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PRESS RELEASE

IMH (FORMER KOKS GROUP) ANNOUNCES FY2014 FINANCIAL RESULTS

Moscow, 9 April 2014

IMH (former KOKS Group), a vertically integrated business combination of the world's largest exporter of merchant pig iron, a leading Russian producer of merchant coke, and coking coal and iron ore assets, announces its financial results for the full year ended 31 December 2014.

Key Group Financials

RUBm	2014	2013	2014/ 2013, %
Revenue	47,233	43,036	+10
COGS	(30,616)	(30,842)	(1)
Gross profit	16,617	12,194	+36
Operating profit	8,091	1,476	+448
Adj. EBITDA	11,492	6,595	+74
Adj. EBITDA margin, %	24	15	-
Adj. EBITDA	12,587	7,016	+79
Net loss	(7,701)	(2,436)	(216)
Purchase of property, plant and equipment	6,204	6,007	+3
Net cash from operating activities	12,342	9,797	+26
Debt	39,552	27,074	+46

 

- IMH's revenue rose by 10% y-o-y mainly due to higher pig iron and coke exports on the back of the weakening Russian Rouble.

- COGS improved by 1%. All opex reduction initiatives are ongoing and continue to pay off. The growing payroll budget and the rising coal prices at the end of 2014 contributed to a smoother reduction in COGS vs. the previous period.

- The Group's gross profit was up 36%, with gross profit margin of 35% vs. 28% in the previous period. Thus, margins tend to be rising.

- Operating profit was 448% up (growing by more than five times) due to a higher revenue, lower COGS and reduction in distribution costs resulting from improved efficiency of the IMH's logistics function.

- The adjusted IFRS-based consolidated EBITDA for FY2014 grew by 74%. The adjusted EBITDA for the full year ended 31 December 2014 was up 79% y-o-y. The adjusted EBITDA margin reached 24% showing a considerable increase y-o-y.

- In 2H 2014, the Russian Rouble suffered from sweeping fluctuations causing material FX losses on Eurobonds and interest accrued thereon. In addition, there was a substantial increase of exchange losses on FX loans and interest accrued thereon. Total FX losses were RUB 14,417 million. The Group's financing costs totalled RUB 18,196 million in 2014. As a result of the FX losses, the Group posted a net loss of RUB 7,701 million.

- PP&E purchase costs in FY2014 grew 3% y-o-y, with most capex spent on the construction of the second phase at the Butovskaya mine, construction of the Tikhov mine, and construction of the lower mining level at the Gubkin mine.

- Net cash from operating activities rose by 26%, mainly due to a higher revenue from sales of finished products and consistently stable prices for the Group's key products on the back of relatively low feedstock prices.

- Debt was up 46% as at 31 December 2014 vs. 31 December 2013, mainly due to the weakening of the Russian Rouble, which caused the revaluation and increase in the cost of USD-denominated borrowings.

Financial Performance by Key Segments

Coal

RUBm	2014	2013	2014/ 2013, %
Segment revenue5	8,327	6,812	+22
IFRS-based consolidated EBITDA	859	1,097	(22)
IFRS-based consolidated EBITDA margin, %	10	16	-

 

The Coal segment increased its revenue in FY2014 by 22% due to higher sales of coal concentrate and lower volumes of coal processing services under tolling arrangements. In addition, the revenue growth is attributable to a moderate rise in coal concentrate prices in 2H 2014 on the back of the growing demand for coal and coke from Ukrainian smelters. However, the international market still tends to be dominated by consistently low feedstock prices. In this context, coal prices seem to have stabilised by now, which positively affects the opex at OAO TSOF Berezovskaya.

The segment's EBITDA was adversely impacted by ZAO Siberian Resources and OOO Gornyak, which stopped generating cash flow after the termination of operations in 2013, but continued generating costs associated with asset maintenance and mothballing. Currently, both entities are under liquidation.

Also, OOO Uchastok Koksoviy suffered from rising production costs in 2H 2014 due to a number of equipment repairs and upkeeps as well as rising prices for fuel purchases.

In FY2014, the total output at the Coal segment's facilities was 1,747 thousand tonnes of coal (+5% y-o-y) and 2,412 thousand tonnes of coal concentrate (flat y-o-y).

