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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 EVRAZ Third Quarter 2021 Trading Update Conference Call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Ms. Irina Bakhturina. Ma'am, please begin.
Good afternoon, everyone. Welcome to our management call, which is dedicated to give us Q3 trading results. My name is Irina Bakhturina, and I'm Head of Investor Relations for EVRAZ. I will take some time to introduce our key speakers for today. We have Sergey Markov, who is the Director in Marketing and Operational Planning. He will present Steel section and give an introduction to the presentation. We have Alexander Erenburg, Vice President of Vanadium Division, who will take the Vanadium section. Evgeny Terekhov, Commercial Director for Coal Division will speak about Coal. And we also have Olesya Afanasyeva, Senior Vice President, CFO of EVRAZ North America. She will run through EVRAZ North America slides. We will have a Q&A session at the end. Please pick turns. And with this, we are ready to start, and I will pass the floor to Sergey Markov. Sergey, please.
Thank you. Good afternoon, ladies and gentlemen. My name is Sergey Markov, and I would like to share with you our operational results for Q3. So it was quite a mixed third quarter for us. Our consolidated crude steel production edged by 1%, mainly due to larger production volumes at EVRAZ North America. Production in the Russian operations decreased slightly amid scheduled capital repairs mainly at EVRAZ NTMK.So overall sales of our steel products declined by almost 8%, primarily due to a slowdown of Russian construction product market accompanied by lower sales of railways and semi-finished products because of logistics restrictions on the route and also detentions in port amid inclement weather. This was partly offset by better performance of our operations at North America, mainly in Pueblo.So our raw coking coal production fell by almost 2% following scheduled longwall movements at the Osinnikovskaya, Yerunakovskaya-8, Uskovskaya and Raspadskaya mines. In addition, the Raspadskaya-Koksovaya mine had to temporarily slow its operations because of difficult geological conditions. Output from the remaining assets increased during the quarter.Coking coal concentrate production decreased by almost 2%, mainly because of reduction of coke production at EVRAZ ZSMK. The Coal segment stand-alone coal concentrate production remained at the level of the previous quarter. Our external sales of iron ore products declined by 10%, driven by the partial shift of sales to Q4 amid temporary logistics restrictions due to vessel delays.Sales of vanadium products fell by almost 12% because of reduced global demand from the automotive sector amid the semiconductor shortage and slowdowns in the Russian oil, gas and rail sectors. In addition, some global steel mills scheduled major maintenance during the summer months.Moving to Slide 6, just a few words on the global market trends in the reporting quarter. Coal, Chinese coking coal prices reached new all-time highs, driven by weak output following safety stoppages and supply bottlenecks. Tight spot availability and robust demand also affected the Australian benchmark. Global iron ore prices fell sharply on the back of intensifying steel output cuts in China.CIS billet and slab export price spread narrowed as we expected. And the gap between flat and long products' prices has been returning to the historical levels. And the finished steel prices slid slightly down on the back of gradual recovery of supply-demand balance after COVID-related restrictions. Domestic steel demand deceleration in China in the second half of the year also contributed to negative price dynamics.Let's move to the Slide 7. A few words about our cash cost dynamics. Our cash cost of slabs increased quarter-on-quarter mainly due to higher raw material prices. Iron ore products cash cost remains almost unchanged. And finally, our coking coal cash cost increased quarter-on-quarter mainly due to lower mining volumes at the Osinnikovskaya, Yerunakovskaya-8, Raspadskaya and Uskovskaya mines following longwall moves.Now let's turn to the Slide #9. Here, we can see the overview of third quarter production results of our Steel segment. Production volumes of iron ore products fell by almost 7%, mainly because of scheduled repairs at the Abagurskaya processing plant at the same time in September. This was partly offset by an increase in sinter production volumes at EVRAZ KGOK following the completion of scheduled maintenance and repairs.Pig iron production at our Russian mills remained mostly flat quarter-on-quarter and our crude steel output edged down by almost 1%, driven by scheduled capital repairs at EVRAZ NTMK.Turning to -- your attention to the next slide, #10, just a few comments on Steel segment sales. External sales of our iron ore products declined by 10%, driven by partial shift of sales to Q4 amid temporary logistics restrictions on western routes due to vessel delays. Sales of semi-finished products fell by almost 7% because of logistics restrictions on the route and delays in ports amid inclement weather, although shipments from factories increased slightly. It means that we sailed the storms, but just didn't ship it from the ports in Q3 and did it in Q4.Sales of finished products declined by 14%, mainly due to slowdown of construction product market after the successful Q2 and the sales of particularly construction products declined by almost 15.3%.And now I would like to pass the word to Alexander Erenburg, who will say a few words about our vanadium business. Alexander?
