverage (net debt/EBITDA) target of below 3.0x is achieved.
Giacomo Baizini
Chief Financial Officer
EVRAZ plc
Review of operATIONS by SEGMENT
STEEL
Market environment
While there are signs that the outlook for demand is slowly improving, excess steelmaking capacity remains the biggest concern for the sector. The majority of steelmakers in Europe and the US are experiencing low capacity utilisation rates, which, coupled with a high fixed cost base has a negative impact on profitability margins.
According to Worldsteel, global crude steel production grew 2.6% during the first half of this year compared to H1 2013 with China's 2.8% growth in output being the major driving force.
After a period of contraction in 2013, steel market conditions started to show signs of gradual improvement in major regions. Global crude steel production is expected to increase by 0.9% in H2 2014, according to CRU, and expected to be 4.6% higher than in H2 2013.
Russia's crude steel output increased by 0.4% in H1 2014 compared to H1 2013. Nevertheless, overall consumption of crude steel equivalent slipped by 2.5%. This was mainly caused by the reduced demand in flat products and rail. Long steel products witnessed a growth of just 0.9% y-o-y. The demand for rebar increased by 7% in H1 2014 when compared to H1 2013, and was mainly driven by residential construction as a result of capital investments in this segment. However, demand for sections and beams dropped by 8% as compared to H1 2013. A rebound in infrastructure development is forecasted to compensate for this decline in H2 2014. Long-term consumption growth in Russia and CIS is expected to be driven by substantial investments in infrastructure modernisation and the upcoming 2018 FIFA World Cup preparation.
Prices in the local Russian market saw an upwards trend when analysed in Russian roubles, but due to the national currency depreciation, US dollar-denominated prices decreased by 8-10% y-o-y, depending on the product segment. Billet prices decreased by 1.4%.
US crude steel production increased by 1.1% in H1 2014 compared to H1 2013, with apparent consumption of finished steel products(1) increasing by 5.5%. The pricing environment continues to improve with rebar prices rising by 3.5% and hot rolled coil prices remaining stable with a slight 0.3% increase year-to-date.
European crude steel production increased by 4.2% in H1 2014 compared to H1 2013, with apparent consumption of finished steel products(1) increasing by 4.0%. Overcapacity continues to exist in Europe but has stabilised at 85-90 mtpa level, according to CRU. "Metal margins" in the EU have stabilised and are recovering from trough levels.
South African crude steel production increased by 2.1% in the first half of 2014 compared to the first half of 2013 with apparent consumption of finished steel products declining by 10.6%. Various macro-economic issues, including extended labour disruptions and a slow pace of infrastructure spending within the economy, have led to stagnant demand. As a result, economic growth forecasts have been lowered to below 2% for 2014. Despite this outlook, pricing improved by 7% over the period as a result of the weak Rand placing pressure on imports.
__________________________________
(1) Including hot-rolled long and flat steel products only
Sales review
Steel segment revenues
(US$ million) Six months ended 30 June
-----------------------------
2014 2013 Change
--------------------- -------- ------- ----------
To third parties 5,855 6,332 (7.5%)
--------------------- -------- ------- ----------
To coal segment 8 11 (27.3%)
--------------------- -------- ------- ----------
To iron ore segment 25 34 (26.5%)
--------------------- -------- ------- ----------
To vanadium segment 2 1 100.0%
--------------------- -------- ------- ----------
To other operations 8 15 (46.7%)
--------------------- -------- ------- ----------
Total Steel segment 5,898 6,393 (7.7%)
--------------------- -------- ------- ----------
Steel segment revenues by products
Six months ended 30 June
------------------------------------------------------------------------------------------
2014 2013 2014 v 2013
------------------------------------- ------------------------------------- ------------
US$ % of total segment US$ % of total segment
million revenue million revenue % change
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Steel products, external
sales 5,431 92.1% 5,819 91.0% (6.7%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Semi-finished
products(1) 1,178 20.0% 1,014 15.9% 16.2%
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Construction products(2) 1,811 30.7% 2,058 32.2% (12.0%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Railway products(3) 910 15.4% 839 13.1% 8.5%
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Flat-rolled products(4) 605 10.3% 1,057 16.5% (42.8%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Tubular products(5) 762 12.9% 623 9.7% 22.3%
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Other steel products(6) 165 2.8% 228 3.6% (27.6%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Steel products,
intersegment sales 20 0.3% 27 0.4% (25.9%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Other revenues(7) 447 7.6% 547 8.6% (18.3%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
Total 5,898 100.0% 6,393 100.0% (7.7%)
-------------------------- --------- -------------------------- --------- -------------------------- ------------
(1) Includes billets, slabs, pig iron, pipe blanks and other semi-finished products
(2) Includes rebars, wire rods, wire, beams, channels and angles
(3) Includes rail, wheels, tyres and other railway products
(4) Includes commodity plate, specialty plate and other flat-rolled products
(5) Includes large diameter line pipes, ERW pipes and casing, seamless pipes, casing and tubing, other tubular products
(6) Includes rounds, grinding balls, mine uprights and strips
(7) Includes coke and coking products, refractory products, ferroalloys, scrap, energy, services and Mapochs mine's iron ore fines
Sales volumes of Steel segment
('000 tonnes) Six months to 30 June
------ ------------------------
2014 2013 Change
-------------------------------- ------ ---------- ------------
Steel products, external sales 7,653 7,739 (1.1%)
-------------------------------- ------ ---------- ------------
Semi-finished products 2,316 1,945 19.1%
-------------------------------- ------ ---------- ------------
Construction products 2,716 2,776 (2.2%)
-------------------------------- ------ ---------- ------------
Railway products 1,046 887 17.9%
-------------------------------- ------ ---------- ------------
Flat-rolled products 771 1,391 (44.6%)
-------------------------------- ------ ---------- ------------
Tubular products 547 448 22.1%
-------------------------------- ------ ---------- ------------
Other steel products 257 292 (12.0%)
-------------------------------- ------ ---------- ------------
Intersegment sales 27 35 (22.9%)
-------------------------------- ------ ---------- ------------
Total 7,680 7,774 (1.2%)
-------------------------------- ------ ---------- ------------
Geographic breakdown of external steel products' sales
US$ million 000 t
------------------------------ ------------------------------
H1 2014 H1 2013 Change, % H1 2014 H1 2013 Change, %
-------------- -------- -------- ---------- -------- -------- ----------
Russia 2,150 2,421 (11.2%) 3,231 3,227 0.1%
-------------- -------- -------- ---------- -------- -------- ----------
Americas 1,578 1,454 8.5% 1,476 1,349 9.4%
-------------- -------- -------- ---------- -------- -------- ----------
Asia 890 840 6.0% 1,715 1,555 10.3%
-------------- -------- -------- ---------- -------- -------- ----------
Europe 282 529 (46.7%) 477 838 (43.1%)
-------------- -------- -------- ---------- -------- -------- ----------
CIS 353 351 0.6% 487 466 4.5%
-------------- -------- -------- ---------- -------- -------- ----------
Africa & RoW 178 224 (20.5%) 267 304 (12.2%)
-------------- -------- -------- ---------- -------- -------- ----------
Total 5,431 5,819 (6.7%) 7,653 7,739 (1.1%)
-------------- -------- -------- ---------- -------- -------- ----------
The Steel segment's revenues decreased by 7.7% to US$5,898 million in H1 2014 compared to US$6,393 million in H1 2013, which was largely a result of lower steel product prices during the period.
Revenues from external sales of semi-finished products increased by 16.2% due to higher sales volumes, which reflected the changes in Group product mix. Sales of slabs to third parties in H1 2014 grew from H1 2013 increased as a result of suspension of operation at EVRAZ Palini e Bertoli and the EVRAZ Vitkovice Steel disposal.
Railway products' external revenues grew due to higher sales volumes after the modernisation of EVRAZ ZSMK's rail mill despite sales prices for railway products being lower in H1 2014 when compared to H1 2013. This is predominantly due to the fact that sales prices in US dollar terms in Russia have not been fully adjusted after the material Russian rouble devaluation.
Revenues from tubular product sales to third parties increased in H1 2014 primarily due to higher sales volumes, particularly of ERW pipe & casing and casing & tubing products as result of a strong order book.
Revenues from construction products to third parties sales decreased by 12.0% primarily as a result of reduced prices accompanied by lower sales volumes in H1 2014. The revenue was affected by a decline in prices of construction products in Russia, caused by lag in a local price adjustment after the Russian rouble depreciation, and in Asia.
Flat rolled product external revenues in H1 2014 were significantly lower than in H1 2013 due to lower sales volumes. The main causes of this fall in revenues was the EVRAZ Vitkovice Steel disposal, the suspension of operations of EVRAZ Claymont Steel and EVRAZ Palini e Bertoli, and the shutdown of the EVRAZ ZSMK plate rolling mill.
Revenues from other steel products decreased by 27.6% in H1 2014 compared to H1 2013 as a result of significantly lower prices combined with a fall in sales volumes.
Lower revenues from sales in Russia, which accounted for 40% of external steel sales, were mainly attributable to lower prices, whereas sales volumes remained stable when compared to the previous year.
Steel segment cost of revenue
Steel segment cost of revenue
Six months ended 30 June
--------------------------------------------------------------------------------------
2014 2013 2014 v 2013
----------------------------------- ----------------------------------- ------------
US$ million % of segment revenue US$ million % of segment revenue % change
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Cost of revenue 4,649 78.8% 5,260 82.3% (11.6%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Raw materials 2,362 40.0% 2,741 42.9% (13.8%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Iron ore 850 14.4% 994 15.5% (14.5%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Coking coal 510 8.6% 674 10.5% (24.3%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Scrap 636 10.8% 710 11.1% (10.4%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Other raw materials 366 6.2% 363 5.7% 0.8%
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Semi-finished products 92 1.6% 214 3.3% (57.0%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Transportation 213 3.6% 251 3.9% (15.1%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Staff costs 499 8.5% 548 8.6% (8.9%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Depreciation 183 3.1% 233 3.6% (21.5%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Energy 425 7.2% 471 7.4% (9.8%)
-------------------------- ------------ --------------------- ------------ --------------------- ------------
Other* 875 14.8% 802 12.5% 9.1%
-------------------------- ------------ --------------------- ------------ --------------------- ------------
* Includes repairs and maintenance, industrial services, auxiliary materials, goods for resale, taxes in cost of revenue, and effect of changes in work-in-progress and finished goods inventories.
EVRAZ's steel segment cost of revenue decreased to US$4,649 million in H1 2014, compared to US$5,260 million in H1 2013.
The principal factors affecting the change in the steel segment cost of revenue, in absolute terms, in H1 2014 compared to H1 2013 were:
-- The cost of raw materials decreased by 13.8% due to a decline in prices for all main raw materials (particularly iron ore, coking coal, scrap) accompanied by a decrease in production volumes of crude steel by 4%. Meanwhile the decline in coke produced for sale at EVRAZ ZSMK (due to coke plant shutdown) and at EVRAZ's Ukrainian assets, the fall in scrap consumption due to EVRAZ Claymont's closure, the reduction of coke costs due to better coal mix at EVRAZ NTMK, and the improving coke yields at EVRAZ ZSMK all contributed to decreased production volumes.
-- The costs of semi-finished products decreased by 57%, primarily due to lower consumption of slab purchased from third parties at Evraz North America assets which were substituted by shipments from EVRAZ NTMK, as well as lack of pig iron consumption by EVRAZ Vitkovice Steel, which was also substituted by EVRAZ NTMK and purchased slabs.
-- Transportation costs decreased by 15.1%, for which the primary causes were the weakening of the Russian rouble, and the reduced exports from Russian mills.
-- Staff costs decreased by 8.9%, which was mainly caused by the Russian rouble weakening. Additionally, the reduction in staff costs caused by the suspension of EVRAZ Claymont (-US$14 million) and EVRAZ Palini e Bertoli (-US$3 million) was offset by wage inflation at EVRAZ NTMK and EVRAZ ZSMK, and other changes.
-- Depreciation and depletion costs were mostly reduced by the Russian rouble weakening, together with the reassessment of remaining useful lives of plant and equipment at EVRAZ NTMK, EVRAZ ZSMK and EVRAZ DMZ (-US$26 million in total), and suspension of EVRAZ Claymont (-US$9 million).
-- Lower energy costs were driven by the Russian rouble weakening, the reduced consumption of natural gas by EVRAZ DMZ due to technology optimisation (-US$9 million), the EVRAZ Palini e Bertoli suspension (-US$7 million) and reduced production at EVRAZ Vitkovice Steel (-US$2 million).
-- Other costs increased primarily due to changes in work in progress and finished goods and auxiliary materials usage.
Steel segment gross profit
Steel segment gross profit increased by 10% to US$1,249 million in the six months ended 30 June 2014 from US$1,133 million in the six months ended 30 June 2013, as a result of lower costs that were partially offset by lower revenue.
Operational update - Steel segment
Steel products: Russia
In June 2014, the PCI unit was commissioned at EVRAZ ZSMK and is expected to reach its full capacity in November 2014. Pulverised coal injection will save costs on natural gas consumed for hot iron production, and reduce coke consumption by 15-20%. At the same time blast furnace productivity is expected to improve by approximately 5%.
In June 2014, following the scheduled launch of PCI at EVRAZ ZSMK and the resulting decline in internal coke consumption, accompanied by the weak demand for coke in the domestic and export markets, the EVRAZ ZSMK steel plant shut down its coke chemical plant EKS-2. The shutdown will reduce the plant's fixed costs.
In June 2014, the EVRAZ Caspian Steel rolling mill (former Vostochny rolling mill) in Kostanay, Kazakhstan started commercial production. The first lot of rebars has been delivered to customers, with sales in 2014 expected to amount to 150,000 tonnes. The main markets for the mill's products will be those of Kazakhstan and the Central Asia.
Activities related to enhance customer focus remained among the key priorities for EVRAZ in H1 2014. This can be seen through deliveries via a logistics hub in Siberia increasing by more than double compared to the same period of 2013. Furthermore, in order for clients to effectively carry out a number of tasks, including placing and tracking online orders, checking online payment statuses and file claims, EVRAZ launched a CRM system in June 2014. The new system has proven to be beneficial by additionally optimising the claim processing procedure.
EVRAZ Russia continued to develop new products to better meet customers' needs. These are niche steel products produced with new proprietary technologies. Production of rebar A 1000 was launched by EVRAZ ZSMK, the only steel plant in Russia which can produce this type of rebars from steel grade 28C, the use of which reduces the rebar cash cost. EVRAZ ZSMK is now mastering rebar A600C, a premium niche product which is resistant to temperature changes and corrosion. Mass production of rebar A600C will begin in September 2014. Mastering of rebars under Hongkong's standard CS:2012 and US standard ASTM A615 is underway.
Railway products: Russia
A total of 529,000 tonnes of rails were sold to EVRAZ's customers in Russia and the CIS. More than half of this volume has been produced at EVRAZ ZSMK's modernised rail mill.
More than 120,000 tonnes of 25-metre head hardened rails, an innovative product aimed to substitute imported rails, was produced in H1 2014, and in May 2014, the first lot of 100-metre head-hardened rails was shipped to Russian Railways. Head-hardened DT350 rails for use in high-speed mixed-traffic railway operations and head-hardened DT370 rails, which have higher wear resistance and contact fatigue life were certified in August.
In H1 2014, despite a continued weakness in the Russian railcar industry, EVRAZ's wheel making demonstrated strong results. The continued sales under a long-term agreement with Russia's largest railcar producer, together with the strengthening of relationships with other clients in both Russia and CIS allowed the EVRAZ NTMK wheel mill to operate at near full capacity.
