REG - Evraz Plc - Half Yearly Report <Origin Href="QuoteRef">EVRE.L</Origin> - Part 2
29/10/2014 15:28
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products by 10% compared to H1 2013.
This was achieved through sustained availability at the two rolling mills and successful reduction of semi-finished product
stocks, providing increased feedstock to the mills.
COAL
Market environment
Seaborne spot coking coal prices continued their gradual decline during Q1 2014, in the face of both cyclical and
structural headwinds, with Australian Queensland FOB HCC spot price reaching US$112/t by the end of March (-18%YTD).
Following this, the price had stabilised at around US$115/t level for the most of Q2 2014, partially supported by a supply
side contraction and a number of mine closures announced in Australia and US. Queensland FOB HCC spot price stood at
US$114/t at the end of June.
In May 2014, Queensland Resources Council noted that approximately 25% of all coal operations in Queensland, Australia, are
loss-making. Further, market analysts estimate that around 40% of global seaborne supply is uneconomic on a cash cost basis
at current commodity prices, while about 75-80% of US export supply is loss-making. Supply-side pressure in the sector is
expected to persist, potentially resulting in a number of additional closure announcements in the coming months, thereby
gradually narrowing the seaborne supply/demand imbalance and providing some support for prices in the medium term.
Coking coal prices in the Russian market were more stable due to the fact that most coal producers are near or even below
breakeven point and were not prepared for substantial discounts on their products. However, there has been a decline in
demand for Russian coal concentrate in the Asian markets, due to the abundance of good quality brands supply from
Australian producers which has led to a significant decrease in Russian export prices.
Sales review
Coal segment revenues
(US$ million) Six months ended 30 June
2014 2013 Change
To third parties 398 381 4.5%
To steel segment 266 341 (22.0%)
To other operations 1 - n/a
Total Coal segment 665 722 (7.9%)
(7.9%)
External sales
Coal products 390 58.6% 372 51.5% 4.8%
Raw coking coal 39 5.9% 23 3.2% 69.6%
Coking coal concentrate 296 44.5% 332 46.0% (10.8%)
Raw steam coal 54 8.1% 13 1.8% 315.4%
Steam coal concentrate 1 0.1% 4 0.6% (75.0%)
Intersegment sales
Coal products 266 40.0% 339 47.0% (21.5%)
Raw coking coal 58 8.7% 85 11.8% (31.8%)
Coking coal concentrate 208 31.3% 254 35.2% (18.1%)
Other revenues 9 1.4% 11 1.5% (18.2%)
Total 665 100.0% 722 100.0% (7.9%)
Other revenues
9
1.4%
11
1.5%
(18.2%)
Total
665
100.0%
722
100.0%
(7.9%)
External sales
Coal products 5,279 3,755 40.6%
Raw coking coal 792 375 111.2%
Coking coal concentrate 3,362 2,986 12.6%
Raw steam coal 1,112 353 215.0%
Steam coal concentrate 13 41 (68.3%)
Intersegment sales
Coal products 3,271 3,542 (7.7%)
Raw coking coal 1,094 1,363 (19.7%)
Coking coal concentrate 2,177 2,179 (0.1%)
Total, coal products 8,550 7,297 17.2%
Coking coal concentrate
2,177
2,179
(0.1%)
Total, coal products
8,550
7,297
17.2%
Total coal segment revenues decreased by 7.9% to US$665 million in H1 2014 compared to US$722 million in H1 2013, primarily
due to lower sales prices as well as the higher share of export sales, which offset the increase in coking coal and steam
coal volumes.
External sales volumes of coal products increased in H1 2014 by 40.6% mainly due to higher sales of raw coking coal and
coking concentrate as a result of the production ramp-up at the Yerunakovskaya VIII and the Raspadskaya mines as well as
the increase of raw steam coal sales mainly due to the full operation of Yuzhkuzbassugol's Kusheyakovskaya mine until May
2014, while in Q1 2013 it was closed for longwall repositioning.
In H1 2014, Coal segment sales to the Steel segment amounted to US$266 million and 40.0% of sales, compared to US$339
million and 47.0% of sales in H1 2013.
During the period, approximately 73% of EVRAZ's steel-making coking coal consumption was satisfied by the Group's own
operations, compared with 72% inH1 2013.
