16 Sep 2010 13:04

MMK posts $53 mln Q2 IFRS profit, below forecast

MOSCOW. Sept 16 (Interfax) - Magnitogorsk Iron & Steel Works (MMK) closed Q2 2010 with net profit of $53 million to International Financial Reporting Standards (IFRS), including exceptional items, down 40% from Q1 2010, the Russian steel maker said in a statement.

Net profit excluding one-off items would have been $122 million.

Analysts told Interfax in a consensus forecast that they thought earnings for the period would be $125 million.

MMK's Global Depositary Receipts (GDR) fell 0.7% to $11.8 a share by 12.28 p.m. Moscow time on the London Stock Exchange after the results were unveiled.

Sales revenue grew 25% compared with Q1 2010 to $2.068 billion and earnings before taxes, depreciation and amortization (EBITDA) amounted to $437 million.

Analysts forecast revenue of $2.03 billion and EBITDA - $441 million.

"Strict cost control, increase of raw materials use from captive sources and decrease of consumption ratios secured high profitability level," MMK said.

"Despite significant increase of raw materials prices and unstable market conditions since June, 2010, MMK managed to keep the EBITDA margin at a high level of 21.1%," it said.

MMK financial highlights ($ mln):

Q2 2010 Q1 2010 Change (%)
Sales revenue 2 068 1 652 25%
EBITDA 437 374 17%
EBITDA margin (%) 21,1% 22,6% -
Net income 53 94 44%

MMK's debt was $2.9 billion as of June 30, with short-term debt of $931 million or 32% of the total. This amount includes $292 mln of revolving credit facilities of traders within MMK Group. Cash and cash equivalents were $953 million.

A "strong balance and well-balanced strategy of borrowings is the solid platform for further growth," MMK said.

Capex fell to $498 million in Q2 2010, from $620 million in Q1 2010. "The investments are made to continue supplies of mill 2000 equipment in order to master production of high-quality automotive steel. This is in line with MMK's strategy to increase HVA products share and strengthen presence in the domestic market to meet growing demand from the largest sectors of the Russian economy," the company said.

MMK operating highlights, '000 tonnes

Q2 2010 Q1 2010 +/-
Finished products output 2 623 2 453 7%
Slabs and billets 115 0 -
Long products 203 210 -3%
Flat hot-rolled products 1 397 1 509 -7%
High value-added products 908 734 24%
Plate (Plate mill 5000) 228 176 30%
Flat cold-rolled products 306 251 22%
Downstream products 374 307 22%

Finished steel production grew by 7% in Q2 2010 q-on-q. The growth is entirely driven by increased output of HVA products as the result of commissioning of new facilities for production of highly profitable products to meet the demand coming from the domestic market.

HVA products share in the product mix went up to 35% in Q2 2010 (30% in Q1 2010 and 27% in 2009).

MMK continued to increase the volume of domestic shipments, meeting the growing demand from the key steel consuming industries. Export shipments grew by 2% in Q2 2010, while domestic shipments increased by 9%.

Shipments to Russia and CIS accounted for 65% of overall shipments in Q2 2010.

In value, sales to Russia and CIS accounted for 71% of total steel products sales. Pipe manufacturers and machinery-builders (including automakers) remained major customers of MMK in the domestic market in Q2 2010 accounting for 37% and 23% of MMK's overall domestic shipments, respectively.

MMK's export revenue originated from different regions of the world. The key export markets remained the Middle East and Europe (33% and 32% of all export shipments in Q2 2010 respectively).

MMK's acquisition of coal company Belon not only guarantees increased deliveries of high quality coal concentrate to MMK, but also contributes significantly to MMK Group financials. Belon's contribution to MMK Group financials amounted to $140 million in sales and $70 million in EBITDA, which corresponds to EBITDA margin of 50%.

Belon production volumes in Q2 2010 amounted to 1.6 million tonnes of coal concentrate. Profit for the period of coal segment amounted to USD 22 mln.

MMK plans to increase production volumes by more than 60% by 2014 from the current levels as the result of Magnitogorsk production site development and MMK-Atakas project completion.

Growth plans are called for increasing exposure to perspective domestic market and market of Turkey with high quality flat products, mainly by means of import replacement.

Investments made to master quality and new products types (with prevailing share of HVA-products) allow MMK to maintain high level of domestic shipments to end customers in order to meet robust demand. The share of HVA products in MMK production portfolio will grow up to 50% by 2014 thus accounting for the bulk of the increment in volumes growth.

MMK said it had been active in increasing its vertical integration over the last 18 months: integration into in iron ore increased from 20% in 2008 to 30% in Q2 2010 through the production growth at captive sources and slag processing program. A long-term agreement with Eurasian Natural Resources Corporation (ENRC) for supply of other volumes required is effective till 2017. MMK has covered 50% of its requirement of coking coal through acquisition of Belon. MMK has consolidated the largest scrap collector in Russia (ZAO Profit) which implies 100% integration in scrap and is 85% self-sufficient in electricity.

Viktor Rashnikov, MMK's board chairman, is its MMK's main beneficiary, controlling 86.6% of the shares.