EVRAZ intends to grow its railway business by entering new markets and product segments. This process has already begun, with 60E1/E2 rail profiles for export markets having been developed at EVRAZ ZSMK rail mill and with EVRAZ having started the process of qualification with Deutsche Bahn that will allow EVRAZ to participate in the latter's tenders in 2015. Furthermore, the process to achieve certification under the European Raiway Agency's Technical Specification for Interoperability (TSI), in order to be able to supply rails to Europe and some other regions, has been initiated. In addition, in June 2014, the TSI certificate was issued by Výzkumný Ústav elezniční (VUZ), the Czech Republic, to the next type of wheel for European market produced at EVRAZ NTMK. The first lot of wheels for the European market was produced and shipped in June 2014.
EVRAZ continues to strengthen its presence in the North American and European railway wheel markets, in line with targets set out for the year. This is demonstrated by EVRAZ: having confirmed the Association of American Railroads (AAR) certificate; proceeding with wheel sales to the USA and European railway wheel markets.
Efforts to further develop the rail and wheel product portfolio will continue through 2014.
Steel: North America
In H1 2014 crude steel output at the North American operations declined by 13.8% compared to H1 2013 primarily due to the suspension of the EVRAZ Claymont facility. Excluding the impact of Claymont, crude steel output increased by 0.3%. Meanwhile, the output of finished steel products decreased by 9.8% in H1 2014, driven by discontinued operations at the Claymont facility. Excluding Claymont, finished production increased by 3.9% due to growth in ERW pipe, casing & tubing and rail production.
EVRAZ North America's Flat products group has focused on the following key objectives:
-- Price maximisation as the Company saw an upside in the plate market due to opportunities created by supply/demand imbalances in the first half of 2014;
-- Improvement of productivity rates at the EVRAZ Portland Mill - tonnes per operating hour increased year over year, from 113 to 121 tonnes, resulting in additional production of 28,000 t ,
-- Identification and qualifying of alternative slab sources in the USA to increase our "Buy America" opportunity with respect to bridge grades on the West Coast in line with the target set out for the year, and
-- Supplement of the EVRAZ Regina melt shop volumes with slabs from Russia's EVRAZ NTMK to maximise rolling utilisation.
In Tubular products, the EVRAZ Pueblo seamless mill improved yields and conversion costs. Additionally, operating improvements at EVRAZ Calgary have been made through higher controls being set on steel input quality, the development of longer runs, process standardisation and increased employee training. New hydrotesting capabilities and other yield improvement projects are planned for H2 2014. The EVRAZ Calgary heat treat investment project has been initiated aiming to expand capacity by 59,000 tonnes per year by mid-2015. Our second premium threading line at EVRAZ Red Deer which has a 25,000 tonne capacity and was commissioned in 2013, is now fully operational.
As a result of successful completion of the rail mill modernisation and steel making upgrade projects at EVRAZ Pueblo, the EVRAZ Pueblo rail mill improved product quality and increased production capacity to 526,000 tonnes per year. This ensured that in H1 2014, projected production and yield rates were achieved. In addition, automated nondestructive test equipment will be installed later this year to ensure weld life and quality of the rails.
Steel: Ukraine
In H1 2014 crude steel output at EVRAZ DMZ Petrovskogo amounted to 0.5 million tonnes and was broadly unchanged compared to H1 2013. Sales of steel products increased by 1.4%, with domestic sales decreasing by 17%, to Russia and other CIS countries by 30%, while sales to far export destination rose by 23%.
The project for the modernisation of mill 800 at EVRAZ DMZ Petrovskogo, as set out in the targets for 2014, has made significant progress. Following the approval of the plans, and the completion of the design estimates, the necessary equipment has been ordered.
Installation of a pilot automated system for environmental monitoring at EVRAZ Bagliykoks is under way. The governmental approval has been received, and the provider of the equipment has been confirmed. Additionally, the modernised heat station demineraliser plant to reduce water discharges at EVRAZ Bagliykoks is expected to be commissioned in September 2014. Both of these developments suggest that the targets set out for this year will be achieved.
New product development included the launch of channel U220 and U260 production according to eurostandards DIN 1026-1, the production of two parts of KamAZ 533-310 wheel rim and relaunch of production of KamAZ 7,0-20 and GAZ-53 wheel rims, and the production of railcar uprights. Additionally, four types of angles (sizes 75, 80, 90 and 100) have been certified in accordance with eurostandard DIN. Subsequently the shipment of these products to the EU market has begun.
Steel: South Africa
In H1 2014, EVRAZ Highveld Steel and Vanadium increased production of saleable steel products by 10% compared to H1 2013. This was achieved through sustained availability at the two rolling mills and successful reduction of semi-finished product stocks, providing increased feedstock to the mills.
COAL
Market environment
Seaborne spot coking coal prices continued their gradual decline during Q1 2014, in the face of both cyclical and structural headwinds, with Australian Queensland FOB HCC spot price reaching US$112/t by the end of March (-18%YTD). Following this, the price had stabilised at around US$115/t level for the most of Q2 2014, partially supported by a supply side contraction and a number of mine closures announced in Australia and US. Queensland FOB HCC spot price stood at US$114/t at the end of June.
In May 2014, Queensland Resources Council noted that approximately 25% of all coal operations in Queensland, Australia, are loss-making. Further, market analysts estimate that around 40% of global seaborne supply is uneconomic on a cash cost basis at current commodity prices, while about 75-80% of US export supply is loss-making. Supply-side pressure in the sector is expected to persist, potentially resulting in a number of additional closure announcements in the coming months, thereby gradually narrowing the seaborne supply/demand imbalance and providing some support for prices in the medium term.
Coking coal prices in the Russian market were more stable due to the fact that most coal producers are near or even below breakeven point and were not prepared for substantial discounts on their products. However, there has been a decline in demand for Russian coal concentrate in the Asian markets, due to the abundance of good quality brands supply from Australian producers which has led to a significant decrease in Russian export prices.
Sales review
Coal segment revenues
(US$ million) Six months ended 30 June
-----------------------------
2014 2013 Change
--------------------- ------- ------- -----------
To third parties 398 381 4.5%
--------------------- ------- ------- -----------
To steel segment 266 341 (22.0%)
--------------------- ------- ------- -----------
To other operations 1 - n/a
--------------------- ------- ------- -----------
Total Coal segment 665 722 (7.9%)
--------------------- ------- ------- -----------
Coal segment revenues by products
Six months ended 30 June
----------------------------------------------------------------------------------------
2014 2013 2014 v 2013
------------------------------------ ------------------------------------ ------------
% of total segment % of total segment
US$ million revenue US$ million revenue % change
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
External sales
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Coal products 390 58.6% 372 51.5% 4.8%
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Raw coking coal 39 5.9% 23 3.2% 69.6%
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Coking coal
concentrate 296 44.5% 332 46.0% (10.8%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Raw steam coal 54 8.1% 13 1.8% 315.4%
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Steam coal concentrate 1 0.1% 4 0.6% (75.0%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Intersegment sales
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Coal products 266 40.0% 339 47.0% (21.5%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Raw coking coal 58 8.7% 85 11.8% (31.8%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Coking coal
concentrate 208 31.3% 254 35.2% (18.1%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Other revenues 9 1.4% 11 1.5% (18.2%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Total 665 100.0% 722 100.0% (7.9%)
------------------------ ------------ ---------------------- ------------ ---------------------- ------------
Sales volumes of Coal segment
('000 tonnes)
H1 2014 H1 2013 Change
------------------------------- -------- -------- --------
External sales
------------------------------- -------- -------- --------
Coal products 5,279 3,755 40.6%
------------------------------- -------- -------- --------
Raw coking coal 792 375 111.2%
------------------------------- -------- -------- --------
Coking coal concentrate 3,362 2,986 12.6%
------------------------------- -------- -------- --------
Raw steam coal 1,112 353 215.0%
------------------------------- -------- -------- --------
Steam coal concentrate 13 41 (68.3%)
------------------------------- -------- -------- --------
Intersegment sales
------------------------------- -------- -------- --------
Coal products 3,271 3,542 (7.7%)
------------------------------- -------- -------- --------
Raw coking coal 1,094 1,363 (19.7%)
------------------------------- -------- -------- --------
Coking coal concentrate 2,177 2,179 (0.1%)
------------------------------- -------- -------- --------
Total, coal products 8,550 7,297 17.2%
------------------------------- -------- -------- --------
Total coal segment revenues decreased by 7.9% to US$665 million in H1 2014 compared to US$722 million in H1 2013, primarily due to lower sales prices as well as the higher share of export sales, which offset the increase in coking coal and steam coal volumes.
External sales volumes of coal products increased in H1 2014 by 40.6% mainly due to higher sales of raw coking coal and coking concentrate as a result of the production ramp-up at the Yerunakovskaya VIII and the Raspadskaya mines as well as the increase of raw steam coal sales mainly due to the full operation of Yuzhkuzbassugol's Kusheyakovskaya mine until May 2014, while in Q1 2013 it was closed for longwall repositioning.
In H1 2014, Coal segment sales to the Steel segment amounted to US$266 million and 40.0% of sales, compared to US$339 million and 47.0% of sales in H1 2013.
During the period, approximately 73% of EVRAZ's steel-making coking coal consumption was satisfied by the Group's own operations, compared with 72% inH1 2013.
Coal segment cost of revenue
Coal segment cost of revenue
Six months ended 30 June
--------------------------------------------------------------------------------------
2014 2013 2014 v 2013
----------------------------------- ----------------------------------- ------------
US$ million % of segment revenue US$ million % of segment revenue % change
----------------- ------------ --------------------- ------------ --------------------- ------------
Cost of revenue 557 83.8% 640 88.6% (13.0%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Raw materials 1 0.2% 1 0.1% 0.0%
----------------- ------------ --------------------- ------------ --------------------- ------------
Transportation 84 12.6% 85 11.8% (1.2%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Staff costs 163 24.5% 185 25.6% (11.9%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Depreciation 134 20.2% 173 24.0% (22.5%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Energy 26 3.9% 30 4.2% (13.3%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Other* 149 22.4% 166 23.0% (10.2%)
----------------- ------------ --------------------- ------------ --------------------- ------------
* Includes primarily contractor services and materials for maintenance and repairs and certain taxes
The coal segment cost of revenue decreased to US$557 million or 83.8% of coal segment revenue in the six months ended 30 June 2014 compared with US$640 million or 88.6% of coal segment revenue in the six months ended 30 June 2013.
The principal factors affecting the change in coal segment cost of revenue in the six months ended 30 June 2014 compared to the six months ended 30 June 2013 were:
-- Transportation costs decreased by 1.2% due to Russian rouble weakening (-US$11 million). This effect was offset by higher sales at Raspadskaya and Yuzhkuzbassugol, changes in sales destinations (higher exports) and an increase in Russian railway tariffs (+US$10 million).
-- Staff costs went down by 11.9%. The decrease was attributable to headcount optimisation, shutting down of the Yuzhkuzbassugol mines (Abashevskaya, Kusheyakovskaya) and Gramoteinskaya sale (-US$23 million) as well as the impact of the Russian rouble weakening on Yuzhkuzbassugol and Raspadskaya (-US$21 million). Lower level of unproductive time, on one hand, increased staff costs, but, on the other hand, decreased other operating expenses(+US$22 million).
-- Depreciation and depletion costs decreased by 22.5% mainly due to a lower depreciation and depletion expense at Yuzhkuzbassugol caused by the revision and detailing of future mining plans and lower mineral deposits depletion (-US$34 million). This was also accompanied by a decrease in the US dollar amount of depreciation due to the rouble weakening (-US$17 million). The decrease was partially offset by an increase in depreciation due to the revision and elaboration of mining future plans by IMC at Raspadskaya (+US$13 million).
-- Energy costs were down by 13.3% due to mine shutdown at Yuzhkuzbassugol (-US$5 million) as well as Russian rouble weakening (-US$3 million) that was slightly offset by higher electricity costs related to higher production volumes at Raspadskaya (+US$3 million).
-- Other costs decreased by 10.2% primarily due to a reduction in auxiliary material costs at Yuzhkuzbassugol supported by cost cutting initiatives (-US$6 million), revising mineral extraction tax payments for the previous year at Raspadskaya (-US$9 million) and the influence of Russian rouble weakening (-US$19 million). This was partly offset by increased environmental protection services expenses (sample control and prevention drilling, +US$8 million) and changes in stock of WIP and finished goods (+US$4 million).
Coal segment gross profit
The coal segment's gross profit increased to US$108 million in the six months ended 30 June 2014 from US$82 million in the six months ended 30 June 2013.
Operational update - Coal segment
In H1 2014, EVRAZ's raw coking coal output totalled 9.8 million tonnes, representing an increase of 0.7 million tonnes compared to H1 2013. The primary growth driver was the launch of longwalls at the Raspadskaya mine.
Yuzhkuzbassugol
In H1 2014, Yuzhkuzbassugol mined 5.3 million tonnes of raw coking coal, a 4% increase compared to 5.1 million tonnes in H1 2013, following the ramp-up of the Yerunakovskaya-VIII mineand a better performance from both the Alardinskaya and Uskovskaya mines. The Alardinskaya mine has operated at increased capacity since the beginning of the year and the Uskovskaya mine had demonstrated solid performance before it closed for longwall repositioning at the end of H1 2014. The growth of output in H1 2014 fully offset the loss of production from shutdown of the Abashevskaya mine in January 2014.
The Company remains on track to reduce operating costs, including capital expenditures. Executing the cost reduction programme at Yuzhkuzbassugol, including headcount optimisation, resulted in cost savings of over US$11 million in H1 2014, with further benefits expected in the second half.
Ensuring safe working conditions for all of the company's facilities continues to be a management priority. In accordance with key initiatives for 2014, energy isolation programme LOTO (Lock out, Try out) has been successfully introduced at the Alardinskaya and Yerunakovskaya-VIII mines. During the period, further progress has continued with the programme to prevent spontaneous combustion.
Raspadskaya
In H1 2014, raw coking coal output from Raspadskaya amounted to 4.4 million tonnes, or 12% higher than in H1 2013, including 1.7 million tonnes of raw coal mined at the Raspadskaya mine. However, the increase was below the volumes expected due to delay in launch of longwall at the MUK-96 underground mine as a result of geological conditions, which offset the positive effects of the longwall launch. Raspadskaya is currently operating on three longwalls with a fourth expected to begin operations in September this year.
Project documentation relating to the 3rd stage of recovery at Raspadskaya has now been approved enabling production to expand by up to 6 million tonnes of raw coal per year. Development of a deposit of about 500,000 tonnes of "K" grade coking coal at the Raspadskaya-Koksovaya mine commenced in June. In addition, project documentation was approved to start mining in the Raspadsky IX-XI sections which will enable the extension of works at the Raspadsky open pit from 2.5 to 4.5 km and increase annual production from 4 to 6 million tonnes.
In line with its plan to develop new premium markets, EVRAZ signed a contract to supply material volumes of semi-hard (GZh) concentrate to POSCO (South Korea). Trial shipments of semi-soft coal (GZhO) monoconcentrate were made to Japanese steel and coke producers. Trial lots of semi-hard (KO) concentrate were shipped to a number of Russian customers.
Mezhegeyugol
Significant progress at Mezhegeyugol during the period included the completion of three development units. In addition, three inclines were developed, noteably at the same time: a transportation main, a conveyor main and a ventilation main.
Management changes
Sergey Stepanov was appointed General Director of Raspadskaya Coal Company with effect from 1 July 2014.
IRON ORE
Market environment
After almost six months of relative stability in H2 2013, with China CFR (62% Fe) prices trading in a narrow range of US$130-140/t for most of the period, the seaborne iron ore market started 2014 on a downward trend. A general slowdown in Chinese demand growth in Q1 2014 along with the destocking by major steel mills and the surge in Australian shipments of iron ore collectively resulted in an approximate 22% year-to-date price drop by mid-March (down to US$105/t). After a short rebound to US$119/t levels in April on the back of brief iron ore inventory restocking and the Chinese authorities' announcement of efforts to stabilise the economy, the China CFR price continued its downward trend, reaching US$89/t by mid-June (the lowest level since September 2012). At the end of June, the China CFR price stood at US$94/t, representing an approximate.30% decline year-to-date.
