Kemerovo, Russian Federation
OJSC Kuzbasskaya Toplivnaya Company (“KTK”; RTS, MICEX: “KBTK”), one of the fastest-growing thermal coal producers in Russia, is pleased to announce the unaudited IFRS financial results for the 6 months ended 30 June 2010.
Overview
In H1 2010 upon completion of a IPO on Russian stock exchanges the Company continued to implement its strategy of further production growth aimed at achieving the aggregate structural capacity of existing mines of 11 mln tonnes of coal per year by 2015 and growth of high added value products sales. In order to achieve this goal the Company started operation on two newmine sectors, and commenced the first stage of enrichment plant construction. In addition, in Q2 2010 a joint venture Kuzbass Transport Company was launched to provide the Company with rail road wagons for coal transportation and hedging of risks related to rental cost increase.
Due to the fact that the peak demand for thermal coal occurs in Q3 and Q4, and the production and sales figures are at their lowest in Q2, the Company’s revenues strongly depend on seasonal fluctuations. At the same time, active development of current deposits for ensuring future growth of coal extraction does not allow cost redistribution proportionally with revenue change during the year. Accordingly, financial results of the Company in H1 are typically lower than the financial results in H2.
In addition to seasonality, in the reporting period profitability of production was affected by two factors – lower export prices comparing to H1 2009 when the Company continued to supply coal under the contracts signed in 2008 at the peak of demand, as well as increased production costs related to exploded rock volume increase as part of stripping and increased transportation distance to refuse tips.
Financial highlights
Operational highlights
Post period end
Igor Prokudin, CEO of the Company, commented:
“The first half of 2010 was highlighted by one of the most important events in the history of Kuzbasskaya Toplivnaya Company – by completing the IPO we have become a full-fledged player on the global financial market and the first publicly listed producer of thermal coal in Russia. IPO allowed us to achieve two major goals – raise funds for Company’s investment program and decrease our debt and financial costs. Today I am pleased to present the first interim financial statements of KTK in the status of a public company.
Over the first 6 months of 2010 we continued to implement our strategy of further production and reserves growth aimed at achieving the aggregate structural capacity of existing mines to 11 million tonnes of coal per year by 2015. In terms of technology, in 2010 we experienced one of the most challenging and costly stages of extraction development. In correspondence with the deposit development plan the second mine sectors on Cheremshanskiy and Vinogradovskiy open-pit mines have been launched. As a result, the exploded rock volume increased by 50% and the distance of stripping transportation increased by 30% comparing to the same period last year. In relation to this and due to the extraction growth by 3% year-on-year our production cash costs4 per tonne of coal increased by 24% from RUR 476 to RUR 590, which lead to a decrease of EBITDA comparing to the same period last year, in line with management expectations. We expect that in the second half of 2010 the Company will produce 50% more coal than in the first half, which should lead to a decrease in stripping ratio and positively affect the profitability of the business.
During the first 6 months of 2010 we continued to implement the long term strategy to increase the share of high margin products in the general structure of the Company’s sales. We have increased the sorted coal production volume by almost 50% and brought the export volume to 47% from the total sales volume despite relatively low prices. As a result we were able to increase our presence on key markets. At the end of the year we are planning to fulfill the current production year plan – 6.85 mln. tonnes per annum - and increase the sales of more profitable sorted coal and export sales.
Despite the decrease in some profitability ratios, management is satisfied with the development of the Company over the reporting period. We anticipate that EBITDA for H2 2010 and the year in general might exceed the results of 2009. This might happen as a result of a significant increase in production and sorting volumes, coal price growth on domestic and export markets as a heating season commences, changes in export structure in favor of more profitablecontracts, and the start of sales of a more profitablesorted coal produced at our first enrichment plant.
We are confident that our business strategy will allow us to use all opportunities of the Russian and international thermal coal markets for dynamic business development and growth in shareholder value of the Company.”
Conference-call
KTK’s management will host a conference call for investors and analysts followed by a Q&A session on the day of the results at 16.00 Moscow / 13.00 London / 08.00 New York.
The dial-in details are:
| Date: | Thursday, 26 August 2010 |
| Time: | 08.00 New York / 13.00 London / 16.00 Moscow* |
| Title: | KTK - H1 2010 IFRS Statements Conference Call |
| International/UK Dial in: | + 44 (0) 20 7162 0025 |
| USA Dial in: | + 1 334 323 6201 |
* We recommend that participants start dialing in 5-10 minutes prior to ensure a timely start to the conference call.