Coal segment cost of revenue
Coal segment cost of revenue
Six months ended 30 June
2014 2013 2014 v 2013
US$ million % of segment revenue US$ million % of segment revenue % change
Cost of revenue 557 83.8% 640 88.6% (13.0%)
Raw materials 1 0.2% 1 0.1% 0.0%
Transportation 84 12.6% 85 11.8% (1.2%)
Staff costs 163 24.5% 185 25.6% (11.9%)
Depreciation 134 20.2% 173 24.0% (22.5%)
Energy 26 3.9% 30 4.2% (13.3%)
Other* 149 22.4% 166 23.0% (10.2%)
23.0%
(10.2%)
* Includes primarily contractor services and materials for maintenance and repairs and certain taxes
The coal segment cost of revenue decreased to US$557 million or 83.8% of coal segment revenue in the six months ended 30
June 2014 compared with US$640 million or 88.6% of coal segment revenue in the six months ended 30 June 2013.
The principal factors affecting the change in coal segment cost of revenue in the six months ended 30 June 2014 compared to
the six months ended 30 June 2013 were:
· Transportation costs decreased by 1.2% due to Russian rouble weakening (-US$11 million). This effect was offset by
higher sales at Raspadskaya and Yuzhkuzbassugol, changes in sales destinations (higher exports) and an increase in Russian
railway tariffs (+US$10 million).
· Staff costs went down by 11.9%. The decrease was attributable to headcount optimisation, shutting down of the
Yuzhkuzbassugol mines (Abashevskaya, Kusheyakovskaya) and Gramoteinskaya sale (-US$23 million) as well as the impact of the
Russian rouble weakening on Yuzhkuzbassugol and Raspadskaya (-US$21 million). Lower level of unproductive time, on one
hand, increased staff costs, but, on the other hand, decreased other operating expenses(+US$22 million).
· Depreciation and depletion costs decreased by 22.5% mainly due to a lower depreciation and depletion expense at
Yuzhkuzbassugol caused by the revision and detailing of future mining plans and lower mineral deposits depletion (-US$34
million). This was also accompanied by a decrease in the US dollar amount of depreciation due to the rouble weakening
(-US$17 million). The decrease was partially offset by an increase in depreciation due to the revision and elaboration of
mining future plans by IMC at Raspadskaya (+US$13 million).
· Energy costs were down by 13.3% due to mine shutdown at Yuzhkuzbassugol (-US$5 million) as well as Russian rouble
weakening (-US$3 million) that was slightly offset by higher electricity costs related to higher production volumes at
Raspadskaya (+US$3 million).
· Other costs decreased by 10.2% primarily due to a reduction in auxiliary material costs at Yuzhkuzbassugol supported
by cost cutting initiatives (-US$6 million), revising mineral extraction tax payments for the previous year at Raspadskaya
(-US$9 million) and the influence of Russian rouble weakening (-US$19 million). This was partly offset by increased
environmental protection services expenses (sample control and prevention drilling, +US$8 million) and changes in stock of
WIP and finished goods (+US$4 million).
Coal segment gross profit
The coal segment's gross profit increased to US$108 million in the six months ended 30 June 2014 from US$82 million in the
six months ended 30 June 2013.
Operational update - Coal segment
In H1 2014, EVRAZ's raw coking coal output totalled 9.8 million tonnes, representing an increase of 0.7 million tonnes
compared to H1 2013. The primary growth driver was the launch of longwalls at the Raspadskaya mine.
Yuzhkuzbassugol
In H1 2014, Yuzhkuzbassugol mined 5.3 million tonnes of raw coking coal, a 4% increase compared to 5.1 million tonnes in H1
2013, following the ramp-up of the Yerunakovskaya-VIII mineand a better performance from both the Alardinskaya and
Uskovskaya mines. The Alardinskaya mine has operated at increased capacity since the beginning of the year and the
Uskovskaya mine had demonstrated solid performance before it closed for longwall repositioning at the end of H1 2014. The
growth of output in H1 2014 fully offset the loss of production from shutdown of the Abashevskaya mine in January 2014.
The Company remains on track to reduce operating costs, including capital expenditures. Executing the cost reduction
programme at Yuzhkuzbassugol, including headcount optimisation, resulted in cost savings of over US$11 million in H1 2014,
with further benefits expected in the second half.
Ensuring safe working conditions for all of the company's facilities continues to be a management priority. In accordance
with key initiatives for 2014, energy isolation programme LOTO (Lock out, Try out) has been successfully introduced at the
Alardinskaya and Yerunakovskaya-VIII mines. During the period, further progress has continued with the programme to prevent
spontaneous combustion.