This low price environment has displaced a fraction of Chinese domestic output in recent months, falling from an adjusted annualised rate of 339 mtpa in January to 315 mtpa in May 2014(1) . Most of the volume displacement comes from the marginal Chinese iron ore mines higher up the global cost curve who find production uneconomical at current prices, although the impact on seaborne trade and market conditions remains to be seen, with China likely compensating the marginal volume loss by increasing imports.
____________________________________________
(1) According to National Bureau of Statistics of China
Sales review
Iron ore segment revenues
(US$ million) Six months ended 30 June
-----------------------------
2014 2013 Change
------------------------ ------- ------- -----------
To third parties 179 224 (20.1%)
------------------------ ------- ------- -----------
To steel segment 473 665 (28.9%)
------------------------ ------- ------- -----------
To other operations 7 11 (36.4%)
------------------------ ------- ------- -----------
Total Iron ore segment 659 900 (26.8%)
------------------------ ------- ------- -----------
Iron ore segment revenues by products
Six months ended 30 June
---------------------------------------------------------------------------------------------
2014 2013 2014 v 2013
-------------------------------------- --------------------------------------- ------------
% of total segment % of total segment
US$ million revenue US$ million revenue % change
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
External sales
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Iron ore products* 160 24.3% 195 21.7% (17.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Sinter - - 6 0.7% (100.0%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Pellets 61 9.3% 70 7.8% (12.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Other 99 15.0% 119 13.2% (16.8%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Intersegment sales
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Iron ore products 460 69.8% 639 71.0% (28.0%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Iron ore concentrate 110 16.7% 244 27.1% (54.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Sinter 125 19.0% 156 17.3% (19.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Pellets 225 34.1% 239 26.6% (5.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Other revenues** 39 5.9% 66 7.3% (40.9%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
Total 659 100.0% 900 100.0% (26.8%)
----------------------- ------------ ------------------------ ------------ ------------------------- ------------
(*) External sales of iron ore produced at the Mapochs mine, part of EVRAZ Highveld, are accounted for in the Steel segment
(**) Includes crushed stone
Sales volumes of Iron ore segment
('000 tonnes)
H1 2014 H1 2013 Change
----------------------------------- -------- -------- ---------
External sales
----------------------------------- -------- -------- ---------
Iron ore products 2,064 2,133 (3.2%)
----------------------------------- -------- -------- ---------
Sinter - 55 (100.0%)
----------------------------------- -------- -------- ---------
Pellets 610 607 0.5%
----------------------------------- -------- -------- ---------
Other 1,454 1,471 (1.2%)
----------------------------------- -------- -------- ---------
Intersegment sales
----------------------------------- -------- -------- ---------
Iron ore products* 5,587 6,892 (18.9%)
----------------------------------- -------- -------- ---------
Iron ore concentrate 1,342 2,454 (45.3%)
----------------------------------- -------- -------- ---------
Sinter 1,745 1,950 (10.5%)
----------------------------------- -------- -------- ---------
Pellets 2,500 2,488 0.5%
----------------------------------- -------- -------- ---------
Total, iron ore products* 7,651 9,025 (15.2%)
----------------------------------- -------- -------- ---------
* External sales of iron ore produced at the Mapochs mine, part of EVRAZ Highveld, are accounted for in the Steel segment
Total Iron ore segment revenues decreased by 26.8% to US$659 million in H1 2014 compared to US$900 million in H1 2013, primarily due to lower sales volumes for internal consumption as a result of the optimisation of Evrazruda's assets (disposal of Abakan iron ore mine, Teya iron ore mine, Mundybash beneficiation plant in December 2013), closure of the Irba mine at Evrazruda in the April 2013 and EVRAZ VGOK disposal in September 2013. The decrease in sales volumes were accompanied b lower iron ore prices.
External sales volumes of iron ore products decreased by 3.2% in H1 2014 compared to H1 2013, driven by lower sales volumes primarily as a result of disposal of EVRAZ VGOK in October 2013. Intersegment sales volumes decreased by 18.9% as a result of the optimisation of Evrazruda's assets in December 2013 and the disposal of EVRAZ VGOKin September 2013. The closure of the Irba mine at Evrazruda also contributed to lower iron ore volumes being supplied to the Steel segment.
In H1 2014, Iron ore segment sales to the Steel segment amounted to US$473 million and 71.8% of sales, compared to US$665 million and 73.9% of sales in H1 2013.
During the period, approximately 77% of EVRAZ's iron ore consumption were satisfied by the Group's own operations compared with 95% in H1 2013, predominantly due to the disposal of assets in the Iron ore segment.
Iron ore segment cost of revenue
Iron ore segment cost of revenue
Six months ended 30 June
--------------------------------------------------------------------------------------
2014 2013 2014 v 2013
----------------------------------- ----------------------------------- ------------
US$ million % of segment revenue US$ million % of segment revenue % change
----------------- ------------ --------------------- ------------ --------------------- ------------
Cost of revenue 441 66.9% 669 74.3% (34.1%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Raw materials 66 10.0% 50 5.6% 32.0%
----------------- ------------ --------------------- ------------ --------------------- ------------
Transportation 43 6.5% 109 12.1% (60.6%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Staff costs 124 18.8% 185 20.6% (33.0%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Depreciation 42 6.4% 54 6.0% (22.2%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Energy 91 13.8% 126 14.0% (27.8%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Other* 75 11.4% 145 16.1% (48.3%)
----------------- ------------ --------------------- ------------ --------------------- ------------
* Includes primarily contractor services and materials for maintenance and repairs and certain taxes
The iron ore segment cost of revenue decreased to US$441 million or 66.9% of iron ore segment revenue, in the six months ended 30 June 2014 compared with US$669 million, or 74.3% of iron ore segment revenue, in the six months ended 30 June 2013.
The principal factors affecting the change in iron ore segment cost of revenue in the six months ended 30 June 2014 compared to the six months ended 30 June 2013 were:
-- Raw material costs increased by 32.0%, primarily due to iron ore purchases from sold Tey and Abakan subsidiaries, which were in the Group before (+US$30 million). The effect was partially offset by VGOK disposal (-US$3 million) and KGOK lower coal input prices and sinter production (-US$8 million).
-- Transportation costs decreased by 60.6% mostly due to Evrazruda subsidiaries disposals with large rail and car logistics (-US$24 million), VGOK disposal (-US$16 million) and the effect of the weakening of Russian rouble and Ukrainian hryvnia.
-- Staff costs decreased by 33.0% driven by Evrazruda subsidiaries (-US$23 million) and VGOK disposal (-US$32 million), but were also influenced by an increase in wage inflation (+US$6 million). The rouble and hryvnia weakening also contributed to costs decline.
-- Depreciation and depletion costs decreased by 22.2% due to VGOK disposal, and were accompanied by a decreased depreciation in US dollar terms at Russian and Ukrainian sites due to local currencies weakening.
-- Energy costs decreased by 27.8% primarily due to lower production volumes with Evrazruda subsidiaries (-US$12 million) and VGOK disposal (-US$15 million), and the weakening of the Russian rouble and Ukrainian hryvnia.
-- Other costs decreased by 48.3% due to a reduction in auxiliary materials, taxes and services due to Evrazruda subsidiaries (-US$31 million) and VGOK disposal (-US$19 million), the KGOK cost optimisation programme which reduced diesel and lube consumption
(-US$9 million), as well as influence of the Russian rouble and Ukrainian hryvnia weakening.
Iron ore segment gross profit
The iron ore segment's gross profit decreased to US$218 million in the six months ended 30 June 2014 from US$231 million in the six months ended 30 June 2013. The disposal of Evrazruda subsidiaries and VGOK dropped the production volumes of iron ore segment and iron ore prices were lower in the six month ended 30 June 2014 than in the six month ended 30 June 2013.
Operational update - Iron ore segment
Iron ore - Russia
In the iron ore segment we continued to focus on operational improvement programmes and cost reductions during the period.
The restructuringof Evrazruda'soperations is underway. The project to reconstruct the Sheregesh iron ore mine and expand its production has continued as planned. In H1 2014 a key stage of the project was completed with the commissioning of a new mine shaft and an underground crushing complex at the -115 metre level. The development programme for the Abagursky processing plant is being finalised.
In H1 2014, in line with its asset portfolio and cost optimisation programme, EVRAZ sold the non-core power generating company Sheregesh Energo and the Irba iron ore mine was shutdown as economically unprofitable in June 2013.
Operations at our core iron ore business, EVRAZ KGOK, were stable: in H1 2014 it mined 28.7 million tonnes of iron ore (+0.5 million tonnes compared to H1 2013) and produced 4.9 million tonnes (+218,000) of saleable iron ore products, including 1.8 million tonnes of sinter and 3.1 million tonnes of pellets.
EVRAZ KGOK continued to realise the project to adopt new, more environmentally friendly technologies for industrial waste storage and to build a new tailings dump. The survey results for the technical project have undergone a state expert review with the result expected in Q3 2014. However, after a thorough review of the project, EVRAZ has decided to put off the construction by two years, to 2017 at least, and carry out a new prefeasibility study to explore the possibility of prolonging waste storage by the current technology by 3 years and to decrease project CAPEX.
With regard to the project to develop of the Sobstvenno-Kachkanarskoye deposit, the necessary technical and ecological approvals have now been received. The next stage is approval by the state expert committee, expected in Q3 2014.
At the Timiriron ore project, a tender to design the first stage of the iron ore mine has been held. As EVRAZ confirmed at its Investor Day in June 2014, execution of the project is subject to securing project finance and negotiations are continuing with potential lenders.
Iron ore - Ukraine
In H1 2014, EVRAZ Sukha Balka produced 1,450 thousand tonnes of lump ore compared to 1,461 thousand tonnes in H1 2013.
A new horizon of -1,340 metres was commissioned at the Yubileynaya mine. Mining will begin once iron ore at the existing horizon has been depleted, expected by Q3 2015. The new horizon will be developed for a minimum of five years, and the Company expects to be able to mine approximately 10.8 million tonnes of raw ore and produce 8 million tonnes of saleable iron ore with Fe content of 60%.
In line with its targets for 2014, the Company has been implementing the electrical safety programme aimed at removing 50% of electrical networks below the surface by year end. The first stage has been completed with 40% of electrical networks dismantled.
VANADIUM
Market environment
Vanadium is a key element in the steel making process, with the majority of globally produced vanadium used as an alloying agent to increase steel strength. As a result, demand for vanadium is closely linked to steel production levels, in particular high strength steels with application in the pipe industry, rebars, tool steel, automotive. Vanadium used in this process is ferrovanadium while vanadium pentoxide is used as a catalyst for the production of sulphuric acid.
Ferrovanadium (FeV) demand was robust in H1 2014, fuelled by pipeline projects in CIS, Europe, and healthy steel demand in North America. Prices increased steadily from the low levels of Q4 2013 approaching ca US$27.3/kg in May, only to decrease to US$25.5/kg in June 2014 due to stronger FeV exports from China. The FeV spot price stood at US$25/kg at the end of June.
FeV prices are expected to further decline during Q3 to US$24/kg to US$25/kg as Chinese rebar producers are significantly decreasing their Vanadium consumption in response to poor domestic demand.
Sales review
Vanadium segment revenues
(US$ million) Six months ended 30 June
-----------------------------
2014 2013 Change
------------------------ -------- ------- ----------
To third parties 244 256 (4.7%)
------------------------ -------- ------- ----------
To steel segment 11 12 (8.3%)
------------------------ -------- ------- ----------
Total Vanadium segment 255 268 (4.9%)
------------------------ -------- ------- ----------
Vanadium segment revenues by products
Six months ended 30 June
--------------------------------------------------------------------------------------------
2014 2013 2014 v 2013
-------------------------------------- -------------------------------------- ------------
% of total segment % of total segment
US$ million revenue US$ million revenue % change
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
External sales
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Vanadium products 242 94.9% 253 94.4% (4.3%)
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Vanadium in slag 4 1.6% 1 0.4% 300.0%
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Vanadium in alloys and
chemicals 238 93.3% 252 94.0% (5.6%)
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Intersegment sales,
vanadium products 9 3.5% 10 3.7% (10.0%)
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Other revenues 4 1.6% 5 1.9% (20.0%)
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Total 255 100.0% 268 100.0% (4.9%)
------------------------ ------------ ------------------------ ------------ ------------------------ ------------
Sales volumes of vanadium segment
(tonnes of pure Vanadium)
H1 2014 H1 2013 Change
----------------------------------- -------- -------- -------
External sales
----------------------------------- -------- -------- -------
Vanadium products 8,992 8,612 4.4%
----------------------------------- -------- -------- -------
Vanadium in slag 204 192 6.3%
----------------------------------- -------- -------- -------
Vanadium in alloys and chemicals 8,788 8,420 4.4%
----------------------------------- -------- -------- -------
Intersegment sales 401 346 15.9%
----------------------------------- -------- -------- -------
Total 9,393 8,958 4.9%
----------------------------------- -------- -------- -------
Vanadium segment revenues decreased by 4.9% to US$255 million in H1 2014 compared to US$268 million in H1 2013 reflecting a decrease in sales prices of vanadium products partially compensated by higher sales volumes.
Vanadium segment cost of revenue
Vanadium segment cost of revenue
Six months ended 30 June
--------------------------------------------------------------------------------------
2014 2013 2014 v 2013
----------------------------------- ----------------------------------- ------------
US$ million % of segment revenue US$ million % of segment revenue % change
----------------- ------------ --------------------- ------------ --------------------- ------------
Cost of revenue 215 84.3% 210 78.4% 2.4%
----------------- ------------ --------------------- ------------ --------------------- ------------
Raw materials 53 20.8% 43 16.0% 23.3%
----------------- ------------ --------------------- ------------ --------------------- ------------
Transportation 2 0.8% - - n/m
----------------- ------------ --------------------- ------------ --------------------- ------------
Staff costs 33 12.9% 32 11.9% 3.1%
----------------- ------------ --------------------- ------------ --------------------- ------------
Depreciation 9 3.5% 11 4.1% (18.2%)
----------------- ------------ --------------------- ------------ --------------------- ------------
Energy 34 13.3% 33 12.3% 3.0%
----------------- ------------ --------------------- ------------ --------------------- ------------
Other 84 32.9% 91 34.0% (7.7%)
----------------- ------------ --------------------- ------------ --------------------- ------------
The vanadium segment cost of revenue increased by 2.4% to US$215 million, or 84.3% of vanadium segment revenue in H1 2014 from US$210 million, or 78.4% of vanadium segment revenue in H1 2013. The decrease in EVRAZ's vanadium segment's cost of revenue in H1 2014 as compared to H1 2013, in absolute terms, was attributable to increase of production and sales volumes of vanadium products in alloys and chemicals.
Vanadium segment gross profit
In H1 2014, gross profit of EVRAZ's vanadium segment decreased to US$40 million compared with US$58 million in H1 2013, primarily due to lower prices for final vanadium products.
Operationalupdate - Vanadium segment
The project to expand throughput of vanadium pentoxide at EVRAZ Vanady Tula is underway with engineering and technical solutions to implement the project being developed. Evaluation of the technical solutions and implementation alternatives is expected to be completed by the end of the year.
The equipment for the pulp filtration project at EVRAZ Vanady Tula was installed in March 2014 and pilot production commenced. The optimal operations mode is being assessed.
EVRAZ Stratcor completed the OVP (oxide vanadium products) project aimed at reaching 100% capacity utilisation and eliminating more expensive third-party feedstock. Now EVRAZ Stratcor is converting oxide vanadium products produced by EVRAZ Vanady Tula. As a result, output of specialty high value added vanadium chemicals has increased by 5% compared to H1 2013 and the plant is close to operating at full capacity.
