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Ladies and gentlemen, I would like to welcome you all to EVRAZ Q1 2020 Trading Update Management Call. My name is Brika, and I'll be today's call operator. [Operator Instructions]And now I would like to hand over to our host for today's call, Irina Bakhturina, the IR Director, to begin today's conference call. So Irina, please go ahead.
Good evening, ladies and gentlemen. Thank you very much for joining us this evening. I would like to welcome you all to our conference call, which is dedicated to our production and sales results in the first quarter of 2020.Today, we have a group of speakers, first of them is Aleksey Ivanov, who is the Senior Vice President in Commerce and Business Development. We have Alexander Erenburg, Head of Vanadium Division; Sergey Stepanov, Head of Coal Division; and Alexander Vasiliev, who is Chief Financial Officer for EVRAZ North America. We also have a presentation, which is uploaded on our website, please have a look. We will use it during our discussion today.With this, I will pass the floor to Aleksey Ivanov for his part of the presentation. Aleksey, please. Thank you.
Thank you, Irina. Good afternoon, ladies and gentlemen. We had an overall positive first quarter, which was generally in line with our expectations. The consolidated crude steel output went up by 3.2% quarter-on-quarter and reached 3.6 million tonnes. Output rose mainly due to completion of capital repairs at EVRAZ NTMK converter number 2, which took place in the fourth quarter 2019.Sales of semi-finished products demonstrated 15.3% decline quarter-on-quarter on the back of higher than usual sales volumes from Russia at fourth quarter last year on the back of good export market opportunities. Sales of finished products went down by 6.1% due to the seasonal decline in demand in the first quarter of this year as well as due to the sale of Palini & Bertoli in 2019. In addition, sales were impacted by lower tubular product sales due to a lack of line pipe products and deterioration of OCTG market demand in North America. Production of raw coking coal decreased by 4.8% quarter-on-quarter, driven by weaker demand for coal on global market and lower production following the longwall move at the Uskovskaya mine. Production at Mezhegeyugol has been suspended until favorable market conditions are restored. External sales volumes of coking coal products surged by 30.4% quarter-on-quarter due to successfully completed task to maximize product shipments as well as higher sales volumes to China. Vanadium product sales had a 9.9% decline due to the weaker demand for ferrovanadium in Europe amid lower demand in the automotive industry. Lower sales to Europe was partially compensated by increased ferrovanadium and oxide sales to Asia and Russia.Moving to the Slide #6, just a few words on the market. Iron ore prices held steady at the average level of $90 per tonne in the first quarter 2020 as the COVID-19 outbreak reduced Chinese and other countries iron ore production. Also supplies from Australia and Brazil were negatively affected by weather disruptions. Coking coal prices stayed firm in first quarter 2020 at the average level of 150 tonnes -- $150 per tonne, also supported by supply disruption, reduced production in China amid COVID-19, bad weather conditions in Australia and Mongolian coal exports ban into China.As for the steel, despite prices for slabs averaged at $425 per tonne in quarter 9 -- in the first quarter 2020, weakening demand amid the spreading effect of the coronavirus adds pressure to steel prices.Now let's move to the Slide #7. A few words about our cash cost dynamics. Our cash cost of slabs decreased by 8% quarter-on-quarter, primarily due to lower prices of raw materials. Iron ore cash cost decreased by 19% quarter-on-quarter, driven mainly by a lower fixed cost due to repair works, higher production volumes and ruble depreciation. Coking coal cash cost decreased by 19 -- 11% quarter-on-quarter, mainly due to the lower production at the Raspadsky open pit and open pit side of Raspadskaya-Koksovaya mine. These open pits have a quite high cash cost comparing to the Raspadsky mine, which means the decrease of production at open pit have impacted positively on average cash cost figure. Now I suggest to move to the next chapter, Slide 9, where you can see the overview of the first quarter production results of our steel segment. Pig iron output at our Russian mills went up by 2.3% quarter-on-quarter with a 5.2% increase in production volumes at EVRAZ NTMK following resumption of operation at blast furnace number 5. Crude steel output rose by 3.8% quarter-on-quarter, mainly due to completion of capital repairs at EVRAZ NTMK's converter number 2. Iron ore products output went up by almost 10% quarter-on-quarter, mainly due to completion of capital repairs of roasting machine number 1.Turning your attention to the next slide, #10, just a few comments on steel segment sales. Semi-finished product sales urged down by 15.9% quarter-on-quarter, driven by higher than usual sales volumes from Russia at fourth quarter 2019 on the back of good export market conditions. Sales of finished goods -- finished products dropped by 3.9% quarter-on-quarter due to the seasonal decline in demand in the first quarter of the year in Russia and sales of Palini & Bertoli. Sales of iron ore products surged by 30% quarter-on-quarter most of that -- as most of the fourth quarter of the last year sales volumes were actually delivered in the first quarter 2020 due to logistical limitation on shipments to China.Now I will pass to Alexander Erenburg, who will update you on our Vanadium business.