A live webcast of the presentation will be available
The conference call replay will be available through 2 September 2010.
| International Replay Number: | + 44 (0) 20 7031 4064 |
| US Toll Replay Number: | + 1 88 365 02 40 |
| Replay Access Code: | 872732 |
For more information please contact:
Financial Dynamics Moscow
Tatiana Kosheleva
Leonid Solovyev
+7 495 795 06 23
OJSC "Kuzbasskaya Toplivnaya Company" Kemerovo
Elena Sarycheva
Head of public affars department
+7 384 236 47 62
For investor enquiries please contact:
OJSC "Kuzbasskaya Toplivnaya Company" Moscow
Anton Rumyantsev
Investor relatinons manager
+7 495 787 68 05
Financial overview
| Mln. RUR | 6 months 2010 | 6 months 2009 | Change, % |
| Revenue | 5651 | 4596 | 23% |
| Cost of sales | -4845 | -3485 | 39% |
| Gross profit | 806 | 1111 | -27% |
| Commercial, administrative and other costs | 599 | 524 | 14% |
| Operating profit | 207 | 587 | -65% |
| EBITDA | 540 | 961 | -44% |
| Net profit | 4 | 266 | -98% |
Revenue
In the first half of 2010 KTK’s revenue increased by 23% compared to the same period last year to RUR 5,561 mln. (H1 2009: RUR 4,596 mln.), primarily due to increase in transportation costs included in coal prices and increase in exported and third-party coal sales volume. Revenues net of transportation and retail mark-ups increased by 8% comparing to H1 2009.
During the first six months revenues from export sales were affected by two differently directed tendencies. Export sales increased by 40% to RUR 3,273 mln. (H1 2009: RUR 2,344 mln.) as a result of an increase in sales volume on international markets, a change in price defining formula for export contracts and incorporation of transportation costs in the coal prices for consumers. At the same time the revenue was negatively affected by a decrease in average export prices5 by 18% comparing to the same period last year. Such decrease is related to the fact that in H1 2009 the Company was selling coal under the contracts signed in 2008 at high prices, and in Q1 2010 the Company was selling coal under the contracts signed in Q4 of the crisis 2009.
Despite the price decrease compared to the same period last year, the average export prices during the first and the second quarters of 2010 on both eastern and western directions were compatible to the corresponding international peers6 corrected by value of coal, cost of processing in ports and cost of freight. Increase in export revenue net of transportation costs was 14% compared to the same period last year.
The revenue increase in resale segment to RUR 866 mln. (H1 2009: RUR 584 mln.) was primarily a result of an increase in third party purchased coal sales volumes by 42%. Revenue from the own coal sales in Russia accounted for RUR 1,212 mln. decreasing by 14% compared to the same period last year. Such decrease is due to relative decrease in transportation costs which are included to the coal price due to growth of sales in Kemerovo region comparing to other regions. In general, the average domestic prices7 in H1 increased by 3% up to RUR 892 per tonne (H1 2009: RUR 868 per tonne). The domestic sales revenue net of transportation and retail mark-ups has also increased by 3% comparing to H1 2009.
Cost of sales
| Mln. RUR | 6 months 2010 | 6 months 2009 | Change, % |
| Rail road tariff and transportation | 2161 | 1379 | 57% |
| Purchased coal | 647 | 421 | 54% |
| Labor compensation and social payments | 435 | 357 | 22% |
| Fuel | 371 | 267 | 39% |
| Depreciation | 332 | 340 | -2% |
| Extraction, processing and sorting of coal | 332 | 286 | 16% |
| Spare parts | 233 | 168 | 39% |
| Extraction and environment payments | 92 | 102 | -10% |
| Repair and maintenance | 95 | 67 | 42% |
| Operative leasing | 38 | 26 | 46% |
| Other costs | 175 | 128 | 52% |
| Change in coal remains | -66 | -56 | 18% |
| Cost of sales | 4845 | 3485 | 39% |
In the first half of 2010 the cost of sales increased by 39% comparing to the same period last year to RUR 4,845 mln. (H1 2009: RUR 3,485 mln.).
The increase in cost of sales is a mainly a result of a significant growth in transportation costs, an increase in production costs due to change in mining and geological conditions of extraction process and readjustment of salaries, as well as increase in costs for third party purchasing coal for resale.
Transportation costs (RUR 2,161 mln.) increased by 57% comparing to H1 2009 and accounted for 45% of cost of sales of the Company. The reason for a significant increase in transportation costs was the change in conditions of export coal supplies from FCA (supply costs are compensated by a buyer) to DAF or CPT (supply costs are compensated by a seller) as well as increase in exported coal volume by 455 tsd. tonnes. After the launch of OJSC Kuzbass Transport Company in cooperation with one of Russian rail road operators, the Company has started increasing coal shipping operations in wagons purchased from Kuzbass Transport Company. According to management expectations, this hedgesa significant amount of future risks related to increase in wagon rent costs, and in future will allow full utilizationof the fleet rented from Kuzbass Transport Company for supplies at the prices fixed for the next 10 years.