OTHER BUSINESSES
EVRAZ's other operations include trading, logistics, port services, electricity and heat generation and other auxiliary activities.
Sales review
Other operations segment revenues
(US$ million) Six months ended 30 June
-----------------------------
2014 2013 Change
-------------------------------- ------- ------- -----------
To third parties 129 126 2.4%
-------------------------------- ------- ------- -----------
To steel segment 200 224 (10.7%)
-------------------------------- ------- ------- -----------
To coal segment 32 22 45.5%
-------------------------------- ------- ------- -----------
To iron ore segment 73 93 (21.5%)
-------------------------------- ------- ------- -----------
Total Other operations segment 434 465 (6.7%)
-------------------------------- ------- ------- -----------
Revenues from other operations decreased by 6.7% to US$434 million in H1 2014 as compared to US$465 million in H1 2013, principally due to the disposal of Central Heat and Power Plant and decrease in revenues of Zabsib Heat and Power Plant. Revenue of other operations segment includes the following (sales figures shown below include sales within the same segment):
-- Nakhodka Trade Sea Port provides various sea port services to EVRAZ. The company's revenue totaled US$57 million in H1 2014 and US$45 million in H1 2013.
-- Metallenergofinance ("MEF") supplies electricity to EVRAZ's steel, iron ore and coal segments as well as third parties. MEF's sales amounted to US$228 million in H1 2014 compared to US$219 million in H1 2013. Intersegment sales accounted for 69% and 76% of MEF's revenue in H1 2014 and H1 2013 respectively.
-- Zapsib Heat and Power Plant generates electricity and heating. Most sales are classified as intersegment as they relate to the supply of internal energy to EVRAZ ZSMK. Sales were US$57 million in H1 2014, compared to US$65 million in H1 2013. The decrease of revenue is primarily attributable to the accident at Zabsib Heat and Power Plant in March 2014.
-- Sinano Ship Management and East Metals Shipping provide sea freight services to EVRAZ's steel segment. These companies' sales totaled US$58 million in H1 2014 and US$61 million in H1 2013, with intersegment sales accounting for almost 98% in H1 2014 and 94% in H1 2013 of its revenue. Lower revenues in H1 2014 compared to H1 2013 were attributable to the sale of ships and as a result of a decline in sea freight services to third parties.
Other operations segment cost of revenue and gross profit
The other operations segment's cost of revenue in H1 2014 amounted to 78.8% of other operations revenue, or US$342 million compared to 81.7%, or US$380 million in H1 2013.
The major components of cost of revenue at EVRAZ Nakhodka Trade Sea Port are staff and inventory costs. The major component of MEF's cost of revenue is the purchase of electricity from power generating companies. The major components of the Zapsib Heat and Power Plant's cost of revenue are steam coal for power generation, depreciation and staff costs, while the major component of Sinano's cost of revenue is ship hire fees.
In H1 2014, gross profit of EVRAZ's other operation segment increased to US$92 million compared with US$85 million in H1 2013.
Operational update - Other businesses
In H1 2014 EVRAZ Metall Inprom (EMI)'s market share remained stable at 11%. During the period EMI sold over 950,000 tonnes of steel products, 2% less than in H1 2013, while the trading margin per tonne increased from 4.6% to 5.8%.
EMI is implementing measures to increase its portfolio in the segment of tubular products and expand sales of flat products in line with its Customer focus strategy. Company standards of customer service have been defined. Tools to increase sales efficiency are being implemented and include system surcharges for services and industry pricing differentiated by each sector.
In order to reduce costs and improve business efficiency, in line with its 2014 targets, EMI has focused on the shutdown of low-margin units, storage areas and branches, and on increasing staff productivity.
Cargo turnover at the EVRAZ Nakhodka Trade Sea Port (EVRAZ NMTP) increased by 24% in H1 2014 compared to H1 2013. EVRAZ Nakhodka Trade Sea Port continues to pursue the realisation of two projects, which will enable an increase in the volume of cargo turnover of coal to 7.3 million tonnes by 2016.
Sales of EVRAZ Nakhodka Trade Sea Port increased by 27%. On 20 January 2014, EVRAZ NTMP concluded an agreement with East Metals AG for the handling of ferrous metals and coal, whereas in H1 2013 all port services related to handling of EVRAZ's export products were rendered under a contract with Russian Railways.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties affecting EVRAZ were set out in detail under the heading Principal Risks and Uncertainties on pages 24 to 27 of the Annual Report 2013 http://www.evraz.com/investors/annual_reports/ . We provide below an update on those risks which impacted the Company during the Period and which we expect to be the most significant for the rest of the year: The remaining principal risks identified in the Annual Report are unchanged.
Risk and risk description Mitigations
------------------------------------- --------------------------------------------
Global economic factors, EVRAZ has a focused investment
industry conditions and cost policy aimed at reducing and managing
effectiveness the cost base with the objective
EVRAZ operations are highly of being among the sector's lowest
dependent and sensitive to cost producers.
the global macroeconomic In respect of its mining operations
environment, economic and the Company has a focus on divestiture
industry conditions, e.g. or downscaling of high cost and
global supply / demand balance lower coal quality mining assets
for steel and particularly and development of efficient low
for iron ore and coking coal cost mining operations. The Company's
which has the potential to strategic focus is on improvement
significantly affect both of operations through optimising
product prices and volumes that part of the Group's coal
across all markets. product portfolio of assets producing
As EVRAZ operations have lower quality semi-hard coal.
a high level of fixed costs, For steelmaking operations EVRAZ
global economic and industry aims to idle rolling operations
conditions can impact the in low growth markets.
Company's operational performance For both mining and steelmaking
and liquidity. Liquidity operations the Company executes
risk with a related reduction cost reduction projects to reinforce
in the availability of finance competitiveness of assets. Particularly,
brings a risk of insufficient conversion and logistics cost
capital investment to ensure optimisation programmes were initiated
the long-term sustainability during the Period.
of the Company Capital and operational initiatives
aligned with the overall EVRAZ
strategy are specified within
the section "CEO's report" on
pages 2 to 5 of this report.
------------------------------------- --------------------------------------------
Health, safety and environmental HSE issues have direct oversight
(HSE) issues at Board level and HSE procedures
Safety and environmental and material issues are given
risks are inherent to the top priority at all internal management
Company's principal business level meetings. Management KPIs
activities of steelmaking include a material factor for
and mining. Further, EVRAZ safety performance. EVRAZ has
operations are subject to instigated a programme to improve
a wide range of HSE laws, the management of safety risks
regulations and standards, across all business units with
the breach of any of which the objective of embedding a new
may result in fines, penalties, safety, harm-free culture at all
suspension of production, management and operational levels.
or other sanctions. Such The Company continues to focus
actions could have a material on standardisation of critical
adverse effect on the Company's safety programmes with a main
business, financial condition focus in 2014 on implementing
and business prospects. an energy isolation programme,
The key material environmental or Lockout Tryout (LOTO). Further,
issues are primarily concerned EVRAZ has introduced a programme
with air emissions and water of Behavior Safety Observations
quality. to drive a more proactive approach
to preventing injuries and incidents.
Safety training has been reviewed
and strengthened and an operational
safety assessment is undertaken
for all new projects.
Environmental commitments are
detailed in Note 13 to the EVRAZ
plc unaudited interim condensed
consolidated financial statements
for six-month period ended 30
June 2014.
------------------------------------- --------------------------------------------
Dependency on certain key The strategic risks and opportunities
markets within EVRAZ's key regions are
The Company's profitability regularly reviewed, including
is highly dependent on limited consideration of the quality and
geographical markets, i.e. nature of the Company's product
41% of EVRAZ revenues are portfolio, relative cost effectiveness
derived from Russia, and and the sustainability of industry
24% from North America. sector market positioning together
with effective in-house and external
distribution networks. The Company's
product portfolio development
and its production and distribution
strategies are focused on leveraging
leading market positions within
the steel construction and logistic
segments and within the coking
coal and vanadium markets.
The medium term risk of declining
demand for rail products in the
Russian market and a risk of new
rail production capacity introduced
by competitors is partly addressed
by exploring rail market opportunities
outside Russia and North America.
Risks related to the tubular product
market are addressed by long-term
contracts with customers in North
America combined with the new
opportunities provided by the
US policy of decreasing dependency
on oil & gas supplies from other
countries.
For the long steel product market
EVRAZ benefits from its wide proprietary
distribution network in Russia
(EVRAZ Metall Inprom).
------------------------------------- --------------------------------------------
Human Resources Succession planning is a key feature
The principal HR risk is of EVRAZ's human resources management.
the quality and availability EVRAZ has invested substantial
of critical operational and resource in training, internal
business skills of EVRAZ mentoring, and development of
management and employees, its pool of successors.
particularly in certain regions EVRAZ seeks to meet its leadership
and for particular business and skill needs through retention
units, e.g. engineers, mining of its employees, internal promotion,
experts and project managers. structured professional internal
Associated risks involve mentoring and external development
selection, recruitment, training programs, including internal training,
and retention of employees schools of engineers, technical
and qualified executives. forums, and expertise certification
programmes. Additionally, training
programmes of the Moscow Skolkovo
business school provide further
contribution to the development
and training for the key strategic
management pool.
------------------------------------- --------------------------------------------
Potential Actions by Governments Although these risks are mostly
EVRAZ operates in a number not within the Company's control,
of countries and there is EVRAZ and its executive teams
a risk that governments or are members of various national
government agencies could industry bodies and, as a result,
adopt new laws and regulations, contribute to the thinking of
or otherwise impact the Company's such bodies and, when appropriate,
operations. New laws, regulations participate in relevant discussions
or other requirements could with political and regulatory
have the effect of limiting authorities.
the Company's ability to The Company has diligently taken
obtain financing in international international legal advice in
markets, or selling its products. order to assess the risk of consequences
To date the Company has not from sanctions against Russian
been significantly impacted businesses and develop mitigating
by recent geopolitical developments measures.
relating to Ukraine. There
is a risk, however, that,
if these events were to escalate,
there could be an impact
on EVRAZ's operations in
the country (EVRAZ generates
approximately 6% of consolidated
revenue from its Ukrainian
business) and revenues from
the sale of coking coal to
third party Ukrainian customers.
In addition, EVRAZ may be
affected by government sanctions
against Russian business
if they are broadened from
the current level causing
capital market risk and operating
risk.
------------------------------------- --------------------------------------------
Treasury EVRAZ employs skilled specialists
EVRAZ, as with many other to manage and mitigate such risks
large and multi-national and the management of such risks
corporates, faces various is embedded in internal controls.
treasury risks including Oversight of the key risks is
liquidity, credit access, reported within the monthly Board
currency fluctuations, interest reports and compliance with the
rate, and tax compliance internal controls is reviewed
risks. In addition, and as by the management independent
mentioned above, potential internal audit function, which
actions by Governments, including reports to the Audit Committee
economic sanctions impacting on a monthly basis.
Russian entities, may increase EVRAZ continues to undertake certain
the Company's capital market actions in order to extend the
risk in respect of new funding debt maturity profile and lower
issues. short-term external funding needs,
as well as proactively managing
the remaining portion of debt
subject to maintenance covenants.
Liquidity risk is managed through
revisiting capital expenditure
plans, cost optimisation programmes,
continued asset portfolio rationalisation,
and revision of the Company's
dividend policy. The EVRAZ treasury
management team and the directors
regularly and pro-actively review
all funding requirements and exposures.
------------------------------------- --------------------------------------------
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors confirm that to the best of our knowledge this consolidated interim financial information has been prepared in accordance with lAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:
An indication of important events that have occurred during the first six months and their impact on the consolidated interim financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and material related party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report.
By order of the Board
Alexander Frolov
Chief Executive Officer
26 August 2014
Giacomo Baizini
Chief Financial Officer
26 August 2014
Appendix 1
EBITDA
EBITDA represents profit from operations plus depreciation, depletion and amortisation, impairment of assets, loss (gain) on disposal of property, plant and equipment, and foreign exchange loss (gain). EVRAZ presents an EBITDA because it considers EBITDA to be an important supplemental measure of its operating performance and believes that EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the same industry. EBITDA is not a measure of financial performance under IFRS and it should not be considered as an alternative to net profit as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. EVRAZ's calculation of EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. EBITDA has limitations as an analytical tool and potential investors should not consider it in isolation, or as a substitute for an analysis of our operating results as reported under IFRS. Some of these limitations include:
-- EBITDA does not reflect the impact of financing or financing costs on EVRAZ's operating performance, which can be significant and could further increase if EVRAZ were to incur more debt.
-- EBITDA does not reflect the impact of income taxes on EVRAZ's operating performance.
-- EBITDA does not reflect the impact of depreciation and amortisation on EVRAZ's operating performance. The assets of EVRAZ's businesses which are being depreciated and/or amortised will have to be replaced in the future and such depreciation and amortisation expense may approximate the cost of replacement of these assets in the future. EBITDA, due to the exclusion of these costs, does not reflect EVRAZ's future cash requirements for these replacements. EBITDA also does not reflect the impact of a loss on disposal of property, plant and equipment.
Reconciliation of profit (loss) from operations to EBITDA is as follows:
Six months ended 30 June
---------------------------
2014 2013
------------- ------------
(US$ million)
------------------------------------------------- ---------------------------
Consolidated EBITDA reconciliation
------------------------------------------------- ---------------------------
Profit from operations 297 145
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation, depletion and amortisation 435 580
------------------------------------------------- ------------- ------------
Impairment of assets 147 7
------------------------------------------------- ------------- ------------
Loss on disposal of property, plant & equipment 21 14
------------------------------------------------- ------------- ------------
Foreign exchange loss/(gain) 180 179
------------------------------------------------- ------------- ------------
Consolidated EBITDA 1,080 925
------------------------------------------------- ------------- ------------
Steel segment EBITDA reconciliation
------------------------------------------------- ------------- ------------
Profit from operations 344 339
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation and amortisation 228 294
------------------------------------------------- ------------- ------------
Impairment of assets 40 (32)
------------------------------------------------- ------------- ------------
Loss on disposal of property, plant & equipment 7 8
------------------------------------------------- ------------- ------------
Foreign exchange loss/(gain) 152 42
------------------------------------------------- ------------- ------------
Steel segment EBITDA 771 651
------------------------------------------------- ------------- ------------
Coal segment EBITDA reconciliation
------------------------------------------------- ------------- ------------
Profit from operations (108) (187)
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation, depletion and amortisation 136 187
------------------------------------------------- ------------- ------------
Impairment of assets 77 63
------------------------------------------------- ------------- ------------
Loss on disposal of property, plant & equipment 13 6
------------------------------------------------- ------------- ------------
Foreign exchange loss/(gain) 14 40
------------------------------------------------- ------------- ------------
Coal segment EBITDA 132 109
------------------------------------------------- ------------- ------------
Iron ore segment EBITDA reconciliation
------------------------------------------------- ------------- ------------
Profit from operations 220 254
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation, depletion and amortisation 43 55
------------------------------------------------- ------------- ------------
Impairment of assets 3 (24)
------------------------------------------------- ------------- ------------
Foreign exchange loss/(gain) (50) (54)
------------------------------------------------- ------------- ------------
Iron ore segment EBITDA 216 231
------------------------------------------------- ------------- ------------
Vanadium segment EBITDA reconciliation
------------------------------------------------- ------------- ------------
(Loss)/profit from operations (20) 11
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation and amortisation 15 23
------------------------------------------------- ------------- ------------
Impairment of assets 25 -
------------------------------------------------- ------------- ------------
Vanadium segment EBITDA 20 34
------------------------------------------------- ------------- ------------
Other operations EBITDA reconciliation
------------------------------------------------- ------------- ------------
Profit from operations 38 45
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
Depreciation and amortisation 11 17
------------------------------------------------- ------------- ------------
Impairment of assets 2 -
------------------------------------------------- ------------- ------------
Gain on disposal of property, plant & equipment 1 (1)
------------------------------------------------- ------------- ------------
Other operations EBITDA 52 61
------------------------------------------------- ------------- ------------
Unallocated EBITDA reconciliation
------------------------------------------------- ------------- ------------
Loss from operations (181) (256)
------------------------------------------------- ------------- ------------
Add:
------------------------------------------------- ------------- ------------
+ depreciation 2 4
------------------------------------------------- ------------- ------------
+ (gain)/loss from disposal of PPE - 1
------------------------------------------------- ------------- ------------
+ forex gain/losses 64 151
------------------------------------------------- ------------- ------------
Other unallocated operations EBITDA (115) (100)
------------------------------------------------- ------------- ------------
Intersegment eliminations
------------------------------------------------- ------------- ------------
Eliminations EBITDA 4 (61)
------------------------------------------------- ------------- ------------
Appendix 2
Cash and short-term bank deposits
Cash and short-term bank deposits is not a measure under IFRS and it should not be considered as an alternative to other measures of financial position. EVRAZ's calculation of cash and short-term bank deposits may be different from the calculation used by other companies and therefore comparability may be limited.