Yes, Sergey, thank you. Hello, ladies and gentlemen. Just a quick update on the vanadium business of EVRAZ, as Sergey already covered it in the summary. However, I would probably like to pinpoint a few important things, which happened in Q3.One, you see that the prices increased to $38, which is pretty strong price for vanadium market. And I believe it's a good price because we would be scared if it would go strongly beyond $40. As we've seen in 2018, there might be some substitution with the other products or run away from vanadium. So I believe, price-wise and market-wise, considering fundamentals, vanadium market is pretty strong now. Production was pretty strong in Q3 as well. Sales of vanadium are relatively volatile. That's the nature of vanadium markets. We see pretty few producers and traders trying to kind of engage into vanadium trading.So we -- apart from that, in this 11.8%, there is kind of reporting charges, reporting effect because we -- in September, we went away from conversion at one of our third parties and started to sell them vanadium slag, which is not reported here. So real kind of external sales are not down by 12%, but rather by 8% to 10%. However, the demand did decrease a little bit around the back of the kind of another COVID wave or waves throughout the world. We believe that the market fundamentals are pretty strong. In Q3, the structure of the sales kept improving. We sold much less material to the China, which used to be a balancing market. And in Q3 versus Q4 -- versus Q2, we sold probably like 15% to 20% less our products to China and sold it to our key markets like North America, Europe and Asia, excluding China. That's probably the main points on vanadium market.And here, I would like to pass the word to Evgeny Terekhov.
Thank you, Alexander. Good afternoon, ladies and gentlemen. I want to start from coal production section on Page 14. As Sergey already mentioned, in third quarter, we slightly decreased raw coking coal output, mainly due to the incidence of longwall phase changes at Osinnikovskaya, Yerunakovskaya-8, Uskovskaya and Raspadskaya mines. At the same time, Raspadskaya-Koksovaya mine temporarily slowed down due to difficult geological conditions. At the same time, output of coking coal concentrate remained flat quarter-on-quarter.Please move to Page 15 regarding sales. External sales declined by 10.8% quarter-on-quarter due to decrease of raw coking coal sales, and we just changed the product mix in favor of coking coal concentrate. And at the same time, shipments were affected by logistical problems. We have problems to move our coal from Kuzbass to Far East due to flooding near Zabaikalsky area and related problems.If we compare 9 months results with last year, we declined in our sales plunge by 73% due to high base effect because last year, during pandemic, we decided to sell off stockpiles. And right now, we have no stockpiles, and we have very healthy stocks of coal. And intersegment sales fell by 9%, mainly due to problems at Raspadskaya-Koksovaya and we produced lower -- less raw coal and we produced less concentrate. So that's along Coal, and I pass the floor as usual to Olesya Afanasyeva. Please, Olesya.
Thank you, Evgeny. Good morning or good afternoon, everyone. So let's turn to Slide 17 on the presentation for the update on the North American segment. In Q3 of 2021, our crude steel production increased 18.3% compared to the second quarter of the year. This increase was primarily driven by continued strong market demand, both in the U.S. and Canada as well as the resumption of operations at our Pueblo facility from the unplanned downtime in the second quarter.In the current environment, sales of our tubular product surged 38% quarter-over-quarter as North American small diameter pipe and OCTG markets continue to improve. Similarly, sales of flat-rolled products grew by 19.7% in Q3, driven by strong customer order book. Rail product sales improved 3.5% over the same period of time, supported by steady demand from our major railroad customers. We did see a decline in our sales of construction products, which decreased by 23.3% quarter-over-quarter. Reduced sales were driven by steel flow constraints following the unplanned downtime in steelmaking in the second quarter, and the volumes are expected to be balanced in the fourth quarter of the year as market fundamentals remain strong.This concludes my brief remarks for North America, and I would like to turn it back over to Sergey now. Thank you. Sergey?