Raspadskaya
In H1 2014, raw coking coal output from Raspadskaya amounted to 4.4 million tonnes, or 12% higher than in H1 2013,
including 1.7 million tonnes of raw coal mined at the Raspadskaya mine. However, the increase was below the volumes
expected due to delay in launch of longwall at the MUK-96 underground mine as a result of geological conditions, which
offset the positive effects of the longwall launch. Raspadskaya is currently operating on three longwalls with a fourth
expected to begin operations in September this year.
Project documentation relating to the 3rd stage of recovery at Raspadskaya has now been approved enabling production to
expand by up to 6 million tonnes of raw coal per year. Development of a deposit of about 500,000 tonnes of "K" grade coking
coal at the Raspadskaya-Koksovaya mine commenced in June. In addition, project documentation was approved to start mining
in the Raspadsky IX-XI sections which will enable the extension of works at the Raspadsky open pit from 2.5 to 4.5 km and
increase annual production from 4 to 6 million tonnes.
In line with its plan to develop new premium markets, EVRAZ signed a contract to supply material volumes of semi-hard (GZh)
concentrate to POSCO (South Korea). Trial shipments of semi-soft coal (GZhO) monoconcentrate were made to Japanese steel
and coke producers. Trial lots of semi-hard (KO) concentrate were shipped to a number of Russian customers.
Mezhegeyugol
Significant progress at Mezhegeyugol during the period included the completion of three development units. In addition,
three inclines were developed, noteably at the same time: a transportation main, a conveyor main and a ventilation main.
Management changes
Sergey Stepanov was appointed General Director of Raspadskaya Coal Company with effect from 1 July 2014.
IRON ORE
Market environment
After almost six months of relative stability in H2 2013, with China CFR (62% Fe) prices trading in a narrow range of
US$130-140/t for most of the period, the seaborne iron ore market started 2014 on a downward trend. A general slowdown in
Chinese demand growth in Q1 2014 along with the destocking by major steel mills and the surge in Australian shipments of
iron ore collectively resulted in an approximate 22% year-to-date price drop by mid-March (down to US$105/t). After a short
rebound to US$119/t levels in April on the back of brief iron ore inventory restocking and the Chinese authorities'
announcement of efforts to stabilise the economy, the China CFR price continued its downward trend, reaching US$89/t by
mid-June (the lowest level since September 2012). At the end of June, the China CFR price stood at US$94/t, representing an
approximate.30% decline year-to-date.
This low price environment has displaced a fraction of Chinese domestic output in recent months, falling from an adjusted
annualised rate of 339 mtpa in January to 315 mtpa in May 20141. Most of the volume displacement comes from the marginal
Chinese iron ore mines higher up the global cost curve who find production uneconomical at current prices, although the
impact on seaborne trade and market conditions remains to be seen, with China likely compensating the marginal volume loss
by increasing imports.
____________________________________________
1 According to National Bureau of Statistics of China
Sales review
Iron ore segment revenues
(US$ million) Six months ended 30 June
2014 2013 Change
To third parties 179 224 (20.1%)
To steel segment 473 665 (28.9%)
To other operations 7 11 (36.4%)
Total Iron ore segment 659 900 (26.8%)
(26.8%)
External sales
Iron ore products* 160 24.3% 195 21.7% (17.9%)
Sinter - - 6 0.7% (100.0%)
Pellets 61 9.3% 70 7.8% (12.9%)
Other 99 15.0% 119 13.2% (16.8%)
Intersegment sales
Iron ore products 460 69.8% 639 71.0% (28.0%)
Iron ore concentrate 110 16.7% 244 27.1% (54.9%)
Sinter 125 19.0% 156 17.3% (19.9%)
Pellets 225 34.1% 239 26.6% (5.9%)
Other revenues** 39 5.9% 66 7.3% (40.9%)
Total 659 100.0% 900 100.0% (26.8%)
239
26.6%
(5.9%)
Other revenues**
39
5.9%
66
7.3%
(40.9%)
Total
659
100.0%
900
100.0%
(26.8%)
* External sales of iron ore produced at the Mapochs mine, part of EVRAZ Highveld, are accounted for in the Steel segment
** Includes crushed stone
External sales
Iron ore products 2,064 2,133 (3.2%)
Sinter - 55 (100.0%)
Pellets 610 607 0.5%
Other 1,454 1,471 (1.2%)
Intersegment sales
Iron ore products* 5,587 6,892 (18.9%)
Iron ore concentrate 1,342 2,454 (45.3%)
Sinter 1,745 1,950 (10.5%)
Pellets 2,500 2,488 0.5%
Total, iron ore products* 7,651 9,025 (15.2%)
Pellets
2,500
2,488
0.5%
Total, iron ore products*
7,651
9,025
(15.2%)
* External sales of iron ore produced at the Mapochs mine, part of EVRAZ Highveld, are accounted for in the Steel segment
Total Iron ore segment revenues decreased by 26.8% to US$659 million in H1 2014 compared to US$900 million in H1 2013,
primarily due to lower sales volumes for internal consumption as a result of the optimisation of Evrazruda's assets
(disposal of Abakan iron ore mine, Teya iron ore mine, Mundybash beneficiation plant in December 2013), closure of the Irba
mine at Evrazruda in the April 2013 and EVRAZ VGOK disposal in September 2013. The decrease in sales volumes were
accompanied bу lower iron ore prices.