30 June 2014 31 December 2013
------------- -------------------
(US$ million)
----------------------------------------------------- ----------------------------------
Cash and short-term bank deposits Calculation
----------------------------------------------------- ----------------------------------
Cash and cash equivalents 1,353 1,604
----------------------------------------------------- ----------------- ---------------
Cash of disposal groups classified as held for sale - 7
----------------------------------------------------- ----------------- ---------------
Short-term bank deposits - -
----------------------------------------------------- ----------------- ---------------
Cash and short-term bank deposits 1,353 1,611
----------------------------------------------------- ----------------- ---------------
Appendix 3
Definition of Free Cash Flow
Free Cash Flow represents EBITDA, net of non-cash items, less changes in working capital, income tax paid, interest paid and covenant reset charges, conversion premiums, premiums on early repurchase of bonds and realised gain on swaps, interest income and debt issue costs, less capital expenditure, including recorded in financing activities, purchases of subsidiaries, net of cash acquired, proceeds from sale of disposal groups classified as held for sale, net of transaction costs, less purchases of treasury shares for participants of the incentive plans, plus other cash flows from investing activities. Free Cash Flow is not a measure under IFRS and it should not be considered as an alternative to other measures of financial position. EVRAZ's calculation of Free Cash Flow may be different from the calculation used by other companies and therefore comparability may be limited.
Appendix 4
Total debt
Total debt represents the nominal value of loans and borrowings plus unpaid interest, finance lease liabilities, loans of assets classified as held for sale, the nominal effect of cross-currency swaps on principal of rouble-denominated notes. Total debt is not a measure under IFRS and it should not be considered as an alternative to other measures of financial position. EVRAZ's calculation of total debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation shall not be considered for covenant compliance reasons.
Total debt has been calculated as follows:
30 June
Total debt calculation 2014 31 December 2013
-------- -----------------
(US$ million)
----------------------------------------------------------------------------------------- ---------------------------
Long-term loans, net of current portion 5,960 6,041
----------------------------------------------------------------------------------------- -------- -----------------
Short-term loans and current portion of long-term loans 1,244 1,816
----------------------------------------------------------------------------------------- -------- -----------------
Add back: Unamortised debt issue costs and fair value adjustment to liabilities assumed
in
business combination 40 41
----------------------------------------------------------------------------------------- -------- -----------------
Nominal effect of cross-currency swaps on principal of rouble-denominated notes 230 186
----------------------------------------------------------------------------------------- -------- -----------------
Loans of assets classified as held for sale - 76
----------------------------------------------------------------------------------------- -------- -----------------
Finance lease liabilities, including current portion 5 6
----------------------------------------------------------------------------------------- -------- -----------------
Total debt 7,479 8,166
----------------------------------------------------------------------------------------- -------- -----------------
Appendix 5
Net debt
Net debt represents total debt less cash and liquid short-term financial assets, including those related to disposal groups classified as held for sale. Net debt is not a measure under IFRS and it should not be considered as an alternative to other measures of financial position. EVRAZ's calculation of net debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation shall not be considered for covenant compliance reasons.
Net debt has been calculated as follows:
Net debt calculation 30 June 2014 31 December 2013
------------- -----------------
(US$ million)
-------------------------------------------- --------------------------------
Total debt 7,479 8,166
-------------------------------------------- ------------- -----------------
Short-term bank deposits - -
-------------------------------------------- ------------- -----------------
Cash and cash equivalents (1,353) (1,604)
-------------------------------------------- ------------- -----------------
Cash of assets classified as held for sale - (7)
-------------------------------------------- ------------- -----------------
Collateral under swaps (31) (21)
-------------------------------------------- ------------- -----------------
Net debt 6,095 6,534
-------------------------------------------- ------------- -----------------
For further information:
Media Relations:
Vsevolod Sementsov
VP, Corporate Communications
London: +44 207 832 8998 Moscow: +7 495 937 6871
media@evraz.com
Investor Relations:
London: +44 207 832 8990 Moscow: +7 495 232 1370
EVRAZ plc
Unaudited Interim Condensed Consolidated Financial Statements
Six-month period ended 30 June 2014
Contents
Report on Review of Interim Condensed Consolidated Financial Statements
Unaudited Interim Condensed Consolidated Financial Statements
Unaudited Interim Condensed Consolidated Statement of Operations
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income
Unaudited Interim Condensed Consolidated Statement of Financial Position
Unaudited Interim Condensed Consolidated Statement of Cash Flows
Unaudited Interim Condensed Consolidated Statement of Changes in Equity
Selected Notes to the Unaudited Interim Condensed Consolidated Financial Statements
Independent Review Report to EVRAZ plc
Introduction
We have been engaged by EVRAZ plc (the Company) to review the condensed set of financial statements in the interim report for the six months ended 30 June 2014 which comprises the Interim Condensed Consolidated Statement of Operations, Interim Condensed Consolidated Statement of Comprehensive Income, Interim Condensed Consolidated Statement of Financial Position, Interim Condensed Consolidated Statement of Cash Flows, Interim Condensed Consolidated Statement of Changes in Equity and related notes 1 to 15. We have read the other information contained in the Interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland), 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
26 August 2014
Unaudited Interim Condensed Consolidated Statement of Operations
(In millions of US dollars, except for per share information)
Six-month period
ended 30 June
Notes 2014 2013
restated*
-------- ----------
Revenue
Sale of goods $ 6,628 $ 7,142
Rendering of services 177 177
-------- ----------
6,805 7,319
Cost of revenue (5,192) (5,886)
Gross profit 1,613 1,433
Selling and distribution costs (543) (608)
General and administrative expenses (390) (438)
Social and social infrastructure
maintenance expenses (13) (22)
Loss on disposal of property, plant
and equipment (21) (14)
Impairment of assets 5 (147) (7)
Foreign exchange gains/(losses),
net (180) (179)
Other operating income 18 48
Other operating expenses (40) (68)
-------- ----------
Profit from operations 297 145
Interest income 9 16
Interest expense (296) (373)
Share of profits/(losses) of joint
ventures and associates 8 5 3
Gain/(loss) on derecognition of equity
investments, net - 89
Gain/(loss) on financial assets and
liabilities, net (43) (71)
Gain/(loss) on disposal groups classified
as held for sale, net 4 113 54
Other non-operating gains/(losses),
net - (2)
Profit/(loss) before tax 85 (139)
Income tax expense 6 (84) (7)
-------- ----------
Net profit/(loss) $ 1 $ (146)
======== ==========
Attributable to:
Equity holders of the parent entity $ 38 $ (131)
Non-controlling interests (37) (15)
-------- ----------
$ 1 $ (146)
======== ==========
Earnings/(losses) per share:
basic, for profit/(loss) attributable
to equity holders of the parent entity,
US dollars 11 $ 0.03 $ (0.09)
diluted, for profit/(loss) attributable
to equity holders of the parent entity,
US dollars 11 $ 0.02 $ (0.09)
* The amounts shown here do not correspond to the financial statements for the six-month period ended 30 June 2013 and reflect adjustments made in connection with the cessation of classification of a subsidiary as held for sale and the completion of initial accounting (Note 2).
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income
(In millions of US dollars)
Six-month period
ended 30 June
Notes 2014 2013
restated*
-------- ----------
Net profit/(loss) $ 1 $ (146)
Other comprehensive income
Other comprehensive income to be
reclassified to profit or loss in
subsequent periods
Exchange differences on translation
of foreign operations into presentation
currency (197) (409)
Recycling of exchange difference
to profit or loss (Note 4) (65) 68
Net gains/(losses) on available-for-sale
financial assets (9) 4
-------- ----------
(271) (337)
Effect of translation to presentation
currency of the Group's joint ventures
and associates 8 (5) (10)
-------- ----------
Share of other comprehensive income
of joint ventures and associates
accounted for using the equity method (5) (10)
Items not to be reclassified to
profit or loss in subsequent periods
Gains/(losses) on re-measurement
of net defined benefit liability (29) -
Income tax effect 9 -
-------- ----------
(20) -
Decrease in revaluation surplus
in connection with the impairment
of property, plant and equipment - (5)
Income tax effect - 1
-------- ----------
- (4)
Total other comprehensive loss (296) (351)
-------- ----------
Total comprehensive loss, net of
tax $ (295) $ (497)
======== ==========
Attributable to:
Equity holders of the parent entity $ (248) $ (449)
Non-controlling interests (47) (48)
-------- ----------
$ (295) $ (497)
======== ==========
* The amounts shown here do not correspond to the financial statements for the six-month period ended 30 June 2013 and reflect adjustments made in connection with the cessation of classification of a subsidiary as held for sale and the completion of initial accounting (Note 2).
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Financial Position
(In millions of US dollars)
30 June 31 December
Notes 2014 2013
restated*
------------- -------------
Assets
Non-current assets
Property, plant and equipment 7 $ 8,772 $ 9,387
Intangible assets other than goodwill 530 588
Goodwill 1,980 1,988
Investments in joint ventures and
associates 8 191 191
Deferred income tax assets 80 86
Other non-current financial assets 119 144
Other non-current assets 57 62
------------- -------------
11,729 12,446
Current assets
Inventories 1,694 1,744
Trade and other receivables 943 915
Prepayments 87 124
Loans receivable 42 21
Receivables from related parties 9 22 13
Income tax receivable 46 59
Other taxes recoverable 260 283
Other current financial assets 65 71
Cash and cash equivalents 10 1,353 1,604
------------- -------------
4,512 4,834
Assets of disposal groups classified
as held for sale 92 409
------------- -------------
4,604 5,243
------------- -------------
Total assets $ 16,333 $ 17,689
============= =============
Equity and liabilities
Equity
Equity attributable to equity holders
of the parent entity
Issued capital 11 $ 1,507 $ 1,473
Treasury shares (1) (1)
Additional paid-in capital 11 2,469 2,326
Revaluation surplus 159 162
Other reserves 11 - 156
Unrealised gains and losses 3 12
Accumulated profits 2,508 2,589
Translation difference (1,943) (1,685)
------------- -------------
4,702 5,032
Non-controlling interests 378 431
------------- -------------
5,080 5,463
Non-current liabilities
Long-term loans 12 5,960 6,041
Deferred income tax liabilities 751 841
Employee benefits 491 492
Provisions 261 254
Other long-term liabilities 266 230
------------- -------------
7,729 7,858
Current liabilities
Trade and other payables 1,497 1,488
Advances from customers 129 180
Short-term loans and current portion
of long-term loans 12 1,244 1,816
Payables to related parties 9 149 458
Income tax payable 94 57
Other taxes payable 227 202
Provisions 78 45
Dividends payable by the parent entity
to its shareholders 11 90 -
Dividends payable by the Group's subsidiaries
to non-controlling shareholders - 5
------------- -------------
3,508 4,251
Liabilities directly associated with
disposal groups classified as held
for sale 16 117
------------- -------------
3,524 4,368
------------- -------------
Total equity and liabilities $ 16,333 $ 17,689
============= =============
* The amounts shown here do not correspond to the financial statements for the year ended 31 December 2013 and reflect adjustments made in connection with the cessation of classification of a subsidiary as held for sale (Note 2).
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Cash Flows
(In millions of US dollars)
Six-month period
ended
30 June
2014 2013
restated*
------- ----------
Cash flows from operating activities
Net profit/(loss) $ 1 $ (146)
Adjustments to reconcile net profit/(loss)
to net cash flows from operating activities:
Deferred income tax (benefit)/expense (59) (140)
Depreciation, depletion and amortisation 435 580
Loss on disposal of property, plant and
equipment 21 14
Impairment of assets 147 7
Foreign exchange (gains)/losses, net 180 179
Interest income (9) (16)
Interest expense 296 373
Share of (profits)/losses of associates
and joint ventures (5) (3)
(Gain)/loss on derecognition of equity investments,
net - (89)
(Gain)/loss on financial assets and liabilities,
net 43 71
(Gain)/loss on disposal groups classified
as held for sale, net (113) (54)
Other non-operating (gains)/losses, net - 2
Bad debt expense 21 (1)
Changes in provisions, employee benefits
and other long-term assets and liabilities (2) (43)
Expense arising from the equity-settled
awards 15 11
Other (1) (2)
970 743
Changes in working capital:
Inventories (35) 101
Trade and other receivables (74) (176)
Prepayments 29 15
Receivables from/payables to related parties (186) 94
Taxes recoverable (1) 68
Other assets 10 (3)
Trade and other payables 118 (225)
Advances from customers (46) (32)
Taxes payable 66 42
Other liabilities (7) 1
Net cash flows from operating activities 844 628
Cash flows from investing activities
Issuance of loans receivable to related
parties (1) (1)
Issuance of loans receivable - (1)
Proceeds from repayment of loans receivable,
including interest 1 1
Purchases of subsidiaries, net of cash acquired (102) 82
Purchase of interest in a joint venture - (16)
Restricted deposits at banks in respect
of investing activities 2 (1)
Short-term deposits at banks, including
interest 3 680
Purchases of property, plant and equipment
and intangible assets (339) (492)
Proceeds from disposal of property, plant
and equipment 4 3
Proceeds from sale of disposal groups classified
as held for sale, net of transaction costs
(Note 4) 296 (1)
Dividends received - 1
Other investing activities, net 13 (17)
Net cash flows from/(used in) investing
activities (123) 238
Cash flows from financing activities
Purchase of treasury shares $ (13) $ -
Proceeds from loans provided by related
parties (Note 9) 267 -
Repayment of loans provided by related parties
(Note 9) (251) -
Proceeds from bank loans and notes 1,052 1,776
Repayment of bank loans and notes, including
interest (1,286) (2,849)
Net proceeds from/(repayment of) bank overdrafts
and credit lines, including interest (712) 412
Payments for purchase of property, plant
and equipment on deferred terms (26) -
Gain on derivatives not designated as hedging
instruments 25 19
Collateral under swap contracts (10) (26)
Payments under finance leases, including
interest (1) (2)
Other financing activities (5) -
Net cash flows used in financing activities (960) (670)
Effect of foreign exchange rate changes
on cash and cash equivalents (20) (49)
Net increase/(decrease) in cash and cash
equivalents (259) 147
Cash and cash equivalents at beginning of
year 1,604 1,382
----------- -----------
Add back: decrease in cash of disposal groups
classified as assets held for sale 8 5
----------- -----------
Cash and cash equivalents at end of period $ 1,353 $ 1,534
=========== ===========
Supplementary cash flow information:
Cash flows during the period:
Interest paid $ (264) $ (302)
Interest received 10 17
Income taxes paid (94) (126)
* The amounts shown here do not correspond to the financial statements for the six-month period ended 30 June 2013 and reflect adjustments made in connection with the cessation of classification of a subsidiary as held for sale and the completion of initial accounting (Note 2).