Production costs8 (RUR 1,466 mln.) increased by 28% year-on-year (H1 2009: RUR 1,145 mln.)and accounted for 30% of the Company’s cost of sales for the first six months of 2010. Key growth factors of production costs are:
Commercial, management and other operating costs
Commercial, administrative and other costs increased by 14% to RUR 599 mln. (H1 2009: RUR 524 mln.). Additional costs were a result of an increase in commercial and managing personnel compensation due to readjustment of salaries as well as increase of sales volume, asset taxincrease amid the main funds growth, imputed carry-over vacation reserves, assigning of surplus costs from IPO to administrative costs.
Despite the increase in commercial and management personnel costs by 33%, the ratio of overhead expenses to revenue remained stable at 11% level due to decrease in third parties costs as well as one-off sale of unutilized land properties.
Operating profit and EBITDA
Operating profit decreased by 65% to RUR 207 mln. (H1 2009: RUR 587 mln.).
EBITDA accounted for RUR 540 mln. Which is by 44% less than in the same period last year. (H1 2009: RUR 961 mln.). The decrease in EBITDA was related to decrease in the average coal price9 net of VAT and rail road tariffs by 6% comparing to H1 2010, primarily as a result of export prices decrease as well as increase in production costs related to the start of operation of the second mine sectors at Cheremshanskiy and Vinogradovskiy open-pit mines.
As a result of factors mentioned above the H1 net profit decreased to RUR 4 mln. (H1 2009: RUR 266 mln.).
Debt load
| Mln. RUR | З0 June 2010 | З0 June 2010 |
| Long term loans and credits | 2331 | 2410 |
| Short term loans and credits | 537 | 1719 |
| Total debt, including: | 2868 | 4129 |
| Ruble-denominated | 840 | 3941 |
| Foreign currency-denominated | 2028 | 188 |
| Cash and cash equivalents | 255 | 87 |
| Net debt | 2613 | 4042 |
| Interest expenses | 94 | 294 |
In H1 the Company has reducedits loan portfolio using a portion of proceeds raised during the IPO. As a result the total debt leveldecreased by 231% to RUR 2,868 mln., and net debt amounted to RUR 2,613 mln. The share of short term loans and credits decreased to 19% of the total debt volume. Foreign currency debt at the end of reporting period accounted for RUR 2,028 mln. or 70% from the total debt volume and was fully denominated in US dollars. Due to decrease in debt servicing costs interest expenses in H1 decreased thrice to RUR 94 mln. (H1 2009: RUR 294 mln.). The average interest rate of the obtained loans and credits in the reporting period amounted to 8.2% per anuum.The ratio of the net debt to EBITDA at the end of reporting period was 2.4 which corresponds with the Company’s loan portfolio management strategy.
Cash flow
During the reporting period operating cash flow before tax and interest decreased by 70% to RUR 134 mln. (H1 2009: RUR 447 mln.). It was primarily affected by increase in production cash costs10 per 1 tonne of produced coal from RUR 476 in H1 2009 up to RUR 590 in H1 2010.
Due to decrease in interest payments in H1 2010 this cash flow was substantial for covering the income tax and interest on loans. As a result the net operating cash inflow for the reporting period was positive RUR 3 mln. compared to the same period last year when the outflow was RUR 41 mln.
Capital expenditures
During the reporting period the capex increased by 2.6 times to RUR 1,347 mln. (H1 2009: RUR 522 mln.). The funds were spent in accordance with the long term investment program and were directed primarily to acquisitions of modern mining and transport equipment, construction of the first enrichment plant and construction of the heated repair bay for BelAztrucks.
Current trading and outlook 2010
After the reporting period the Company increased its monthly extraction and sorting volumes. According to management’s expectations, extraction and sorting volumes in July and August 2010 are likely to exceed the average monthly volumes of H1 2010 by around 30%. The Company is planning to maintain monthly production and sorting volumes at the high level during H2 2010. According to the management, compared to H1 2010 in Q3 the growth of the average coal prices net of VAT and rail road tariff will be 8% on domestic market and 12% when exported.
According to the management, the launch of the enrichment plant in August 2010 will allow the Company to increase high quality sorted coal production volumes by 350 thnd. tonnes in Q3 and Q4 2010. As a result the total production volume in 2010 may increase to 6.85 mln. tonnes, which corresponds with the Company’s annual plan. In addition, in H2 2010 extraction volume growth by 50% should lead to decrease in stripping ratio by 20%.