External sales volumes of iron ore products decreased by 3.2% in H1 2014 compared to H1 2013, driven by lower sales volumes
primarily as a result of disposal of EVRAZ VGOK in October 2013. Intersegment sales volumes decreased by 18.9% as a result
of the optimisation of Evrazruda's assets in December 2013 and the disposal of EVRAZ VGOKin September 2013. The closure of
the Irba mine at Evrazruda also contributed to lower iron ore volumes being supplied to the Steel segment.
In H1 2014, Iron ore segment sales to the Steel segment amounted to US$473 million and 71.8% of sales, compared to US$665
million and 73.9% of sales in H1 2013.
During the period, approximately 77% of EVRAZ's iron ore consumption were satisfied by the Group's own operations compared
with 95% in H1 2013, predominantly due to the disposal of assets in the Iron ore segment.
Iron ore segment cost of revenue
Iron ore segment cost of revenue
Six months ended 30 June
2014 2013 2014 v 2013
US$ million % of segment revenue US$ million % of segment revenue % change
Cost of revenue 441 66.9% 669 74.3% (34.1%)
Raw materials 66 10.0% 50 5.6% 32.0%
Transportation 43 6.5% 109 12.1% (60.6%)
Staff costs 124 18.8% 185 20.6% (33.0%)
Depreciation 42 6.4% 54 6.0% (22.2%)
Energy 91 13.8% 126 14.0% (27.8%)
Other* 75 11.4% 145 16.1% (48.3%)
16.1%
(48.3%)
* Includes primarily contractor services and materials for maintenance and repairs and certain taxes
The iron ore segment cost of revenue decreased to US$441 million or 66.9% of iron ore segment revenue, in the six months
ended 30 June 2014 compared with US$669 million, or 74.3% of iron ore segment revenue, in the six months ended 30 June
2013.
The principal factors affecting the change in iron ore segment cost of revenue in the six months ended 30 June 2014
compared to the six months ended 30 June 2013 were:
· Raw material costs increased by 32.0%, primarily due to iron ore purchases from sold Tey and Abakan subsidiaries,
which were in the Group before (+US$30 million). The effect was partially offset by VGOK disposal (-US$3 million) and KGOK
lower coal input prices and sinter production (-US$8 million).
· Transportation costs decreased by 60.6% mostly due to Evrazruda subsidiaries disposals with large rail and car
logistics (-US$24 million), VGOK disposal (-US$16 million) and the effect of the weakening of Russian rouble and Ukrainian
hryvnia.
· Staff costs decreased by 33.0% driven by Evrazruda subsidiaries (-US$23 million) and VGOK disposal (-US$32 million),
but were also influenced by an increase in wage inflation (+US$6 million). The rouble and hryvnia weakening also
contributed to costs decline.
· Depreciation and depletion costs decreased by 22.2% due to VGOK disposal, and were accompanied by a decreased
depreciation in US dollar terms at Russian and Ukrainian sites due to local currencies weakening.
· Energy costs decreased by 27.8% primarily due to lower production volumes with Evrazruda subsidiaries (-US$12 million)
and VGOK disposal (-US$15 million), and the weakening of the Russian rouble and Ukrainian hryvnia.