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Changes in
Equity
(In millions of US dollars)
Attributable to equity holders of the parent entity
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additional Unrealised
Issued Treasury paid-in Revaluation Other gains Accumulated Translation Non-controlling Total
capital shares capital surplus reserves and losses profits difference Total interests Equity
------------------------ ---------------------- ------------------------ ---------------------- ---------------------- --------------------- ---------------------------- -------------------------- ------------------------ ---------------------- ------------------------
At 31 December
2013 (as
reported) $ 1,473 $ (1) $ 2,326 $ 162 $ 156 $ 12 $ 2,566 $ (1,687) $ 5,007 $ 427 $ 5,434
Subsidiary that
ceased
to be
classified as
held
for sale (Note
2) - - - - - - 23 2 25 4 29
At 31 December
2013 (as
restated) 1,473 (1) 2,326 162 156 12 2,589 (1,685) 5,032 431 5,463
Net
profit/(loss) - - - - - - 38 - 38 (37) 1
Other
comprehensive
income/(loss) - - - (3) - (9) (16) (258) (286) (10) (296)
Total
comprehensive
income/(loss)
for the period - - - (3) - (9) 22 (258) (248) (47) (295)
Issue of shares
(Note 11) 34 - 122 - (156) - - - - - -
Acquisition of
non-controlling
interests in
existing
subsidiaries - - 6 - - - - - 6 (6) -
Purchase of
treasury shares
(Note 11) - (13) - - - - - - (13) - (13)
Transfer of
treasury shares
to participants
of the
Incentive Plans
(Note 11) - 13 - - - - (13) - - - -
Share-based
payments - - 15 - - - - - 15 - 15
Dividends
declared by the
parent entity
to its
shareholders
(Note 11) - - - - - - (90) - (90) - (90)
At 30 June 2014 $ 1,507 $ (1) $ 2,469 $ 159 $ - $ 3 $ 2,508 $ (1,943) $ 4,702 $ 378 $ 5,080
======================== ====================== ======================== ====================== ====================== ===================== ============================ ========================== ======================== ====================== ========================
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Changes in Equity (continued)
(In millions of US dollars)
Attributable to equity holders of the parent entity
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additional Unrealised
Issued Treasury paid-in Revaluation Other gains Accumulated Translation Non-controlling Total
capital shares capital surplus reserves and losses profits difference Total interests Equity
------------------------ ---------------------- ------------------------ ---------------------- ---------------------- -------------------- ---------------------------- -------------------------- ------------------------ ---------------------- ------------------------
At 31 December
2012 (as
reported) $ 1,340 $ (1) $ 1,820 $ 173 $ - $ 5 $ 3,004 $ (1,424) $ 4,917 $ 200 $ 5,117
Subsidiary that
ceased
to be
classified as
held
for sale (Note
2) - - - - - - 5 - 5 - 5
------------------------ ---------------------- ------------------------ ---------------------- ---------------------- -------------------- ---------------------------- -------------------------- ------------------------ ---------------------- ------------------------
At 31 December
2012 (as
restated) 1,340 (1) 1,820 173 - 5 3,009 (1,424) 4,922 200 5,122
Net loss* - - - - - - (131) - (131) (15) (146)
Other
comprehensive
income/(loss)* - - - (4) - 4 - (318) (318) (33) (351)
Total
comprehensive
income/(loss)
for the period* - - - (4) - 4 (131) (318) (449) (48) (497)
Issue of shares 133 - 478 - 156 - - - 767 - 767
Acquisition of
non-controlling
interests in
existing
subsidiaries - - 1 - - - - - 1 (3) (2)
Non-controlling
interests
arising on
acquisition
of subsidiaries - - - - - - - - - 314 314
Share-based
payments - - 11 - - - - - 11 - 11
At 30 June 2013
(restated) $ 1,473 $ (1) $ 2,310 $ 169 $ 156 $ 9 $ 2,878 $ (1,742) $ 5,252 $ 463 $ 5,715
======================== ====================== ======================== ====================== ====================== ==================== ============================ ========================== ======================== ====================== ========================
* The amounts shown here do not correspond to the financial statements for the six-month period ended 30 June 2013 and reflect adjustments made in connection with the cessation of classification of a subsidiary as held for sale and the completion of initial accounting (Note 2).
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Selected Notes
to the Unaudited Interim Condensed Consolidated Financial Statements
Six-month period ended 30 June 2014
1. Corporate Information
These interim condensed consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 26 August 2014.
EVRAZ plc ("EVRAZ plc" or "the Company") was incorporated on 23 September 2011 as a public company under the laws of the United Kingdom with the registered number 7784342. The Company's registered office is at 5(th) Floor, 6 St. Andrew Street, London, EC4A 3AE, United Kingdom.
The Company, together with its subsidiaries (the "Group"), is involved in the production and distribution of steel and related products and coal and iron ore mining. In addition, the Group produces vanadium products. The Group is one of the largest steel producers globally.
Lanebrook Limited (Cyprus) is the ultimate controlling party of the Company.
Going Concern
These interim condensed consolidated financial statements have been prepared on a going concern basis.
The Group's activities in all of its operating segments continue to be affected by the uncertainty and instability of the current economic environment (Note 13). In response the Group implemented a number of cost cutting initiatives, reduced capital expenditures and continues to reduce the level of debt.
Based on the currently available facts and circumstances the directors and management have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.
2. Significant Accounting Policies
Basis of Preparation
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 "Interim Financial Reporting", as adopted by the European Union. Accordingly, these interim condensed consolidated financial statements do not include all the information and disclosures required for a complete set of financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2013, which were prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.
The comparative figures as of 31 December 2013 are not the Company's statutory accounts for the year ended 31 December 2013 in terms of Section 435 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2013 have been filed with the Registrar of Companies. The auditor's report under section 495 of the Companies Act 2006 in relation to these accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Operating results for the six-month period ended 30 June 2014 are not necessarily indicative of the results that may be expected for the year ending 31 December 2014.
Restatement of Financial Statements
Subsidiary that Ceased to Be Classified as Held for Sale
On 12August 2014, the Group signed an agreement to sell 34% in EVRAZ Highveld Steel and Vanadium Limited and decided to retain control over the remaining 51.1% ownership interest. The subsidiary was classified as a disposal group held for sale starting from 31 December 2012 and the carrying value of its net assets was based on management's best estimate of the net proceeds from the sale.
As a result of this decision the subsidiary ceased to meet the definition of a disposal group held for sale. In accordance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" the Group restated its consolidated financial statements for the periods in which the assets were classified as held for sale as if the subsidiary had not been classified as an asset held for sale in the past and all assets and liabilities and the results of operations had been accounted for in accordance with the applicable International Financial Reporting Standards as adopted by the European Union.
Completion of Initial Accounting
The purchase price allocation for Raspadskaya acquired in January 2013 has been completed during the preparation of the annual consolidated financial statements for 2013. As a result, the Group recognised adjustments to the provisional values of identifiable assets, liabilities and contingent liabilities of the entity and restated the interim consolidated financial statements as of 30 June 2013 and for the six-month period then ended.
Reclassifications
In the second half of 2013, the Group started to apply new accounting policies with respect to certain operating costs previously included in general and administrative expenses and selling costs. Consequently, the statement of operations for the six-month period ended 30 June 2013 has been adjusted for comparability purposes.
The effects of the restatements on the previously reported amounts are set out below.
Statement of Operations Year ended 31 December 2013
Subsidiary
that ceased
As previously to be held
reported for sale Restated
---------------- ------------- ---------
Revenue
Sale of goods $ 14,071 $ - $ 14,071
Rendering of services 340 - 340
---------------- ------------- ---------
14,411 - 14,411
Cost of revenue (11,468) (33) (11,501)
Gross profit 2,943 (33) 2,910
Selling and distribution costs (1,183) (30) (1,213)
General and administrative expenses (877) - (877)
Social and social infrastructure
maintenance expenses (50) - (50)
Loss on disposal of property,
plant and equipment (47) - (47)
Impairment of assets (446) (117) (563)
Foreign exchange gains/(losses),
net (258) - (258)
Other operating income 53 - 53
Other operating expenses (116) - (116)
---------------- ------------- ---------
Profit/(loss) from operations 19 (180) (161)
Interest income 23 - 23
Interest expense (699) - (699)
Share of profits/(losses) of joint
ventures and associates 8 - 8
Gain/(loss) on derecognition of
equity investments, net 89 - 89
Gain/(loss) on financial assets
and liabilities, net (43) - (43)
Gain/(loss) on disposal groups
classified as held for sale, net (25) 156 131
Other non-operating gains/(losses),
net 15 - 15
Loss before tax (613) (24) (637)
Income tax benefit/(expense) 41 45 86
---------------- ------------- ---------
Net profit/(loss) $ (572) $ 21 $ (551)
================ ============= =========
Attributable to:
Equity holders of the parent entity $ (522) $ 18 $ (504)
Non-controlling interests (50) 3 (47)
---------------- ------------- ---------
$(572) $ 21 $ (551)
================ ============= =========
Earnings/(losses) per share:
for profit/(loss) attributable
to equity holders of the parent
entity, US dollars, basic and
diluted $ (0.35) $ 0.01 $ (0.34)
Statement of Comprehensive
Income Year ended 31 December 2013
Subsidiary
that ceased
As previously to be held
reported for sale Restated
Net profit/(loss) $ (572) $ 21 $ (551)
Other comprehensive income/(loss)
Other comprehensive income
to be reclassified to profit
or loss in subsequent periods
Exchange differences on translation
of foreign operations into
presentation currency (378) 3 (375)
Exchange differences recycled
to profit or loss 90 - 90
Net gains/(losses) on available-for-sale
financial assets 7 - 7
(281) 3 (278)
Effect of translation to presentation
currency of the Group's joint
ventures and associates (11) - (11)
--------------------- ---------------------- ---------------------
(11) - (11)
Items not to be reclassified
to profit or loss in subsequent
periods
Gains/(losses) on re-measurement
of net defined benefit liability 119 - 119
Income tax effect (30) - (30)
--------------------- ---------------------- ---------------------
89 - 89
Decrease in revaluation surplus
in connection with the impairment
of property, plant and equipment (9) - (9)
Income tax effect 2 - 2
--------------------- ---------------------- ---------------------
(7) - (7)
Total other comprehensive
income/(loss) (210) 3 (207)
--------------------- ---------------------- ---------------------
Total comprehensive income/(loss),
net of tax $ (782) $ 24 $ (758)
===================== ====================== =====================
Attributable to:
Equity holders of the parent
entity $ (697) $ 20 $ (677)
Non-controlling interests (85) 4 (81)
--------------------- ---------------------- ---------------------
$ (782) $ 24 $ (758)
===================== ====================== =====================
Statement of Changes in Equity Year ended 31 December 2013
Subsidiary
that ceased
As previously to be held
reported for sale Restated
Accumulated profits $ 2,566 $ 23 $ 2,589
Translation difference (1,687) 2 (1,685)
Non-controlling interests 427 4 431
Statement of Financial Position 31 December 2013
Subsidiary
that ceased
As previously to be held
reported for sale Restated
-------------- ------------- -------------
Assets
Non-current assets
Property, plant and equipment $ 9,251 $ 136 $ 9,387
Intangible assets other than
goodwill 525 63 588
Goodwill 1,988 - 1,988
Investments in joint ventures
and associates 191 - 191
Deferred income tax assets 86 - 86
Other non-current financial
assets 140 4 144
Other non-current assets 62 - 62
-------------- ------------- -------------
12,243 203 12,446
Current assets
Inventories 1,641 103 1,744
Trade and other receivables 873 42 915
Prepayments 122 2 124
Loans receivable 21 - 21
Receivables from related
parties 13 - 13
Income tax receivable 59 - 59
Other taxes recoverable 281 2 283
Other current financial assets 71 - 71
Cash and cash equivalents 1,576 28 1,604
-------------- ------------- -------------
4,657 177 4,834
Assets of disposal groups
classified as held for sale 804 (395) 409
-------------- ------------- -------------
5,461 (218) 5,243
-------------- ------------- -------------
Total assets $ 17,704 $ (15) $ 17,689
============== ============= =============
Equity and liabilities
Equity
Equity attributable to equity
holders of the parent entity
Issued capital $ 1,473 $ - $ 1,473
Treasury shares (1) - (1)
Additional paid-in capital 2,326 - 2,326
Revaluation surplus 162 - 162
Other reserves 156 - 156
Unrealised gains and losses 12 - 12
Accumulated profits 2,566 23 2,589
Translation difference (1,687) 2 (1,685)
-------------- ------------- -------------
5,007 25 5,032
Non-controlling interests 427 4 431
-------------- ------------- -------------
5,434 29 5,463
Non-current liabilities
Long-term loans $ 6,039 $ 2 $ 6,041
Deferred income tax liabilities 827 14 841
Employee benefits 481 11 492
Provisions 194 60 254
Other long-term liabilities 230 - 230
------------- ----------- -------------
7,771 87 7,858
Current liabilities
Trade and other payables 1,395 93 1,488
Advances from customers 179 1 180
Short-term loans and current
portion of long-term loans 1,816 - 1,816
Payables to related parties 458 - 458
Income tax payable 57 - 57
Other taxes payable 202 - 202
Provisions 39 6 45
Dividends payable by the
Group's subsidiaries to non-controlling
shareholders 5 - 5
------------- ----------- -------------
4,151 100 4,251
Liabilities directly associated
with disposal groups classified
as held for sale 348 (231) 117
------------- ----------- -------------
4,499 (131) 4,368
------------- ----------- -------------
Total equity and liabilities $ 17,704 $ (15) $ 17,689
============= =========== =============
Statement of Operations Six-month period ended 30 June 2013
----------------------------------------------------------------------------------------
Subsidiary
that ceased Completion
As previously to be held of initial
reported for sale accounting Reclassifications Restated
-------------- ------------- ---------------------- ---------------------- ---------
Revenue
Sale of goods $ 7,142 $ - - - $ 7,142
Rendering of services 220 - - (43) 177
-------------- ------------- ---------------------- ---------------------- ---------
7,362 - - (43) 7,319
Cost of revenue (5,877) (16) 12 (5) (5,886)
Gross profit 1,485 (16) 12 (48) 1,433
Selling and distribution
costs (618) (17) (11) 38 (608)
General and administrative
expenses (448) - - 10 (438)
Social and social
infrastructure maintenance
expenses (22) - - - (22)
Loss on disposal of
property, plant and
equipment (10) - (4) - (14)
Impairment of assets (7) - - - (7)
Foreign exchange
gains/(losses),
net (177) - (2) - (179)
Other operating income 48 - - - 48
Other operating expenses (68) - - - (68)
-------------- ------------- ---------------------- ---------------------- ---------
Profit/(loss) from
operations 183 (33) (5) - 145
Interest income 16 - - - 16
Interest expense (377) - 4 - (373)
Share of profits/(losses)
of joint ventures
and associates 3 - - - 3
Gain/(loss) on
derecognition
of equity investments,
net 89 - - - 89
Gain/(loss) on financial
assets and liabilities,
net (71) - - - (71)
Gain/(loss) on disposal
groups classified
as held for sale,
net 54 - - - 54
Other non-operating
gains/(losses), net (3) - 1 - (2)
Loss before tax (106) (33) - - (139)
Income tax
benefit/(expense) (16) 9 - - (7)
-------------- ------------- ---------------------- ---------------------- ---------
Net loss $ (122) $ (24) $ - - $ (146)
============== ============= ====================== ====================== =========
Attributable to:
Equity holders of
the parent entity $ (111) $ (20) $ - $ - $ (131)
Non-controlling interests (11) (4) - - (15)
-------------- ------------- ---------------------- ---------------------- ---------
$ (122) $ (24) $ - $ - $ (146)
============== ============= ====================== ====================== =========
Earnings/(losses)
per share:
for profit/(loss)
attributable to equity
holders of the parent
entity, US dollars,
basic and diluted $ (0.07) $ (0.02) - - $ (0.09)
Statement of
Comprehensive
Income Six-month period ended 30 June 2013
Subsidiary
that ceased Completion
As previously to be held of initial
reported for sale accounting Restated
Net loss $ (122) $ (24) $ - $ (146)
Other comprehensive
income/(loss)
Other comprehensive
income
to be reclassified to
profit
or loss in subsequent
periods
Exchange differences
on translation
of foreign operations
into
presentation currency (414) 2 3 (409)
Exchange differences
recycled
to profit or loss 68 - - 68
Net gains/(losses) on
available-for-sale
financial assets 4 - - 4
(342) 2 3 (337)
Effect of translation
to presentation
currency of the
Group's joint
ventures and
associates (10) - - (10)
--------------------- ---------------------- ---------------------- ---------------------
Share of other
comprehensive
income/(loss) of
joint ventures
and associates
accounted for
using the equity
method (10) - - (10)
Items not to be
reclassified
to profit or loss in
subsequent
periods
Decrease in
revaluation surplus
in connection with
the impairment
of property, plant
and equipment (5) - - (5)
Income tax effect 1 - - 1
--------------------- ---------------------- ---------------------- ---------------------
(4) - - (4)
Total other
comprehensive
income/(loss) (356) 2 3 (351)
--------------------- ---------------------- ---------------------- ---------------------
Total comprehensive
income/(loss),
net of tax $ (478) $ (22) $ 3 $ (497)
===================== ====================== ====================== =====================
Attributable to:
Equity holders of the
parent
entity $ (430) $ (19) $ - $ (449)
Non-controlling
interests (48) (3) 3 (48)
--------------------- ---------------------- ---------------------- ---------------------
$ (478) $ (22) $ 3 $ (497)
===================== ====================== ====================== =====================
Statement of Changes in
Equity Six-month period ended 30 June 2013
Subsidiary
that ceased Completion
As previously to be held of initial
reported for sale accounting Restated
Accumulated profits $ 2,893 $ (15) $ - $ 2,878
Translation difference (1,743) 1 - (1,742)
Non-controlling interests 509 (3) (43) 463
2. Significant Accounting Policies
Changes in Accounting Policies
In the preparation of the interim condensed consolidated financial statements, the Group followed the same accounting policies and methods of computation as compared with those applied in the complete consolidated financial statements for year ended 31 December 2013, except for the adoption of new standards and interpretations and revision of the existing IAS as of 1 January 2014.
