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SUEK announces IFRS 1H 2016 results

16 September 2016

SUEK LTD (“SUEK”, “the Group” or “Company”) today published its financial results for the six months ended 30 June 2016, prepared in accordance with IFRS and reviewed by KPMG.

Key 1H financial and operational results1 :

US$ million, unless otherwise stated       1H 2016      1H 2015
Revenue           1,781           2,122
EBITDA              407              484
EBITDA margin             23%             23%
Net profit/(loss)                96              163
Net debt/bank EBITDA2           3.23x             3.3x
Capital expenditure (capex)              156              157
 Production, million tonnes             53.3             46.5
 Sales, million tonnes             52.6             49.1
        - including, international sales             24.2             22.8 
        - including, domestic sales             28.4             26.3 

                

Financial and Operational Review

In the first half of 2016, average thermal coal prices decreased by over 20% year-on-year to US$ 51 per tonne in the Asian markets and US$ 47 per tonne in Europe, reaching decade lows and lowering SUEK’s year-on-year financial indicators. Group revenues and EBITDA for the January to June 2016 period declined by 16% to US$ 1,781 million and US$ 407 million, respectively.

Still, EBITDA margin in 1H remained stable year-on-year at 23%. It was supported by effective cost control, stable operations of production units and tighter control on capital expenditure. Focusing on maintenance projects and limiting expansion CAPEX only to projects already at an advanced stage of implementation allowed the company to add production and shipment capacity on the most cost-efficient basis.

In addition, despite the challenging market environment, SUEK managed to increase its sales by 7% year-on-year to 52.6 million tonnes. Sales to international markets rose by 6% to 24.2 million tonnes during the January to June 2016 period due to our efficient extensive sales network in key regions, with SUEK’s main deliveries going to Japan, South Korea, China, the Netherlands, Taiwan, India, Turkey, and Morocco. Sales to Russian customers grew 9% year-on-year to 28.4 million tonnes as lower water levels in reservoirs affected hydroelectricity generation and led to stronger coal demand.

Strong sales and stable operations at most of SUEK’s production and transport facilities provided total coal production of 53.3 million tonnes, which was 6.8 million tonnes higher than in 1H 2015. The Company continued its strategic focus on increasing washing capacity, with the volume of coal washed in 1H 2016 reaching a historic high of 19.3 million tonnes. Shipment through ports, where SUEK Group is one of the major shareholders, rose by 2% year-on-year, with shipments through the Vanino Bulk Terminal exceeding of 10 million tonnes, setting a new 6-month record.

Strict cost and CAPEX control, as well as increased sales volumes, ensured SUEK’s strong cash portfolio, and enabled the Company to deleverage year-on-year as well as obtain necessary financing on comfortable terms. In February, the Company secured a US$ 1,252 million pre-export finance facility from a group of major international banks, with 5 and 7 year tranches. The funds raised enabled SUEK to satisfy its 2016 refinancing needs and extend the bulk of its maturities to 2018-2020. As at 30 June 2016, SUEK’s net debt amounted to US$ 2,791 million, compared to US$3,425 million as at 30 June 2015. The net debt to bank EBITDA ratio also decreased year-on-year and was 3.23x as at 30 June 2016.

Positive free cash flow and adequate liquidity contributed to Moody’s confirmation of SUEK’s Ba3 rating with a stable outlook. The rating agency also noted SUEK’s ability to control operating costs via increases in efficiency and effectiveness of operations, its substantial coal reserves and the favourable geological conditions of deposits, control over a considerable portion of the transportation infrastructure, including port facilities, and a well-diversified Russian and international customer base.

Market review

Thermal coal market conditions remained challenging in the first half of 2016, with prices declining to 10-year lows and international market volumes down 3% year-on-year to 442 million tonnes.

The Atlantic market saw lower demand, especially from countries such as the UK, where regulation led to further significant decrease in coal-fired capacity during 1H. Asian imports were flat year-on-year. India decreased imports by 8 million tonnes year-on-year as domestic coal production increased by 15 million tonnes, while overall stocks were estimated at 90 to 100 million tonnes. South Korean demand increased at a slower pace than expected due to transmission line issues and lower operating rates at older plants.

Meanwhile, several markets demonstrated signs of recovery during the first half of the year. The Chinese government addressed the domestic coal overcapacity by decreasing the statutory working days for coal miners by 16%, which is expected to lead to a reduction in coal capacity of at least 250 million tonnes by the end of 2016, according to the country’s National Development and Reform Commission. The overcapacity cuts, combined with a renewed appetite for coal spurred by last year’s credit measures designed to stimulate the economy, triggered price increments in both the domestic and international markets. Despite the imminent restart of nuclear plants, Japanese coal demand remained stable. Russian thermal coal demand increased slightly to 64.4 million tonnes as elevated coal consumption by the power generating sector in Siberia and the Far East continued, although hydroelectric output recovered partially.

Due to operational issues and in response to lower demand in the Atlantic market, several major exporters rebalanced their shipments. Indonesia continued to reduce exports as heavy rains impacted production during the second quarter and many small producers stopped operations due to the challenging market environment and toughening regulations. Historically low freight rates diverted Colombian supply to Asia, thus helping to ease the oversupply in the Atlantic market. US exports declined by about 7 million tonnes, with 4 million fewer tonnes delivered to European and Mediterranean markets.

Vladimir Rashevsky, CEO of JSC SUEK, commented:
“Although the global market environment remained complicated in the first half of the year, we managed to ensure stable operations throughout our business cycle. We progressed well in our strategic goals of expanding our washing and port shipment capacities. Our focus on operational efficiency and cost control, as well as strong sales, provided positive cash flow enabling us to maintain a stable balance sheet, refinance our debt on comfortable terms, and reaffirm our credit ratings."

SUEK Group (www.suek.com) is one of the largest coal companies in the world and the leading coal producer in Russia. SUEK’s mining, processing, transportation and service facilities are located in seven regions of Russia. SUEK’s trading network encompasses all key international markets, with offices in Russia, Poland, China, Japan, South Korea, Indonesia, the US and Taiwan. The Group employs over 32,000 people.

SUEK IFRS consolidated financial statements for the six months ended 30 June 2016 are available at http://www.suek.com/investors/reporting/
Bank EBITDA is calculated in accordance with SUEK loan agreements

SUEK announces IFRS 1H 2016 results
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