· Other costs decreased by 48.3% due to a reduction in auxiliary materials, taxes and services due to Evrazruda
subsidiaries (-US$31 million) and VGOK disposal (-US$19 million), the KGOK cost optimisation programme which reduced diesel
and lube consumption
(-US$9 million), as well as influence of the Russian rouble and Ukrainian hryvnia weakening.
Iron ore segment gross profit
The iron ore segment's gross profit decreased to US$218 million in the six months ended 30 June 2014 from US$231 million in
the six months ended 30 June 2013. The disposal of Evrazruda subsidiaries and VGOK dropped the production volumes of iron
ore segment and iron ore prices were lower in the six month ended 30 June 2014 than in the six month ended 30 June 2013.
Operational update - Iron ore segment
Iron ore - Russia
In the iron ore segment we continued to focus on operational improvement programmes and cost reductions during the period.
The restructuringof Evrazruda'soperations is underway. The project to reconstruct the Sheregesh iron ore mine and expand
its production has continued as planned. In H1 2014 a key stage of the project was completed with the commissioning of a
new mine shaft and an underground crushing complex at the -115 metre level. The development programme for the Abagursky
processing plant is being finalised.
In H1 2014, in line with its asset portfolio and cost optimisation programme, EVRAZ sold the non-core power generating
company Sheregesh Energo and the Irba iron ore mine was shutdown as economically unprofitable in June 2013.
Operations at our core iron ore business, EVRAZ KGOK, were stable: in H1 2014 it mined 28.7 million tonnes of iron ore
(+0.5 million tonnes compared to H1 2013) and produced 4.9 million tonnes (+218,000) of saleable iron ore products,
including 1.8 million tonnes of sinter and 3.1 million tonnes of pellets.
EVRAZ KGOK continued to realise the project to adopt new, more environmentally friendly technologies for industrial waste
storage and to build a new tailings dump. The survey results for the technical project have undergone a state expert review
with the result expected in Q3 2014. However, after a thorough review of the project, EVRAZ has decided to put off the
construction by two years, to 2017 at least, and carry out a new prefeasibility study to explore the possibility of
prolonging waste storage by the current technology by 3 years and to decrease project CAPEX.
With regard to the project to develop of the Sobstvenno-Kachkanarskoye deposit, the necessary technical and ecological
approvals have now been received. The next stage is approval by the state expert committee, expected in Q3 2014.
At the Timiriron ore project, a tender to design the first stage of the iron ore mine has been held. As EVRAZ confirmed at
its Investor Day in June 2014, execution of the project is subject to securing project finance and negotiations are
continuing with potential lenders.
Iron ore - Ukraine
In H1 2014, EVRAZ Sukha Balka produced 1,450 thousand tonnes of lump ore compared to 1,461 thousand tonnes in H1 2013.
A new horizon of -1,340 metres was commissioned at the Yubileynaya mine. Mining will begin once iron ore at the existing
horizon has been depleted, expected by Q3 2015. The new horizon will be developed for a minimum of five years, and the
Company expects to be able to mine approximately 10.8 million tonnes of raw ore and produce 8 million tonnes of saleable
iron ore with Fe content of 60%.
In line with its targets for 2014, the Company has been implementing the electrical safety programme aimed at removing 50%
of electrical networks below the surface by year end. The first stage has been completed with 40% of electrical networks
dismantled.
VANADIUM
Market environment
Vanadium is a key element in the steel making process, with the majority of globally produced vanadium used as an alloying
agent to increase steel strength. As a result, demand for vanadium is closely linked to steel production levels, in
particular high strength steels with application in the pipe industry, rebars, tool steel, automotive. Vanadium used in
this process is ferrovanadium while vanadium pentoxide is used as a catalyst for the production of sulphuric acid.
Ferrovanadium (FeV) demand was robust in H1 2014, fuelled by pipeline projects in CIS, Europe, and healthy steel demand in
North America. Prices increased steadily from the low levels of Q4 2013 approaching ca US$27.3/kg in May, only to decrease
to US$25.5/kg in June 2014 due to stronger FeV exports from China. The FeV spot price stood at US$25/kg at the end of
June.
FeV prices are expected to further decline during Q3 to US$24/kg to US$25/kg as Chinese rebar producers are significantly
decreasing their Vanadium consumption in response to poor domestic demand.