Coke

RUBm	2014	2013	2014/2013, %
Segment revenue	19,825	19,668	+0.8
IFRS-based consolidated EBITDA	2,838	1,570	+81
IFRS-based consolidated EBITDA margin, %	14	8	-

 

The segment's performance was largely supported by the growing demand for coke from Ukrainian smelters, which emerged in 2H 2014 and continued throughout Q1 2015, in addition to extra proceeds from exports driven by US Dollar exchange rates. As a result, the Coke segment increased its revenue by 0.8%. Lower coal feedstock prices in 1H 2014 and production of high-margin high-quality coke throughout 2014 cumulatively resulted in an 81% EBITDA growth. Production costs in 2H 2014 marginally grew vs. 1H 2014 due to coking coal price growth in late 2014 and scheduled maintenance in winter. The Coke segment's EBITDA margin increased to 14% vs. 8% in FY2013.

In FY2014, OAO Koks produced a total of 2,601 thousand tonnes of coke (+2% y-o-y).

Ore & Pig Iron

RUBm	2014	2013	2014 / 1H 2013, %
Segment revenue	33,190	28,105	+18
IFRS-based consolidated EBITDA	7,467	3,681	+103
IFRS-based consolidated EBITDA margin, %	22	13	-

 

The segment greatly enhanced its financial performance due to stable global prices for merchant pig iron on the back of the Russian Rouble weakening against the US Dollar and lower purchased feedstock prices. In FY2014, exports accounted for 93% of total pig iron output. In total, the segment produced and sold more pig iron in FY2014 than in FY2013 due to no scheduled major maintenance breaks. Its revenue rose by 18%. The costs of pig iron production in FY2014 were down by 2% y-o-y. The segment's FY2014 EBITDA more than doubled while EBITDA margin reached 22% showing a considerable improvement y-o-y.

Distribution costs were much reduced in 1H 2014, which also contributed to higher EBITDA and EBITDA margin. The segment's margins were also driven by increased production of special grades of pig iron.

In FY2014, the total pig iron output was 2,184 thousand tonnes (+4% y-o-y), with special grades of pig iron representing 28% of the total. Higher output was ensured by uninterrupted equipment operation and no scheduled maintenance breaks.

Debt Portfolio Management

The Group's debt as at 31 December 2014 was RUB 39,552 million, a 46% increase vs. 31 December 2013. The increase was mainly driven by exchange rate effects, which resulted in the rising RUB cost of FX borrowings. In particular, exchange losses on Eurobonds and interest accrued thereon amounted to RUB 7,930 million.

In May 2014, IMH refinanced its RUB 5 billion bond debt with a 3-year loan from ROSSIYA Bank.

Since 2013 the Group repurchased its Eurobonds in the market for a total of USD 36 million.

The Group remains committed to maintaining its leverage and reducing the cost of borrowings. The Group is developing initiatives to reduce its debt going forward and is steadily working towards a more diversified debt portfolio by engaging new lending banks. As at 31 December 2014, undrawn committed credit facilities amounted to RUB 18,751 million. The average interest rate in FY2014 was 7.55%.

Sergey Cherkaev, Vice President, Chief Financial Officer of the Industrial Metallurgical Holding (KOKS Group's management company), commented on the 2014 results:

'2014 favoured the Group very much. We greatly enhanced our margins, revenues and operating profits. We achieved our targets on margins thanks to such external factors as higher revenues from exports on the back of a weaker RUB/USD exchange rate, lower feedstock prices, the reopened Ukrainian market for our coke and by-products as well as freezes on transport and electricity tariffs in 1H 2014.

Our internal efforts in FY2014 were focused on further opex cuts, operational excellence, increased production of higher-margin products and capex rationalisation.

OAO Tulachermet launched its upgraded Turbine Generator Unit 2, which is just one example where we achieved success in cutting opex. This project resulted in a considerable reduction in power purchases. In the nearest future, after repairs are finalised at Turbine Generator Unit 5, power purchases will be discontinued, with excess power to be sold externally. The turbine generator units at Tulachermet are driven by the steam produced through blast furnace gas utilisation. Thus, repairs at the turbine generator units will result in a fully closed power supply cycle.

OAO Koks will capitalise on this success, having already put in the pilings for own coke-oven gas power plant. The project will be implemented in 1H 2016 and will pay off within 5 years.

We continuously find new opportunities to optimise our business processes. In 2014, we embarked on efficiency improvement initiatives which won international renown. In particular, the 5S programme is ongoing, while the Total Manufacturing Optimisation programme (aimed at encouraging labour-saving innovations) is gaining momentum. The Group keeps on implementing new systems to automate process management, accounts and records, reporting and document flow.

