Mechel Reports the 2016 Financial Results

Consolidated revenue – 276.0 bln rubles, EBITDA^* -  66.2 bln rubles
Net profit, attributable to shareholders of Mechel PAO – 7.1 bln rubles

MOSCOW, April 26, 2017 (GLOBE NEWSWIRE) -- Mechel PAO (MOEX:MTLR) (NYSE:MTL), a leading Russian mining and steel group, announces financial results for the full year 2016.

Mechel PAO’s Chief Executive Officer Oleg Korzhov commented on the 2016 results:

“Last year, markets of steel and steelmaking commodities have repeatedly surprised us. The year began with a dynamic surge of steel prices, then the coal market began its recovery which became a dramatic hike by the end of summer. By December, coal prices approached historical highs.

“As a result, with stable production and sales volumes the Group showed an improvement of all financial results by the year’s end. Our revenue went up by 9% year-on-year, EBITDA was up by 45% and EBITDA margin reached 24%. It should be noted separately that for the first time since 2011 the Group earned a net profit, attributable to shareholders of Mechel PAO, of 7.1 bln rubles.

“Signing debt restructuring agreements with Russian state banks, which account for 71% of the company’s debt portfolio, was a prime achievement. Restructuring conditions put off the maturity of our main body of debt until 2020 with following amortization until April 2022. Loan rates were reconsidered and tied to the key interest rate of the Central Bank of the Russian Federation. Besides, the new agreements provide for a partial interest capitalization, which brings down our current debt service payments.

“The Group’s capital expenditure for 2017 is set at 12.5 bln rubles.

“All this considered, the cashflow generated by the Group enables us to service our debt, operate successfully and, if the current favorable market situation holds, begin to decrease our debt burden.”

Consolidated Results For The Full Year 2016

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^* EBITDA - Adjusted EBITDA. Please find the calculation of the Adjusted EBITDA and other non-IFRS measures used here and hereafter in Attachment A.

Mining Segment

Mechel Mining Management OOO’s Chief Executive Officer Pavel Shtark noted:

“Last year, the Group’s mining division significantly improved its financial results as the global coking coal market rapidly recovered. The surge in metallurgical coal prices which began in the middle of the year halted only in mid-December. Prices for high-quality coking coal topped $300 per tonne. This means that prices have nearly quadrupled over the year, rising from historical lows to peak levels last seen in 2011.

“In order to use this favorable market situation to the fullest, the division re-oriented its sales of coking and other metallurgical coals to focus on more profitable Asian markets. If in 1Q2016 72% of our coking coal concentrate went to export, in 4Q2016 exports accounted for 90% of this product’s sales, while total sales of coking coal concentrate in 4Q2016 topped 1Q2016 sales by nearly 10%.

“At the same time, our mining facilities effectively controlled their expenditures and optimized production processes. Last year we invested a lot of work into shifting Yakutugol Holding Company’s Dzhebariki-Haya underground mine to open mining, which is a safer and more profitable mining method. Open mining at Dzhebariki-Haya began in March 2017. At Elga, which is our most promising project, coking coal now accounts for 75% of volumes mined there, which means an increased output of the most profitable product.

“As a result, last year compared to 2015 our revenue from sales to third parties went up by 11%, EBITDA was up by 56% and EBITDA margin to 34%. If we look at the dynamics in the fourth quarter as compared to the third quarter, revenue went up by nearly half, EBITDA grew by 88% and EBITDA margin reached 46%.

“In early 2017, coal markets remain favorable. Despite a persistent slump in coal spot prices, which reached $150-160 per tonne by mid-February, the first quarter’s benchmark was $285 per tonne, which enabled us to continue selling a major part of our coal for high prices. Cataclysmic weather in Australia in the end of the first quarter and at the outset of the second one again hiked coal prices to historical highs. Major Australian mining companies have one by one declared force-majeure, the world’s largest coal terminals have been closed for days, but the worst problem lay in the devastation of the railroad infrastructure. The quarter prices, which have been expected to fix close to the spot prices in March, have not been fixed. Price negotiations have been put on hold until the cyclone’s consequences could be assessed.

“We expect that in 2017 coal mining volumes will remain stable at last year’s level.”

Steel Segment

Mechel-Steel Management Company OOO’s Chief Executive Officer Andrey Ponomarev noted:

“Last year the division’s financial results showed confident growth. Considering that the division’s overall production and sales volume has slightly changed, the chief factors that had a positive impact on the results were a favorable market situation and optimization of our product range in favor of high-margin products.

“Last year, the situation on the markets for the division’s steel products has largely been positive for our company. Early last year Chinese producers left the billet market, which boosted prices for finished products. Russia’s long products market quickly took on the positive impulse from export quotations. A major rebar shortage on several regional markets also became an additional growth factor. However, as this surge was not supported by end demand, the growth was soon checked, and the downslide persisted until late August. After that prices continued to waver until the end of the year under the influence of various factors, but remained at much higher levels than they had been early in the year.

“The production and sales structure has also changed. The share of semi-finished products like billets and wire rod in our sales continued to decline. Instead we increased sales of high-margin products such as rails and other structural shapes produced by Chelyabinsk Metallurgical Plant’s universal rolling mill. In 2016 the mill produced over 500,000 tonnes of high-quality rolls, including 300,000 tonnes of rails. This year the mill’s load will increase even further, and the mill will master production of new types of profiles, including rails compliant with foreign railroad standards.

