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Our business is coal, steel and ore

Our business is coal, steel and ore
Special project Coal of the East of Russia

Why can the Elga coal deposit now be considered a priority development area in the Far East? Will the development of the deposit help Mechel overcome the crisis? Oleg Korzhov, General Director of Mechel OAO, spoke about the mechanisms of financial stabilization of the mining and metallurgical holding and participation in the Far Eastern investment projects in an interview with

- Oleg Viktorovich, the government was unable to resolve the issue of assistance companies at the expense of budget funds, and the most likely scenario is the issue of bonds. What consequences will this entail for Mechel? Have any other salvation options been considered?

- It is still too early to put an end - the discussion of possible support measures continues, various ways to stabilize the company's financial position are being considered. The issue of convertible bonds is the most acceptable option for all participants, since it does not provide for budget spending and allows the company to restructure the debt burden so that Mechel can work efficiently and pay the debt.

Another option, which was considered, is the sale of RZD 321-kilometer railway from BAM to Elginsky deposit. This railway could become a core asset for Russian Railways. They invest in the modernization of the BAM and Transsib, and the Elga makes this eastern section of the BAM pay off. If the deal is implemented, it will be able to radically change the situation with the debt burden of the company. There is an active process of discussion, there are other options.

- Answering the question of how a solution could be in this case, Minister of Industry of the Russian Federation D. Manturov said that strategic investments from East Asian companies, for example, Chinese, could be attracted. Is this option being considered? And if so, are there foreign companies who are interested in such a strategic partnership?

- Yes, we are considering the option of attracting a strategic investor in the Elga field. This is the main investment project of Mechel, the largest deposit of high-quality coking coal in Russia with reserves of 2,2 billion tons. It is located in Southern Yakutia and has a unique geographical advantage in the coal market of the APR countries because of the short transport link to the Far Eastern ports.

Therefore, of course, the largest Asian metallurgical companies are interested in entering the project - it will allow them to ensure their own production of coal for decades to come. We have not yet started active marketing of the project, but we are at a low start. I can say that already at this stage there are a number of interesting people from Southeast Asia and other regions. Last fall, VEB approved the allocation of an 2,5 billion dollars loan for the development of the project - now that we have financing, this is a completely new investment story that is of interest to virtually all the largest steel producers in the region.

- What will be the future development strategy of the company, on what possible direction of the business you will focus, perhaps, further development of the Elga deposit will help? How are deposits estimated? Did you consider selling options for a part of the Elgaugol project?

- Mechel is a mining and metallurgical company. Elginskoye field is indeed the main element of our development strategy - in the future, its development will allow the company to become one of the three largest producers of coal for metallurgy in the world.

The second direction of development is metallurgy with high added value. Last year, we launched a universal rail-mill at the Chelyabinsk Metallurgical Plant, capable of producing 100-meter rails for high-speed lines. After its release at full capacity, we expect to supply RZD to 400000 tons of rails annually. Also, Mechel is the largest manufacturer of hardware in Russia and one of the largest - fittings and special steels. We plan to maintain a leading position in these segments.

- How did it happen that a private company investing huge amounts of money in an infrastructure project, in particular a railway branch to the Yakutia field, without which the development of the field would be impossible, found no support for the way out of the difficult situation either by the largest monopoly of Russian Railways, Which should create conditions for the development of infrastructure?

- Now the negotiations on the measures of support for Mechel are continuing, therefore it is wrong to say that there is no help. In the process, the best government experts are involved, dozens of different schemes are being worked out. The final decisions have not yet been made, but work in this direction is conducted by the capital, so we can not say that we were thrown in a difficult situation.

Of course, the infrastructure in the absolute majority of countries is built at the expense of the state or funded by special institutions. But, unfortunately, in the Russian economy there is no tool to attract money for long-term projects. We began to develop the Elgin project in 2008, and the first millions of tons of concentrate will go to the market in 2018, thus, for a payback, financing for at least 13-15 years is necessary, and in Russia such money cannot be attracted to the market. Our largest competitor, Australian BHP Billiton, recently placed bonds at 2-5% per annum, and our average rate on the debt portfolio in 2013 was 9,1% per annum. It is logical that they have a significant competitive advantage only in the cost of capital, if we could attract financing two to three times cheaper, we would not have a shadow of a problem with debts now. But these are already questions of national scale and state policy in the field of the banking system. Our business is coal, steel and ore.

