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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Q3 2020 Trading Update Conference Call. Today's call will be recorded.And at this time, I'd like to turn the conference over to Irina Bakhturina. Please go ahead, ma'am.
Thank you very much, Catherine. Good afternoon, ladies and gentlemen. My name is Irina Bakhturina, and I'm Head of Investor Relations for EVRAZ. I would like to welcome you to our management call, which is dedicated to the Q3 trading update.We will have 3 speakers today. Alexey Ivanov will guide you through highlights and will discuss the Steel segment; Evgeny Terekhov will cover the Coal segment; and Olesya Afanasyeva, the interim CFO for EVRAZ North America, will talk about the development in North America. After -- we have actually uploaded the presentation on our website. I'm sure you all had a look at it. We will go through this presentation during this call.I think we are ready to start. At the end of the presentation, we will give you time for questions and answers. They will be additionally announced. So now I pass the word to Aleksey. Aleksey, please go ahead.
Good afternoon, ladies and gentlemen. We had rather positive third quarter, which was generally in line with our expectations. The consolidated crude steel output fell by 4.4% quarter-on-quarter, mainly due to the planned shutdown of bast furnace number 5 and the launch of number 6 after the completion of major overhaul at EVRAZ NTMK.Sales of semi-finished products fell by 24.9% following the increase of sales of finished goods to the Russian market. Sales of finished products increased by 5.6% amid better market condition in Russia and improved product mix.Production of raw coking coal went up by 14.6%, driven by the completion of longwall moves at the Alardinskaya and Esaulskaya mines in quarter 2.Production at the Raspadsky open pit remained suspended during the reporting period due to the unfavorable market conditions. Operations were resumed in October 2020 amid dwindling stockpiles and rising prices for coal products.External sales volumes of coking coal products climbed by 23.6% quarter-on-quarter following an improvement in market conditions. External sales of iron ore products grew by 9% quarter-on-quarter due to higher shipments to export market in quarter #3 2020.Vanadium product sales rose by 13.4% quarter-on-quarter, mainly due to increased steel utilization rates and slightly recovery of the automotive industry. The regional sales and product mix was also changed due to serve the more active Chinese oxide market.Moving to the Slide #6. We have a few words on the market. Global steel markets weathered the storm and are now experiencing a gradual recovery, largely fueled by robust demand in China. Iron ore prices continued to rise, which together with better-than-expected steel demand has led to a surge in steel prices. Coking coal prices started to recover mainly supported by healthy steel demand, especially restocking from China and India and partially by supply concerns.Let's move to the Slide #7, a few words about our cash growth dynamics. Our cash cost of slabs remained almost unchanged. The same is with our iron ore cash cost, which remained flat quarter-on-quarter. Coking coal cash cost declined quarter-on-quarter, mainly due to higher production volumes.Now let's turn to Slide #9, where you can see the overview of third quarter production results of our Steel segment. Pig iron output at our Russian mills fell by 3.8% quarter-on-quarter, mainly due to the planned shutdown of blast furnace number 5 and launch of the blast furnace number 6 at EVRAZ NTMK after completion of the major overhaul. Crude steel output decreased by 3.3% quarter-on-quarter, primarily due to lower pig iron availability. Iron ore products output went up almost 1.4% quarter-on-quarter, mainly due to an increase in primary concentrate production volumes at EVRAZ ZSMK mining operations. This was partially offset by scheduled capital repairs at EVRAZ Kachkanarsky GOK sinter plant in July-August 2020.Turning your attention to the next Slide #10, just a few comments on Steel segment sales. Semi-finished product sales went down by 21.6% quarter-on-quarter following the increase of sales of finished goods to the Russian market. Sales of finished products rose by 11.4% quarter-on-quarter due to the better market conditions in Russia and improved product mix. Sales of iron ore products surged by 9% quarter-on-quarter amid higher shipments to export market in quarter #3.Now I'd like to say a few words about our vanadium investment. Let's move to the next slide, 11. Ferrovanadium prices remained at an average level of $24 per kg of vanadium in quarter #3 despite slight demand recovery. Sales of vanadium products grew by 13.4% quarter-on-quarter due to primarily increased steel utilization rates and a slight recovery in the automotive industry. The regional sales and product mix was also changed due to serve the more active Chinese oxide market. Production of vanadium slightly declined quarter-on-quarter following lower steel availability.Now I'd like to pass over to Evgeny Terekhov, who will speak about Coal Division results.