In the segment of internal sales of own coal the management is expecting an increase in revenue as a result of a planned increase in sales in H2 2010 as well as increase in sorted coal share in the general structure of sales. In H2 2010 the Company’s average coal price11 on the domestic market mayincrease by 5-8% due to the start of heating season.
In the segment of export sales of own coal the management is expecting an increase in revenue as a result of increase in prices related to supply structure changes. In H1 significant volume of coal was supplied under the contracts signed in 2009, while supplies under the contracts signed in 2010 at higher prices are planned for H2. According to the management’s expectations and due to export contracts signed as of the end of reporting period, in H2 2010 the Company’s average export prices net of VAT and rail road tariffs should increase by 10-15% compared to H1 2010.
According to coal price dynamic on domestic and international markets as well as due to planned increase in extraction and sorting volumes in Q2 and Q3, the management expects that H2 EBITDA and full year EBITDA will be higher compared to the same period last year.
The management remains positive about business outlook in H2, as historically the major part of Company’s revenue generated during the second half of the year due to seasonality of thermal coal consumption.
Forward –Looking Statements
This press release might contain forward-looking statements that refer to future events or forecast financial indicators for OJSC “Kuzbasskaya Toplivnaya Company”. Such statements do not guarantee that these are actions to be taken by OJSC “Kuzbasskaya Toplivnaya Company” in the future, and estimates can be inaccurate and uncertain. Actual final indicators and results can considerably differ from those declared in any forward-looking statements. “ OJSC “Kuzbasskaya Toplivnaya Company” does not intend to change these statements to reflect actual results
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Operating profit (loss) | 207 | 587 |
| Amortization for a period | 368 | 369 |
| Losses (profit) from disposals | -35 | 5 |
| EBITDA | 540 | 961 |
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Consolidated cost of sales | 4845 | 3485 |
| Excluding affiliated companies cost of sales | -1156 | -1466 |
| OJSC КТК cost of sales | 3689 | 2019 |
| Excluding: | ||
| Amortization (cost of sales) | -300 | -308 |
| Purchased coal | -231 | -164 |
| Change of commodities and materials remains | 95 | 50 |
| Railroad tariffs and transportation costs | -1647 | -341 |
| Cash costs allocated to cost of sales | 1606 | 1256 |
| Consolidated commercial costs | 221 | 193 |
| Commercial costs of affiliated companies | -221 | -193 |
| Commercial costs of OJSC КТК | - | - |
| Net of amortization (as part of commercial costs) | - | - |
| Cash costs allocated to commercial costs | - | - |
| Total cash costs of coal production | 1605 | 1256 |
| Coal production, mln. tonnes | 2,72 | 2,64 |
| Total cash cost per 1 tonne of coal, rub. | 590 | 476 |
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Earnings | 1212 | 1402 |
| Cost of sales | -969 | -997 |
| Gross profit | 243 | 405 |
| Gross margin,% | 20% | 29% |
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Earnings | 3273 | 2344 |
| Cost of sales | -2877 | -1757 |
| Gross profit | 396 | 587 |
| Gross margin,% | 12% | 25% |
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Earnings | 866 | 584 |
| Cost of sales | -809 | -541 |
| Gross profit | 57 | 43 |
| Gross margin,% | 7% | 7% |
| Mln. rub | 6 months 2010 | 6 months 2009 |
| Earnings | 300 | 266 |
| Cost of sales | -190 | -190 |
| Gross profit | 110 | 76 |
| Gross margin,% | 37% | 29% |
1 EBITDA calculated in Appendix, Table 1
2 EBITDA margin calculated was adjusted to railroad tariffs and transportation services
3 Net debt calculated on page 9
4 Production cash costs calculated in Appendix, Table 2
5 Net of VAT and rail road tariffs
6 According to the management, based on quality of characteristics of supplied coal, the most appropriate peers for the Company’s export sales are the price indexes CIF ARA (6,000 kcal/kg), FOB Indonesia (5,800 kcal/kg)
7 Net of VAT and rail road tariffs
8 Production costs include production personnel salaries, fuel, extraction and sorting costs, spare parts purchasing costs, repair and maintenance costs
9 Net of VAT and rail road tariffs
10 Production cash costs are calculated in Appendix, Table 2
11 Net of VAT and rail road tariffs
12 EBITDA for each period is defined as results from operating activities, adjusted for amortisation and depreciation, impairment loss and loss on disposal of property, plant and equipment. EBITDA is not a measurement of the Company’s operating performance under IFRS and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating activities or as a measure of the Company’s liquidity