“The steel division’s facilities conducted repairs and equipment modernization and mastered new types of products as planned. For example, Chelyabinsk Metallurgical Plant completed capital repairs of its blast furnace #5 as well as repairs of the key equipment of its oxygen converter workshop which accounts for over 70% of all steel made by the plant. Beloretsk Metallurgical Plant mastered production of 12 new types of steel products, including wire used for import substitution, wire ropes and steel ribbons for various industries.

“The chief factor impacting our products’ cost dynamics is the prices for incoming commodities which were particularly volatile last year. However, within the Group this factor was compensated by a high level of vertical integration.

“As a result, last year as compared to 2015, revenue from sales to third parties went up by 11%, EBITDA grew by 35% and EBITDA margin reached 14%. In the fourth quarter compared to the third quarter, revenue went up by 3%, EBITDA grew by 16% and EBITDA margin reached 16%.”

Power Segment        

Mechel-Energo OOO’s Chief Executive Officer Petr Pashnin noted:

“Last year production and sales of electricity went down due to several factors, including a warmer weather as well as constantly high load of hydroelectric power stations which increased market competition. The decline in sales as well as the growth of tariffs for electric power transmission increased our commercial costs and decreased the division’s financial results.

“In 2016 as compared to 2015, revenue from sales to third parties went down by 7%, EBITDA by 20% and EBITDA margin slumped to 4%. In the fourth quarter compared to the third quarter, revenue went up by 47%. EBITDA demonstrated a major slump as commercial expenditure and production costs went up.”

The management of Mechel will host a conference call today at 18:00 p.m. Moscow time (4:00 p.m. London time, 11 a.m. New York time) to review Mechel’s financial results and comment on current operations. The call may be accessed via the Internet at http://www.mechel.com, under the Investor Relations section.

Mechel is one of the leading Russian companies. Its business includes three segments: mining, steel and power. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, hardware, heat and electric power. Mechel products are marketed domestically and internationally.

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time to time with the U.S. Securities and Exchange Commission, including our Form 20-F. These documents contain and identify important factors, including those contained in the section captioned “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in our Form 20-F, that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or ADRs, financial risk management and the impact of general business and global economic conditions.

Attachments to the FY 2016 Earnings Press Release

Attachment A

Non-IFRS financial measures. This press release includes financial information prepared in accordance with International Financial Reporting Standards, or IFRS, as well as other financial measures referred to as non-IFRS. The non-IFRS financial measures should be considered in addition to, but not as a substitute for the information prepared in accordance with IFRS.

Adjusted EBITDA (EBITDA) represents net profit (loss) attributable to shareholders of Mechel PAO before Depreciation and depletion, Foreign exchange (gain) loss, net, Finance costs, including fines and penalties on overdue loans and borrowings and finance leases payments, Finance income, Net result on the disposal of non-current assets, Impairment of goodwill and other non-current assets, Write-off of accounts receivables, Allowance for doubtful accounts,  Write-off of inventories to net realisable value, Loss (profit) after tax from discontinued operations, net, Net result on the disposal of subsidiaries, Profit (loss) attributable to non-controlling interests, Income tax expense (benefit), Pension service cost and actuarial loss, other related expenses, Other fines and penalties, Gain on write-off of accounts payable with expired legal term and Other one-off items. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of our Revenue. Our adjusted EBITDA may not be similar to EBITDA measures of other companies. Adjusted EBITDA is not a measurement under IFRS and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of profit (loss). We believe that our adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While interest expenses, depreciation and depletion are considered operating expenses under IFRS, these expenses primarily represent the non-cash current period allocation of costs associated with non-current assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry.

Adjusted net profit (loss) represents net profit (loss) attributable to shareholders of Mechel PAO before Impairment of goodwill and other non-current assets, Loss (profit) after tax from discontinued operations, net, Net result on the disposal of subsidiaries, Effect on (loss) profit attributable to non-controlling interests, Foreign exchange (gain) loss, net, Pension service cost and actuarial loss, other related expenses, Other fines and penalties, Gain on write-off of accounts payable with expired legal term and Other one-off items. Our adjusted net profit (loss) may not be similar to adjusted net profit (loss) measures of other companies. Adjusted net profit (loss) is not a measurement under IFRS and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of profit (loss). We believe that our adjusted net profit (loss) provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations. While impairment of goodwill and other non-current assets is considered operating expenses under IFRS, these expenses represent the non-cash current period allocation of costs associated with assets acquired or constructed in prior periods. Our adjusted net profit (loss) calculation is used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry.

Our calculations of Net debt, excluding fines and penalties on overdue amounts** and trade working capital are presented below:

EBITDA can be reconciled to our consolidated statement of profit (loss) as follows:

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** Calculations of Net debt could be differ from indicators calculated in accordance with loan agreements upon dependence on definitions in such agreements.

Attachment B

CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME (LOSS)
for the year ended December 31, 2016
(All amounts are in millions of Russian rubles, unless stated otherwise)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of December 31, 2016
(All amounts are in millions of Russian rubles)

CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31, 2016
(All amounts are in millions of Russian rubles, unless stated otherwise)

****There were certain reclassifications to conform with the current period presentation