Sales review
Vanadium segment revenues
(US$ million) Six months ended 30 June
2014 2013 Change
To third parties 244 256 (4.7%)
To steel segment 11 12 (8.3%)
Total Vanadium segment 255 268 (4.9%)
(4.9%)
Vanadium segment revenues by products
Six months ended 30 June
2014 2013 2014 v 2013
US$ million % of total segment revenue US$ million % of total segment revenue % change
External sales
Vanadium products 242 94.9% 253 94.4% (4.3%)
Vanadium in slag 4 1.6% 1 0.4% 300.0%
Vanadium in alloys and chemicals 238 93.3% 252 94.0% (5.6%)
Intersegment sales, vanadium products 9 3.5% 10 3.7% (10.0%)
Other revenues 4 1.6% 5 1.9% (20.0%)
Total 255 100.0% 268 100.0% (4.9%)
100.0%
(4.9%)
Sales volumes of vanadium segment
(tonnes of pure Vanadium)
H1 2014 H1 2013 Change
External sales
Vanadium products 8,992 8,612 4.4%
Vanadium in slag 204 192 6.3%
Vanadium in alloys and chemicals 8,788 8,420 4.4%
Intersegment sales 401 346 15.9%
Total 9,393 8,958 4.9%
Vanadium segment revenues decreased by 4.9% to US$255 million in H1 2014 compared to US$268 million in H1 2013 reflecting a
decrease in sales prices of vanadium products partially compensated by higher sales volumes.
Vanadium segment cost of revenue
Vanadium segment cost of revenue
Six months ended 30 June
2014 2013 2014 v 2013
US$ million % of segment revenue US$ million % of segment revenue % change
Cost of revenue 215 84.3% 210 78.4% 2.4%
Raw materials 53 20.8% 43 16.0% 23.3%
Transportation 2 0.8% - - n/m
Staff costs 33 12.9% 32 11.9% 3.1%
Depreciation 9 3.5% 11 4.1% (18.2%)
Energy 34 13.3% 33 12.3% 3.0%
Other 84 32.9% 91 34.0% (7.7%)
34.0%
(7.7%)
The vanadium segment cost of revenue increased by 2.4% to US$215 million, or 84.3% of vanadium segment revenue in H1 2014
from US$210 million, or 78.4% of vanadium segment revenue in H1 2013. The decrease in EVRAZ's vanadium segment's cost of
revenue in H1 2014 as compared to H1 2013, in absolute terms, was attributable to increase of production and sales volumes
of vanadium products in alloys and chemicals.
Vanadium segment gross profit
In H1 2014, gross profit of EVRAZ's vanadium segment decreased to US$40 million compared with US$58 million in H1 2013,
primarily due to lower prices for final vanadium products.
Operationalupdate - Vanadium segment
The project to expand throughput of vanadium pentoxide at EVRAZ Vanady Tula is underway with engineering and technical
solutions to implement the project being developed. Evaluation of the technical solutions and implementation alternatives
is expected to be completed by the end of the year.
The equipment for the pulp filtration project at EVRAZ Vanady Tula was installed in March 2014 and pilot production
commenced. The optimal operations mode is being assessed.
EVRAZ Stratcor completed the OVP (oxide vanadium products) project aimed at reaching 100% capacity utilisation and
eliminating more expensive third-party feedstock. Now EVRAZ Stratcor is converting oxide vanadium products produced by
EVRAZ Vanady Tula. As a result, output of specialty high value added vanadium chemicals has increased by ~5% compared to H1
2013 and the plant is close to operating at full capacity.
OTHER BUSINESSES
EVRAZ's other operations include trading, logistics, port services, electricity and heat generation and other auxiliary
activities.
Sales review
Other operations segment revenues
(US$ million) Six months ended 30 June
2014 2013 Change
To third parties 129 126 2.4%
To steel segment 200 224 (10.7%)
To coal segment 32 22 45.5%
To iron ore segment 73 93 (21.5%)
Total Other operations segment 434 465 (6.7%)
(6.7%)
Revenues from other operations decreased by 6.7% to US$434 million in H1 2014 as compared to US$465 million in H1 2013,
principally due to the disposal of Central Heat and Power Plant and decrease in revenues of Zabsib Heat and Power Plant.
Revenue of other operations segment includes the following (sales figures shown below include sales within the same
segment):
· Nakhodka Trade Sea Port provides various sea port services to EVRAZ. The company's revenue totaled US$57 million in H1
2014 and US$45 million in H1 2013.