Thank you, Aleksey. I won't hold the call for too long because vanadium was partially covered by Aleksey. So first quarter of 2020 was very favorable for us due to our efforts in terms of vanadium production slag. The first quarter -- in first quarter, we saw almost 7% increase in slag production. It was due to our continuous efforts of increasing the efficiency of our throughput chain, starting from iron ore, increasing the content of vanadium in iron ore, then like improving our blast furnace process, et cetera, et cetera. So in the end, by increasing the vanadium content, increasing the share of duplex process in converter shops, we managed to increase quite substantially slag production by average in first quarter 2020.However, the first, the sales of final vanadium products saw the decrease versus fourth quarter 2019, which is, in general, a natural pattern, seasonal pattern, which we observed, usually the first quarter is smaller in sales. It reflects also the Chinese New Year. This year, we might speculate that the COVID virus outburst might affect it as well. However, we attribute that decrease mostly to the decreased production in automotive sector in Europe. Russian consumption and Chinese consumption, Asian consumption in general of vanadium products, including oxide and ferrovanadium, was pretty strong. Now in second quarter, we believe it will be even stronger. However, European market is still under depress of the COVID outburst and, general, not very positive sentiment of the industry development.That's probably it. I would pass the word to Sergey Stepanov, Head of our Coal division, now.
Thank you, Alexander. So first quarter for the coal business was relatively good. The major good factor was increase of our sales by 30% comparing to the fourth quarter. So this was majorly due to railway successful transportation. We had -- in the fourth quarter last year, we had quite tough limitations due to high competition for taking coal to the East. And the first quarter was much better because in the energy coal market, there was already decline. While in our segment, in coking coal, there was still quite strong prices. However, the competition for railway infrastructure was slightly lower. So our sales has grown up 30%. That allowed us to increase coking coal concentrate production, the product production by 7% using our stocks. And as Aleksey Ivanov mentioned, we produced slightly less of raw coking coal because we have accumulated -- by the end of the last year, we have accumulated quite substantial reserves. So we decided to put some constraints for our raw coal production to keep our results of raw coking coal in the normal limits. However, we still managed to increase our concentrate production and sell some reserves of concentrate from the stockpile, so that was the first quarter.In the second quarter, I think there are 2 factors. On the one hand, railway limitations are also less than in fourth quarter, so it's quite favorable environment for transporting to the East. However, 2 other factors started to enter the situation; number one is price decline, and number two is some demand decline in volumes. So we hope to overcome the volume part, but the price, you see the spot prices in the market, prices started to go down in the second quarter. The only good factor about all the situation probably regarding the prices and our cost per tonne and the total economy is exchange rate, which became more favorable to us in March, and it still allows us to sell all our coal at profit so far. So we are trying to understand how situation will develop. And hope that this COVID-19 situation will start to resolve step by step in June, which will allow us to pass this period without substantial losses or something.So at this point, I would like to pass the word to Alexander Vasiliev, our CFO of EVRAZ North America.