Yes, thank you, Olesya. So now, ladies and gentlemen, let's talk a little bit about our operational outlook for the fourth quarter. For Slide #19, yes, for Steel segment, we expect that our iron ore production volumes will increase following the completion of repairs at EVRAZ KGOK in September and our pig iron production volumes are expected to remain at the level of Q3.For Coal segment, we expect that raw coal production will increase quarter-on-quarter due to stabilization of production volumes at the Alardinskaya and Raspadskaya mines, completion of longwall movements of Osinnikovskaya and Yerunakovskaya-8 mines and also the launch of new equipment at the Raspadskaya-Koksovaya open-pit. And for Steel North America segment, we expect that steel production and sales volumes will be flat quarter-on-quarter as market sentiments remain strong in our segments.With that, that's the end of our presentation, and I believe we are ready to do Q&A. Thank you.
[Operator Instructions] And our first question will come from Dan Shaw with Morgan Stanley.
First one, just on Raspadskaya, on the demerger. Can you say anything on that? When might we hear a little bit more about when that's going to finalize? I think the last sort of guidance we had on that was that it would be before year-end, which feels like it's approaching quite quickly. So do you have any comments on that transaction at this stage? That's the first question.
Yes, I will take that question. The only thing we can say at the moment is that we have received the approval of the Board for the deal, and we have published the information about that, I think, in September. We hope to receive all necessary regulatory approvals and publish technical information on the circular by the end of November. I think this is the time line for now.
Okay. Perfect. And is it still expected that there will be sort of a cash option for investors that have an alternative to receiving Raspadskaya stock. I think you cited in one of your previous press releases.
Unfortunately, I cannot comment on this right now. I think the information will be available a bit later.
Okay. Understood. Then just one more question on coal prices. It sounds like there's some sort of logistical issues with Russian Railways. So I was just wondering whether you're seeing these problems and if you're finding it difficult to move material around and particularly to export coal and steel at the moment?
Yes. Thank you for your question. Yes, I think that, right now, everything is okay. We move as much as we can, and we have all the necessary quotations from Ministry of Energy. We have enough railway cars, and so I expect we will increase our shipments to export in the fourth quarter.
Our next question will come from Dmitry Smolin with Sinara Investment Bank.
I have probably 2 questions. On Coal, first, we are hearing that domestic coking coal price is down by 85% quarter-on-quarter. And could you please confirm it? And what are your current export prices to Asia to -- mainly to China for the grade at the moment in the fourth quarter? And second one, do you expect any improvement in your ESG rating of Raspadskaya demerger by the year-end?
Yes, I will comment on domestic prices. You're right. You might know that domestic prices are linked to international benchmarks. And I think everybody knows that the current benchmarks are historically high. So yes, the increase in prices are quite huge. And your second part of this question, we have formula-linked contracts, and so we supply to Asia using long-term and spot contracts while the holding to the same hard coking coal or semisoft benchmarks and indexes. So yes, roughly, you can take current semisoft index and put some premium to that, so around $300. So normal price for grade coal.
Sorry, benchmark for semisoft in China or FOB Australia?
It doesn't matter, frankly. It's -- last week, Chinese prices became higher, but usually, you can take FOB Australia add some freight rates and received CFR China. So yes, $300 is current levels for CFR China then $264 Australia and freight around $30 right now. So it's very close levels. So yes, our price is around $300, FOB price.
Our next question will come from Boris with REM Capital.
Sinitsyn from Renaissance Capital. A few questions from my side, please. Firstly, in terms of your coking coal volumes, but production volumes, could you please remind your guidance in terms of run of mine for 2021, if you have any plan for 2022, please share.