The increased sales of premium grades is just one way to drive margins. Our success particularly relies on the coal produced by the Butovskaya mine, which is low in sulphur and phosphorus. Pig iron based on low-phosphorus coke is in great demand in the international market.

Despite changes to the capex programme, our priorities remain as before. We are financing only high-margin assets which require the shortest time to pay off such as the construction of the second phase at the Butovskaya mine, construction of the Tikhov mine, and construction of the underlying bed at KMAruda's Gubkin mine. The construction of the second phase at the Butovskaya mine is financed through the cash flow the mine generates, with no impact on our current liabilities. Preparation is ongoing for the construction of a desulphurisation facility at Tulachermet to enhance the Group's capacity to produce premium grades of pure pig iron.

We made great progress optimising our debt portfolio. Our most important achievements include refinancing of our RUB-denominated bonds with a long-term loan from ROSSIYA Bank and buyback of our Eurobonds for a total of USD 36 million. We consider financial sustainability a top priority for the Group. Going forward, we intend to keep our leverage stable or reduce it should the opportunity arise.'

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Full audited annual consolidated IFRS financial statements for the full year ended 31 December 2014 are available at:

http://www.koksgroup.ru/_upload/docs_lang/filename_document2_4765.pdf

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Key highlights of 2014 and beyond:

- In March 2014, IMH acquired the Koksoviy Glubokiy deposit. According to preliminary estimates, the deposit's reserves are approximately 27 million tonnes of coking coal. The deposit's high-grade coal is mostly represented by process grade coals of К and КО Russian grades, used in the by-product coking industry. The Koksoviy Glubokiy deposit spans the fields of the former Cherkasovskaya, Surtaikha and Vakhrushev mines and shares mining allotments with KOKS Group's another company, OOO Uchastok Koksoviy.

- In May 2014, OAO Koks redeemed its RUB 5 billion BO-02 series bond in full. The bond was redeemed when due on 28 May 2014 out of a loan from ROSSIYA Bank.

- In September 2014, Fitch Ratings assigned IMH Long- and Short-term Issuer Default Ratings (IDR) of 'B', with a Stable outlook on the long-term rating. Fitch also assigned KOKS Finance Limited's loan participation notes a senior unsecured rating of 'B-' with a Recovery Rating of 'RR5', also with a Stable outlook on the long-term rating.

- In December 2014, Standard & Poor's raised its long-term corporate credit ratings in foreign and local currency of OAO Koks to 'B' from 'B-', with a Stable outlook. S&P also raised the issue rating on the senior unsecured loan participation notes to 'B-' from 'CCC+' with a recovery Rating of 'RR5'. The rating agency also upwardly revised Koks' financial risk profile to 'aggressive' from 'highly leveraged.'

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Operating results in Q1 2015

Production, '000 tonnes	Q1 2015	Q1 2014	Q1 2015/ Q1 2014, %
Coal production	514.4	400	+29%
Coal concentrate	563	602	(6)%
Coke with 6% moisture content	695.6	673.6	+3%
Iron ore production, total	1,223.8	1,218.6	0.4%
Iron ore concentrate	560.5	546.1	+3%
Pig iron, total	537.9	547.2	(2)%
Steel-making pig iron	499.8	518.8	(4)%
Pig iron, premium grades	38.09	28.4	34%

 

The growing coal production was driven by efficient operations of the Butovskaya mine and the Uchastok Koksoviy open-pit mine. The rise in coke production was due to the demand from Ukraine. In Q1 2015, the Group also resumed coke supplies to Asia as the weakening Russian Rouble contributed to higher revenues from exports. OAO KMAruda increased production both in iron ore and ore concentrate. Pig iron production declined marginally as the Group was increasingly focused on premium grades which, though time consuming and technology-intensive, are more profitable and in higher demand.

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About the Company

IMH (KOKS Group) is a vertically integrated business that produces merchant pig iron and coke and mines and processes coking coal and iron ore. IMH is the world's largest exporter of merchant pig iron and Russia's largest manufacturer of merchant coke. IMH's four operating divisions are Coal, Coke, Ore & Pig Iron, and Polema. Key production facilities are located in Russia's Kemerovo, Belgorod, Kaluga and Tula regions.

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For more details, please visit our corporate website www.koksgroup.com or address any inquiries to:

Ekaterina Popova

Director for Integrated Communications

Tel.: +7 495 725-5680 (ext. 405)

E-mail: popova@metholding.com

2nd Verkhniy Mikhailovskiy proezd, d. 9, Moscow 115419, Russia