OREANDA-NEWS. OJSC "Kuzbasskaya Toplivnaya Company" (RTS/MICEX: "KBTK"), one of the largest producers and exporters of thermal coal in Russia, is pleased to announce its unaudited condensed interim consolidated financial statements under IFRS for the 3 months 2013 ended March 31, 2013.

Financial highlights RUB mln. 
Q11  2013 Q42  2012 Ch. Q12  2012 Ch.2
Revenue 4,927 6,229 -21% 6,652 -26%
Cost of sales 4,277 4,838 -12% 5,358 -20%
Production cash costs per tonne, RUB 559 583 -4% 777 -28%
Gross profit 650 1,391 -53% 1,294 -50%
Gross profit margin 13% 22% - 9 ppts 19% -6 ppts
Distribution, administrative and other costs 417 511 -18% 448 -7%
Operating profit 233 880 -74% 846 -72%
Operating profit margin 5% 14% -9 ppts 13% -8 ppts

EBITDA3 509 1,197 -57% 1,117 -54%
EBITDA margin 10% 19% -9 ppts 17% -7 ppts
EBITDA per tonne, RUB 213 501 -57% 512 -58%
Net profit 86 697 -88% 896 -90%
Net profit margin 2% 11% -9 ppts 13% -11 ppts

During Q1 2013 the Company has been working in the face of declining prices for thermal coal in the domestic and export markets. Management continues to implement a cost cutting program, and reviewing contracts with suppliers for all types of input resources and services. Compared to Q1 2012, production cash costs4 fell by 27%, cost of sales has dropped 20%, distribution, administrative and other costs decreased by 7%. One of the key measures to reduce costs was the sale5 of the associated transportation company LLC "Kuzbass Transport Company", which reduced the cost of rail cars rent by 2 times. The above measures will enable the Company to maintain a stable position in the market and get the maximum economic benefit from possible price increases for high-quality thermal coal in the medium term.

Revenue

Revenues in Q1 2013 decreased by 21% to RUB 4,927 mln., influenced by the seasonal decline in demand for coal caused by the ending heating season. Quarter-on-quarter revenue decline occurred in all key segments of the Company’s business. In a segment of own coal exports sales revenue decreased by 14%, and in the segment of the domestic sales of coal produced by 27%.

Operating profit and EBITDA

Due to the seasonal decline in demand for coal in the domestic market and a reduction in revenue from export sales, operating income in Q1 2013 decreased by 74% and amounted RUB 233 mln. Production cash costs6 in Q1 reduced by 10% to RUB 1,228 mln. Cost of sales in Q1 decreased to RUB 4,277 mln. as a result of lower production cash costs and the purchase of coal for the resale. The level of distribution, administrative and other costs in the Q1 2013 decreased by 18% to RUB 417 mln. due to decrease in sales volume. EBITDA in Q4 declined by 54% to RUB 509 mln.

Net profit

Net profit in Q1 was RUB 86 mln., decreased by 88% quarter-on-quarter. The negative impact on net profit had a decline in gross margin in export sales of own coal segment from 18% in Q4 2012 to 7% in Q1 2013.


The main reason for the growth of total debt was financing the acquisition of rail car fleet from LLC "Kuzbass Transport Company", with the aim of further resale. In May 2013 deal to sell rail cars to LLC "ZapSib-Transservice" was closed9, and raised funds were returned to banks.

Net debt as of March 31, 2013 amounted to RUB 6,318 mln., increased by 35% compared with the figure as of December 31, 2012. The net debt to EBITDA ratio amounted 2.20. The ratio increase has affected the 57% quarterly reduction in EBITDA and decrease in cash and cash equivalents by 21% to RUB 1,858 mln. Under the terms of loan agreements with banks, net debt to EBITDA ratio should not exceed the level of 3.50-4.00. Management plans to work consistently to reduce debt and increase the proportion of long-term loans during 2013.

The company carries out effective financial and investment policies, resulting in the average interest rate for RUB denominated borrowings at the level of 8.53%8, and borrowings in US dollars – 4.80%.