Anyone, who's going to take that question? Boris, can you repeat maybe...
Sure, sure. I'll repeat the question. The question is on production volume guidance for coking coal for 2021, around those mine guidance and the guidance for 2022?
Evgeny, do you want to speak about this or we can get back at some point later?
I'm sorry, I was off the line. So yes, if you can repeat the question, I will try to answer.
Boris, once again please.
Great. Sure, sure. So guidance for run of mine production volume of coal for 2021 and for 2022, please?
Okay. I think that our forecast, we're going to produce around 23 million tonnes, I think a bit more this year, and try to produce around 25 million tonnes next year.
Thank you. That's clear. My second question is on the coking coal cash cost, which was up quite strongly in the third quarter based on your report. Could you please tell the reasons for the increase? And basically, what are the expectations? Do you expect this level to remain or to decline going forward?
Yes. Yes. The cash cost, it depends on the sales volume, on production and sales volume. And due to some problems and coincidence of longwall phase changes, their production volume and sales volume was quite low, and that was the reason for cash cost increase. In first quarter, it will decrease for sure.
Our next question will come from Lynette D'Souza with Investcorp.
Could you please make some comments about possibility of interim dividend taking into consideration your good results, if it is possible?
Unfortunately, it's not possible to comment on dividends. It's the decision that is made by the Board. And that's basically when the management gets to know about it, too. So apologies.
Our next question will come from Anton Fedotov with Bank of America.
I have also a question regarding the upcoming demerger of your coal business. EVRAZ has the main board listing on London Stock Exchange, while Raspadskaya is listed on the Moscow Stock Exchange. Will there be any requirement to place DDRs of Raspadskaya in London in order to do this demerger?
No, there is no such requirement. But anyhow, all technical details will be available closer to the end of November.
Our next question will come from Dmitry Smolin with Sinara Investment Bank.
Yes, hello, again, I think you didn't answer my second question regarding the possibility of ESG rating upgrades. So currently, for example, you have BBB MSCI ESG rating -- with the ESG rating agencies regarding potential improvement after the stock demerger?
Dmitry, I don't think that the improvement in ESG ratings are directly connected with Raspadskaya to be honest. But on a separate note, I can say that we are constantly working on improving our ESG rating. And essentially, we hope that the next year will be some improvement, not only for MSCI, but for all of them. Hope this answers your question.
Okay. And just one more question from my side, if I may. So in terms of liquidity of EVRAZ share, so currently comparing EVRAZ's liquidity average daily trading volumes with other steel names. So it looks like your liquidity is significantly way below your peers on Moscow Exchange. So in my view, could considerably increase your liquidity and may result in better investment attractiveness of the company?
You're absolutely right. And we have this in mind. We basically approve that this will improve the liquidity. But this is something that we will consider once we demerge on the coal business. So after the deal is over. So it's definitely a consideration for us.
Our next question will come from Alexander Bodrov with JPMorgan.
I have 2 questions. My first question is on Russian steel sales in the fourth quarter. And could you please walk us through the dynamics and book buildings for the rest of the year? Do you expect that sales in Russia will return somehow at the level of the first half of this year?And my second question is about the logistical issues that you mentioned, and you also mentioned that they somehow could probably disappear in third quarter, if I heard it correctly. But I see from the press that, for example, Russian Steel Association points out that currently, they see and that the industry experience -- still experience some issues. Do you see these issues current days? Or -- and if yes, how far you're going to cope with this? And how you're going to shift your sales from the third quarter to the fourth quarter?
Yes. Thank you for the question. I think I will cover it for Russian steel market, yes, you're right. It looks like late September and early October, and now what we see is the demand is much better than in August and September, and we expect that our rolling mill capacity will be fully utilized by products for Russian, first of all, construction products market. And what we also see, in the end of October, prices started growing. So we expect a good end of the year from this point of view.And what about logistical restrictions? I think what happened in, let's say, August, is that due to high prices for steel and, let's say, also iron ore and coal, Russian producers their volumes for exports. And that created, I don't know how to say, let's say, traffic jams on the road. That's what the reason for some restrictions that we had in Q3. And what we see now, I don't know if Evgeny will correct me if I'm wrong about Coal. But for other sectors, it looks like situation is more stable. It's still -- there are still some cases of rail wagon shortage, but I would say it's not critical. So it looks like we are able to ship everything we are going to sell.