Thank you, Sergey, and hello, everyone. In the first quarter, the North American division faced a number of challenges; 2 key ones were declines in oil and gas market and also a cyberattack that we experienced in March. And so our crude steel production was relatively flat quarter-over-quarter with an increase in Pueblo, Colorado facility by approximately 18%, and that was offset by a similar decrease in Regina, Saskatchewan, which was driven, as I said, by a cyberattack. In order to minimize the impact of this event, we moved our annual outage in this facility from April to March. But as a result, we lost roughly 3.5 weeks of production in that month.Our production of steel products went down by 4.7%, and the main driver there was against cyberattack that we faced in March. As far as sales are concerned, tubular product sales went down due to weaker demand for OCTG and line pipe products, as previously mentioned, and the timing of shipments of the large-diameter pipe. Sales of railway products went down by approximately 10% as a result of some reduction in demand that we started seeing. And sales of construction products on the opposite increased by approximately 20%, driven by growth and seasonal activity after traditionally slow fourth quarter. Sales of flat products decreased by 7%, mainly in Canada. This, as I mentioned before, was mainly driven by cyberattack, and there is -- that's basically our sense.With that, I will turn it over back to Aleksey.
Thank you, Alexander. Now ladies and gentlemen, I'd like to talk about the outlook for the second quarter of 2020.Let's turn to Slide 19. For Steel segment, we expect that the COVID-19 pandemic does not significantly affect the production of pig iron and steel in Russia. However, it could possibly affect the rolling mills utilization amid expected decrease in demand on the domestic market. Pig iron production will decrease quarter-on-quarter following capital repairs of blast furnace number 2 in May 2020, the gas pause in June at EVRAZ ZSMK and capital repairs of blast furnace number 7 in May at EVRAZ NTMK. Iron ore pellet production are expected to be slightly lower quarter-on-quarter, mainly due to capital repairs at the pelletizing plant and reduced sinter production due to capital repair of EVRAZ KGOK's sinter plant in May.For Steel North America segment, we expect that steel production in Canada to be roughly flat quarter-on-quarter due to the ongoing outage in April and reduced OCTG demand amid the COVID-19 pandemic and the collapse in oil and gas prices. Canadian tubular sales volumes are expected to increase slightly, driven by higher recognition of current large-diameter pipe orders due to the timing of pipe coating and delivery.For coal segment, we expect that raw coal production will decrease quarter-on-quarter due to longwall repositioning at the Raspadskaya-Koksovaya, Uskovskaya mines and reduced output at the Raspadsky open pit as well as due to the reserve depletion at one of the longwalls at Raspadskaya mine. The decline will be partially offset by the completion of longwall move at the Erunakovskaya mine.With that, that's the end of our presentation, and I believe we are ready to switch to Q&A. Thank you.
[Operator Instructions] The first question we have from the phone lines comes from Boris Sinitsyn from VTB Capital.
It's Boris Sinitsyn from VTB capital. Probably 2 questions from my side, please. Firstly, obviously, the market conditions has worsened and you're assessing your plans for this year. So how do you look at your current CapEx guidance, midterm one of roughly $1 billion per annum? What portion of your projects might be postponed or delayed? And how would capital expenditures for 2020 look like? This is the first question, please.
Thank you, Boris for the question. I will ask -- I'll take it. So certainly, the market condition will be more complex this year. And as we discussed and announced during our Investor Day last October, the CapEx of our development stage is quite flexible. So we currently assess prioritization of these projects, and they are certainly at different stages. No one of them, we believe, are kind of nonstrategical, but certainly, we will not be able to allow to go full speed as we assumed before. So I think the fair guidance we can give you that CapEx will be low by 20%, at least. And we certainly will observe situation further in order to adjust accordingly to the market condition.