New/Revised Standards and Interpretations Adopted in 2014:
-- IFRS 10 "Consolidated Financial Statements", IAS 27 "Separate Financial Statements"
IFRS 10 replaced the portion of IAS 27 "Consolidated and Separate Financial Statements" that addresses the accounting for consolidated financial statements. It also addresses the issues raised in SIC-12 "Consolidation - Special Purpose Entities". IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 require management to exercise significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27.
-- IFRS 12 "Disclosure of Interests in Other Entities"
IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity's interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required, but has no impact on the Group's financial position or performance.
-- Amendments to IFRS 10, IFRS 12 and IAS 27
These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss.
-- IFRS 11 "Joint Arrangements", IAS 28 "Investments in Associates and Joint Ventures"
IFRS 11 replaced IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly-controlled Entities" - Non-monetary Contributions by Venturers". IFRS 11 removed the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. As a consequence of the new IFRS 11 and IFRS 12, IAS 28 "Investments in Associates", has been renamed IAS 28 "Investments in Associates and Joint Ventures", and describes the application of the equity method to investments in joint ventures in addition to associates.
-- Amendments to IAS 32 "Financial Instruments: Presentation" - Offsetting Financial Assets and Financial Liabilities
These amendments clarify the meaning of "currently has a legally enforceable right to set-off" and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting.
-- Amendments to IAS 36 - Recoverable Amount Disclosures for Non-financial Assets"
These amendments remove the unintended consequences of IFRS 13 "Fair Value Measurement" on the disclosures required under IAS 36 "Impairment of Assets". In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which an impairment loss has been recognised or reversed during the period.
-- Amendments to IAS 39 - Novation of Derivatives and Continuation of Hedge Accounting"
These amendments provide relief from discontinuing hedge accounting when novation of a derivative
designated as a hedging instrument meets certain criteria.
-- IFRIC 21 "Levies"
IFRIC 21 is applicable to all levies imposed by governments under legislation, other than outflows that are within the scope of other standards (e.g., IAS 12 Income Taxes) and fines or other penalties for breaches of legislation. The interpretation clarifies that an entity recognises a liability for a levy no earlier than when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, no liability is recognised before the specified minimum threshold is reached.
The new standards, interpretations and amendments described above did not have a significant impact on the financial position or performance of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
3. Segment Information
The management reporting that is used by the chief operating decision maker for making decisions about resource allocation has changed to put more emphasis on analysis of the operating results of the mining segment separately for coal and iron ore operations. As such, the mining segment has been split into two separate reportable segments. The comparative segment information has been restated accordingly.
The following tables present measures of segment profit or loss based on management accounts.
Six-month period ended 30 June 2014
US$ million Steel Coal Iron Ore Vanadium Other Eliminations Total
--------- ------- -------- -------- ------ ------------ ---------
Revenue
Sales to external
customers $ 6,216 $ 307 $ 86 $ 123 $ 98 $ - $ 6,830
Inter-segment sales 362 311 760 151 254 (1,838) -
--------- ------- -------- -------- ------ ------------ ---------
Total revenue 6,578 618 846 274 352 (1,838) 6,830
========= ======= ======== ======== ====== ============ =========
Segment result -
EBITDA $ 759 $ 110 $ 210 $ 15 $ 43 $ (62) $ 1,075
========= ======= ======== ======== ====== ============ =========
Six-month period ended 30 June 2013
US$ million Steel Coal Iron Ore Vanadium Other Eliminations Total
--------- ------- -------- -------- ------- ------------ ---------
Revenue
Sales to external
customers $ 6,641 $ 317 $ 55 $ 148 $ 100 $ - $ 7,261
Inter-segment sales 179 386 799 140 235 (1,739) -
--------- ------- -------- -------- ------- ------------ ---------
Total revenue 6,820 703 854 288 335 (1,739) 7,261
========= ======= ======== ======== ======= ============ =========
Segment result -
EBITDA $ 530 $ 67 $ 181 $ 27 $ 36 $ (34) $ 807
========= ======= ======== ======== ======= ============ =========
3. Segment Information (continued)
The following table shows a reconciliation of revenue and EBITDA used by the management for decision making and revenue and profit or loss before tax per the consolidated financial statements prepared under IFRS.
Six-month period ended 30 June 2014
US$ million Steel Coal Iron Ore Vanadium Other Eliminations Total
--------- ------- -------- -------- ------- ------------ ---------------
Revenue $ 6,578 $ 618 $ 846 $ 274 $ 352 $ (1,838) $ 6,830
Reclassifications and
other adjustments (680) 47 (187) (19) 82 732 (25)
Revenue per IFRS financial
statements $ 5,898 $ 665 $ 659 $ 255 $ 434 $ (1,106) $ 6,805
EBITDA $ 759 $ 110 $ 210 $ 15 $ 43 $ (62) $ 1,075
Exclusion of management
services from segment
result 57 4 12 2 1 - 76
Unrealised profits adjustment (41) 1 - - - 38 (2)
Reclassifications and
other adjustments (4) 17 (6) 3 8 28 46
--------- ------- -------- -------- ------- ------------ ---------------
12 22 6 5 9 66 120
--------- ------- -------- -------- ------- ------------ ---------------
EBITDA based on IFRS
financial statements $ 771 $ 132 $ 216 $ 20 $ 52 $ 4 $ 1,195
Unallocated subsidiaries (115)
---------------
$ 1,080
===============
Depreciation, depletion
and amortisation expense (228) (136) (43) (15) (11) - (433)
Impairment of assets (40) (77) (3) (25) (2) - (147)
Gain/(loss) on disposal
of property, plant and
equipment and intangible
assets (7) (13) - - (1) - (21)
Foreign exchange gains/(losses),
net (152) (14) 50 - - - (116)
--------- ------- -------- -------- ------- ------------ ---------------
344 (108) 220 (20) 38 4 363
Unallocated income/(expenses),
net (66)
---------------
Profit/(loss) from operations $ 297
Interest income/(expense),
net (287)
Share of profits/(losses)
of joint ventures and
associates 5
Gain/(loss) on derecognition
of equity investments,
net -
Gain/(loss) on financial
assets and liabilities (43)
Gain/(loss) on disposal
groups classified as
held for sale 113
Other non-operating gains/(losses),
net -
---------------
Profit/(loss) before
tax $ 85
===============
3. Segment Information (continued)
Six-month period ended 30 June 2013
US$ million Steel Coal Iron Ore Vanadium Other Eliminations Total
--------- ------- -------- -------- ------- ------------ ---------------
Revenue $ 6,820 $ 703 $ 854 $ 288 $ 335 $ (1,739) $ 7,261
Reclassifications and
other adjustments (427) 19 46 (20) 130 310 58
Revenue per IFRS financial
statements $ 6,393 $ 722 $ 900 $ 268 $ 465 $ (1,429) $ 7,319
EBITDA $ 530 $ 67 $ 181 $ 27 $ 36 $ (34) $ 807
Exclusion of management
services from segment
result 75 4 19 2 2 - 102
Unrealised profits adjustment 8 - - (1) - (27) (20)
Reclassifications and
other adjustments 38 38 31 6 23 - 136
--------- ------- -------- -------- ------- ------------ ---------------
121 42 50 7 25 (27) 218
--------- ------- -------- -------- ------- ------------ ---------------
EBITDA based on IFRS
financial statements $ 651 $ 109 $ 231 $ 34 $ 61 $ (61) $ 1,025
Unallocated subsidiaries (100)
---------------
$ 925
===============
Depreciation, depletion
and amortisation expense (294) (187) (55) (23) (17) - (576)
Impairment of assets 32 (63) 24 - - - (7)
Gain/(loss) on disposal
of property, plant and
equipment and intangible
assets (8) (6) - - 1 - (13)
Foreign exchange gains/(losses),
net (42) (40) 54 - - - (28)
--------- ------- -------- -------- ------- ------------ ---------------
339 (187) 254 11 45 (61) 301
Unallocated income/(expenses),
net (156)
---------------
Profit/(loss) from operations $ 145
Interest income/(expense),
net (357)
Share of profits/(losses)
of joint ventures and
associates 3
Gain/(loss) on derecognition
of equity investments,
net 89
Gain/(loss) on financial
assets and liabilities (71)
Gain/(loss) on disposal
groups classified as
held for sale 54
Other non-operating gains/(losses),
net (2)
---------------
Profit/(loss) before
tax $ (139)
===============
In the six-month period ended 30 June 2014, the Group made a reversal of the allowance for net realisable value in the amount of $13 million.
The material changes in property, plant and equipment during the six-month period ended 30 June 2014 other than those disclosed above are presented below:
US$ million Steel Coal Iron ore Vanadium Other Total
------- ------- -------- -------- ----- -------
Additions $ 136 $ 106 $ 46 $ 4 $ 4 $ 296
4. Sales of Ownership Interests in Subsidiaries
Sale of EVRAZ Vitkovice Steel
On 3 April 2014, the Group sold its wholly-owned subsidiary EVRAZ Vitkovice Steel to a third party for a cash consideration of $287 million on a debt free and normalised working capital basis. As of June 30 2014, $19 million of working capital deficit to be paid by the Group to the purchaser were unpaid. Transaction costs in the amount of $3 million were unpaid as of 30 June 2014.
The Group recognised a $96 million gain on the sale of the subsidiary, including $61 million of cumulative exchange gains reclassified from other comprehensive income to the consolidated statement of operations. Cash disposed with the subsidiary amounted to $20 million.
Sale of Business Units of Evrazruda
On 21 April 2014, the Group sold to third parties an iron ore mine Irbinsky Rudnik and a service entity Sheregesh-Energo located in Western Siberia. The cash consideration amounted to 20 million roubles (approximately $0.6 million).
The Group recognised a $24 million gain on the sale, including $4 million of cumulative exchange gains reclassified from other comprehensive income to the consolidated statement of operations.
5. Impairment of Non-current Assets
The summary of impairment losses recognition and reversals is presented below.
US$ million Goodwill Property, Taxes
and intangible plant and receivable Total
assets equipment
---------------- ----------- ------------ --------
EVRAZ Highveld Steel $ (15) $ (40) $ - $ (55)
Yuzhkuzbassugol - (77) - (77)
EVRAZ Nizhny Tagil
Metallurgical Plant - (13) - (13)
Others, net - (9) 7 (2)
$ (15) $ (139) $ 7 $ (147)
================ =========== ============ ========
The Group recognised impairment losses as a result of the impairment testing at the level of cash-generating units. In addition, the Group made a write-off of certain functionally obsolete items of property, plant and equipment and recorded an impairment relating to capitalised site restoration costs and taxes with a long-term recovery.
For the purpose of the impairment testing as of 30 June 2014 the Group assessed the recoverable amount of each cash-generating unit ("CGU") where indicators of impairment were identified.
The recoverable amount has been determined based on a value-in-use calculation using cash flow projections based on the actual operating results and business plans approved by management and appropriate discount rates reflecting time value of money and risks associated with respective cash-generating units. For the periods not covered by management business plans, cash flow projections have been estimated by extrapolating the respective business plans results using a zero real growth rate.
The key assumptions used by management in the value-in-use calculations with respect to the cash-generating units to which the goodwill was allocated and where indicators of impairment existed are presented in the table below.
Average Average
Period Pre-tax price price Recoverable Carrying
of discount of commodity of commodity amount amount
forecast, rate, per tonne per tonne of CGU, of CGU,
years % Commodity in 2014 in 2015 US$ million US$ million
------------ ---------- ------------- ------------- ------------- ------------- -------------
EVRAZ Palini
e Bertoli 5 14.52 steel plates $624 $655 233 192
EVRAZ Inc.
NA
cash-generating
units:
Rocky Mountain
Steel Mills seamless
- Seamless 5 13.78 pipes $1,373 $1,449 280 129
In addition, the Group determined that there were indicators of impairment in other cash generating units and tested them for impairment using the following assumptions.
Average Average
Pre-tax price price of
Period discount of commodity commodity
of forecast, rate, per tonne per tonne
years % Commodity in 2014 in 2015
-------------- ---------- -------------------- -------------- -----------
EVRAZ Dnepropetrovsk
Iron and Steel Works 5 14.83 steel products $539 $570
EVRAZ United West-Siberian
Iron & Steel Plant 5 15.04 steel products $488 $507
EVRAZ Caspian Steel 5 15.00 rebars $510 $539
steel mill
EVRAZ Yuzhny Stan 5 14.07 under construction $572 $604
EVRAZ Bagleykoks 5 14.35 coke $190 $209
Yuzhkuzbassugol 17 13.03 coal $73 $80
Raspadskaya 22 13.53 coal $55 $63
EVRAZ Highveld Steel 5 13.26 steel products $711 $748
Discount Rates
Discount rates reflect the current market assessment of the risks specific to each cash-generating unit. The discount rates have been determined using the Capital Asset Pricing Model and analysis of industry peers.Reasonably possible changes in discount rates could lead to an impairment at EVRAZ United West-Siberian Iron & Steel Plant, EVRAZ Yuzhny Stan and EVRAZ Highveld Steel cash-generating units. If the discount rates were 10% higher, this would lead to an additional impairment of $139 million.
Sales Prices
The prices of the products sold by the Group were estimated using industry research. The Group expects that the nominal prices will grow with a compound annual growth rate of 0%-10% in 2014 - 2018 and 3.0% in 2019 and thereafter. Reasonably possible changes in sales pricescould lead to an additional impairment at EVRAZ United West-Siberian Iron & Steel Plant and EVRAZ Highveld Steel cash-generating units. If the prices assumed for the 2(nd) half of 2014 and 2015 were 10% lower, this would lead to an impairment of $261 million.