· Metallenergofinance ("MEF") supplies electricity to EVRAZ's steel, iron ore and coal segments as well as third
parties. MEF's sales amounted to US$228 million in H1 2014 compared to US$219 million in H1 2013. Intersegment sales
accounted for 69% and 76% of MEF's revenue in H1 2014 and H1 2013 respectively.
· Zapsib Heat and Power Plant generates electricity and heating. Most sales are classified as intersegment as they
relate to the supply of internal energy to EVRAZ ZSMK. Sales were US$57 million in H1 2014, compared to US$65 million in H1
2013. The decrease of revenue is primarily attributable to the accident at Zabsib Heat and Power Plant in March 2014.
· Sinano Ship Management and East Metals Shipping provide sea freight services to EVRAZ's steel segment. These
companies' sales totaled US$58 million in H1 2014 and US$61 million in H1 2013, with intersegment sales accounting for
almost 98% in H1 2014 and 94% in H1 2013 of its revenue. Lower revenues in H1 2014 compared to H1 2013 were attributable to
the sale of ships and as a result of a decline in sea freight services to third parties.
Other operations segment cost of revenue and gross profit
The other operations segment's cost of revenue in H1 2014 amounted to 78.8% of other operations revenue, or US$342 million
compared to 81.7%, or US$380 million in H1 2013.
The major components of cost of revenue at EVRAZ Nakhodka Trade Sea Port are staff and inventory costs. The major component
of MEF's cost of revenue is the purchase of electricity from power generating companies. The major components of the Zapsib
Heat and Power Plant's cost of revenue are steam coal for power generation, depreciation and staff costs, while the major
component of Sinano's cost of revenue is ship hire fees.
In H1 2014, gross profit of EVRAZ's other operation segment increased to US$92 million compared with US$85 million in H1
2013.
Operational update - Other businesses
In H1 2014 EVRAZ Metall Inprom (EMI)'s market share remained stable at 11%. During the period EMI sold over 950,000 tonnes
of steel products, 2% less than in H1 2013, while the trading margin per tonne increased from 4.6% to 5.8%.
EMI is implementing measures to increase its portfolio in the segment of tubular products and expand sales of flat products
in line with its Customer focus strategy. Company standards of customer service have been defined. Tools to increase sales
efficiency are being implemented and include system surcharges for services and industry pricing differentiated by each
sector.
In order to reduce costs and improve business efficiency, in line with its 2014 targets, EMI has focused on the shutdown of
low-margin units, storage areas and branches, and on increasing staff productivity.
Cargo turnover at the EVRAZ Nakhodka Trade Sea Port (EVRAZ NMTP) increased by 24% in H1 2014 compared to H1 2013. EVRAZ
Nakhodka Trade Sea Port continues to pursue the realisation of two projects, which will enable an increase in the volume of
cargo turnover of coal to 7.3 million tonnes by 2016.
Sales of EVRAZ Nakhodka Trade Sea Port increased by 27%. On 20 January 2014, EVRAZ NTMP concluded an agreement with East
Metals AG for the handling of ferrous metals and coal, whereas in H1 2013 all port services related to handling of EVRAZ's
export products were rendered under a contract with Russian Railways.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties affecting EVRAZ were set out in detail under the heading Principal Risks and
Uncertainties on pages 24 to 27 of the Annual Report 2013 http://www.evraz.com/investors/annual_reports/ . We provide below
an update on those risks which impacted the Company during the Period and which we expect to be the most significant for
the rest of the year: The remaining principal risks identified in the Annual Report are unchanged.
Risk and risk description Mitigations
Global economic factors, industry conditions and cost effectiveness EVRAZ operations are highly dependent and sensitive to the global macroeconomic environment, economic and industry conditions, e.g. global supply / demand balance for steel and particularly for iron ore and coking coal which has the potential to significantly affect both product prices and volumes across all markets.As EVRAZ operations have a high level of fixed costs, global economic and industry conditions can impact the Company's operational performance and liquidity. Liquidity risk with a related reduction in the availability of finance brings a risk of insufficient capital investment to ensure the long-term sustainability of the Company EVRAZ has a focused investment policy aimed at reducing and managing the cost base with the objective of being among the sector's lowest cost producers. In respect of its mining operations the Company has a focus on divestiture or downscaling of high cost
and lower coal quality mining assets and development of efficient low cost mining operations. The Company's strategic focus is on improvement of operations through optimising that part of the Group's coal product portfolio of assets producing lower quality
semi-hard coal.For steelmaking operations EVRAZ aims to idle rolling operations in low growth markets. For both mining and steelmaking operations the Company executes cost reduction projects to reinforce competitiveness of assets. Particularly, conversion
and logistics cost optimisation programmes were initiated during the Period. Capital and operational initiatives aligned with the overall EVRAZ strategy are specified within the section "CEO's report" on pages 2 to 5 of this report.