Okay. Fair enough. Next question is on your -- the balance between financial leverage and dividends. You have a target of keeping net debt below $4 billion and keeping net debt-to-EBITDA below 2x throughout the cycle. In terms of net debt-to-EBITDA, may I ask if it's the hard ceiling for you, so should we expect that in any case, you would keep it below 2x? Or there might be some situations it is above the threshold?
Boris, this is Irina. I will take your questions. With regards to debt, we are committed, actually, if you look at our dividend policy, to keeping it below 3, so that we can pay dividends. And that's like a high level plan. We are -- of course, our target is 2 and below 2. Currently, it's hard to say where we would be by the end of the first half, but I'm pretty sure that we will be below 2 still. So if this question is connected to the dividend payment, I can answer that. So currently, the plan is to stick to the dividend policy that we've announced previously, and that's $300 million semiannual installments. So the only thing I can say now is that we are committed to paying $150 million if we are below 3 in terms of net debt-to-EBITDA. All other decisions will be made by the Board, and that would be just before the financial results that we will announce in August. And that's basically all I can say about that.
Yes. But just a follow-up on the net debt-to-EBITDA, if I hear you correct, so the 3x net debt-to-EBITDA, is it the hard ceiling and 2x kind of soft ceiling?
Yes.
[Operator Instructions] And we now have a question from Anna Antonova from JPMorgan.
Just a quick question on your Coal division. So you have temporarily suspended Mezhegeyugol operations until market conditions improve. The question here is, would you consider temporarily decreasing capacity utilization at your other mines throughout this year, if market conditions do not improve? And a second question on the same topic is, what kind of price recovery would allow you to restart Mezhegey?
Yes. So regarding the first question on the kind of slowdown on the other coal assets, I think Aleksey Ivanov has already mentioned that we put some constraint on one of our open pit operations. So the major -- there is one category of the coal, which is semi-soft high fluidity, which will produce some huge amount, and these categories seem to be in surplus now on the market. So postpone -- so we cut the production on the open pit, which produced this particular coal. We -- fortunately, we have this longwall changeover, a lot of them in April, May and partly in June, which majorly decreases our production of this coal. And we are looking forward to see situations in June and July because we believe that our production and our demand, our sales will be in balance, definitely will be in balance majorly in April, May and June, mainly due to this kind of production plan, which we have. So the question would be July. And we need to understand beginning of June, I think we need to understand how situation will develop volume wise and price wise as well. So I think in 1 month, we will decide if we need to continue these limitations for output of this particular call. All other grades look -- source of coal looks to be fine. So but this particular call could force us to continue limitation on the open pit and probably to limit some other operations.Regarding Mezhegey coal, the major thing was not the price when we decided to stop it, but it was volumes because like Raspadskaya during last 2 years increased production in all assets. And in fourth quarter, as you remember last year, there was limitations for railway transportation, and we couldn't transfer, I think, like 20% of coal, which we would like to transport to the East. And we decided to stop one operation because just we accumulated quite substantial reserves. So now we're decreasing these reserves, first a couple of quarters, but I think Mezhegey is a question of both total demand in tonnes on the market, our capacity to transport this coal to the East and prices as well. So I think first operation to start would be to launch all our longwalls in Kuzbass underground, this is number one, possibility to increase production; number two, open pit in Kuzbass and only stage number 3 would be Mezhegey. So I would maybe return to this question in 3 months because for now, it looks that Kuzbass sources are kind of easy, cheaper and more logical to start with. So this is all I wanted to say about. If I covered your question, this is good; if not, so please ask again.
All clear. Thank you.
[Operator Instructions] We have had no questions registered at this time. So I'll hand back over to you.
Yes, if there are no further questions, I would like to thank all our participants on EVRAZ side and on the telephone side. Thank you all very much, and stay safe. Bye.
Thank you. Bye-bye.
Thank you. Bye-bye.
Thank you. Bye.
Thank you. Bye.
Ladies and gentlemen, that does conclude today's call. Thank you again for joining. You may now disconnect your lines.