Hello, ladies and gentlemen, let me give some information on Coal business and our performance in the third quarter. As Alexey already said in third quarter, we -- the production of raw coking coal grew by 14.6% quarter-on-quarter basis and it's related to some completion of longwall moves and just internal issues. We produced more than in the second quarter, but production is still on a low level due to the suspension of production at Raspadsky open pit due to very bad market conditions.Relating to coking coal concentrate, the production of coking coal concentrate rose by 2.2%. It's like the same amount as the previous quarter.If we go to the Slide #14, what I can say about sales. External sales increased by 26 -- 23.6% quarter-on-quarter basis due to improved market conditions. Our main customers in Japan and Korea increased production of crude steel after a very bad second quarter and we managed to sell additional amount to compensate that low levels of the second quarter.And I think that's all. You can ask your questions later. And I pass -- Olesya, please continue on North American business, please.
Thank you, Evgeny. Good morning, and good afternoon, everyone, depending on where you're joining us from today. I would like to invite you to slide -- to open Slide 16 of the presentation for the review of the North American results.In Q3 in North America, our crude steel production was 13.3% lower than in the second quarter of the year. This decline was primarily attributable to continued depressed demand across North American steel markets, driven by the slow economic recovery during the COVID pandemic and remaining energy markets uncertainty.In this environment, sales of our tubular products dropped by 34.4% quarter-over-quarter, as our OCTG mills in Canada and in the U.S. remained idled. At the same time, however, line pipe production continued to be stable with both large and small diameter mills producing to current orders. Meanwhile, our railway product sales decreased by 15% due to the typical seasonal slowdown of purchases from Class 1 railroads and the planned maintenance outage we had in September.As far as construction products are concerned, sales decreased by 10.1% compared to the second quarter of the year. Here, the decline was mostly due to maintenance downtime in July and August.On the other hand, in the flat-rolled products segment, we saw a positive trend quarter-over-quarter. Our sales volumes spiked 44.9%, recovering from the historically low levels in the second quarter. This improvement was driven by service tier customers, including purchases as they started to replenish their levels of inventory, which dropped to historical lows in the second quarter.This concludes the comments for North America, and I would like to turn it over back to Alexey Ivanov.
Yes. Thank you, Olesya. Now ladies and gentlemen, I'd like to talk about our outlook for the fourth quarter of 2020.And please draw your attention to Slide #18. For Steel segment, we expect that pig iron production volumes will increase following the launch of blast furnace number 6 at EVRAZ NTMK. Iron ore pellet production volumes are expected to rise following the completion of scheduled repairs of the roast and sinter machines at EVRAZ Kachkanarsky GOK sinter plant in the third quarter.For Coal segment, we expect that raw coal production will increase quarter-on-quarter following the return of -- to the planned capacity after elimination of mining and geological issues at Raspadskaya and Raspadskaya-Koksovaya mines. This will also be supported by the completion of the longwall move at the Esaulskaya mine and a resumption of mining operation at Raspadsky open pit.For Steel, North America segment, we expect that headwinds will remain for production and sales volumes for all product groups due to the uncertainty in energy markets and slow economic recovery during the resurgent COVID-19 pandemic, leaving North American customers cautious in their purchasing decisions.With that, that is the end of our presentation. And I believe we are ready to switch to Q&A.
[Operator Instructions] Now we will take the first question from Ivan Salkovskiy.
Hello, everybody. Could you hear me? Hello, it's Ivan Salkovskiy from VTB Capital. So congratulations for the solid results. Just one question. What is your current view on coal price dynamics in Q4? We have -- I suppose, we have third quarter coal prices.
Okay. I think I will answer. Thank you for your question. In our opinion, we will see the stable price situation during the year-end because, yes, we faced it like a speculative spike of -- height of prices due to some rumors that China can open the market for Australian coals. After that, another rumor is that China will not open the market for Australian coals, but they're like reasonable ore fair price levels at -- in the range of $110, $120, will be fair and we expect that level till the year-end. And enough of that, let's see what will be their weather prediction in Queensland. And maybe in first quarter, the only reason for price increase will be the weather forecast.
[Operator Instructions] We'll now take the next question from Anna Antonova.
Just a few questions from our side. I'll ask one by one. First, on the Russian Steel division, what is your outlook for sales into Q4? And do you see the delayed demand from the domestic construction sector supporting your sales volumes in Q4? That's the first question.
Yes. I'll take it. Thank you very much for your question. I think we exposed to several segments and Construction segment was very high. We left very demand in quarter #3. I think it will be deteriorated due to the season in quarter number -- in the next quarter. It's normal because, to intervene, we never had bigger sales than in the second and third quarter. It might be a little better due to assessed -- kind of prolonged demand and it rather allows construction activity, it might be a little bit better than year-over-year.On the Rail side, we have a very strong demand from Russian Railways, and we probably meet the same or slightly higher volumes comparing to the next year. We don't see any problems in production segments like grinding balls. We have a very good demand for beams. And I think the most challenging segment for us is wheels due to the significant decline in evolving production in the market.
