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Fortescue share sale boosts MMK Q1 profit

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Fortescue share sale boosts MMK Q1 profit

Russiansteelmaker OJSC Magnitogorsk Iron& Steel Works swung back into the black in the first quarter, unveilingearnings of US$157 million, 19.9% lower than the same period of 2015, but up fromthe US$125 million net loss realized in the final three months of 2015.

The Urals-basedsteelmaker also confirmed May 6 that it sold part of its 5.37% stake in Australianiron ore major Fortescue Metals GroupLtd. during the period, when iron ore prices rallied at the start ofthe year.

The US$68million in cash realized from the stock sale helped push the Russian group backto profit and cut debt.

It usedthe funds to help cut net debt by 17.3%, or US$195 million. MMK's net debt at theend of March totaled US$929 million, or 0.6x EBITDA.

MMK'sfirst-quarter revenues fell 11.1% quarter on quarter to US$1.05 billion. The companyblamed the result on lower seasonal prices for steel in its core central Russianmarket, as well as the further depreciation of the Russian ruble against the U.S.dollar early in the quarter. The ruble averaged 65.93 to the dollar in the lastthree months of 2015, but 74.68 to the dollar in the first quarter.

Lowercustomer demand was also a problem.

"Lowsteel prices and weak demand for the company's products in early 2016 put pressureon cash flow," the statement read.

EBITDAin the first quarter was US$287 million, or 4.4% above the previous quarter. Excludingthe sale of the FMG stock, EBITDA fell 20.4% on a quarterly basis to US$219 million— the company's lowest quarterly performance since the fourth quarter of 2011.

Despitethe weak start to the year, MMK said it managed to improve quarter-on-quarter cashflow during the period by reducing CapEx and optimizing working capital.

Freecash flow in the first quarter totaled US$96 million, up 41.2% over the linked period.

MMK,the most domestic-focused of Russia's big steel groups, said it expected marketconditions to improve in the second quarter, adding that steel prices in Russiaare already improving.

"Earlysigns of a recovery in domestic demand and a gradual increase in ruble prices onthe domestic market … [is enabling] the company to expect an improvement in itsfinancial metrics in [the second quarter]," the statement read.

Marketanalysts that follow the company took a similarly upbeat view, at least in the shortterm.

The resultswere "stronger than expected," Oleg Petropavlovskiy, a mining analystat BCS Global Markets in Moscow, wrote in a May 6 note to clients.

He alsopointed to evidence that Russian steel prices are steadily recovering.

Hot rolledprices in May are 25% to 27% higher on a monthly basis, and cold-rolled prices areup by 16% to 17%, Petropavlovskiy wrote. Going forward, steel traders expect another10% month-on-month price increase for flat steel in June, he added.

However,the analyst noted that both market analysts and steel companies themselves werepessimistic about the global steel market, which is facing oversupply this year.

Followinga meeting with the company May 6, Petropavlovskiy wrote that MMK expected localRussian steel prices to stay strong until at least the third quarter, when Chinesesupply could increase, sparking a price correction.

Petropavlovskiynoted the overall "long-term fundamental story in steel remains negative dueto oversupply."

MMK meanwhilesaid it expects CapEx this year to come in at about US$400 million.

The boardtasked the CEO with developing a new dividend policy that will see the steelmakerpay out at least 30% of its IFRS free cash flow in dividends on a semi-annual basis.