- Did the company's problems with debt obligations affect its social policy: staff reduction, labor remuneration and support of social programs?

- No, they did not. Due to poor market conditions, we stopped our coal company Bluestone in the US, but in 2014 we do not plan staff reductions in Russia.

- The crisis of overproduction, the considerable volatility of commodity prices, in particular coal and metals, in the world, are not the factors of uncertainty for building further plans for the company? And are there any options for the development of the company in the event of a large drop in world prices for raw materials?

- The catastrophic drop in world prices for raw materials has already happened - the prices for coking coal are at a seven-year low. Nevertheless, the market believes in recovery, Australian producers do not close assets, despite the losses.

The demand for coal in the long run will only grow, Asia will be the main locomotive (80% of world consumption). Analysts expect Asia to grow in the next 10 years from 250 to 350 million tonnes of coking coal.

Mechel's enterprises are located as profitably as possible to enter the Chinese market. We are actively working in this direction: in 2013, Mechel’s deliveries accounted for 7,5% of all Chinese imports of metallurgical coal. And even with today's record low prices, Mechel makes a profit.

According to the AME agency, Yakutugol is on the 6 place for profitability in the world, Yuzhny Kuzbass - on the 15, and Elga, after launching the first stage, will be on the 7 place on the 66 largest enterprises in the world.

Launching of Elga in 2017 year will allow us to significantly improve the financial result - this will be one of the most effective coal projects in the world. Thus, at any price conjuncture we plan to remain among the leaders.

- How can the company’s logistical direction and further development of the ports of Posiet and Vanino help an early recovery from the crisis?

- Poset and Vanino - Mechel's transport security guarantees. With the release of the Elginsky deposit at full capacity, we will significantly increase the volume of supplies through the Far Eastern ports. We have already increased the capacity of the Posiet port to 7 million tons per year, it already transports more cargo by 25% than a year ago. Since the moment we got access to the port of Vanino, there growth was more than 30%.

If Elga in 2018 year will give 8 million tons of finished products, it is vitally important for us to be able to deliver them to customers. Asia already now occupies 75% in the structure of our export sales, and this share will grow.

- How are the relations between the company's management and the regional authorities of the Far Eastern regions in which the company operates?

- We have a constructive working relationship with regional authorities at all levels. We are pleased that the regions highly appreciate our projects, such as the construction of the Elga coal complex, the reconstruction of the Posyet port, and our participation in Vanino is also highly appreciated. Regional leaders understand and share the problem of financial stabilization, which the company now faces. We feel their support, for which I want to say many thanks to them.

- Will there be new approaches to the development of the Far East, in particular the Torah, to the withdrawal of Mechel from a crisis situation?

- The Elginsky project in itself creates a territory of advanced development - in the remote taiga, where for a few hundred kilometers there is not a trace of civilization, a huge mining complex is being built with a settlement for 3000 people. It will be a new coal basin, similar to Kuzbass or Donbass, in addition to the specific area we are developing, there are rich coal reserves, the estimated reserves of which exceed 40 billion tons, there are deposits of iron ore, other minerals - almost the entire periodic table.

Even when planning BAM, there was an option to build a road in such a way that it would pass through the Elga and the untold wealth surrounding it. The strategy of the coal industry of the Russian Federation implies that the center of Russian coal mining will shift to Eastern Siberia - precisely due to the Elga deposit and Tuvan projects. But if the Kyzyl-Kuragino branch, which is supposed to open Tyva’s coal reserves, has not even started to build yet, then the railway to Elga is ready.

The new mining cluster around Elga will definitely be. Whether the decision to develop it exactly as TOR or whether other mechanisms will be applied, we cannot say yet.

- Will the relations between the state and the Mechel company become not the best example for foreign investors coming to Russia?

- We believe that our relations with the state are just an example for foreign investors. Mechel's projects are being implemented in line with the state policy - we develop Siberia and the Far East through the Elginskoye field, creating thousands of new jobs. Our new rail and structural mill will allow RZD to abandon the import of Japanese and Austrian rails - ours are now no worse. We are strengthening relations with Asian countries - now these are our main consumers. Russian coal in the Asia-Pacific region is more competitive than American and Canadian coal - we confidently press our competitors on the world market. Therefore, here we do not see any negative examples, rather the opposite.

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