Health, safety and environmental (HSE) issues Safety and environmental risks are inherent to the Company's principal business activities of steelmaking and mining. Further, EVRAZ operations are subject to a wide range of HSE laws, regulations and standards, the breach of any of which may result in fines, penalties, suspension of production, or other sanctions. Such actions could have a material adverse effect on the Company's business, financial condition and business prospects. The key material environmental issues are primarily concerned with air emissions and water quality. HSE issues have direct oversight at Board level and HSE procedures and material issues are given top priority at all internal management level meetings. Management KPIs include a material factor for safety performance. EVRAZ has instigated a programme to
improve the management of safety risks across all business units with the objective of embedding a new safety, harm-free culture at all management and operational levels. The Company continues to focus on standardisation of critical safety programmes with
a main focus in 2014 on implementing an energy isolation programme, or Lockout Tryout (LOTO). Further, EVRAZ has introduced a programme of Behavior Safety Observations to drive a more proactive approach to preventing injuries and incidents. Safety training
has been reviewed and strengthened and an operational safety assessment is undertaken for all new projects. Environmental commitments are detailed in Note 13 to the EVRAZ plc unaudited interim condensed consolidated financial statements for six-month
period ended 30 June 2014.
Dependency on certain key markets The Company's profitability is highly dependent on limited geographical markets, i.e. 41% of EVRAZ revenues are derived from Russia, and 24% from North America. The strategic risks and opportunities within EVRAZ's key regions are regularly reviewed, including consideration of the quality and nature of the Company's product portfolio, relative cost effectiveness and the sustainability of industry sector market
positioning together with effective in-house and external distribution networks. The Company's product portfolio development and its production and distribution strategies are focused on leveraging leading market positions within the steel construction and
logistic segments and within the coking coal and vanadium markets.The medium term risk of declining demand for rail products in the Russian market and a risk of new rail production capacity introduced by competitors is partly addressed by exploring rail
market opportunities outside Russia and North America. Risks related to the tubular product market are addressed by long-term contracts with customers in North America combined with the new opportunities provided by the US policy of decreasing dependency
on oil & gas supplies from other countries. For the long steel product market EVRAZ benefits from its wide proprietary distribution network in Russia (EVRAZ Metall Inprom).
Human Resources The principal HR risk is the quality and availability of critical operational and business skills of EVRAZ management and employees, particularly in certain regions and for particular business units, e.g. engineers, mining experts and project managers. Associated risks involve selection, recruitment, training and retention of employees and qualified executives. Succession planning is a key feature of EVRAZ's human resources management. EVRAZ has invested substantial resource in training, internal mentoring, and development of its pool of successors.EVRAZ seeks to meet its leadership and skill needs through
retention of its employees, internal promotion, structured professional internal mentoring and external development programs, including internal training, schools of engineers, technical forums, and expertise certification programmes. Additionally,
training programmes of the Moscow Skolkovo business school provide further contribution to the development and training for the key strategic management pool.
Potential Actions by Governments EVRAZ operates in a number of countries and there is a risk that governments or government agencies could adopt new laws and regulations, or otherwise impact the Company's operations. New laws, regulations or other requirements could have the effect of limiting the Company's ability to obtain financing in international markets, or selling its products.To date the Company has not been significantly impacted by recent geopolitical developments relating to Ukraine. There is a risk, however, that, if these events were to escalate, there could be an impact on EVRAZ's operations in the country (EVRAZ generates approximately 6% of consolidated revenue from its Ukrainian business) and revenues from the sale of coking coal to third party Ukrainian customers. In addition, EVRAZ may be affected by government sanctions against Russian business if they are broadened from the current level causing capital market risk and operating risk. Although these risks are mostly not within the Company's control, EVRAZ and its executive teams are members of various national industry bodies and, as a result, contribute to the thinking of such bodies and, when appropriate, participate in relevant
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