All clear. And the second question is on the Coal -- on the Coal market and the Coal division. So you mentioned that you have resumed mining operations at Razrez Raspadsky in October. What kind of domestic market or general market conditions do you see for resumption of other operations, for example, at Mezhegeyugol? What should -- what kind of improvement would you like to see in the market? What requisite will be for resumption of mining activities at Mezhegey? That's I guess the second question.
Thank you. Yes. The first question about the resumption of Raspadsky open pit operations. I think that, that coal will go to both markets -- to domestic market because, yes, the demand is quite healthy. And we try to sell additional tonnage due to additional demands, for example, from Mezhegeyugol Company after they sold their Elga project. Most of the Elga coal goes to Far East. And there is -- so there is additional demand from Mezhegeyugol itself. So we can easily supply additional tonnage to domestic markets. And so we need some more coal to supply according to our long-term contracts to Asian clients.When we stopped the open pit in the beginning of this year, our stockpiles were enough to support our sales. And right now, we have very low and very healthy levels of stockpiles of raw coal. And to be on the safe side and we feel that the market is quite stable right now, we decided to restart the operation on open pits. So we will use that coal for domestic and for external sales.And second question about Mezhegey, I don't think that we will restart that mine this year. And we will consider this possibility if the market condition will improve. I think we need at least $20, $30 more in price indexes to make that decision. But as I said, we -- right now, we don't consider the restart.
All clear. And I guess last question from our side is on the North American Steel division. You mentioned that you'll continue to see headwind going into Q4. Does this imply that your sale of crude steel production and steel sales volumes in the division in Q4 will be sequentially lower quarter-on-quarter in Q4?
Yes. Thank you for your question and I'll take it. Would you expect that our sales in Q4 would be comparable to the Q3 levels? Based on the -- some signs of improvement that we're seeing in the OCTG market as the rig count in Western Canada improved compared to what we saw in the second and third quarter. However, by and large, we don't expect the volumes to improve significantly over the Q3 level.
And in terms of pricing, do you see any signs of improvement there? Or you would expect prices to remain under pressure for your product mix in North America?
We are expecting a slight improvement in pricing. The -- in flip segment, for example, the CRU has announced increases in the -- going into Q4. However, at this point, there's still a high level of uncertainty of whether those prices -- price increases will stay and materialize. So at this time, we are forecasting a slight increase, but not a significant step-up.
All clear. And the final question, I guess, I appreciate that this is just a trade update, but could you -- given that we are approaching year-end, could you please provide us an update on your CapEx plans for this year? Has anything changed since the update you provided in August with your H1 results? And what is the current status of your major CapEx projects? Any insight of that would be much appreciated.
Okay. Thank you very much for your question. I will take it. Alexey Ivanov. We always criticize actually for our higher CapEx, right, and -- but we are quite flexible in managing it. And we wide it significantly while entering into COVID-19 crisis. And we are ready to guide you that our CapEx for this year will be at the level of $750 million.
[Operator Instructions] We'll now take the next question from Nina Dergunova.
I have a couple of questions. First, can you speak a bit on the sustainability of strong demand in Russian takeup for Rails and Construction segments? Can this strength hold beyond this year? And what will support this? That's my first question.
Yes. I think construction demand will be supported by low-income rates actually because we all see that people start buying kind of flats rather than -- and taking mortgage. And we believe that economical activity certainly will be better in the next year in comparison to this year because certainly quarantine measures that were taken in the second quarter significantly affect market demand of construction. And we have a serious boost in demand in the third quarter this year.On the Rail side, it's usually driven by projects of Russian Railway and quite old and required repairs in Russian Railways infrastructure. So -- and I think this is a long-term trend. So -- and due to all kind of decisions to bottleneck of Rail infrastructure, we believe that we will see healthy demand from Russian Railways for continuous years.
Very well, clear. And the second question, what you were saying about the Coal market outlook. What is your expectation for coal prices into early 2021? Do you think China will have to come out to market and start buying from Australia by this time?
Thank you. Very interesting question. Yes, we all want to know if Chinese government will decide on that issue. But in my opinion, yes, we -- right now, it's not a question of some China, Australia political issues. Just the total growth for this year is over. And China consistently tried to restrict the import amount -- coal import amount and they want to have it stable at the current levels. And this year, yes, as I said, the quarter is over. And Australia represents more than 80% mainly of total import and that's why it's like a hot topic for Australians.In my opinion, starting from January, yes, we will have new quotation period and everything will come to normal and Australians will start to import coal without any restriction. And in that case, we can see like restocking period and the prices will be supported by this activity, is my opinion.