Sales Volumes
Management assumed that the sales volumes of steel products would increase by 2.6% in 2015 and would grow evenly during the following four years to reach normal asset capacity utilisation thereafter. Reasonably possible changes in sales volumes could lead to an additional impairment at EVRAZ United West-Siberian Iron & Steel Plant and EVRAZ Highveld Steel. If the sales volumes were 10% lower than those assumed for the 2(nd) half of 2014 and 2015, this would lead to an impairment of $72 million.
Cost Control Measures
The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonably possible deviation of cost from these plans could lead to an additional impairment at EVRAZ United West-Siberian Iron & Steel Plant and EVRAZ Highveld Steel cash-generating units. If the actual costs were 10% higher than those assumed for the 2(nd) half of 2014 and 2015, this would lead to an impairment of $566 million.
The unit's recoverable amount would become equal to its carrying amount if the assumptions used to measure the recoverable amount changed as follows:
Discount Sales Sales Cost control
rates prices volumes measures
--------- -------- --------- -------------
EVRAZ United West-Siberian
Iron & Steel Plant 1.9% (0.8)% (3.7)% 0.6%
EVRAZ Yuzhny Stan 6.0% - - -
6. Income Taxes
Major components of income tax expense were as follows:
Six-month period
ended 30 June
US$ million 2014 2013
--------- --------
Current income tax expense $ (128) $ (149)
Adjustment in respect of income tax of
previous years (15) 2
Deferred income tax benefit relating to
changes in tax rates 6 -
Deferred income tax benefit relating to
origination and reversal of temporary
differences 53 140
Income tax expense reported in the consolidated
statement of operations $ (84) $ (7)
========= ========
7. Property, Plant and Equipment
The movement in property, plant and equipment for the six-month period ended 30 June 2014 was as follows:
Buildings Transport Assets
and Machinery and motor Mining Other under
US$ million Land constructions and equipment vehicles assets assets construction Total
------ ---------------- -------------- ---------- ------- ------- ---------------- ---------
At 31 December
2013,
cost, net of
accumulated
depreciation
(as
reported) $ 156 $ 1,554 $ 3,667 $ 187 $ 2,679 $ 22 $ 986 $ 9,251
Cessation of
classification
of a subsidiary
as
held for sale 1 6 100 2 17 4 6 136
------ ---------------- -------------- ---------- ------- ------- ---------------- ---------
At 31 December
2013,
cost, net of
accumulated
depreciation
(as
restated) 157 1,560 3,767 189 2,696 26 992 9,387
Additions - - 1 - 28 - 267 296
Assets put into
operation - 31 112 14 77 2 (236) -
Disposals (1) (2) (14) (2) (3) - (3) (25)
Depreciation and
depletion
charge - (58) (251) (22) (72) (3) - (406)
Impairment
losses
recognised in
statement
of operations - (7) (52) - (79) - (4) (142)
Impairment
losses
reversed
through
statement of
operations - 1 1 - - - 1 3
Transfer to
assets
held for sale - (3) (3) - - - - (6)
Change in site
restoration
and
decommissioning
provision - 1 - - 74 - 5 80
Translation
difference (2) (67) (136) (10) (150) (2) (48) (415)
------ ---------------- -------------- ---------- ------- ------- ---------------- ---------
At 30 June 2014,
cost, net of
accumulated
depreciation $ 154 $ 1,456 $ 3,425 $ 169 $ 2,571 $ 23 $ 974 $ 8,772
====== ================ ============== ========== ======= ======= ================ =========
On 1 January 2014, the Group changed its estimation of useful lives of property, plant and equipment, which resulted in a $31 million decrease in depreciation expense as compared to the amounts that would have been charged had no change in estimate occurred.
8. Investments in Joint Ventures and Associates
The movement in investments in joint ventures and associates during the six-month period ended 30 June 2014 was as follows:
US$ million Timir Streamcore Other associates Total
------- ---------- ---------------- -------
At 31 December 2013 $ 141 $ 40 $ 10 $ 191
Share of profit/(loss) (1) 5 1 5
Translation difference (4) (1) - (5)
------- ---------- ---------------- -------
At 30 June 2014 $ 136 $ 44 $ 11 $ 191
======= ========== ================ =======
9. Related Party Disclosures
For the Group related parties include associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Group's ultimate parent or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Amounts owed by/to related parties were as follows:
Amounts due from Amounts due to
related parties related parties
---------------------- ----------------------
30 June 31 December 30 June 31 December
US$ million 2014 2013 2014 2013
-------- ------------ -------- ------------
Vtorresource-Pererabotka $ 6 $ 4 $ 14 $ 13
Yuzhny GOK 5 5 127 336
Liability to management
of Raspadskaya for the
acquisition of Corber - - - 102
Other entities 14 7 8 7
25 16 149 458
Less: allowance for doubtful
accounts (3) (3) - -
-------- ------------ -------- ------------
$ 22 $ 13 $ 149 $ 458
======== ============ ======== ============
In the first half of 2014, Ukrainian hryvnia has depreciated against US dollar by 48%. As a result, the Group recognised a $85 million foreign exchange loss on the balances and transactions with Yuzhny GOK.
Transactions with related parties were as follows for the six-month periods ended 30 June:
Sales to Purchases from
related parties related parties
-------------------
US$ million 2014 2013 2014 2013
--------- -------- --------- --------
Genalta Recycling Inc. $ - $ - $ 11 $ 11
Interlock Security Services - - 22 27
Raspadsky Ugol - - - 5
Vtorresource-Pererabotka 10 7 229 205
Yuzhny GOK 25 34 142 71
Other entities 2 5 16 20
--------- -------- --------- --------
$ 37 $ 46 $ 420 $ 339
========= ======== ========= ========
On 1 April 2014, the Group received a non-interest bearing loan of 2,935 million Ukrainian hryvnias ($267 million at the exchange rate as of the date of disbursement) from Standart IP, an entity under control of one of the major shareholders. The proceeds were used for the purposes of short-term liquidity management for a Ukrainian subsidiary. The loan was fully repaid in several installments by 10 April 2014.
Compensation to Key Management Personnel
In the six-month periods ended 30 June 2014 and 2013, key management personnel totalled 51 and 57 persons, respectively. Total compensation to key management personnel was included in general and administrative expenses and consisted of the following in the six-month periods ended 30 June:
US$ million 2014 2013
----- -----
Salary $ 12 $ 13
Performance bonuses 14 -
Social security taxes 3 2
Share-based payments 7 5
Termination benefits 1 -
$ 37 $ 20
===== =====
10. Cash and Cash Equivalents
Cash and cash equivalents were denominated in the following currencies:
30 June 31 December
US$ million 2014 2013
---------- ------------
US dollar $ 937 $ 1,300
Russian rouble 269 195
Ukrainian hryvnia 79 17
Euro 7 9
South African rand 36 32
Canadian dollar 24 50
Other 1 1
---------- ------------
$ 1,353 $ 1,604
========== ============
The above cash and cash equivalents mainly consist of cash at banks.
At 30 June 2014 and 31 December 2013, the assets of disposal groups classified as held for sale included cash amounting to $Nil and $7 million, respectively.
11. Equity
Share Capital
30 June 31 December
Number of shares 2014 2013
-------------- --------------
Issued and fully paid
Ordinary shares of $1 each 1,506,527,294 1,472,582,366
Share Issue
On 27 January 2014, EVRAZ plc issued 33,944,928 shares in connection with the exercise of the warrants included in the purchase consideration for Raspadskaya.
Treasury Shares
30 June 31 December
Number of shares 2014 2013
-------- ------------
Number of treasury shares 303,370 302,717
In 2014, the Group purchased 7,252,575 shares of EVRAZ plc for $13 million and transferred 7,251,922 shares to participants of Incentive Plans. The cost of treasury shares transferred to the participants of Incentive Plans, amounting to $13 million, was charged to accumulated profits.
Earnings per Share
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares.
The following reflects the profit/(loss) and share data used in the basic and diluted earnings per share computations:
Six-month period
ended 30 June
----------------------------------------------
2014 2013
Weighted average number of ordinary shares outstanding during the
period 1,505,402,864 1,492,577,321
Effect of dilution: share options 25,615,845 -
---------------- ----------------------------
Weighted average number of ordinary shares adjusted for the effect of
dilution 1,531,018,709 1,492,577,321
Profit/(loss) for the period attributable to equity holders of the
parent entity, US$ million $ 38 $ (131)
Basic earnings/(losses) per share $ 0.03 $ (0.09)
Diluted earnings/(losses) per share $ 0.02 $ (0.09)
The warrants issued in connection with the acquisition of a controlling interest in Corber are included in the calculation of basic earnings per share starting from the date of their issue.
As the Group reported net losses in the six-month period ended 30 June 2013, the share-based awards were antidilutive.
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these consolidated financial statements.
Dividends
On 8 April 2014, the Board of directors of EVRAZ plc proposed to declare special dividends in the amount of $90.4 million, which represent $0.06 per share. On 12 June 2014, the Annual Shareholders Meeting approved the payment of these dividends out of the sale proceeds for EVRAZ Vitkovice Steel (Note 4). The dividends were paid in July 2014.
12. Loans and Borrowings
Short-term and long-term loans and borrowings were as follows:
30 June 31 December
US$ million 2014 2013
---------- ------------
Bank loans $ 1,530 $ 2,065
8.25 per cent notes due 2015 577 577
7.40 per cent notes due 2017 600 600
9.5 per cent notes due 2018 509 509
6.75 per cent notes due 2018 850 850
6.50 per cent notes due 2020 1,000 1,000
13.5 per cent bonds due 2014 528 611
8.75 per cent bonds due 2015 116 119
9.95 per cent bonds due 2015 446 458
8.40 per cent bonds due 2016 595 611
Liabilities under 7.75 per cent bonds
due 2017 assumed in business combination 400 400
Fair value adjustment to liabilities
assumed in business combination 24 27
Other liabilities 4 8
Unamortised debt issue costs (64) (68)
Interest payable 89 90
---------- ------------
$ 7,204 $ 7,857
========== ============
At 30 June 2014 and 31 December 2013, the liabilities of disposal groups classified as held for sale included bank loans amounting to $Nil and $76 million, respectively.
Some of the loan agreements and terms and conditions of notes provide for certain covenants in respect of Evraz Group S.A. and its subsidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios, including restrictions in respect of indebtedness and profitability.
Pledged Assets
The Group pledged its rights under some export contracts as collateral under the loan agreements. All proceeds from sales of steel pursuant to these contracts can be used to satisfy the obligations under the loan agreements in the event of a default.
At 30 June 2014 and 31 December 2013, the Group had inventory with a carrying value of $51 million and $63 million, respectively, pledged as collateral under the loan agreements.
At 30 June 2014, 100% shares of Mezhegeyugol and EVRAZ Caspian Steel were pledged as collateral under bank loans with a carrying value of $174 million. These subsidiaries represented 1.7% of the consolidated assets at 30 June 2014 and did not generate revenues in the reporting period.
Partial Repurchase of the 13.5% Bonds Due 16 October 2014
In April 2014, the Group re-purchased bonds for a nominal amount totalling 2,258 million roubles ($64 million at the exchange rates as of the dates of the transactions). There was no gain or loss on the transaction.
Unutilised Borrowing Facilities
As of 30 June 2014, the Group had unutilised bank loans in the amount of $1,987 million, including $395 million of committed facilities.
13. Commitments and Contingencies
Operating Environment of the Group
The Group is one of the largest vertically integrated steel producers globally and the largest steel producer in Russia. The Group's major subsidiaries are located in Russia, Ukraine, the European Union, the USA, Canada and the Republic of South Africa. Russia, Ukraine and the Republic of South Africa are considered to be developing markets with higher economic and political risks. Steel consumption is affected by the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions.
The global economic recession resulted in a significantly lower demand for steel products and decreased profitability.In addition, the political crisis over Ukraine led to an additional uncertainty in the global economy. The unrest in the Southeastern region of Ukraine and the economic sanctions imposed on Russia caused the depreciation of national currencies, economic slowdown, deterioration of liquidity in the banking sector, and tighter credit conditions within Russia and Ukraine. If the Ukrainian crisis broadens and further sanctions are imposed on Russia, this could have an adverse impact on the Group's business.
The global economic climate continues to be unstable and this may negatively affect the Group's results and financial position in a manner not currently determinable.
Taxation
Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities.
Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on management's best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities which were identified by management at the end of the reporting period as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in these financial statements could be up to approximately $39 million.
Contractual Commitments
At 30 June 2014, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $269 million.
In 2010, the Group concluded an agreement for the supply of oxygen, nitrogen and argon by a third party for a period of 20 years. The contractual price comprises a fixed component and a variable component. The total amount of the fixed component approximates 256 million euro. The agreement is within the scope of IFRIC 4 "Determining whether an Arrangement Contains a Lease". At 30 June 2014, the lease had not commenced.
Social Commitments
The Group is involved in a number of social programmes aimed to support education, healthcare and social infrastructure development in towns where the Group's assets are located. The Group budgeted to spend approximately $70 million under these programmes in the second half of 2014.
Environmental Protection
In the course of the Group's operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Management believes that any pending environmental claims or proceedings will not have a material adverse effect on its financial position and results of operations.
In addition, the Group has committed to various environmental protection programmes covering periods from 2014 to 2022, under which the Group will perform works aimed at reductions in environmental pollution and contamination. As of 30 June 2014, the costs of implementing these programmes are estimated at $225 million.
Legal Proceedings
The Group has been and continues to be the subject of legal proceedings, none of which has had, individually or in aggregate, a significant effect on the Group's operations or financial position.
14. Fair Value of Financial Instruments
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
-- Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
-- Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs).
The carrying amounts of financial instruments, such as cash, short-term and long-term investments, short-term accounts receivable and payable, short-term loans receivable and payable and promissory notes, approximate their fair value.
The Group held the following financial instruments measured at fair value:
30 June 2014 31 December 2013
---------------------- ----------------------
Level Level Level Level Level Level
US$ million 1 2 3 1 2 3
------ ------ ------ ------ ------ ------
Assets measured at fair value
Available-for-sale financial
assets 21 - - 30 - -
Liabilities measured at fair
value
Derivatives not designated
as hedging instruments - 294 - - 219 -
Contingent consideration payable
for the acquisition of Stratcor - - 8 - - 8
The following table shows fair values of the Group's bonds and notes.
US$ million 30 June 2014 31 December 2013
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
8.25 per cent notes due 2015 $ 573 $ 611 $ 569 $ 621
7.40 per cent notes due 2017 605 629 605 634
9.5 per cent notes due 2018 506 559 505 568
6.75 per cent notes due 2018 856 851 855 858
6.50 per cent notes due 2020 1,007 947 1,007 951
13.5 per cent bonds due 2014 542 546 627 645
8.75 per cent bonds due 2015 118 115 122 121
9.95 per cent bonds due 2015 453 438 466 464
8.40 per cent bonds due 2016 597 549 614 592
Liabilities under 7.75 per
cent bonds due 2017 assumed
in business combination 428 405 431 417
$ 5,685 $ 5,650 $ 5,801 $ 5,871
========= ======== ========= ========
The fair value of the non-convertible bonds and notes was determined based on market quotations (Level 1).
15. Subsequent Events
Borrowings
In August 2014, the Group received a $425 million 5-year loan from a syndicate of international banks. The interest is set at a rate of LIBOR plus a margin ranging from 2.75% to 4% per annum depending on the net leverage ratio. The loan is payable in equal quarterly instalments starting from August 2016 with a final instalment on 12 August 2019.
Sale of a Non-controlling Interest
On 12 August 2014, the Group signed an agreement to sell 34% in EVRAZ Highveld Steel and Vanadium Limited for approximately $27 million. It is expected that the transaction will be completed in September 2014.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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