May be just one comment there. Yes, the third quarter is a regular maintenance and repairment process on the route from Kuzbass to Far East. So Russian Railways usually finish their works at -- in October. So right now, it's easier to move coal or other goods to Far East because their repairment is over. But in October, it's still difficult to move to the south to the western port, Mechel Energo because their maintenance is on the process. And usually, in November and December, it's usually easier to move everything because there is no restrictions related to maintenance and repairments.
Our next question will come from Nikanor Khalin with VTB Capital.
Majority of my questions have been answered. Just one follow-up on the logistics. Can you say it is approximately in tonnes, how much of volumes have stock logistics wise? And we should expect that will be released next quarter?
Thank you for the questions. Are you talking about steel?
Yes. Yes. I mean the semifinished steel that you said due to logistic restrictions. And as far as I read in your release your kind of shipments from the factory didn't -- how much volumes approximately are net logistics just so I can the kind of inventory release next quarter?
Yes. As I mentioned before, our shipments from mills didn't -- almost didn't change, I mean, in terms of semifinished tonnes. So I will say it's probably 200,000 tonnes or so. And I believe they were already shipped from the ports in October.
Our next question will come from Lynette D'Souza with Investcorp.
Could you please give some information about current trends in prices for the fourth quarter? What's going on and what is your expectation for this quarter and maybe for the first quarter of the next year? And the second question is about, could you make some clearance about the new tax regime in next year? Or what will be implication for you, just some estimate?
Yes. Sorry, I didn't get you. Do you -- are you talking about steel prices or generally?
Yes, steel prices and you said about coal prices, I think it's clear, but steel prices what could we expect in this quarter?
We normally cover steel prices. So as I mentioned, the spread between slabs and billets narrowed. So now prices for slab and square billet are -- I cannot say similar, but they closer to each other. And at the current level for slab, I believe, is $745 or so forestation. And as the price continue to -- the prices were decreasing during the last month, but now what we see is -- looks like stabilization. And the square billet price is stable for some time and thanks to good demand from China and the construction season there. But our expectation is that probably in the next month, some decrease in prices is possible just because the level that we see now is still quite high. But raw material prices can support steel prices. So it's not like a clear trend.Talking about -- but what also we can say is that we are now selling, let's say, December production. So we are more or less confident about our sales portfolio. Domestic market, as I mentioned, now looks much better than a month before. So here the situation is quite bright.And the second question, I'm not sure I can share some specific details, but what we hear now is -- I mean, the numbers of access, right? How to say it in English I'm not sure, but it shouldn't affect our production and sales significantly. That's probably what I can say about it.
Okay. Thank you very much.
On vanadium prices, if you were wondering, they went down in the beginning of October, as I said, to $30.9 London metal billet, which is the main benchmark. And now they are increasing currently about $32.8, we see the intensifying demand. As always, the traders who were waiting for the lowest prices, now I guess they keep like restocking ideally I believe they will keep going up a little bit. I'm not sure whether they will reach back $38 or not.
Our next question will come from Ilia Dmitriev with Goldman Sachs.
Can you give an early indication of what we can expect to hear about during the company's CMD in November?
Yes, absolutely. It will be a short update on the demerger. But I've given it to you pretty much very high level. But again, despite the fact that CMD will be on the 10th of November, we still will not have any technical details. We will talk about ESG agenda, which is actively developing in our company. And we will talk about the investment portfolio. So I guess it would be the main 3 subjects for the Investor Day.
And speakers, at this time, there are no further questions in the queue.
Okay. So if there are no further questions, I would like to thank everyone for being on this call today and the speakers as well, thank you all, have a great day. Thanks, again. Bye.
Thank you, ladies and gentlemen. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.