So you're closer to optimistic on coal prices?
Yes, because this quarter, as usual, it will be like supported by restocking. And as I said, someone in some signs of bad weather in that region for the first quarter due to some climate change. And so we expect heavy wet season in Australia and that stories can support prices in my opinion. And I'm quite optimistic, yes.
Okay, great. And the last question to Olesya, the North American division. Are you undertaking any specific cost-cutting measures at ENA to bring EBITDA back at least breakeven levels? Is there anything the company can do? Or it's solely in the function of exogenous factors that are beyond your control?
Thank you for your question, Nina. Yes, we have been closely focusing on the cost-cutting efforts this year with the significant headwinds that we have been facing. The management team is paying very close attention to minimizing costs to optimizing working capital and working on cash flow improvement measures. So yes, that's definitely again in the focus of our attention.
We'll take the next question from Anton Fedotov.
You have cut your CapEx from the initial guidance announced earlier this year. How should we think about the dividends for this year? Should we expect something close to full free cash flow distribution in terms of dividends? Or you would prefer to stay on the cautious lines?
Anton, this is Irina. I think I will take the question on dividends. Look, we have a dividend policy and it has not changed despite many changes that happened during the year. And we are still guiding everyone to kind of use this policy. We are committed to it, and we are committed to -- I will remind you of saying $300 million a year in 2 semiannual installments. And there's really not much we can say about dividends right now. The decision on the exact sum usually is discussed by the Board after they review the results, whether they're annual results or semiannual. So currently, I can only say that we are committed to the dividend policy. And that's what everybody should actually expect.
[Operator Instructions] We'll now take the next question from [ Velada ].
Sorry, I muted myself. Sorry for that. So my question will be to Aleksey Ivanov, and I believe it will be useful to get back to Slide #5, where you mentioned semi-finished and finished product sales and you compare second and third quarter. So if we calculate the figure, semi-finished product sales dropped by around 400,000 tonnes. While finished products increased by around 100,000, which means that finished products have not covered completely the drop in semi-finished product sales. Could you please tell due to which market was that? And I'd also checked the presentation in more details. The drop in slab was around 300,000 tonnes and in deal at 85,000 tonnes. So due to which market was that?
Yes. Thank you for your question. It's a very easy answer. Actually, probably I was not so clear in my presentation. But we had overall decline in steel production because of switch to new blast furnaces. So we sell always as much as we can, either in domestic market or international market. We sell all steel we can produce. So this attributable gap that you have calculated is due to decline in steel production due to the switch to new blast furnace at EVRAZ NTMK.
But if we compare like Q3 to Q2 for crude steel production, the figure, it's around 2.9 million tonnes. It's same amount, if it's not that big drop.
Okay, Irina, can we just go and answer off-line to those questions.
Yes, I think we can take this off-line. [ Velada ], can you please e-mail your questions and we'll get back to you?
Okay. Yes. No problem.
We'll now take the next question from Nikolay.
It's Nikolay Sosnovskiy. Can you hear me?
Yes, we can.
I had a follow-up on your Coal business. I think I've seen somewhere some comments that this potential transaction with Sibuglemet didn't really go through and EVRAZ even considering some sort of breaking the current operational contract with rep. Can you comment on this? What are your intentions with regards to Sibuglemet and its -- in its kind of operational contract, at least?
Irina, can you please take this question?
I don't think that I know much about this. So Nikolay, if you can...
Yes, let's answer this off-line because, yes, I don't think that we have enough knowledge about the process right now because I'm involved in sales and you're involved in overall, Irina. But this is very specific question, yes.
Yes. Nikolay, I will get back to you on this because we're just not aware of the current situation.
Yes. And the second question is on a slightly different topic, but also on coal. Some stage, EVRAZ has increased its stake in Raspadskaya at above 90%. Do you still think kind of the remainder should be floated, Moscow Exchange? Or are you planning to kind of make Raspadskaya, finally, your 100% subsidiary or how would you restructure your Coal business?
Nikolay, we are planning to keep Raspadskaya as it is right now. So keeping a small amount on the free float. I haven't heard actually of any other plans with regards to the listing. So I guess, this is the only question I can give you right now. So no plans to-do list at the moment.
[Operator Instructions] Since there are no further questions at this time, Irina, I'd like to hand the conference back to you.
Thank you very much, Catherine. We see that there are no further questions. I would like to thank everybody who joined the call and all the participants. Thank you very much, and have a great day. With this, we end the call. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.