Cash flow and investments
RUB mln. Q1  2013 Q4  2012 Ch. Q1  2012 Ch.11
Operating cash flow -1,354 940 n.a. -35 3,769%
Investment cash flow, incl.: -180 -468 -62% -1,326 -86%
Acquisition of property, plant and equipment -199 -713 -72% -991 -80%
Financial cash flow 1,032 -161 n.a. 1,060 -3%
Net increase / (decrease) in cash and cash
 equivalents -502 311   -301 67%

In Q1 2013, operating cash flow amounted to RUB 1,354 mln. Investment cash decreased by 62% to RUB 180 mln. and investment in acquisition of property, plant and equipment spent RUB 199 mln. most of which focus on the completion of the washing plant “Kaskad-2”. Net cash inflow from financing activities in Q1 2013 amounted to RUB 1,032 mln. due to increased borrowings.

Igor Prokudin, CEO of the Company, commented:

"Assessing the results of the financial statements for Q1, I want to note that these results were anticipated for us. Due to difficult market conditions, the Company's revenues decreased by 21%, EBITDA by 57%. Also, following the increased competition in the domestic market during this period, there was a decline in sales, but own sales network enabled the Company to maintain its market share in this segment. As a result, the Company was able to make a profit in Q1, which was due to the efforts of management and all of the Company's cost reduction.

I think the market situation in the near future will be difficult, so we expect performance deterioration in Q2, which also occurs on the background of the seasonal decline in sales, which is characteristic for the coal industry in the summer. In this situation, the main aim is the reduction of the Company’s debt to a comfortable level and the preservation of the course to optimize costs in the next reporting period.

Summing up the results of the last quarter, I want to thank the management and the entire staff of the Company for the well-coordinated work. I emphasize that the current situation today has not changed the basic directions of our strategy."

Key events in Q1 and after reporting date
The company completed construction of the second washing plant "Kaskad-2" next to open-pit mine "Vinogradovsky" with capacity of 4.0 mln. tonnes per year. Presently During the quarter were proceeding the debugging processes and landscaping. In February 2013, the washing plant was presented to existing and potential partners in the international coal market and has received favorable international feedback.
In February 2013, the Company withdrew from the associate members of LLC "Kuzbass Transport Company" (“KTrK”) and signed a long term service contract for the transportation of coal for 2013-2018 with the new owner of the rail car fleet LLC "ZapSib-Transservice". At time of the transaction, KTrK’s fleet was 3,128 rail cars, and its total debt was RUB 7 bln., including financial leasing and bank loans. The contract guarantees the supplier a minimum of 5,000 rail car dispatches per month, which amounts to 65% of the Company’s shipment volumes. Cost of services will be based on the average market prices.
Trade receivables at 31.03.2013 include amounts of LLC "ZapSib-Transservice" on the transaction of rail cars fleet sale. This fleet of rail cars was purchased by the Group from LLC "Kuzbass Transport Company" shortly before withdrawing from the associate members for the purpose of resale. The carrying value of this debt amounted to RUB 1,017 mln. In May 2013 this debt was repaid in full by the buyer.
At the 15th of April took place an annual general meeting of shareholders of the Company. The shareholders approved the payment of dividends in the amount of RUB 5 per share. Total dividend payments for 2012 will be RUB 496 mln., which corresponds to 27.4% of net profit under IFRS. The dividend yield amounted 7.5% (2011: 3.4%).

As a result of the voting shareholders formed a new Board of Directors of OJSC "Kuzbasskaya Toplivnaya Company": Ivan Gepting, Deputy CEO Sales; Vadim Danilov, Chairman of the Board of Directors; Igor Prokudin, CEO; Alexander Arthur John Williams, Independent Director; Yuriy Fridman, Independent Director.

Outlook for Q2 2013
In accordance with the production plan, the coal production in Q2 2013 will increase by 4%, to 2.48 mln. tonnes.
According to the expectations of management, the stripping ratio in Q2 will decline by 6% to 5.74.

Management of KTK tracks the prices in world markets, which in the recent year have remained at a stable low level, and does not expect any increase of thermal coal price in Q2 and Q3 2013. However, the price trends of past periods raise can expectations of rising prices in the medium term.